e10vq
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 March 31, 2011
Commission file number 001-33606
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
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BERMUDA
(State or other jurisdiction of
incorporation or organization)
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98-0501001
(I.R.S. Employer
Identification No.) |
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 278-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes o No þ
As
of May 3, 2011 there were 98,288,667 outstanding Common Shares, $0.175 par value per share,
of the registrant.
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at March 31, 2011 (unaudited) and December 31, 2010
(Expressed in thousands of U.S. dollars, except share and per share information)
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March 31, |
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December 31, |
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2011 |
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2010 |
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(unaudited) |
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Assets |
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Fixed maturities, at fair value (amortized cost: 2011 - $4,544,110; 2010 - $4,772,037) |
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$ |
4,589,849 |
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$ |
4,823,867 |
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Short-term investments, at fair value (amortized cost: 2011 - $565,600; 2010 - $273,444) |
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565,620 |
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273,514 |
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Other investments, at fair value (amortized cost: 2011 - $16,089; 2010 - $18,392) |
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19,772 |
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21,478 |
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Cash and cash equivalents |
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717,444 |
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620,740 |
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Total investments and cash |
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5,892,685 |
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5,739,599 |
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Premiums receivable |
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916,012 |
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568,761 |
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Deferred acquisition costs |
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174,361 |
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123,897 |
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Prepaid reinsurance premiums |
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115,522 |
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71,417 |
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Securities lending collateral |
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33,143 |
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22,328 |
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Loss reserves recoverable |
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453,701 |
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283,134 |
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Paid losses recoverable |
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26,483 |
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27,996 |
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Income taxes recoverable |
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876 |
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1,142 |
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Intangible assets |
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117,853 |
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118,893 |
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Goodwill |
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20,393 |
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20,393 |
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Accrued investment income |
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33,282 |
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33,726 |
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Other assets |
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41,379 |
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49,592 |
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Total assets |
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$ |
7,825,690 |
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$ |
7,060,878 |
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Liabilities |
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Reserve for losses and loss expenses |
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$ |
2,534,415 |
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$ |
2,035,973 |
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Unearned premiums |
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1,083,164 |
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728,516 |
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Reinsurance balances payable |
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157,645 |
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63,667 |
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Securities lending payable |
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33,878 |
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23,093 |
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Deferred income taxes |
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22,705 |
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24,908 |
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Net payable for investments purchased |
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59,671 |
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43,896 |
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Accounts payable and accrued expenses |
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82,190 |
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99,320 |
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Senior notes payable |
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246,901 |
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246,874 |
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Debentures payable |
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289,800 |
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289,800 |
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Total liabilities |
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4,510,369 |
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3,556,047 |
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Commitments and contingent liabilities |
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Shareholders equity |
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Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2011 - 133,320,162; 2010 - 132,838,111; Outstanding: 2011 - 98,288,177; 2010 - 98,001,226) |
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23,331 |
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23,247 |
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Treasury shares (2011 - 35,031,985; 2010 - 34,836,885) |
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(6,131 |
) |
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(6,096 |
) |
Additional paid-in-capital |
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1,870,104 |
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1,860,960 |
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Accumulated other comprehensive (loss) |
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(4,498 |
) |
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(5,455 |
) |
Retained earnings |
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1,432,515 |
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1,632,175 |
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Total shareholders equity |
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3,315,321 |
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3,504,831 |
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Total liabilities and shareholders equity |
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$ |
7,825,690 |
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$ |
7,060,878 |
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The accompanying notes are an integral part of these consolidated financial statements (unaudited).
2
Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
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Three Months Ended |
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March 31, 2011 |
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March 31, 2010 |
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(unaudited) |
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(unaudited) |
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Revenues |
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Gross premiums written |
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$ |
849,896 |
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$ |
870,934 |
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Reinsurance premiums ceded |
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(109,820 |
) |
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(90,739 |
) |
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Net premiums written |
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740,076 |
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780,195 |
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Change in unearned premiums |
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(310,543 |
) |
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(322,501 |
) |
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Net premiums earned |
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429,533 |
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457,694 |
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Net investment income |
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29,975 |
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34,299 |
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Net realized gains on investments |
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6,379 |
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11,398 |
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Net unrealized (losses) gains on investments |
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(12,828 |
) |
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15,413 |
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Other income |
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1,606 |
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|
888 |
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Foreign exchange (losses) |
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(467 |
) |
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(8,764 |
) |
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Total revenues |
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454,198 |
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510,928 |
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Expenses |
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Losses and loss expenses |
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476,198 |
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478,531 |
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Policy acquisition costs |
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77,296 |
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76,176 |
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General and administrative expenses |
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48,477 |
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53,569 |
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Share compensation expenses |
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12,049 |
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6,576 |
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Finance expenses |
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14,001 |
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15,151 |
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Total expenses |
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628,021 |
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630,003 |
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Net (loss) before taxes |
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(173,823 |
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(119,075 |
) |
Tax benefit |
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1,459 |
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|
697 |
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Net (loss) |
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$ |
(172,364 |
) |
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$ |
(118,378 |
) |
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Comprehensive income (loss) |
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Foreign currency translation adjustments |
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957 |
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(1,807 |
) |
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Comprehensive (loss) |
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$ |
(171,407 |
) |
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$ |
(120,185 |
) |
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Earnings per share |
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Weighted average number of common shares
and common share equivalents outstanding |
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Basic |
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97,944,340 |
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126,633,277 |
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Diluted |
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97,944,340 |
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126,633,277 |
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Basic (loss) per share |
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$ |
(1.78 |
) |
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$ |
(0.95 |
) |
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Diluted (loss) per share |
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$ |
(1.78 |
) |
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$ |
(0.95 |
) |
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Cash dividends declared per share |
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$ |
0.25 |
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$ |
0.22 |
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The accompanying notes are an integral part of these consolidated financial statements (unaudited).
3
Validus Holdings, Ltd.
Consolidated Statements of Shareholders Equity
For the Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
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March 31, 2011 |
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March 31, 2010 |
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(unaudited) |
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(unaudited) |
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Common shares |
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Balance Beginning of period |
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$ |
23,247 |
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$ |
23,033 |
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Common shares issued, net |
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84 |
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48 |
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Balance End of period |
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$ |
23,331 |
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$ |
23,081 |
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Treasury shares |
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Balance Beginning of period |
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$ |
(6,096 |
) |
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$ |
(553 |
) |
Repurchase of common shares |
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(35 |
) |
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(844 |
) |
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Balance End of period |
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$ |
(6,131 |
) |
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$ |
(1,397 |
) |
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Additional paid-in capital |
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Balance Beginning of period |
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$ |
1,860,960 |
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$ |
2,675,680 |
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Common shares issued, net |
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3,055 |
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|
300 |
|
Repurchase of common shares |
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|
(5,960 |
) |
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|
(127,313 |
) |
Share compensation expenses |
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|
12,049 |
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|
6,576 |
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|
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Balance End of period |
|
$ |
1,870,104 |
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|
$ |
2,555,243 |
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|
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Accumulated other comprehensive (loss) |
|
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|
|
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|
|
|
Balance Beginning of period |
|
$ |
(5,455 |
) |
|
$ |
(4,851 |
) |
Foreign currency translation adjustments |
|
|
957 |
|
|
|
(1,807 |
) |
|
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|
Balance End of period |
|
$ |
(4,498 |
) |
|
$ |
(6,658 |
) |
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|
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|
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Retained earnings |
|
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Balance Beginning of period |
|
$ |
1,632,175 |
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|
$ |
1,337,811 |
|
Dividends |
|
|
(27,296 |
) |
|
|
(30,137 |
) |
Net (loss) |
|
|
(172,364 |
) |
|
|
(118,378 |
) |
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Balance End of period |
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$ |
1,432,515 |
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|
$ |
1,189,296 |
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Total shareholders equity |
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$ |
3,315,321 |
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$ |
3,759,565 |
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|
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
4
Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
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|
March 31, |
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March 31, |
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2011 |
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2010 |
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|
(unaudited) |
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|
(unaudited) |
|
Cash flows provided by (used in) operating activities |
|
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|
Net (loss) |
|
$ |
(172,364 |
) |
|
$ |
(118,378 |
) |
Adjustments to reconcile net income to cash provided by (used in) operating activities: |
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|
|
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|
Share compensation expenses |
|
|
12,049 |
|
|
|
6,576 |
|
Amortization of discount on senior notes |
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|
27 |
|
|
|
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|
Net realized (gains) on investments |
|
|
(6,379 |
) |
|
|
(11,398 |
) |
Net unrealized losses (gains) on investments |
|
|
12,828 |
|
|
|
(15,413 |
) |
Amortization of intangible assets |
|
|
1,040 |
|
|
|
1,040 |
|
Foreign
exchange (gains) losses on cash and cash equivalents included in net
income |
|
|
(4,694 |
) |
|
|
4,538 |
|
Amortization of premium on fixed maturities |
|
|
8,542 |
|
|
|
3,713 |
|
Change in: |
|
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|
|
|
|
|
|
Premiums receivable |
|
|
(345,025 |
) |
|
|
(255,394 |
) |
Deferred acquisition costs |
|
|
(50,464 |
) |
|
|
(52,829 |
) |
Prepaid reinsurance premiums |
|
|
(44,105 |
) |
|
|
(30,786 |
) |
Loss reserves recoverable |
|
|
(168,836 |
) |
|
|
(18,871 |
) |
Paid losses recoverable |
|
|
1,546 |
|
|
|
(3,509 |
) |
Income taxes recoverable |
|
|
306 |
|
|
|
(41 |
) |
Accrued investment income |
|
|
444 |
|
|
|
(4,875 |
) |
Other assets |
|
|
5,409 |
|
|
|
(6,557 |
) |
Reserve for losses and loss expenses |
|
|
489,356 |
|
|
|
366,176 |
|
Unearned premiums |
|
|
354,648 |
|
|
|
359,487 |
|
Reinsurance balances payable |
|
|
92,655 |
|
|
|
(19,203 |
) |
Deferred income taxes |
|
|
(3,891 |
) |
|
|
(624 |
) |
Accounts payable and accrued expenses |
|
|
(14,535 |
) |
|
|
(19,686 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
168,557 |
|
|
|
183,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities |
|
|
|
|
|
|
|
|
Proceeds on sales of investments |
|
|
1,581,206 |
|
|
|
1,226,380 |
|
Proceeds on maturities of investments |
|
|
108,629 |
|
|
|
113,341 |
|
Purchases of fixed maturities |
|
|
(1,449,698 |
) |
|
|
(1,693,657 |
) |
(Purchases) sales of short-term investments, net |
|
|
(292,131 |
) |
|
|
173,233 |
|
Sales of other investments |
|
|
|
|
|
|
4,383 |
|
(Increase)
in securities lending collateral |
|
|
(10,785 |
) |
|
|
(9,894 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(62,779 |
) |
|
|
(186,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities |
|
|
|
|
|
|
|
|
Net proceeds on issuance of senior notes |
|
|
|
|
|
|
246,793 |
|
Issuance of common shares, net |
|
|
3,139 |
|
|
|
348 |
|
Purchases of common shares under share repurchase program |
|
|
(5,995 |
) |
|
|
(128,157 |
) |
Dividends paid |
|
|
(27,196 |
) |
|
|
(29,944 |
) |
Increase in securities lending payable |
|
|
10,785 |
|
|
|
9,894 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(19,267 |
) |
|
|
98,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency rate changes on cash and cash equivalents |
|
|
10,193 |
|
|
|
(5,795 |
) |
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
96,704 |
|
|
|
90,891 |
|
Cash and cash equivalents beginning of period |
|
|
620,740 |
|
|
|
387,585 |
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
717,444 |
|
|
$ |
478,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid during the period |
|
$ |
26 |
|
|
$ |
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during the period |
|
$ |
17,458 |
|
|
$ |
6,365 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
5
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
1. Basis of preparation and consolidation
These unaudited consolidated financial statements include Validus Holdings, Ltd. and its
wholly and majority owned subsidiaries (together, the Company) and have been prepared in
accordance with generally accepted accounting principles in the United States of America (U.S.
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 in
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was
derived from audited financial statements but does not include all disclosures required by U.S.
GAAP. This Quarterly Report should be read in conjunction with the financial statements included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the
U.S. Securities and Exchange Commission (the SEC).
In the opinion of management, these unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
of the Companys financial position and results of operations as at the end of and for the periods
presented. Certain amounts in prior periods have been reclassified to conform to current period
presentation. All significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
these estimates. The major estimates reflected in the Companys consolidated financial statements
include the reserve for losses and loss expenses, premium estimates for business written on a line
slip or proportional basis, the valuation of goodwill and intangible assets, reinsurance
recoverable balances including the provision for unrecoverable reinsurance recoverable balances and
investment valuation. Actual results could differ from those estimates. The results of operations
for any interim period are not necessarily indicative of the results for a full year. The term
ASC used in these notes refers to Accounting Standard Codifications issued by the United States
Financial Accounting Standards Board (FASB).
2. Recent accounting pronouncements
In January 2010, the FASB issued authoritative guidance on Fair Value Measurements and
Disclosures (ASC 820). This update requires additional disclosures regarding the activity within
Level 3 fair value measurements, including information on a gross basis for purchases, sales,
issuances, and settlements. This guidance is effective for interim and annual reporting periods
beginning after December 15, 2010. The adoption of this update has not had a material impact on the
Companys consolidated financial statements.
In April 2010, the FASB issued authoritative guidance which clarifies the Stock Compensation
guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment
awards. Awards with an exercise price denominated in the currency of a market in which a
substantial portion of the entitys equity securities trades would not be considered to contain a
condition that is not a market, performance or service condition. Therefore, an entity would not
classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance
is effective for accounting periods beginning after December 15, 2010. The adoption of this update
did not impact the Companys consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). The
objective of ASU 2010-20 is to
6
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
provide financial statement users with greater transparency about an entitys allowance for credit
losses and the credit quality of its financing receivables. ASU 2010-20 was effective for interim
and annual periods ending on or after December 15, 2010. The adoption of this update did not have
a material impact on the Companys consolidated financial statements.
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts (ASU 2010-26). The objective of ASU
2010-26 is to address diversity in practice regarding the interpretation of which costs relating to
the acquisition of new or renewal insurance contracts qualify for deferral. ASU 2010-26 is
effective for interim and annual periods beginning after December 15, 2011 and may be applied
prospectively or retrospectively. The
Company early adopted this update effective January 1, 2011
and the adoption did not have an impact on the Companys consolidated financial statements.
3. Investments
The Companys investments in fixed maturities are classified as trading and carried at fair
value, with related net unrealized gains or losses included in earnings. The Company has adopted
all authoritative guidance in effect as of the balance sheet date regarding certain market
conditions that allow for fair value measurements that incorporate unobservable inputs where active
market transaction based measurements are unavailable.
(a) Classification within the fair value hierarchy
Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy
for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer
broadly to assumptions market participants would use in pricing an asset or liability, into three
levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value
hierarchy within which a fair value measurement in its entirety falls is determined based on the
lowest level input that is significant to the fair value measurement in its entirety.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. Level 2
inputs are inputs other than quoted prices within Level 1 that are observable for the asset or
liability, either directly or indirectly. A significant adjustment to a Level 2 input could result
in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs
for the asset or liability.
Level 1 primarily consists of financial instruments whose value is based on quoted market
prices or alternative indices including overnight repos and commercial paper. Level 2 includes
financial instruments that are valued through independent external sources using models or other
valuation methodologies. These models are primarily industry-standard models that consider various
assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity,
current market and contractual prices for the underlying financial instruments, as well as other
relevant economic measures. Substantially all of these assumptions are observable in the
marketplace, can be derived from observable data or are supported by observable levels at which
transactions are executed in the marketplace. The Company performs internal procedures on the
valuations received from independent external sources. Financial instruments in this category
include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds, U.S. agency
and non-agency mortgage and asset-backed securities and bank loans. Level 3 includes financial
instruments that are valued using market approach and income approach valuation techniques. These
models incorporate both observable and unobservable inputs. A hedge fund is the only financial
instrument in this category as at March 31, 2011.
The Companys management and external investment advisors had noted illiquidity and
dislocation in the non-Agency RMBS market for the period September 30, 2008 through to June 30,
2010. During this period, the Company identified certain non-Agency RMBS securities in its
portfolio trading in inactive markets (identified RMBS securities). In order to gauge market
activity for the identified RMBS securities, the Company, with
7
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
assistance from external investment advisors, reviewed the pricing sources for each security in the
portfolio. The Company utilized various pricing vendors to obtain market pricing information for
investment securities.
Consistent with U.S. GAAP, market approach fair value measurements for securities trading in
inactive markets are not determinative. In weighing the fair value measurements resulting from
market approach and income approach valuation techniques, the Company previously placed less
reliance on the market approach fair value measurements. The income approach valuation technique
determines the fair value of each security on the basis of contractual cash flows, discounted using
a risk-adjusted discount rate. As the income approach valuation technique incorporates both
observable and significant unobservable inputs, the securities were included as Level 3 assets with
respect to the fair value hierarchy. The foundation for the income approach was the amount and
timing of future cash flows.
During the three month period ended September 30, 2010, the Company, with assistance from
external investment advisors, determined that market activity had increased for the identified RMBS
securities. Therefore, a market approach valuation technique was adopted for the identified RMBS
securities. Because the market approach incorporates observable inputs, the identified RMBS
securities are classified as Level 2 with respect to the fair value hierarchy at September 30,
2010. During the three months ended December 31, 2010, the Company liquidated substantially all of
the identified RMBS securities which had previously been classified as Level 3 securities.
Other investments consist of an investment in a fund of hedge funds and a deferred
compensation trust held in mutual funds. The fund of hedge funds is a side pocket valued at $10,713
at March 31, 2011. While a redemption request has been submitted, the timing of receipt of proceeds
on the side pocket is unknown. The fund investment manager provides monthly reported net asset
values (NAV) with a one-month delay in its valuation. As a result, the fund investment managers
February 28, 2011 NAV was used as a partial basis for fair value measurement in the Companys March
31, 2011 balance sheet. The fund investment managers NAV relies on an estimate of the performance
of the fund based on the month end positions from the underlying third-party funds. The Company
utilizes the fund investment managers primary market approach estimated NAV that incorporates
relevant valuation sources on a timely basis. As this valuation technique incorporates both
observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3
asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance
between the estimated NAV and the one-month delayed fund investment managers NAV. Immaterial
variances are recorded in the following reporting period.
At March 31, 2011, the Companys investments were allocated between Levels 1, 2 and 3 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
U.S. Government and Government Agency |
|
$ |
|
|
|
$ |
1,050,342 |
|
|
$ |
|
|
|
$ |
1,050,342 |
|
Non-U.S. Government and Government Agency |
|
|
|
|
|
|
501,722 |
|
|
|
|
|
|
|
501,722 |
|
States, municipalities, political subdivision |
|
|
|
|
|
|
30,991 |
|
|
|
|
|
|
|
30,991 |
|
Agency residential mortgage-backed securities |
|
|
|
|
|
|
483,479 |
|
|
|
|
|
|
|
483,479 |
|
Non-Agency residential mortgage-backed securities |
|
|
|
|
|
|
53,369 |
|
|
|
|
|
|
|
53,369 |
|
U.S. corporate |
|
|
|
|
|
|
1,375,281 |
|
|
|
|
|
|
|
1,375,281 |
|
Non-U.S. corporate |
|
|
|
|
|
|
640,177 |
|
|
|
|
|
|
|
640,177 |
|
Bank Loans |
|
|
|
|
|
|
205,196 |
|
|
|
|
|
|
|
205,196 |
|
Catastrophe bonds |
|
|
|
|
|
|
58,071 |
|
|
|
|
|
|
|
58,071 |
|
Asset-backed securities |
|
|
|
|
|
|
180,069 |
|
|
|
|
|
|
|
180,069 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
11,152 |
|
|
|
|
|
|
|
11,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
4,589,849 |
|
|
|
|
|
|
|
4,589,849 |
|
Short-term investments |
|
|
534,426 |
|
|
|
31,194 |
|
|
|
|
|
|
|
565,620 |
|
Hedge fund |
|
|
|
|
|
|
|
|
|
|
10,713 |
|
|
|
10,713 |
|
Mutual funds |
|
|
|
|
|
|
9,059 |
|
|
|
|
|
|
|
9,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
534,426 |
|
|
$ |
4,630,102 |
|
|
$ |
10,713 |
|
|
$ |
5,175,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
At December 31, 2010, the Companys investments were allocated between Levels 1, 2 and 3 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
U.S. Government and Government Agency |
|
$ |
|
|
|
$ |
1,677,166 |
|
|
$ |
|
|
|
$ |
1,677,166 |
|
Non-U.S. Government and Government Agency |
|
|
|
|
|
|
554,199 |
|
|
|
|
|
|
|
554,199 |
|
States, municipalities, political subdivision |
|
|
|
|
|
|
26,285 |
|
|
|
|
|
|
|
26,285 |
|
Agency residential mortgage-backed securities |
|
|
|
|
|
|
445,859 |
|
|
|
|
|
|
|
445,859 |
|
Non-Agency residential mortgage-backed securities |
|
|
|
|
|
|
56,470 |
|
|
|
|
|
|
|
56,470 |
|
U.S. corporate |
|
|
|
|
|
|
1,308,406 |
|
|
|
|
|
|
|
1,308,406 |
|
Non-U.S. corporate |
|
|
|
|
|
|
502,067 |
|
|
|
|
|
|
|
502,067 |
|
Bank loans |
|
|
|
|
|
|
52,566 |
|
|
|
|
|
|
|
52,566 |
|
Catastrophe bonds |
|
|
|
|
|
|
58,737 |
|
|
|
|
|
|
|
58,737 |
|
Asset-backed securities |
|
|
|
|
|
|
123,569 |
|
|
|
|
|
|
|
123,569 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
18,543 |
|
|
|
|
|
|
|
18,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
|
|
|
|
4,823,867 |
|
|
|
|
|
|
|
4,823,867 |
|
Short-term investments |
|
|
259,261 |
|
|
|
14,253 |
|
|
|
|
|
|
|
273,514 |
|
Hedge fund |
|
|
|
|
|
|
|
|
|
|
12,892 |
|
|
|
12,892 |
|
Mutual funds |
|
|
|
|
|
|
8,586 |
|
|
|
|
|
|
|
8,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,261 |
|
|
$ |
4,846,706 |
|
|
$ |
12,892 |
|
|
$ |
5,118,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, Level 3 investments totaled $10,713, representing 0.2% of total investments
measured at fair value on a recurring basis. At December 31, 2010, Level 3 investments totaled
$12,892 representing 0.3% of total investments measured at fair value on a recurring basis.
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value on a recurring basis using Level 3 inputs as at March 31, 2011
and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
|
|
Fixed Maturity |
|
|
|
|
|
|
Total Fair Market |
|
|
|
Investments |
|
|
Other Investments |
|
|
Value |
|
Level 3 investments
Beginning of period |
|
$ |
|
|
|
$ |
12,892 |
|
|
$ |
12,892 |
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
(2,562 |
) |
|
|
(2,562 |
) |
Issuances |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
|
|
|
|
|
260 |
|
|
|
260 |
|
Unrealized gains |
|
|
|
|
|
|
123 |
|
|
|
123 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 investments End of period |
|
$ |
|
|
|
$ |
10,713 |
|
|
$ |
10,713 |
|
|
|
|
|
|
|
|
|
|
|
9
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
Fixed Maturity |
|
|
|
|
|
|
Total Fair Market |
|
|
|
Investments |
|
|
Other Investments |
|
|
Value |
|
Level 3 investments
Beginning of period |
|
$ |
85,336 |
|
|
$ |
25,670 |
|
|
$ |
111,006 |
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
(13,850 |
) |
|
|
(13,850 |
) |
Issuances |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
|
|
|
|
|
662 |
|
|
|
662 |
|
Unrealized (losses) gains |
|
|
(6,307 |
) |
|
|
410 |
|
|
|
(5,897 |
) |
Amortization |
|
|
(11,841 |
) |
|
|
|
|
|
|
(11,841 |
) |
Transfers (out) |
|
|
(67,188 |
) |
|
|
|
|
|
|
(67,188 |
) |
|
|
|
|
|
|
|
|
|
|
Level 3 investments End of period |
|
$ |
|
|
|
$ |
12,892 |
|
|
$ |
12,892 |
|
|
|
|
|
|
|
|
|
|
|
(b) Net investment income
Net investment income was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Fixed maturities and short-term investments |
|
$ |
28,935 |
|
|
$ |
35,755 |
|
Cash and cash equivalents |
|
|
2,581 |
|
|
|
586 |
|
Securities lending income |
|
|
16 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Total gross investment income |
|
|
31,532 |
|
|
|
36,411 |
|
Investment expenses |
|
|
(1,557 |
) |
|
|
(2,112 |
) |
|
|
|
|
|
|
|
Net investment income |
|
$ |
29,975 |
|
|
$ |
34,299 |
|
|
|
|
|
|
|
|
(c) Fixed maturity and short-term investments
The following represents an analysis of net realized gains (losses) and the change in net unrealized (losses) gains on
investments:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Fixed maturities, short-term and other
investments and cash equivalents |
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
15,765 |
|
|
$ |
12,765 |
|
Gross realized (losses) |
|
|
(9,386 |
) |
|
|
(1,367 |
) |
|
|
|
|
|
|
|
Net realized gains on investments |
|
|
6,379 |
|
|
|
11,398 |
|
Net unrealized gains (losses) on securities lending |
|
|
30 |
|
|
|
(1,014 |
) |
Change in net unrealized (losses) gains on
investments |
|
|
(12,858 |
) |
|
|
16,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains and change in net unrealized (losses) gains on investments |
|
$ |
(6,449 |
) |
|
$ |
26,811 |
|
|
|
|
|
|
|
|
10
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government and Government Agency |
|
$ |
1,044,727 |
|
|
$ |
9,871 |
|
|
$ |
(4,256 |
) |
|
$ |
1,050,342 |
|
Non-U.S. Government and Government Agency |
|
|
495,686 |
|
|
|
9,523 |
|
|
|
(3,487 |
) |
|
|
501,722 |
|
States, municipalities, political subdivision |
|
|
31,102 |
|
|
|
59 |
|
|
|
(170 |
) |
|
|
30,991 |
|
Agency residential mortgage-backed securities |
|
|
469,409 |
|
|
|
14,937 |
|
|
|
(867 |
) |
|
|
483,479 |
|
Non-Agency residential mortgage-backed securities |
|
|
58,995 |
|
|
|
124 |
|
|
|
(5,750 |
) |
|
|
53,369 |
|
U.S. corporate |
|
|
1,356,102 |
|
|
|
24,715 |
|
|
|
(5,536 |
) |
|
|
1,375,281 |
|
Non-U.S. corporate |
|
|
634,965 |
|
|
|
8,078 |
|
|
|
(2,866 |
) |
|
|
640,177 |
|
Bank loans |
|
|
205,154 |
|
|
|
691 |
|
|
|
(649 |
) |
|
|
205,196 |
|
Catastrophe bonds |
|
|
57,026 |
|
|
|
1,346 |
|
|
|
(301 |
) |
|
|
58,071 |
|
Asset-backed securities |
|
|
179,919 |
|
|
|
614 |
|
|
|
(464 |
) |
|
|
180,069 |
|
Commercial mortgage-backed securities |
|
|
11,025 |
|
|
|
127 |
|
|
|
|
|
|
|
11,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
4,544,110 |
|
|
|
70,085 |
|
|
|
(24,346 |
) |
|
|
4,589,849 |
|
Total short-term investments |
|
|
565,600 |
|
|
|
111 |
|
|
|
(91 |
) |
|
|
565,620 |
|
Total other investments |
|
|
16,089 |
|
|
|
3,683 |
|
|
|
|
|
|
|
19,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,125,799 |
|
|
$ |
73,879 |
|
|
$ |
(24,437 |
) |
|
$ |
5,175,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Government and Government Agency |
|
$ |
1,665,050 |
|
|
$ |
20,134 |
|
|
$ |
(8,018 |
) |
|
$ |
1,677,166 |
|
Non-U.S. Government and Government
Agency |
|
|
550,759 |
|
|
|
11,635 |
|
|
|
(8,195 |
) |
|
|
554,199 |
|
States, municipalities, political subdivision |
|
|
26,365 |
|
|
|
90 |
|
|
|
(170 |
) |
|
|
26,285 |
|
Agency residential mortgage-backed
securities |
|
|
430,873 |
|
|
|
15,491 |
|
|
|
(505 |
) |
|
|
445,859 |
|
Non-Agency residential mortgage-backed
securities |
|
|
62,020 |
|
|
|
64 |
|
|
|
(5,614 |
) |
|
|
56,470 |
|
U.S. corporate |
|
|
1,288,078 |
|
|
|
28,526 |
|
|
|
(8,198 |
) |
|
|
1,308,406 |
|
Non-U.S. corporate |
|
|
497,689 |
|
|
|
7,939 |
|
|
|
(3,561 |
) |
|
|
502,067 |
|
Bank loans |
|
|
52,612 |
|
|
|
58 |
|
|
|
(104 |
) |
|
|
52,566 |
|
Catastrophe bonds |
|
|
56,991 |
|
|
|
2,042 |
|
|
|
(296 |
) |
|
|
58,737 |
|
Asset-backed securities |
|
|
123,354 |
|
|
|
605 |
|
|
|
(390 |
) |
|
|
123,569 |
|
Commercial mortgage-backed securities |
|
|
18,246 |
|
|
|
299 |
|
|
|
(2 |
) |
|
|
18,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
4,772,037 |
|
|
|
86,883 |
|
|
|
(35,053 |
) |
|
|
4,823,867 |
|
Total short-term investments |
|
|
273,444 |
|
|
|
70 |
|
|
|
|
|
|
|
273,514 |
|
Total other investments |
|
|
18,392 |
|
|
|
3,086 |
|
|
|
|
|
|
|
21,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,063,873 |
|
|
$ |
90,039 |
|
|
$ |
(35,053 |
) |
|
$ |
5,118,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The following table sets forth certain information regarding the investment ratings of the
Companys fixed maturities portfolio as at March 31, 2011 and December 31, 2010. Investment ratings
are the lower of Moodys or Standard & Poors rating for each investment security, presented in
Standard & Poors equivalent rating. For investments where Moodys and Standard & Poors ratings
are not available, Fitch ratings are used and presented in Standard & Poors equivalent rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Estimated Fair |
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
|
|
Value |
|
|
% of Total |
|
|
Value |
|
|
% of Total |
|
AAA |
|
$ |
2,437,814 |
|
|
|
53.1 |
% |
|
$ |
2,946,514 |
|
|
|
61.2 |
% |
AA |
|
|
606,860 |
|
|
|
13.2 |
% |
|
|
428,972 |
|
|
|
8.9 |
% |
A |
|
|
926,119 |
|
|
|
20.2 |
% |
|
|
1,077,389 |
|
|
|
22.3 |
% |
BBB |
|
|
322,274 |
|
|
|
7.0 |
% |
|
|
219,523 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade |
|
|
4,293,067 |
|
|
|
93.5 |
% |
|
|
4,672,398 |
|
|
|
97.0 |
% |
BB |
|
|
154,257 |
|
|
|
3.4 |
% |
|
|
74,475 |
|
|
|
1.5 |
% |
B |
|
|
112,515 |
|
|
|
2.4 |
% |
|
|
45,660 |
|
|
|
0.9 |
% |
CCC |
|
|
27,715 |
|
|
|
0.6 |
% |
|
|
29,219 |
|
|
|
0.6 |
% |
CC |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
D/NR |
|
|
2,295 |
|
|
|
0.1 |
% |
|
|
2,115 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Investment grade |
|
|
296,782 |
|
|
|
6.5 |
% |
|
|
151,469 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
4,589,849 |
|
|
|
100.0 |
% |
|
$ |
4,823,867 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value amounts for fixed maturity securities held at
March 31, 2011 and December 31, 2010 are shown by contractual maturity. Actual maturity may differ
from contractual maturity because certain borrowers may have the right to call or prepay certain
obligations with or without call or prepayment penalties.
12
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Due in one year or less |
|
$ |
395,245 |
|
|
$ |
398,058 |
|
|
$ |
424,327 |
|
|
$ |
426,167 |
|
Due after one year through five years |
|
|
3,195,073 |
|
|
|
3,229,472 |
|
|
|
3,498,334 |
|
|
|
3,540,408 |
|
Due after five years through ten
years |
|
|
232,448 |
|
|
|
232,235 |
|
|
|
207,918 |
|
|
|
206,317 |
|
Due after ten years |
|
|
1,996 |
|
|
|
2,015 |
|
|
|
6,965 |
|
|
|
6,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,824,762 |
|
|
|
3,861,780 |
|
|
|
4,137,544 |
|
|
|
4,179,426 |
|
Asset-backed and mortgage-backed
securities |
|
|
719,348 |
|
|
|
728,069 |
|
|
|
634,493 |
|
|
|
644,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,544,110 |
|
|
$ |
4,589,849 |
|
|
$ |
4,772,037 |
|
|
$ |
4,823,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has a five year, $500,000 secured letter of credit facility provided by a
syndicate of commercial banks. At March 31, 2011, approximately $285,048 (December 31, 2010:
$268,944) of letters of credit were issued and outstanding under this facility for which $348,182
of investments were pledged as collateral (December 31, 2010: $325,532). In 2007, the Company
entered into a $100,000 standby letter of credit facility which provides Funds at Lloyds (the
Talbot FAL Facility). On November 19, 2009, the Company entered into a Second Amendment to the
Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At March 31, 2011, $25,000
(December 31, 2010: $25,000) of letters of credit were issued and outstanding under the Talbot FAL
Facility for which $45,278 of investments were pledged as collateral (December 31, 2010: $45,504).
In addition, $1,810,402 of investments were held in trust at March 31, 2011 (December 31, 2010:
$1,729,631). Of those, $1,553,756 were held in trust for the benefit of Talbots cedants and
policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by
certain regulators (December 31, 2010: $1,489,243).
The Company assumed two letters of credit facilities as part of the acquisition of IPC
Holdings, Ltd. (IPC and such acquisition, the IPC Acquisition). A Credit Facility
between IPC, IPCRe Limited, the Lenders
party thereto and Wachovia Bank, National Association (the IPC Syndicated Facility) and a Letters
of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the IPC Bi-Lateral Facility).
At March 31, 2010, the IPC Syndicated Facility was closed. At March 31, 2011, the IPC Bi-Lateral
Facility had $64,368 (December 31, 2010: $68,063) letters of credit issued and outstanding for
which $105,771 (December 31, 2010: $105,310) of investments were held in an associated collateral
account.
(d) Securities lending
The Company participates in a securities lending program whereby certain securities from its
portfolio are loaned to third parties for short periods of time through a lending agent. The
Company retains all economic interest in the securities it lends and receives a fee from the
borrower for the temporary use of the securities. Collateral in the form of cash, government
securities and letters of credit is required at a rate of 102% of the market value of the loaned
securities and is held by a third party. As at March 31, 2011, the Company had $33,407 (December
31, 2010: $22,566) in securities on loan. During the three months ended March 31, 2011, the Company
recorded a $30 unrealized gain on this collateral in its Statements of Operations (March 31, 2010:
unrealized loss $1,014).
Securities lending collateral reinvested includes corporate floating rate securities and
overnight repo with an average reset period of 4.0 days (December 31, 2010: 17.6 days). As at March
31, 2011, the securities lending collateral reinvested by the Company in connection with its
securities lending program was allocated between Levels 1, 2 and 3 as follows:
13
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Corporate |
|
$ |
|
|
|
$ |
254 |
|
|
$ |
|
|
|
$ |
254 |
|
Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
5,011 |
|
|
|
|
|
|
|
5,011 |
|
Short-term investments |
|
|
27,572 |
|
|
|
306 |
|
|
|
|
|
|
|
27,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,572 |
|
|
$ |
5,571 |
|
|
$ |
|
|
|
$ |
33,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010, the securities lending collateral reinvested by the Company in connection with its
securities program was allocated between Levels 1, 2 and 3 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Corporate |
|
$ |
|
|
|
$ |
229 |
|
|
$ |
|
|
|
$ |
229 |
|
Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
5,005 |
|
|
|
|
|
|
|
5,005 |
|
Short-term investments |
|
|
2,644 |
|
|
|
14,450 |
|
|
|
|
|
|
|
17,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,644 |
|
|
$ |
19,684 |
|
|
$ |
|
|
|
$ |
22,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain information regarding the investment ratings of the
Companys securities lending collateral reinvested as at March 31, 2011 and December 31, 2010.
Investment ratings are the lower of Moodys or Standard & Poors rating for each investment
security, presented in Standard & Poors equivalent rating. For investments where Moodys and
Standard & Poors ratings are not available, Fitch ratings are used and presented in Standard &
Poors equivalent rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Estimated Fair |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Value |
|
|
% of Total |
|
|
Fair Value |
|
|
% of Total |
|
AAA |
|
$ |
5,317 |
|
|
|
16.0 |
% |
|
$ |
5,454 |
|
|
|
24.4 |
% |
AA+ |
|
|
|
|
|
|
0.0 |
% |
|
|
11,003 |
|
|
|
49.3 |
% |
AA |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
AA- |
|
|
|
|
|
|
0.0 |
% |
|
|
2,998 |
|
|
|
13.5 |
% |
A+ |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
A |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
NR |
|
|
254 |
|
|
|
0.8 |
% |
|
|
229 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,571 |
|
|
|
16.8 |
% |
|
|
19,684 |
|
|
|
88.2 |
% |
NR- Short-term investments (a) |
|
|
27,572 |
|
|
|
83.2 |
% |
|
|
2,644 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,143 |
|
|
|
100.0 |
% |
|
$ |
22,328 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This amount relates to short-term investments and is therefore not a rated security. |
The amortized cost and estimated fair value amounts for securities lending collateral
reinvested by the Company at March 31, 2011 and December 31, 2010 are shown by contractual maturity
below. Actual maturity may differ from contractual maturity because certain borrowers may have the
right to call or prepay certain obligations with or without call or prepayment penalties.
14
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Due in one year or less |
|
$ |
27,878 |
|
|
$ |
27,878 |
|
|
$ |
17,093 |
|
|
$ |
17,095 |
|
Due after one year through five years |
|
|
6,000 |
|
|
|
5,265 |
|
|
|
6,000 |
|
|
|
5,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,878 |
|
|
$ |
33,143 |
|
|
$ |
23,093 |
|
|
$ |
22,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Derivative Instruments Used in Hedging Activities
The Company enters into derivative instruments for risk management purposes, specifically to
economically hedge unmatched foreign currency exposures. During the
three months ended March 31, 2011, the Company entered
into foreign currency forward exchange contracts to mitigate the risk of fluctuations in the Euro
and Australian dollar to U.S. dollar rates. During the year ended
December 31, 2010, the
Company entered into a foreign currency forward contract to mitigate the risk of foreign currency
exposure of unpaid losses denominated in Chilean Pesos (CLP). The CLP
foreign currency forward contract was renewed during the three months ended March 31, 2011. The following table summarizes
information on the location and amount of the derivative fair value on the consolidated balance
sheet at March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
Derivatives designated as hedging instruments: |
|
Notional Amount |
|
|
location |
|
|
Fair value |
|
|
location |
|
|
Fair value |
|
Foreign exchange contracts |
|
$ |
70,416 |
|
|
Other assets |
|
|
$ |
551 |
|
|
Other liabilities |
|
|
$ |
843 |
|
The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
Derivatives designated as hedging instruments: |
|
Notional Amount |
|
|
location |
|
|
Fair value |
|
|
location |
|
|
Fair value |
|
Foreign exchange contract |
|
$ |
75,000 |
|
|
Other assets |
|
|
$ |
2,905 |
|
|
Other liabilities |
|
|
$ |
|
|
(a) Classification within the fair value hierarchy
As described in Note 3 Investments under U.S. GAAP, a company must determine the appropriate
level in the fair value hierarchy for each fair value measurement. We estimate the fair value for
these asset derivatives using a valuation obtained from an independent external source. The
assumptions used within the valuation are observable in the marketplace, can be derived from
observable data or are supported by observable levels at which transactions are executed in the
marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value
hierarchy.
(b) Derivative instruments designated as a fair value hedge
The Company designates its derivative instruments as fair value hedges and formally and
contemporaneously documents all relationships between the hedging instruments and hedged items and
links the hedging derivatives 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.
15
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The following table provides the total impact on earnings relating to the derivative
instruments formally designated as fair value hedges along with the impact of the related hedged
items for the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
Amount of Gain |
|
|
|
|
|
|
|
|
|
|
|
(Loss) on Hedged |
|
|
(Loss) Recognized |
|
|
|
Location of |
|
|
Amount of Gain |
|
|
Item Recognized in |
|
|
in Income on |
|
|
|
Gain (Loss) |
|
|
(Loss) Recognized |
|
|
Income Attributable |
|
|
Derivative |
|
|
|
Recognized in |
|
|
in Income on |
|
|
to Risk Being |
|
|
(Ineffective |
|
Derivatives
designated as fair value hedges and related hedged item: |
|
Income |
|
|
Derivative |
|
|
Hedged |
|
|
Portion) |
|
Foreign exchange |
|
Foreign exchange (losses) gains |
|
$ |
(3,822 |
) |
|
$ |
3,822 |
|
|
$ |
|
|
There was no derivative activity for the three months ended March 31, 2010.
5. Reserve for losses and loss expenses
Reserves for losses and loss expenses are based in part upon the estimation of case losses
reported from brokers, insureds and ceding companies. The Company also uses statistical and
actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from
the occurrence of a loss, the reporting of a loss to the Company and the settlement of the
Companys liability may be several months or years. During this period, additional facts and trends
may be revealed. As these factors become apparent, case reserves will be adjusted, sometimes
requiring an increase or decrease in the overall reserves of the Company, and at other times
requiring a reallocation of incurred but not reported reserves to specific case reserves. These
estimates are reviewed regularly, and such adjustments, if any, are reflected in earnings in the
period in which they become known. While management believes that it has made a reasonable estimate
of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not
exceed the total reserves.
The following table represents an analysis of paid and unpaid losses and loss expenses
incurred and a reconciliation of the beginning and ending unpaid loss expenses as at March 31, 2011
and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year ended |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Reserve for losses and loss expenses, beginning of period |
|
$ |
2,035,973 |
|
|
$ |
1,622,134 |
|
Losses and loss expenses recoverable |
|
|
(283,134 |
) |
|
|
(181,765 |
) |
|
|
|
|
|
|
|
Net reserves for losses and loss expenses, beginning of period |
|
|
1,752,839 |
|
|
|
1,440,369 |
|
Increase (decrease) in net losses and loss expenses incurred
in respect of losses occurring in: |
|
|
|
|
|
|
|
|
Current year |
|
|
502,714 |
|
|
|
1,144,196 |
|
Prior years |
|
|
(26,516 |
) |
|
|
(156,610 |
) |
|
|
|
|
|
|
|
Total incurred losses and loss expenses |
|
|
476,198 |
|
|
|
987,586 |
|
Total net paid losses |
|
|
(163,257 |
) |
|
|
(673,422 |
) |
Foreign exchange |
|
|
14,934 |
|
|
|
(1,694 |
) |
|
|
|
|
|
|
|
Net reserve for losses and loss expenses, end of period |
|
|
2,080,714 |
|
|
|
1,752,839 |
|
Losses and loss expenses recoverable |
|
|
453,701 |
|
|
|
283,134 |
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses, end of period |
|
$ |
2,534,415 |
|
|
$ |
2,035,973 |
|
|
|
|
|
|
|
|
16
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
During the period, the Company recorded losses of $148,926 for the Tohoku earthquake, $52,434, for
the Gryphon Alpha mooring failure, $41,881 for the Christchurch earthquake, $31,023 for the
Brisbane floods and $19,500 for the CNRL Horizon explosion.
6. Reinsurance
The Company enters into reinsurance and retrocession agreements in order to mitigate its
accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies
with higher limits and increase its aggregate capacity. The cession of insurance and reinsurance
does not legally discharge the Company from its primary liability for the full amount of the
policies, and the Company is required to pay the loss and bear collection risk if the reinsurer
fails to meet its obligations under the reinsurance or retrocession agreement. Amounts recoverable
from reinsurers are estimated in a manner consistent with the underlying liabilities.
a) Credit risk
The Company evaluates the financial condition of its reinsurers and monitors concentration of
credit risk arising from its exposure to individual reinsurers. The reinsurance program is
generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by
Standard & Poors or the equivalent with other rating agencies. Exposure to a single reinsurer is
also controlled with restrictions dependent on rating. At March 31, 2011, 97.4% of reinsurance
recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from
reinsurers rated A- or better and included $296,998 of IBNR recoverable (December 31, 2010:
$146,519). Reinsurance recoverables by reinsurer are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
Reinsurance |
|
|
|
|
|
|
Reinsurance |
|
|
|
|
|
|
Recoverable |
|
|
% of Total |
|
|
Recoverable |
|
|
% of Total |
|
Top 10 reinsurers |
|
$ |
335,458 |
|
|
|
69.8 |
% |
|
$ |
222,420 |
|
|
|
71.5 |
% |
Other reinsurers balances > $1 million |
|
|
136,307 |
|
|
|
28.4 |
% |
|
|
80,221 |
|
|
|
25.8 |
% |
Other reinsurers balances < $1 million |
|
|
8,419 |
|
|
|
1.8 |
% |
|
|
8,489 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
480,184 |
|
|
|
100.0 |
% |
|
$ |
311,130 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
Reinsurance |
|
|
|
|
Top 10 Reinsurers |
|
Rating |
|
|
Recoverable |
|
|
% of Total |
|
Allianz |
|
AA |
|
$ |
70,807 |
|
|
|
21.1 |
% |
Lloyds Syndicates |
|
|
A+ |
|
|
|
68,541 |
|
|
|
20.5 |
% |
Hannover Re |
|
AA- |
|
|
36,722 |
|
|
|
10.9 |
% |
Manulife |
|
AA- |
|
|
35,000 |
|
|
|
10.4 |
% |
Tokio Marine / Tokio Millennium |
|
AA- |
|
|
26,571 |
|
|
|
7.9 |
% |
Everest Re |
|
|
A+ |
|
|
|
23,726 |
|
|
|
7.1 |
% |
Fully collateralized reinsurers |
|
NR |
|
|
22,520 |
|
|
|
6.7 |
% |
Montpelier Re |
|
|
A- |
|
|
|
20,000 |
|
|
|
6.0 |
% |
Munich Re |
|
AA- |
|
|
16,571 |
|
|
|
4.9 |
% |
Transatlantic Re |
|
|
A+ |
|
|
|
15,000 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
335,458 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
17
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Reinsurance |
|
|
|
|
Top 10 Reinsurers |
|
Rating |
|
|
recoverable |
|
|
% of Total |
|
Lloyds Syndicates |
|
|
A+ |
|
|
$ |
60,716 |
|
|
|
27.2 |
% |
Hannover Re |
|
AA- |
|
|
32,392 |
|
|
|
14.6 |
% |
Fully collateralized reinsurers |
|
NR |
|
|
23,750 |
|
|
|
10.7 |
% |
Montpelier Re |
|
|
A- |
|
|
|
20,000 |
|
|
|
9.0 |
% |
Munich Re |
|
AA- |
|
|
17,411 |
|
|
|
7.8 |
% |
Everest Re |
|
|
A+ |
|
|
|
16,611 |
|
|
|
7.5 |
% |
Allianz |
|
AA |
|
|
14,184 |
|
|
|
6.4 |
% |
Transatlantic Re |
|
|
A+ |
|
|
|
13,758 |
|
|
|
6.2 |
% |
Tokio Millennium Re |
|
AA |
|
|
11,980 |
|
|
|
5.4 |
% |
Platinum Re |
|
|
A |
|
|
|
11,618 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
222,420 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011 and December 31, 2010, the provision for uncollectible reinsurance relating
to losses recoverable was $5,986 and $5,652, respectively. To estimate the provision for
uncollectible reinsurance recoverable, the reinsurance recoverable is first allocated to applicable
reinsurers. This determination is based on a process rather than an estimate, although an element
of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the
$480,184 reinsurance recoverable at March 31, 2011, $22,520 was fully collateralized (December 31,
2010: $23,750).
The Company uses a default analysis to estimate uncollectible reinsurance. The primary
components of the default analysis are reinsurance recoverable balances by reinsurer and default
factors used to determine the portion of a reinsurers balance deemed to be uncollectible. Default
factors require considerable judgment and are determined using the current rating, or rating
equivalent, of each reinsurer as well as other key considerations and assumptions.
7. Share capital
a) Authorized and issued
The Companys authorized share capital is 571,428,571 voting and non-voting shares with a par
value of $0.175 per share. The holders of common voting shares are entitled to receive dividends
and are allocated one vote per share, provided that, if the controlled shares of any shareholder or
group of related shareholders constitute more than 9.09 percent of the outstanding common shares of
the Company, their voting power will be reduced to 9.09 percent.
The Company may from time to time repurchase its securities, including common shares, Junior
Subordinated Deferrable Debentures and Senior Notes. In November 2009, the Board of Directors of
the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the
Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders.
18
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
This amount was in addition to,
and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010
under its previously authorized $400,000 share repurchase program. On May 6, 2010, the Board of
Directors authorized a self tender offer pursuant to which the Company repurchased $300,000 in
common shares. On November 4, 2010, the Board of Directors authorized a self tender offer pursuant
to which the Company repurchased $238,362 in common shares. In addition, the Board of Directors
authorized separate repurchase agreements with funds affiliated with or managed by each of Aquiline
Capital Partners LLC, New Mountain Capital LLC, and Vestar Capital Partners pursuant to which the
Company repurchased $61,638 in common shares. On December 20, 2010, the Board of Directors
authorized the Company to return up to an additional $400,000 to shareholders. This amount is in
addition to the $929,173 of common shares purchased by the Company through December 23, 2010 under
its previously authorized share repurchase program.
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 Companys capital position relative to internal and rating agency targets, legal
requirements and other factors. The repurchase program may be modified, extended or terminated by
the Board of Directors at any time.
The following table is a summary of the common shares issued and outstanding:
|
|
|
|
|
|
|
Common Shares |
|
Common shares issued, December 31, 2010 |
|
|
132,838,111 |
|
Restricted share awards vested, net of shares withheld |
|
|
274,966 |
|
Restricted share units vested, net of shares withheld |
|
|
5,376 |
|
Employee seller shares vested |
|
|
|
|
Options exercised |
|
|
201,709 |
|
Warrants exercised |
|
|
|
|
|
|
|
|
Common shares issued, March 31, 2011 |
|
|
133,320,162 |
|
Shares repurchased |
|
|
(35,031,985 |
) |
|
|
|
|
Common shares outstanding, March 31, 2011 |
|
|
98,288,177 |
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
Common shares issued, December 31, 2009 |
|
|
131,616,349 |
|
Restricted share awards vested, net of shares withheld |
|
|
174,582 |
|
Restricted share units vested, net of shares withheld |
|
|
51,436 |
|
Employee seller shares vested |
|
|
|
|
Options exercised |
|
|
51,534 |
|
Warrants exercised |
|
|
|
|
|
|
|
|
Common shares issued, March 31, 2010 |
|
|
131,893,901 |
|
Shares repurchased |
|
|
(7,983,471 |
) |
|
|
|
|
Common shares outstanding, March 31, 2010 |
|
|
123,910,430 |
|
|
|
|
|
19
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
b) Warrants
During the three months ended March 31, 2011 no warrants were exercised (March 31, 2010: nil).
c) Deferred share units
Under the terms of the Companys Director Stock Compensation Plan, non-management directors
may elect to receive their director fees in deferred share units rather than cash. The number of
share units distributed in case of election under the plan is equal to the amount of the annual
retainer fee otherwise payable to the director on such payment date divided by 100% of the fair
market value of a share on such payment date. Additional deferred share units are issued in lieu of
dividends that accrue on these deferred share units. The total outstanding deferred share units at
March 31, 2011 were 4,762 (December 31, 2010: 4,727).
d) Dividends
On February 9, 2011, the Company announced a quarterly cash dividend of $0.25 per common share
and $0.25 per common share equivalent for which each outstanding warrant is exercisable. This
dividend was paid on March 30, 2011 to holders of record on March 15, 2011.
8. Stock plans
a) Long Term Incentive Plan and Short Term Incentive Plan
The Companys 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. In addition, the
Company may issue restricted share awards or restricted share units in connection with awards
issued under its annual Short Term Incentive Plan (STIP). The total number of shares reserved for
issuance under the LTIP and STIP are 13,126,896 shares of which 4,893,061 shares are remaining. The
LTIP and STIP are 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 Companys
common shares at the date of grant.
i. Options
Options may be exercised for voting common shares upon vesting. Options have a life of 10
years and vest either ratably or at the end of the required service period from the date of grant.
Grant prices are established at the estimated fair value of the Companys common shares at the date
of grant using the Black-Scholes option-pricing model. The following weighted average assumptions
were used for all grants to date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
|
|
|
|
risk free interest |
|
|
Weighted average |
|
|
Expected life |
|
|
|
|
Year |
|
rate |
|
|
dividend yield |
|
|
(years) |
|
|
Expected volatility |
|
2008 |
|
|
3.5% |
|
|
|
3.2% |
|
|
|
7 |
|
|
|
30.0% |
|
2009 |
|
|
3.9% |
|
|
|
3.7% |
|
|
|
2 |
|
|
|
34.6% |
|
2010 (a) |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
|
(a) |
|
The Company did not grant any stock option awards during the year ended December 31, 2010
or the three months ended March 31, 2011. |
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.
20
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Share compensation expenses in respect of options of $1,247 were recorded for the three months
ended March 31, 2011 (March 31, 2010: $1,038). The expenses represent the proportionate accrual of
the fair value of each grant based on the remaining vesting period.
Activity with respect to options for the three months ended March 31, 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair Value |
|
|
Exercise Price |
|
Options outstanding, December 31, 2010 |
|
|
2,723,684 |
|
|
$ |
6.74 |
|
|
$ |
20.19 |
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(201,709 |
) |
|
|
4.48 |
|
|
|
21.94 |
|
Options forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, March 31, 2011 |
|
|
2,521,975 |
|
|
$ |
6.92 |
|
|
$ |
20.05 |
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2011 |
|
|
2,399,880 |
|
|
$ |
6.81 |
|
|
$ |
19.94 |
|
|
|
|
|
|
|
|
|
|
|
Activity with respect to options for the three months ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair Value |
|
|
Exercise Price |
|
Options outstanding, December 31, 2009 |
|
|
3,278,015 |
|
|
$ |
6.83 |
|
|
$ |
19.88 |
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(51,534 |
) |
|
|
5.72 |
|
|
|
22.34 |
|
Options forfeited |
|
|
(3,207 |
) |
|
|
10.30 |
|
|
|
20.39 |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, March 31, 2010 |
|
|
3,223,274 |
|
|
$ |
6.84 |
|
|
$ |
19.84 |
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2010 |
|
|
2,514,697 |
|
|
$ |
6.00 |
|
|
$ |
20.08 |
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011, there were $661 (December 31, 2010: $851) of total unrecognized share
compensation expenses in respect of options that are expected to be recognized over a
weighted-average period of 0.9 years (December 31, 2010: 1.2 years).
ii. Restricted share awards
Restricted shares granted under the LTIP and STIP vest either ratably or at the end of the
required service period and contain certain restrictions during the vesting period, relating to,
among other things, forfeiture in the event of termination of employment and transferability. Share
compensation expenses of $9,156 were recorded for the three months ended March 31, 2011 (March 31,
2010: $4,326). The expenses represent the proportionate accrual of the fair value of each grant
based on the remaining vesting period.
21
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Activity with respect to unvested restricted share awards for the three months ended March 31,
2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Weighted Average |
|
|
|
Share |
|
|
Grant Date |
|
|
|
Awards |
|
|
Fair Value |
|
Restricted share awards outstanding, December 31, 2010 |
|
|
3,114,039 |
|
|
$ |
24.33 |
|
Restricted share awards granted |
|
|
3,333 |
|
|
|
30.92 |
|
Restricted share awards vested |
|
|
(314,881 |
) |
|
|
25.37 |
|
Restricted share awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share awards outstanding, March 31, 2011 |
|
|
2,802,491 |
|
|
$ |
24.23 |
|
|
|
|
|
|
|
|
Activity with respect to unvested restricted share awards for the three months
ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Weighted Average |
|
|
|
Share |
|
|
Grant Date |
|
|
|
Awards |
|
|
Fair Value |
|
Restricted share awards outstanding, December 31, 2009 |
|
|
2,525,958 |
|
|
$ |
23.43 |
|
Restricted share awards granted |
|
|
426,614 |
|
|
|
26.15 |
|
Restricted share awards vested |
|
|
(204,520 |
) |
|
|
24.56 |
|
Restricted share awards forfeited |
|
|
(11,298 |
) |
|
|
22.13 |
|
|
|
|
|
|
|
|
Restricted share awards outstanding, March 31, 2010 |
|
|
2,736,754 |
|
|
$ |
23.77 |
|
|
|
|
|
|
|
|
At March 31, 2011, there were $38,548 (December 31, 2010: $44,290) 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, 2010: 2.5 years).
iii. Restricted share units
Restricted share units under the LTIP and STIP vest either ratably or at the end of the
required service period and contain certain restrictions during the vesting period, relating to,
among other things, forfeiture in the event of termination of employment and transferability. Share
compensation expenses of $114 were recorded for the three months ended March 31, 2011 (March 31,
2010: $173). The expenses represent the proportionate accrual of the fair value of each grant based
on the remaining vesting period.
Activity with respect to unvested restricted share units for the three months ended March 31,
2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Restricted |
|
|
Grant Date |
|
|
|
Share Units |
|
|
Fair Value |
|
Restricted share units outstanding, December 31, 2010 |
|
|
47,049 |
|
|
$ |
25.04 |
|
Restricted share units granted |
|
|
|
|
|
|
|
|
Restricted share units vested |
|
|
(7,129 |
) |
|
|
24.24 |
|
Restricted share units reinvested |
|
|
296 |
|
|
|
25.45 |
|
Restricted share units forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units outstanding, March 31, 2011 |
|
|
40,216 |
|
|
$ |
25.18 |
|
|
|
|
|
|
|
|
22
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Activity with respect to unvested restricted share units for the three months
ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Restricted |
|
|
Grant Date |
|
|
|
Share Units |
|
|
Fair Value |
|
Restricted share units outstanding, December 31, 2009 |
|
|
78,591 |
|
|
$ |
24.84 |
|
Restricted share units granted |
|
|
7,952 |
|
|
|
26.07 |
|
Restricted share units vested |
|
|
(52,679 |
) |
|
|
24.77 |
|
Restricted share units forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units outstanding, March 31, 2010 |
|
|
33,864 |
|
|
$ |
25.24 |
|
|
|
|
|
|
|
|
At March 31, 2011, there were $721 (December 31, 2010: $809) 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, 2010: 2.7 years).
iv. Performance share awards
The Performance Share Awards (PSAs) contain a performance based component. The performance
component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share
over a three year period. For PSAs granted in 2010, the grant date Diluted Book Value per Share
(DBVPS) is $29.68, the DBVPS as at December 31, 2009. The Dividend Adjusted Performance Period
End DBVPS will be the DBVPS as at December 31, 2012. 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 in the period in
which they are determined.
Share compensation expenses in respect of PSAs of $344 were recorded for three months ended
March 31, 2011 (March 31, 2010: $nil). The expenses represent the proportionate accrual of the fair
value of each grant based on the remaining vesting period.
Activity with respect to unvested performance share awards for the three months ended March
31, 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Performance |
|
|
Grant Date |
|
|
|
Share Awards |
|
|
Fair Value |
|
Performance share awards outstanding, December 31, 2010 |
|
|
132,401 |
|
|
$ |
28.70 |
|
Performance share awards granted |
|
|
|
|
|
|
|
|
Performance share awards vested |
|
|
|
|
|
|
|
|
Performance share awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance share awards outstanding, March 31, 2011 |
|
|
132,401 |
|
|
$ |
28.70 |
|
|
|
|
|
|
|
|
23
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Activity with respect to unvested performance share awards for the three months ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Performance |
|
|
Grant Date |
|
|
|
Share Awards |
|
|
Fair Value |
|
Performance share awards outstanding, December 31, 2009 |
|
|
|
|
|
$ |
|
|
Performance share awards granted |
|
|
|
|
|
|
|
|
Performance share awards vested |
|
|
|
|
|
|
|
|
Performance share awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance share awards outstanding, March 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
At March 31, 2011, there were $3,052 (December 31, 2010: $3,375) of total unrecognized share
compensation expenses in respect of PSAs that are expected to be recognized over a weighted-average
period of 2.2 years (December 31, 2010: 2.4 years).
b) Employee seller shares
Pursuant to the Share Sale Agreement for the purchase of Talbot Holdings, Ltd. (Talbot), the
Company issued 1,209,741 restricted shares to Talbot employees (the employee seller shares). Upon
consummation of the acquisition, the employee seller shares were validly issued, fully-paid and
non-assessable and entitled to vote and participate in distributions and dividends in accordance
with the Companys Bye-laws. However, the employee seller shares are subject to a restricted period
during which they are subject to forfeiture (as implemented by repurchase by the Company for a
nominal amount). Forfeiture of employee seller shares will generally occur in the event that any
such Talbot employees employment terminates, with certain exceptions, prior to the end of the
restricted period. The restricted period will end for 25% of the employee seller shares on each
anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbots
Chairman, such that after four years the potential for forfeiture will be completely extinguished.
Share compensation expenses in respect of employee seller shares of $1,188 were recorded for
three months ended March 31, 2011 (March 31, 2010: $1,039).
Activity with respect to unvested employee seller shares for the three months ended March 31,
2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Employee |
|
|
Grant Date |
|
|
|
Seller Shares |
|
|
Fair Value |
|
Employee seller shares outstanding, December 31, 2010 |
|
|
197,879 |
|
|
$ |
22.01 |
|
Employee seller shares granted |
|
|
|
|
|
|
|
|
Employee seller shares vested |
|
|
|
|
|
|
|
|
Employee seller shares forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee seller shares outstanding, March 31, 2011 |
|
|
197,879 |
|
|
$ |
22.01 |
|
|
|
|
|
|
|
|
Activity with respect to unvested employee seller shares for the three months ended March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Employee |
|
|
Grant Date |
|
|
|
Seller Shares |
|
|
Fair Value |
|
Employee seller shares outstanding, December 31, 2009 |
|
|
410,667 |
|
|
$ |
22.01 |
|
Employee seller shares granted |
|
|
|
|
|
|
|
|
Employee seller shares vested |
|
|
|
|
|
|
|
|
Employee seller shares forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee seller shares outstanding, March 31, 2010 |
|
|
410,667 |
|
|
$ |
22.01 |
|
|
|
|
|
|
|
|
24
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
At March 31, 2011, there were $1,090 (December 31, 2010: $2,141) of total unrecognized share
compensation expenses in respect of employee seller shares that are expected to be recognized over
a weighted-average period of 0.3 years (December 31, 2010: 0.5 years).
|
c) Total share compensation expenses |
The breakdown of share compensation expenses by award type was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
Options |
|
$ |
1,247 |
|
|
$ |
1,038 |
|
Restricted share awards |
|
|
9,156 |
|
|
|
4,326 |
|
Restricted share units |
|
|
114 |
|
|
|
173 |
|
Performance share awards |
|
|
344 |
|
|
|
|
|
Employee seller shares |
|
|
1,188 |
|
|
|
1,039 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,049 |
|
|
$ |
6,576 |
|
|
|
|
|
|
|
|
9. Debt and financing arrangements
a) Financing structure and finance expenses
The financing structure at March 31, 2011 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Outstanding (a) |
|
|
Drawn |
|
2006 Junior Subordinated Deferrable Debentures |
|
$ |
150,000 |
|
|
$ |
150,000 |
|
|
$ |
150,000 |
|
2007 Junior Subordinated Deferrable Debentures |
|
|
200,000 |
|
|
|
139,800 |
|
|
|
139,800 |
|
2010 Senior Notes due 2040 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
246,901 |
|
$340,000 syndicated unsecured letter of credit facility |
|
|
340,000 |
|
|
|
|
|
|
|
|
|
$60,000 bilateral unsecured letter of credit facility |
|
|
60,000 |
|
|
|
|
|
|
|
|
|
$500,000 secured letter of credit facility |
|
|
500,000 |
|
|
|
285,048 |
|
|
|
|
|
Talbot FAL Facility (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
|
|
IPC Bi-Lateral Facility |
|
|
80,000 |
|
|
|
64,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,605,000 |
|
|
$ |
914,216 |
|
|
$ |
536,701 |
|
|
|
|
|
|
|
|
|
|
|
25
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The financing structure at December 31, 2010 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment |
|
|
Outstanding (a) |
|
|
Drawn |
|
2006 Junior Subordinated Deferrable Debentures |
|
$ |
150,000 |
|
|
$ |
150,000 |
|
|
$ |
150,000 |
|
2007 Junior Subordinated Deferrable Debentures |
|
|
200,000 |
|
|
|
139,800 |
|
|
|
139,800 |
|
2010 Senior Notes due 2040 |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
246,874 |
|
$340,000 syndicated unsecured letter of credit facility |
|
|
340,000 |
|
|
|
|
|
|
|
|
|
$60,000 bilateral unsecured letter of credit facility |
|
|
60,000 |
|
|
|
|
|
|
|
|
|
$500,000 secured letter of credit facility |
|
|
500,000 |
|
|
|
268,944 |
|
|
|
|
|
Talbot FAL Facility (b) |
|
|
25,000 |
|
|
|
25,000 |
|
|
|
|
|
IPC Bi-Lateral Facility |
|
|
80,000 |
|
|
|
68,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,605,000 |
|
|
|
901,807 |
|
|
|
536,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Indicates utilization of commitment amount, not drawn borrowings. |
|
(b) |
|
Talbot operates in Lloyds through a corporate member, Talbot 2002 Underwriting Capital
Ltd (T02), which is the sole participant in Syndicate 1183. Lloyds sets T02s required
capital annually based on Syndicate 1183s business plan, rating environment, reserving
environment together with input arising from Lloyds discussions with, inter alia,
regulatory and rating agencies. Such capital, called Funds at Lloyds (FAL), comprises:
cash, investments and undrawn letters of credit provided by various banks. |
Finance expenses consist of interest on our junior subordinated deferrable debentures and
senior notes, the amortization of debt offering costs, fees relating to our credit facilities and
the costs of FAL as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
2006 Junior Subordinated Deferrable Debentures |
|
$ |
3,588 |
|
|
$ |
3,588 |
|
2007 Junior Subordinated Deferrable Debentures |
|
|
3,029 |
|
|
|
3,029 |
|
2010 Senior Notes due 2040 |
|
|
5,597 |
|
|
|
3,978 |
|
Credit facilities |
|
|
1,724 |
|
|
|
1,311 |
|
Talbot FAL Facility |
|
|
63 |
|
|
|
422 |
|
Talbot other interest |
|
|
|
|
|
|
75 |
|
Talbot third party FAL facility |
|
|
|
|
|
|
2,748 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,001 |
|
|
$ |
15,151 |
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
$250,000 2010 Senior Notes due 2040 |
On January 21, 2010, the Company offered and sold $250,000 of Senior Notes due 2040 (the 2010
Senior Notes) in a registered public offering. The 2010 Senior Notes mature on January 26, 2040,
and are redeemable at the Companys option in whole any time or in part from time to time at a
make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any
time upon the occurrence of certain tax events as described in the notes prospectus supplement. The
2010 Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity
or early redemption. Interest on the 2010 Senior Notes is payable semi-annually in arrears on
January 26 and July 26 of each year, commencing on July 26, 2010. The net proceeds of $243,967
from the sale of the 2010 Senior Notes, after the deduction of commissions paid to the underwriters
in the
transaction and other expenses, was used by the Company for general corporate purposes, which
included the repurchase of its outstanding capital stock and payment of dividends to shareholders.
Debt issuance costs of $2,808 were deferred as an asset and amortized over the life of the 2010
Senior Notes.
The 2010 Senior Notes are unsecured and unsubordinated obligations of the Company and rank
equally in right of payment with all of the Companys existing and future unsecured and
unsubordinated indebtedness. The 2010
26
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Senior Notes will be effectively junior to all of the Companys future secured debt, to the extent
of the value of the collateral securing such debt, and will rank senior to all our existing and
future subordinated debt. The 2010 Senior Notes will be structurally subordinated to all
obligations of the Companys subsidiaries.
Future expected payments of interest on the 2010 Senior Notes are as follows:
|
|
|
|
|
2011 |
|
$ |
11,094 |
|
2012 |
|
|
22,188 |
|
2013 |
|
|
22,188 |
|
2014 |
|
|
22,188 |
|
2015 and thereafter |
|
|
565,780 |
|
|
|
|
|
Total minimum future payments |
|
$ |
643,438 |
|
|
|
|
|
(c) Junior subordinated deferrable debentures
On June 15, 2006, the Company participated in a private placement of $150,000 of junior
subordinated deferrable interest debentures due 2036 (the 2006 Junior Subordinated Deferrable
Debentures). The 2006 Junior Subordinated Deferrable Debentures mature on June 15, 2036, are
redeemable at the Companys option at par beginning June 15, 2011, and require quarterly interest
payments by the Company to the holders of the 2006 Junior Subordinated Deferrable Debentures.
Interest is payable at 9.069% per annum through June 15, 2011, and thereafter at a floating rate of
three-month LIBOR plus 355 basis points, reset quarterly. The proceeds of $150,000 from the sale of
the 2006 Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the
placement agents in the transaction and other expenses, were used by the Company to fund Validus Re
segment operations and for general working capital purposes. Debt issuance costs of $3,750 were
deferred as an asset and are amortized to income over the five year optional redemption period.
On June 21, 2007, the Company participated in a private placement of $200,000 of junior
subordinated deferrable interest debentures due 2037 (the 2007 Junior Subordinated Deferrable
Debentures). The 2007 Junior Subordinated Deferrable Debentures mature on June 15, 2037, are
redeemable at the Companys option at par beginning June 15, 2012, and require quarterly interest
payments by the Company to the holders of the 2007 Junior Subordinated Deferrable Debentures.
Interest will be payable at 8.480% per annum through June 15, 2012, and thereafter at a floating
rate of three-month LIBOR plus 295 basis points, reset quarterly. The proceeds of $200,000 from the
sale of the 2007 Junior Subordinated Deferrable Debentures, after the deduction of commissions paid
to the placement agents in the transaction and other expenses, were used by the Company to fund the
purchase of Talbot Holdings Ltd. Debt issuance costs of $2,000 were deferred as an asset and are
amortized to income over the five year optional redemption period.
During 2008 and 2009 the Company repurchased from an unaffiliated financial institution
$60,200 principal amount of its 2007 Junior Subordinated Deferrable Debentures due 2037.
Future expected payments of interest and principal on the 2006 and 2007 Junior Subordinated
Deferrable Debentures are as follows:
|
|
|
|
|
2011 |
|
$ |
12,292 |
|
2012 |
|
|
5,928 |
|
2013 |
|
|
|
|
2014 |
|
|
|
|
2015 and thereafter |
|
|
289,800 |
|
|
|
|
|
Total minimum future payments |
|
$ |
308,020 |
|
|
|
|
|
27
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(d) Credit facilities
(i) $340,000 syndicated unsecured letter of credit facility, $60,000 bilateral unsecured
letter of credit facility and $500,000 secured letter of credit facility
On March 12, 2010, the Company entered into a three-year $340,000 syndicated unsecured letter
of credit facility and a $60,000 bilateral unsecured letter of credit facility which provide for
letter of credit availability for Validus Re and the Companys other subsidiaries and revolving
credit availability for the Company (the Three Year Facilities) (the full $400,000 of which is
available for letters of credit and/or revolving loans).
On March 12, 2007, the Company entered into a $500,000 five-year secured letter of credit
facility, as subsequently amended on October 25, 2007, July 24, 2009, and March 12, 2010, which
provides for letter of credit availability for Validus Re and the Companys other subsidiaries (the
Five Year Facility and, together with the Three Year Facilities, the Credit Facilities). The
Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan
Securities Inc. and Deutsche Bank Securities Inc. On October 25, 2007, the Company entered into the
First Amendment to the Credit Facilities to provide for, among other things, additional capacity to
incur up to $100,000 under a new Funds at Lloyds Letter of Credit Facility (as described below) to
support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at
Lloyds of London for the 2008 and 2009 underwriting years of account. The amendment also modified
certain provisions in the Credit Facilities in order to permit dividend payments on existing and
future preferred and hybrid securities notwithstanding certain events of default.
On September 4, 2009, the Company announced that it had entered into Amendments to its
$500,000 five-year secured letter of credit facility and its then outstanding $200,000 three-year
unsecured facility and $100,000 Talbot FAL Facility to amend a specific investment restriction
clause in order to permit the completion of the IPC Acquisition. The amendment also modified and
updated certain pricing and covenant terms.
As amended, the Credit Facilities contain covenants that include, among other things, (i) the
requirement that the Company initially maintain a minimum level of consolidated net worth of at
least 70% of consolidated net worth ($2,925,590) and, commencing with the end of the fiscal quarter
ending December 31, 2009 to be increased quarterly by an amount equal to 50% of its consolidated
net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance
of common shares during such quarter, (ii) the requirement that the Company maintain at all times a
consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00, and
(iii) the requirement that Validus Re and any other material insurance subsidiaries maintain a
financial strength rating by A.M. Best of not less than B++ (Fair). For purposes of covenant
compliance (i) net worth is calculated with investments carried at amortized cost and (ii)
consolidated total debt does not include the Companys junior subordinated deferrable debentures.
The credit facilities also contain restrictions on our ability to pay dividends and other payments
in respect of equity interests at any time that we are otherwise in default with respect to certain
provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur
liens, sell assets and merge or consolidate with others.
As of March 31, 2011, there was $285,048 in outstanding letters of credit under the Five Year
Facility (December 31, 2010: $268,944) and $nil outstanding under the Three Year Facilities
(December 31, 2010: $nil).
As of March 31, 2011, and throughout the reporting periods presented, the Company was in
compliance with all covenants and restrictions under the Credit Facilities.
28
(ii) Talbot FAL Facility
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility
(the Talbot FAL Facility) to provide Funds at Lloyds for the 2008 and 2009 underwriting years of
account; this facility is guaranteed by the Company and is secured against the assets of Validus
Re. The Talbot FAL Facility was provided by a syndicate of commercial banks arranged by Lloyds TSB
Bank plc and ING Bank N.V., London Branch.
On November 19, 2009, the Company entered into an Amendment and Restatement of the Talbot FAL
Facility to reduce the commitment from $100,000 to $25,000, and to extend the support to the 2010
and 2011 underwriting years of account.
As amended, the Talbot FAL Facility contains affirmative covenants that include, among other
things, (i) the requirement that we initially maintain a minimum level of consolidated net worth of
at least 70% of consolidated net worth ($2,607,219), and commencing with the end of the fiscal
quarter ending September 30, 2009 to be increased quarterly by an amount equal to 50% of our
consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from
any issuance of common shares during such quarter, and (ii) the requirement that we maintain at all
times a consolidated total debt to consolidated total capitalization ratio not greater than
0.35:1.00.
The Talbot FAL Facility also contains restrictions on our ability to incur debt at our
subsidiaries, incur liens, sell assets and merge or consolidate with others. Other than in respect
of existing and future preferred and hybrid securities, the payment of dividends and other payments
in respect of equity interests are not permitted at any time that we are in default with respect to
certain provisions under the Credit Facilities. As of March 31, 2011, the Company had $25,000 in
outstanding letters of credit under this facility.
As of March 31, 2011, and throughout the reporting periods presented, the Company was in
compliance with all covenants and restrictions under the Talbot FAL Facility.
(iii) IPC Syndicated Facility and IPC Bi-Lateral Facility
IPC obtained letters of credit through the IPC Syndicated Facility and the IPC Bi-Lateral
Facility (the IPC Facilities). In July, 2009, certain terms of these facilities were amended
including suspending IPCs ability to increase existing letters of credit or to issue new letters
of credit. Effective March 31, 2010, the IPC Syndicated Facility was closed. As of March 31, 2011,
$64,368 of outstanding letters of credit were issued under the IPC Bi-Lateral Facility (December
31, 2010: $68,063).
As of March 31, 2011, and throughout the reporting periods presented, the Company was in
compliance with all covenants and restrictions under the IPC Bi-Lateral Facility.
10. Commitments and contingencies
a) Concentrations of credit risk
The Companys investments are managed following prudent standards of diversification. The
Company attempts to limit its credit exposure by purchasing high quality fixed income investments
to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial
mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In
addition, the Company limits its exposure to any single issuer to 3% or less, excluding treasury
and agency securities. With the exception of the Companys bank loan portfolio, the minimum credit
rating of any security purchased is Baa3/BBB- and where investments are downgraded, the Company
permits a holding of up to 2% in aggregate market value, or 10% with written pre-authorization. At
March 31, 2011, 1.8% of the portfolio, excluding bank loans, had a split rating below Baa3/BBB- and
the Company did not have an aggregate exposure to any single issuer of more than 1.1% of its
investment portfolio, other than with respect to government and agency securities.
29
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
b) Funds at Lloyds
The amounts provided under the Talbot FAL Facility would become a liability of the Company in
the event of Syndicate 1183 declaring a loss at a level which would call on this arrangement.
Talbot operates in Lloyds through a corporate member, Talbot 2002 Underwriting Capital Ltd
(T02), which is the sole participant in Syndicate 1183. Lloyds sets T02s required capital
annually based on syndicate 1183s business plan, rating environment, reserving environment
together with input arising from Lloyds discussions with, inter alia, regulatory and rating
agencies. Such capital, called Funds at Lloyds (FAL), comprises: cash, investments and undrawn
letters of credit provided by various banks. The amounts of cash, investments and letters of
credit at March 31, 2011 amounted to $441,000 (December 31, 2010: $441,000) of which $25,000 is
provided under the Talbot FAL Facility (December 31, 2010: $25,000).
c) Lloyds Central Fund
Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members 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 Companys 2011 estimated premium income at Lloyds of £560,000, the March 31,
2011 exchange rate of £1 equals $1.6031 and assuming the maximum 3% assessment, the Company would
be assessed approximately $26,932.
11. Related party transactions
The transactions listed below are classified as related party transactions as each
counterparty has either a direct or indirect shareholding in the Company.
a) On December 8, 2005, the Company entered into agreements with Goldman Sachs Asset
Management and its affiliates (GSAM) under which GSAM provides investment management services for
a portion of the Companys investment portfolio. Goldman Sachs entities, own 9,634,782 non-voting
shares in the Company, hold warrants to purchase 1,604,410 non-voting shares. Sumit Rajpal,
resigned from the Board of Directors effective February 7, 2011. Mr. Rajpal continues to serves as
Managing Director of Goldman, Sachs and Co., GSAMs parent company. Investment management fees
earned by GSAM for three months ended March 31, 2011 were $360 (March 31, 2010: $379) of which $454
was included in accounts payable and accrued expenses at March 31, 2011 (December 31, 2010: $359).
Management believes that the fees charged were consistent with those that would have been charged
in arms-length transactions with unrelated third parties.
b) Aquiline Capital Partners, LLC and its related companies (Aquiline), which own 6,255,943
shares in the Company, hold warrants to purchase 2,756,088 shares, and have two employees on the
Companys Board of Directors who do not receive compensation from the Company, are shareholders of
Group Ark Insurance Holdings Ltd. (Group Ark). Christopher E. Watson, a director of the Company,
also serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of
Group Ark, the Company recognized gross premiums written during the three months ended March 31,
2011 of $511 (March 31, 2010: $740), of which $535 was included in premiums receivable at March 31,
2011 (December 31, 2010: $378). The Company also recognized reinsurance premiums ceded during the
three months ended March 31, 2011 of $163 (March 31, 2010: $606), of which $89 was included in
reinsurance balances payable at March 31, 2011 (December 31, 2010: $132). Earned premium
adjustments of $334 were incurred during the three months ended March 31, 2011 (March 31, 2010:
nil).
c) Aquiline is also a shareholder of Tiger Risk Partners LLC (Tiger Risk). Christopher E.
Watson, a director of the Company serves as a director of Tiger Risk. Pursuant to certain
reinsurance contracts, the Company recognized brokerage expenses paid to Tiger Risk during the
three months ended March 31, 2011 of $453 (March 31, 2010: $37), of which $638 was included in
accounts payable and accrued expenses at March 31, 2011 (December 31, 2010: $792).
30
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share
information)
d) On November 24, 2009, the Company entered into an Investment Management Agreement with
Conning, Inc. (Conning) to manage a portion of the Companys investment portfolio. Aquiline
acquired Conning on June 16, 2009. John J. Hendrickson and Jeffrey W. Greenberg, directors of the
Company, each serve as a director of Conning Holdings Corp., the parent company of Conning and
Michael Carpenter, the Chairman of Talbot Holdings, Ltd. serves as a director of a subsidiary
company of Conning Holdings Corp. Investment management fees earned by Conning for the three months
ended March 31, 2011 were $146 (March 31, 2010: $85), of which $122 (December 31, 2010: $97) was
included in accounts payable and accrued expenses at March 31, 2011.
12. Earnings per share
The following table sets forth the computation of basic and diluted (loss) per share for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
(Loss) |
|
$ |
(172,364 |
) |
|
$ |
(118,378 |
) |
|
|
|
|
|
|
|
|
|
less: Dividends and distributions declared on outstanding warrants |
|
|
(1,984 |
) |
|
|
(1,749 |
) |
|
|
|
|
|
|
|
(Loss) available to common shareholders |
|
$ |
(174,348 |
) |
|
$ |
(120,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
97,944,340 |
|
|
|
126,633,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) per share |
|
$ |
(1.78 |
) |
|
$ |
(0.95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
(Loss) |
|
$ |
(172,364 |
) |
|
$ |
(118,378 |
) |
|
|
|
|
|
|
|
|
|
less: Dividends and distributions declared on outstanding warrants |
|
|
(1,984 |
) |
|
|
(1,749 |
) |
|
|
|
|
|
|
|
(Loss) available to common shareholders |
|
$ |
(174,348 |
) |
|
$ |
(120,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
97,944,340 |
|
|
|
126,633,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) per share |
|
$ |
(1.78 |
) |
|
$ |
(0.95 |
) |
|
|
|
|
|
|
|
Share equivalents that would result in the issuance of common shares of 15,995 were
outstanding for three months ended March 31, 2011 but were not included in the computation of
diluted earnings per share because the effect would be antidilutive. Due to the net loss in the
three months ended March 31, 2011 and 2010, share equivalents were not included in the computation
of diluted earnings per share, because of their anti-dilutive effect.
13. Subsequent events
During April 2011, a series of tornadoes hit the United States, causing significant property
damage across a number of states including Alabama, Mississippi and Tennessee.
The Company is continuing to review its in-force contracts and preliminary loss information
from clients for the event described above and does not expect that losses, either individually or
when aggregated, will have a material impact on its shareholders equity or liquidity.
31
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share
information)
On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per each common
share and $0.25 per common share equivalent for which each outstanding warrant is exercisable,
payable on June 30, 2011 to holders of record on June 15, 2011.
14. Segment information
The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus
Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments have been determined
under U.S. GAAP segment reporting. The Companys operating segments are strategic business units
that offer different products and services. They are managed and have capital allocated separately
because each business requires different strategies.
Validus Re
The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in
which the segment conducts business are property, marine and
specialty, which includes agriculture,
aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers
compensation, crisis management and motor.
Talbot
The Talbot segment focuses on a wide range of marine and energy, war, political violence,
commercial property, financial institutions, contingency, bloodstock, 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.
Corporate and other reconciling items
The Company has a Corporate function, which includes the activities of the parent company,
and which carries out certain functions for the group. Corporate includes non-core underwriting
expenses, predominantly general and administrative and stock compensation expenses. Corporate
also denotes the activities of certain key executives such as the Chief Executive Officer and Chief
Financial Officer. For internal reporting purposes, Corporate is reflected separately, however
Corporate is not considered an operating segment under these circumstances. Other reconciling
items include, but are not limited to, the elimination of intersegment revenues and expenses and
unusual items that are not allocated to segments.
32
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share
information)
The following tables summarize the results of our operating segments and corporate segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & |
|
|
|
|
Three Months Ended March 31, 2011 |
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
Underwriting income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
611,238 |
|
|
$ |
263,057 |
|
|
$ |
(24,399 |
) |
|
$ |
849,896 |
|
Reinsurance premiums ceded |
|
|
(46,805 |
) |
|
|
(87,414 |
) |
|
|
24,399 |
|
|
|
(109,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
|
564,433 |
|
|
|
175,643 |
|
|
|
|
|
|
|
740,076 |
|
Change in unearned premiums |
|
|
(312,124 |
) |
|
|
1,581 |
|
|
|
|
|
|
|
(310,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
252,309 |
|
|
|
177,224 |
|
|
|
|
|
|
|
429,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting deductions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
310,544 |
|
|
|
165,654 |
|
|
|
|
|
|
|
476,198 |
|
Policy acquisition costs |
|
|
40,066 |
|
|
|
37,216 |
|
|
|
14 |
|
|
|
77,296 |
|
General and administrative expenses |
|
|
10,657 |
|
|
|
28,722 |
|
|
|
9,098 |
|
|
|
48,477 |
|
Share compensation expenses |
|
|
3,105 |
|
|
|
2,719 |
|
|
|
6,225 |
|
|
|
12,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
364,372 |
|
|
|
234,311 |
|
|
|
15,337 |
|
|
|
614,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) |
|
$ |
(112,063 |
) |
|
$ |
(57,087 |
) |
|
$ |
(15,337 |
) |
|
$ |
(184,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
25,651 |
|
|
|
6,590 |
|
|
|
(2,266 |
) |
|
|
29,975 |
|
Other income |
|
|
1,433 |
|
|
|
3,017 |
|
|
|
(2,844 |
) |
|
|
1,606 |
|
Finance expenses |
|
|
(1,713 |
) |
|
|
(63 |
) |
|
|
(12,225 |
) |
|
|
(14,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) before taxes |
|
|
(86,692 |
) |
|
|
(47,543 |
) |
|
|
(32,672 |
) |
|
|
(166,907 |
) |
Tax (expense) benefit |
|
|
(2 |
) |
|
|
1,793 |
|
|
|
(332 |
) |
|
|
1,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating (loss) |
|
$ |
(86,694 |
) |
|
$ |
(45,750 |
) |
|
$ |
(33,004 |
) |
|
$ |
(165,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on investments |
|
|
3,919 |
|
|
|
2,460 |
|
|
|
|
|
|
|
6,379 |
|
Net unrealized (losses) on investments |
|
|
(8,515 |
) |
|
|
(4,313 |
) |
|
|
|
|
|
|
(12,828 |
) |
Foreign exchange (losses) gains |
|
|
(4,360 |
) |
|
|
3,901 |
|
|
|
(8 |
) |
|
|
(467 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(95,650 |
) |
|
$ |
(43,702 |
) |
|
$ |
(33,012 |
) |
|
$ |
(172,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written / Gross premiums written |
|
|
92.3 |
% |
|
|
66.8 |
% |
|
|
|
|
|
|
87.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
123.1 |
% |
|
|
93.5 |
% |
|
|
|
|
|
|
110.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs |
|
|
15.9 |
% |
|
|
21.0 |
% |
|
|
|
|
|
|
18.0 |
% |
General and administrative expenses (a) |
|
|
5.5 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
21.4 |
% |
|
|
38.7 |
% |
|
|
|
|
|
|
32.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
144.5 |
% |
|
|
132.2 |
% |
|
|
|
|
|
|
143.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,065,128 |
|
|
$ |
2,748,079 |
|
|
$ |
12,483 |
|
|
$ |
7,825,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses. |
33
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share
information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & |
|
|
|
|
Three months ended March 31, 2010 |
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
Underwriting income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
640,295 |
|
|
$ |
270,541 |
|
|
$ |
(39,902 |
) |
|
$ |
870,934 |
|
Reinsurance premiums ceded |
|
|
(13,110 |
) |
|
|
(117,531 |
) |
|
|
39,902 |
|
|
|
(90,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
|
627,185 |
|
|
|
153,010 |
|
|
|
|
|
|
|
780,195 |
|
Change in unearned premiums |
|
|
(343,264 |
) |
|
|
20,763 |
|
|
|
|
|
|
|
(322,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
283,921 |
|
|
|
173,773 |
|
|
|
|
|
|
|
457,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting deductions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
348,920 |
|
|
|
129,611 |
|
|
|
|
|
|
|
478,531 |
|
Policy acquisition costs |
|
|
43,503 |
|
|
|
34,945 |
|
|
|
(2,272 |
) |
|
|
76,176 |
|
General and administrative expenses |
|
|
16,312 |
|
|
|
25,548 |
|
|
|
11,709 |
|
|
|
53,569 |
|
Share compensation expenses |
|
|
1,629 |
|
|
|
1,559 |
|
|
|
3,388 |
|
|
|
6,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
410,364 |
|
|
|
191,663 |
|
|
|
12,825 |
|
|
|
614,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) |
|
$ |
(126,443 |
) |
|
$ |
(17,890 |
) |
|
$ |
(12,825 |
) |
|
$ |
(157,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
29,245 |
|
|
|
7,320 |
|
|
|
(2,266 |
) |
|
|
34,299 |
|
Other income |
|
|
1,078 |
|
|
|
1,975 |
|
|
|
(2,165 |
) |
|
|
888 |
|
Finance expenses |
|
|
(1,293 |
) |
|
|
(3,245 |
) |
|
|
(10,613 |
) |
|
|
(15,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) before taxes |
|
|
(97,413 |
) |
|
|
(11,840 |
) |
|
|
(27,869 |
) |
|
|
(137,122 |
) |
Tax (expense) benefit |
|
|
(91 |
) |
|
|
795 |
|
|
|
(7 |
) |
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating (loss) |
|
$ |
(97,504 |
) |
|
$ |
(11,045 |
) |
|
$ |
(27,876 |
) |
|
$ |
(136,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on investments |
|
|
9,779 |
|
|
|
1,619 |
|
|
|
|
|
|
|
11,398 |
|
Net unrealized gains on investments |
|
|
12,195 |
|
|
|
3,218 |
|
|
|
|
|
|
|
15,413 |
|
Foreign exchange (losses) |
|
|
(5,139 |
) |
|
|
(3,599 |
) |
|
|
(26 |
) |
|
|
(8,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(80,669 |
) |
|
$ |
(9,807 |
) |
|
$ |
(27,902 |
) |
|
$ |
(118,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written / Gross premiums written |
|
|
98.0 |
% |
|
|
56.6 |
% |
|
|
|
|
|
|
89.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
122.9 |
% |
|
|
74.6 |
% |
|
|
|
|
|
|
104.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs |
|
|
15.3 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
16.6 |
% |
General and administrative expenses (a) |
|
|
6.3 |
% |
|
|
15.6 |
% |
|
|
|
|
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
21.6 |
% |
|
|
35.7 |
% |
|
|
|
|
|
|
29.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
144.5 |
% |
|
|
110.3 |
% |
|
|
|
|
|
|
134.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,114,815 |
|
|
$ |
2,429,530 |
|
|
$ |
88,231 |
|
|
$ |
7,632,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses. |
34
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share
information)
The Companys exposures are generally diversified across geographic zones. The following tables set forth
the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
|
|
Gross premiums written |
|
|
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
|
% |
|
United States |
|
$ |
192,365 |
|
|
$ |
27,831 |
|
|
$ |
(1,897 |
) |
|
$ |
218,299 |
|
|
|
25.7 |
% |
Worldwide excluding United States (a) |
|
|
26,978 |
|
|
|
67,967 |
|
|
|
(2,712 |
) |
|
|
92,233 |
|
|
|
10.9 |
% |
Europe |
|
|
58,966 |
|
|
|
16,009 |
|
|
|
(502 |
) |
|
|
74,473 |
|
|
|
8.8 |
% |
Latin America and Caribbean |
|
|
25,119 |
|
|
|
18,268 |
|
|
|
(13,629 |
) |
|
|
29,758 |
|
|
|
3.5 |
% |
Japan |
|
|
10,198 |
|
|
|
540 |
|
|
|
(100 |
) |
|
|
10,638 |
|
|
|
1.2 |
% |
Canada |
|
|
100 |
|
|
|
3,808 |
|
|
|
(100 |
) |
|
|
3,808 |
|
|
|
0.4 |
% |
Rest of the world (b) |
|
|
36,057 |
|
|
|
|
|
|
|
|
|
|
|
36,057 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total, non United States |
|
|
157,418 |
|
|
|
106,592 |
|
|
|
(17,043 |
) |
|
|
246,967 |
|
|
|
29.0 |
% |
Worldwide including United States (a) |
|
|
68,196 |
|
|
|
10,530 |
|
|
|
(502 |
) |
|
|
78,224 |
|
|
|
9.2 |
% |
Marine and Aerospace (c) |
|
|
193,259 |
|
|
|
118,104 |
|
|
|
(4,957 |
) |
|
|
306,406 |
|
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
611,238 |
|
|
$ |
263,057 |
|
|
$ |
(24,399 |
) |
|
$ |
849,896 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Gross premiums written |
|
|
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
|
% |
|
United States |
|
$ |
233,567 |
|
|
$ |
25,283 |
|
|
$ |
(3,471 |
) |
|
$ |
255,379 |
|
|
|
29.3 |
% |
Worldwide excluding United States (a) |
|
|
39,764 |
|
|
|
76,018 |
|
|
|
(3,832 |
) |
|
|
111,950 |
|
|
|
12.9 |
% |
Europe |
|
|
80,476 |
|
|
|
15,538 |
|
|
|
(457 |
) |
|
|
95,557 |
|
|
|
11.0 |
% |
Latin America and Caribbean |
|
|
28,739 |
|
|
|
17,227 |
|
|
|
(15,787 |
) |
|
|
30,179 |
|
|
|
3.5 |
% |
Japan |
|
|
650 |
|
|
|
708 |
|
|
|
(65 |
) |
|
|
1,293 |
|
|
|
0.1 |
% |
Canada |
|
|
65 |
|
|
|
3,636 |
|
|
|
(65 |
) |
|
|
3,636 |
|
|
|
0.4 |
% |
Rest of the world (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total, non United States |
|
|
149,694 |
|
|
|
113,127 |
|
|
|
(20,206 |
) |
|
|
242,615 |
|
|
|
27.9 |
% |
Worldwide including United States (a) |
|
|
76,235 |
|
|
|
12,776 |
|
|
|
(1,730 |
) |
|
|
87,281 |
|
|
|
10.0 |
% |
Marine and Aerospace (c) |
|
|
180,799 |
|
|
|
119,355 |
|
|
|
(14,495 |
) |
|
|
285,659 |
|
|
|
32.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
640,295 |
|
|
$ |
270,541 |
|
|
$ |
(39,902 |
) |
|
$ |
870,934 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents risks in two or more geographic zones. |
|
(b) |
|
Represents risks in one geographic zone. |
|
(c) |
|
Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some
instances. |
35
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion and analysis of the Companys consolidated results of operations
for the three months ended March 31, 2011 and 2010 and the Companys consolidated financial
condition, liquidity and capital resources at March 31, 2011 and December 31, 2010. This discussion
and analysis should be read in conjunction with the audited consolidated financial statements and
related notes for the fiscal year ended December 31, 2010, the discussions of critical accounting
policies and the qualitative and quantitative disclosure about market risk contained in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
For a variety of reasons, the Companys historical financial results may not accurately
indicate future performance. See Cautionary Note Regarding Forward-Looking Statements. The Risk
Factors set forth in Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2010 present a discussion of important factors that could cause actual results to
differ materially from the results described in or implied by the forward-looking statements
contained herein.
Executive Overview
The Company underwrites from two distinct global operating segments, Validus Reinsurance, Ltd.
(Validus Re) and Talbot Holdings Ltd. (Talbot). Validus Re, the Companys principal reinsurance operating segment,
operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot,
the Companys principal insurance operating segment, operates through its two underwriting
platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyds of London (Lloyds)
and which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services
Ltd, which is an underwriting agency writing primarily yacht and onshore energy business on behalf
of the Talbot syndicate and others.
The Companys strategy is to concentrate primarily on short-tail risks, which is an area where
management believes current prices and terms provide an attractive risk adjusted return and the
management team has proven expertise. The Companys profitability in any given period is based upon
premium and investment revenues, less net losses and loss expenses, acquisition expenses and
operating expenses. Financial results in the insurance and reinsurance industry are influenced by
the frequency and/or severity of claims and losses, including as a result of catastrophic events,
changes in interest rates, financial markets and general economic conditions, the supply of
insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the IPC
Acquisition) in exchange for common shares and cash. IPCs operations focused on short-tail lines
of reinsurance. The primary lines in which IPC conducted business were property catastrophe
reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and
other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to increase
the Companys capital base and gain a strategic advantage in the then current reinsurance market.
This acquisition created a leading Bermuda carrier in the short-tail reinsurance market that
facilitates stronger relationships with major reinsurance intermediaries.
Business Outlook and Trends
We underwrite global specialty 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 Companys financial
condition and results and ability to write new business. This volatility affects results for the
period in which the loss occurs because U.S. accounting principles do 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 trends when pricing contracts.
36
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 industrys capacity to write new business diminishes. At the same time, management believes
that there is a heightened awareness of exposure to natural catastrophes on the part of cedants,
rating agencies and catastrophe modeling firms, resulting in an increase in the demand for
reinsurance protection.
The global property and casualty insurance and reinsurance industry has historically been
highly cyclical. The Company was formed in October 2005 in response to the supply/demand imbalance
resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed
substantial increases in premium rates in 2006 compared to 2005 levels. During the years ended
December 31, 2007 and 2008, the Company experienced increased competition in most lines of
business. Capital provided by new entrants or by the commitment of additional capital by existing
insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a
softening of rates in most lines. However, during 2008, the insurance and reinsurance industry
incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global
financial crisis. In the wake of these events, the January 2009 renewal season saw decreased
competition and increased premium rates due to relatively scarce capital and increased demand.
During 2009, the Company observed reinsurance demand stabilization and industry capital recovery
from investment portfolio gains. In 2009, there were few notable large losses affecting the
worldwide (re)insurance industry and no major hurricanes making landfall in the United States.
During 2010, the Company continued to see increased competition and decreased premium rates in
most classes of business with the exception of offshore energy, Latin America, financial
institutions and political risk lines. During 2010 there was an increased level of catastrophe
activity, principally the Chilean earthquake and the Deepwater Horizon events.
During the January 2011 renewal season, Validus Re increased gross premiums written on the
U.S. Cat XOL lines and decreased gross premiums written in the proportional lines. In addition,
Validus Re decreased gross premiums written in the International Property lines as market
conditions dictated. In the aftermath of 2010s Deepwater Horizon loss, Validus Re saw additional
opportunities and rate increases in the marine lines. Within the specialty lines, Validus Re
increased gross premiums written in the terrorism lines among other sub-classes. During the first
quarter of 2011, premiums in Talbot have been relatively stable with rate increases occurring on
renewals that have suffered losses but rate reductions continuing elsewhere, as a result of good
experience and excess capacity in the market. Talbot is expecting improved pricing in the energy,
property and political risk lines as a result of recent loss events.
The significant elevated worldwide loss
activity since the beginning of 2010, in conjunction with changes to certain commercial
vendors catastrophe models, is resulting in improved pricing and demand for catastrophe
reinsurance.
Financial Measures
The Company believes the following financial indicators are important in evaluating
performance and measuring the overall growth in value generated for shareholders:
Annualized return on average equity represents the level of net income available to
shareholders generated from the average shareholders equity during the period. Annualized return
on average equity is calculated by dividing the net income for the period by the average
shareholders equity during the period. Average shareholders equity is the average of the
beginning, ending and intervening quarter end shareholders equity balances. Percentages for the
quarter and interim periods are annualized. The Companys objective is to generate superior returns
on capital that appropriately reward shareholders for the risks assumed and to grow premiums
written only when returns meet or exceed internal requirements. Details of annualized return on
average equity are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
Annualized return on average equity |
|
|
(20.2 |
)% |
|
|
(12.2 |
)% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
37
The decrease in annualized return on average equity for the three months ended March 31, 2011
was driven primarily by a net loss. The net loss for the three months ended March 31, 2011
increased by $54.0 million, or 45.6% compared to the three months ended March 31, 2010. This
unfavorable movement was primarily due to the Tohoku earthquake and other large event losses
coupled with an unfavorable movement in unrealized losses on investments.
Diluted book value per common share is considered by management to be an appropriate measure
of our returns to common shareholders, as we believe growth in our book value on a diluted basis
ultimately translates into growth of our stock price. Diluted book value per common share decreased
by $1.66, or 5.0%, from $32.98 at December 31, 2010 to $31.32 at March 31, 2011. The decrease was
due to the loss generated in the three months ended March 31, 2011. Diluted book value per common
share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book
value per common share. Diluted book value per common share is calculated based on total
shareholders equity plus the assumed proceeds from the exercise of outstanding options and
warrants, divided by the sum of common shares, unvested restricted shares, options and warrants
outstanding (assuming their exercise). A reconciliation of diluted book value per common share to
book value per common share is presented below in the section entitled Non-GAAP Financial
Measures.
Cash dividends per common share are an integral part of the value created for shareholders. On
May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per each common share and
$0.25 per common share equivalent for which each outstanding warrant is exercisable, payable on
June 30, 2011 to holders of record on June 15, 2011.
Underwriting income (loss) measures the performance of the Companys core underwriting
function, excluding revenues and expenses such as net investment income (loss), other income,
finance expenses, net realized and unrealized gains (losses) on investments, foreign exchange gains
(losses) and gain on bargain purchase, net of expenses. The Company believes the reporting of
underwriting income enhances the understanding of our results by highlighting the underlying
profitability of the Companys core insurance and reinsurance operations. Underwriting (loss) for
the three months ended March 31, 2011 and 2010 was ($184.5) million and ($157.2) million,
respectively. Underwriting income (loss) is a Non-GAAP financial measure as described in detail and
reconciled in the section below entitled Underwriting Income.
Critical Accounting Policies and Estimates
There are certain accounting policies that the Company considers to be critical due to the
judgment and uncertainty inherent in the application of those policies. In calculating financial
statement estimates, the use of different assumptions could produce materially different estimates.
The Company believes the following critical accounting policies affect significant estimates used
in the preparation of our consolidated financial statements:
|
|
|
Reserve for losses and loss expenses; |
|
|
|
|
Premiums; |
|
|
|
|
Reinsurance premiums ceded and reinsurance recoverable; and |
|
|
|
|
Investment valuation. |
Critical accounting policies and estimates are discussed further in Item 7, Managements
Discussion and Analysis of Results of Operations and Financial Condition in the Companys Annual
Report on Form 10-K for the year ended December 31, 2010.
Segment Reporting
Management has determined that the Company operates in two reportable segments. The two
significant operating segments are Validus Re and Talbot.
Results of Operations
Validus Re commenced operations on December 16, 2005. The Companys fiscal year ends on
December 31. Financial statements are prepared in accordance with generally accepted accounting
principles in the United States of America (U.S. GAAP) for interim financial information.
38
The following table presents results of operations for the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
Gross premiums written |
|
$ |
849,896 |
|
|
$ |
870,934 |
|
Reinsurance premiums ceded |
|
|
(109,820 |
) |
|
|
(90,739 |
) |
|
|
|
|
|
|
|
Net premiums written |
|
|
740,076 |
|
|
|
780,195 |
|
Change in unearned premiums |
|
|
(310,543 |
) |
|
|
(322,501 |
) |
|
|
|
|
|
|
|
Net premiums earned |
|
|
429,533 |
|
|
|
457,694 |
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
476,198 |
|
|
|
478,531 |
|
Policy acquisition costs |
|
|
77,296 |
|
|
|
76,176 |
|
General and administrative expenses |
|
|
48,477 |
|
|
|
53,569 |
|
Share compensation expenses |
|
|
12,049 |
|
|
|
6,576 |
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
614,020 |
|
|
|
614,852 |
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) (a) |
|
|
(184,487 |
) |
|
|
(157,158 |
) |
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
29,975 |
|
|
|
34,299 |
|
Other income |
|
|
1,606 |
|
|
|
888 |
|
Finance expenses |
|
|
(14,001 |
) |
|
|
(15,151 |
) |
|
|
|
|
|
|
|
Operating loss before taxes (a) |
|
|
(166,907 |
) |
|
|
(137,122 |
) |
Tax benefit |
|
|
1,459 |
|
|
|
697 |
|
|
|
|
|
|
|
|
Net operating (loss) (a) |
|
|
(165,448 |
) |
|
|
(136,425 |
) |
|
|
|
|
|
|
|
|
|
Net realized gains on investments |
|
|
6,379 |
|
|
|
11,398 |
|
Net unrealized (losses) gains on investments |
|
|
(12,828 |
) |
|
|
15,413 |
|
Foreign exchange (losses) |
|
|
(467 |
) |
|
|
(8,764 |
) |
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(172,364 |
) |
|
$ |
(118,378 |
) |
|
|
|
|
|
|
|
Selected ratios: |
|
|
|
|
|
|
|
|
Net premiums written / Gross premiums written |
|
|
87.1 |
% |
|
|
89.6 |
% |
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
110.9 |
% |
|
|
104.6 |
% |
Policy acquisition costs |
|
|
18.0 |
% |
|
|
16.6 |
% |
General and administrative expenses (b) |
|
|
14.1 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
Expense ratio |
|
|
32.1 |
% |
|
|
29.7 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
143.0 |
% |
|
|
134.3 |
% |
|
|
|
|
|
|
|
|
|
|
a) |
|
Non-GAAP Financial Measures: In presenting the Companys results, management has
included and discussed underwriting income and operating income that are not calculated under
standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP.
Non-GAAP measures may be defined or calculated differently by other companies. These measures
should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A
reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure,
is presented in the section below entitled Underwriting Income. |
|
b) |
|
The general and administrative ratio includes share compensation expenses. |
39
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
Validus Re |
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
611,238 |
|
|
$ |
640,295 |
|
Reinsurance premiums ceded |
|
|
(46,805 |
) |
|
|
(13,110 |
) |
|
|
|
|
|
|
|
Net premiums written |
|
|
564,433 |
|
|
|
627,185 |
|
Change in unearned premiums |
|
|
(312,124 |
) |
|
|
(343,264 |
) |
|
|
|
|
|
|
|
Net premiums earned |
|
|
252,309 |
|
|
|
283,921 |
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
310,544 |
|
|
|
348,920 |
|
Policy acquisition costs |
|
|
40,066 |
|
|
|
43,503 |
|
General and administrative expenses |
|
|
10,657 |
|
|
|
16,312 |
|
Share compensation expenses |
|
|
3,105 |
|
|
|
1,629 |
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
364,372 |
|
|
|
410,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) (a) |
|
|
(112,063 |
) |
|
|
(126,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Talbot |
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
263,057 |
|
|
$ |
270,541 |
|
Reinsurance premiums ceded |
|
|
(87,414 |
) |
|
|
(117,531 |
) |
|
|
|
|
|
|
|
Net premiums written |
|
|
175,643 |
|
|
|
153,010 |
|
Change in unearned premiums |
|
|
1,581 |
|
|
|
20,763 |
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
177,224 |
|
|
|
173,773 |
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
165,654 |
|
|
|
129,611 |
|
Policy acquisition costs |
|
|
37,216 |
|
|
|
34,945 |
|
General and administrative expenses |
|
|
28,722 |
|
|
|
25,548 |
|
Share compensation expenses |
|
|
2,719 |
|
|
|
1,559 |
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
234,311 |
|
|
|
191,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) (a) |
|
|
(57,087 |
) |
|
|
(17,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Eliminations |
|
|
|
|
|
|
|
|
Gross premiums written |
|
$ |
(24,399 |
) |
|
$ |
(39,902 |
) |
Reinsurance premiums ceded |
|
|
24,399 |
|
|
|
39,902 |
|
|
|
|
|
|
|
|
Net premiums written |
|
|
|
|
|
|
|
|
Change in unearned premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
|
|
|
|
|
|
Policy acquisition costs |
|
|
14 |
|
|
|
(2,272 |
) |
General and administrative expenses |
|
|
9,098 |
|
|
|
11,709 |
|
Share compensation expenses |
|
|
6,225 |
|
|
|
3,388 |
|
|
|
|
|
|
|
|
Total underwriting deductions |
|
|
15,337 |
|
|
|
12,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (loss) (a) |
|
|
(15,337 |
) |
|
|
(12,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting (loss) (a) |
|
$ |
(184,487 |
) |
|
$ |
(157,158 |
) |
|
|
|
|
|
|
|
|
|
|
a) |
|
Non-GAAP Financial Measures. In presenting the Companys results, management has included
and discussed underwriting income that is not calculated under standards or rules that
comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be
defined or calculated differently by other companies. These measures should not be viewed as a
substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure
to net income, the most comparable U.S. GAAP financial measure, is presented in the section
below entitled Underwriting Income. |
40
Three Months Ended March 31, 2011 compared to Three Months Ended March 31, 2010
Net loss for the three months ended March 31, 2011 was ($172.4) million compared to a net
loss of ($118.4) million for the three months ended March 31, 2010, an increase of $54.0 million or
45.6%. The primary factors driving the increase in net loss were:
|
|
An unfavorable movement of $28.2 million in net unrealized (losses) gains on investments. |
|
|
Increase in underwriting loss of $27.3 million due primarily to a $28.2 million decrease
in net premiums earned. Loss and loss expenses were relatively consistent with the three months ended
March 31, 2010, with both quarters experiencing substantial catastrophe losses. Other
underwriting deductions including policy acquisition costs and general and administrative
expenses remained at levels similar to 2010. |
|
|
Decrease in net realized gains on investments of $5.0 million. |
The above items were partially offset by the following factor:
|
|
A favorable movement in foreign exchange of $8.3 million. |
The change in net income for the three months ended March 31, 2011 of $54.0 million as compared to
the three months ended March 31, 2010 is described in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
|
|
Increase (Decrease) Over the Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Corporate and |
|
|
|
|
(Dollars in thousands) |
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
Notable losses decrease (increase)
in net loss and loss expenses (a) |
|
$ |
60,954 |
|
|
$ |
(30,844 |
) |
|
$ |
|
|
|
$ |
30,110 |
|
Less: Notable losses increase
(decrease) in net reinstatement premiums
(a) |
|
|
12,241 |
|
|
|
(6,534 |
) |
|
|
|
|
|
|
5,707 |
|
Other underwriting (loss) |
|
|
(58,815 |
) |
|
|
(1,819 |
) |
|
|
(2,512 |
) |
|
|
(63,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) (b) |
|
|
14,380 |
|
|
|
(39,197 |
) |
|
|
(2,512 |
) |
|
|
(27,329 |
) |
Net investment income |
|
|
(3,594 |
) |
|
|
(730 |
) |
|
|
|
|
|
|
(4,324 |
) |
Other income |
|
|
355 |
|
|
|
1,042 |
|
|
|
(679 |
) |
|
|
718 |
|
Finance expenses |
|
|
(420 |
) |
|
|
3,182 |
|
|
|
(1,612 |
) |
|
|
1,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,721 |
|
|
|
(35,703 |
) |
|
|
(4,803 |
) |
|
|
(29,785 |
) |
Taxes |
|
|
89 |
|
|
|
998 |
|
|
|
(325 |
) |
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,810 |
|
|
|
(34,705 |
) |
|
|
(5,128 |
) |
|
|
(29,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) gains on investments |
|
|
(5,860 |
) |
|
|
841 |
|
|
|
|
|
|
|
(5,019 |
) |
Net unrealized (losses) on investments |
|
|
(20,710 |
) |
|
|
(7,531 |
) |
|
|
|
|
|
|
(28,241 |
) |
Net foreign exchange gains |
|
|
779 |
|
|
|
7,500 |
|
|
|
18 |
|
|
|
8,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(14,981 |
) |
|
$ |
(33,895 |
) |
|
$ |
(5,110 |
) |
|
$ |
(53,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Notable losses for the three months ended March 31, 2011 include: Tohoku earthquake,
Gryphon Alpha, Christchurch earthquake, Brisbane floods and CNRL Horizon. Notable losses for
the three months ended March 31, 2010 include Chilean earthquake, windstorm Xynthia and
Melbourne hailstorm. Excludes the reserve for potential development on 2010 and 2011 notable
loss events. |
|
(b) |
|
Non-GAAP Financial Measures. In presenting the Companys results, management has included and
discussed underwriting income (loss) that is not calculated under standards or rules that
comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be
defined or calculated differently by other companies. These measures should not be viewed as a
substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure
to net income, the most comparable U.S. GAAP financial measure, is presented in the section
below entitled Underwriting Income. |
41
Gross Premiums Written
Gross premiums written for the three months ended March 31, 2011 were $849.9 million compared
to $870.9 million for the three months ended March 31, 2010, a decrease of $21.0 million or 2.4%.
Gross premiums written on the property lines decreased by $58.0 million, while the marine and
specialty lines increased by $27.1 million and $9.9 million, respectively. Details of gross
premiums written by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
419,123 |
|
|
|
49.3 |
% |
|
$ |
477,137 |
|
|
|
54.8 |
% |
|
|
(12.2 |
)% |
Marine |
|
|
287,748 |
|
|
|
33.9 |
% |
|
|
260,625 |
|
|
|
29.9 |
% |
|
|
10.4 |
% |
Specialty |
|
|
143,025 |
|
|
|
16.8 |
% |
|
|
133,172 |
|
|
|
15.3 |
% |
|
|
7.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
849,896 |
|
|
|
100.0 |
% |
|
$ |
870,934 |
|
|
|
100.0 |
% |
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Re gross premiums written for the three months ended March 31, 2011 were $611.2
million compared to $640.3 million for the three months ended March 31, 2010, a decrease of $29.1
million or 4.5%. Details of Validus Re gross premiums written by line of business are provided
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
365,268 |
|
|
|
59.7 |
% |
|
$ |
412,408 |
|
|
|
64.5 |
% |
|
|
(11.4 |
)% |
Marine |
|
|
185,033 |
|
|
|
30.3 |
% |
|
|
169,986 |
|
|
|
26.5 |
% |
|
|
8.9 |
% |
Specialty |
|
|
60,937 |
|
|
|
10.0 |
% |
|
|
57,901 |
|
|
|
9.0 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
611,238 |
|
|
|
100.0 |
% |
|
$ |
640,295 |
|
|
|
100.0 |
% |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in gross premiums written in the property lines of $47.1 million was due
primarily to a $39.7 million decrease in premiums from proportional business. This reduction was
caused by a combination of a number of large quota share reinsurance contracts being removed from
the market, reduced rates across the majority of territories and cedants increasing their net
retention limits. Catastrophe excess of loss gross premiums written also decreased $1.5 million,
net of increased reinstatement premiums of $24.4 million. The increase in gross premiums written of
$15.0 million in the marine lines was due primarily to a $23.7 million increase in new and renewing
business due to growth in proportional lines within the marine lines, this was offset by a $10.0
million decrease in inter-company business written with Talbot. The increase in gross premiums
written in the specialty lines of $3.0 million was primarily due to a $2.0 million increase in new
business generated by Validus Re Singapore.
Gross premiums written under the quota share, surplus treaty and excess of loss contracts
between Validus Re and Talbot decreased by $4.3 million in the property lines, $10.0 million in the
marine lines and $1.2 million in the specialty lines as compared to the three months ended March
31, 2010. These reinsurance agreements with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended March 31, 2011 were $263.1 million
compared to $270.5 million for the three months ended March 31, 2010, a decrease of $7.5 million or
2.8%. The $263.1 million of gross premiums written translated at 2010 rates of exchange would have
been $261.0 million during the three months ended March 31,
2011, a decrease of $9.5 million compared to 2010.
Details of Talbot gross premiums written by line of business are provided below.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
Gross Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
70,729 |
|
|
|
26.9 |
% |
|
$ |
85,874 |
|
|
|
31.8 |
% |
|
|
(17.6 |
)% |
Marine |
|
|
104,935 |
|
|
|
39.9 |
% |
|
|
102,873 |
|
|
|
38.0 |
% |
|
|
2.0 |
% |
Specialty |
|
|
87,393 |
|
|
|
33.2 |
% |
|
|
81,794 |
|
|
|
30.2 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
263,057 |
|
|
|
100.0 |
% |
|
$ |
270,541 |
|
|
|
100.0 |
% |
|
|
(2.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in gross premiums written in the property lines of $15.1 million was primarily
due to a $14.6 million reduction in reinstatement premiums and premiums written on the property
treaty lines. The increase in gross premiums written in the specialty lines of $5.6 million was
primarily due to a $6.3 million increase in new and renewing business in the war, political risk
and violence lines.
Reinsurance Premiums Ceded
Reinsurance premiums ceded for the three months ended March 31, 2011 were $109.8 million
compared to $90.7 million for the three months ended March 31, 2010, an increase of $19.1 million
or 21.0%. Reinsurance premiums ceded in the property lines increased by $26.5 million, partially
offset by a decrease in the specialty lines of $7.4 million. Details of reinsurance premiums ceded
by line of business are described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Reinsurance |
|
|
Reinsurance Premiums |
|
|
Reinsurance |
|
|
Reinsurance Premiums |
|
|
|
|
(Dollars in thousands) |
|
Premiums Ceded |
|
|
Ceded (%) |
|
|
Premiums Ceded |
|
|
Ceded (%) |
|
|
% Change |
|
Property |
|
$ |
68,168 |
|
|
|
62.0 |
% |
|
$ |
41,673 |
|
|
|
45.9 |
% |
|
|
63.6 |
% |
Marine |
|
|
15,566 |
|
|
|
14.2 |
% |
|
|
15,624 |
|
|
|
17.2 |
% |
|
|
(0.4 |
)% |
Specialty |
|
|
26,086 |
|
|
|
23.8 |
% |
|
|
33,442 |
|
|
|
36.9 |
% |
|
|
(22.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,820 |
|
|
|
100.0 |
% |
|
$ |
90,739 |
|
|
|
100.0 |
% |
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Re reinsurance premiums ceded for the three months ended March 31, 2011 were
$46.8 million compared to $13.1 million for the three months ended March 31, 2010, an increase of
$33.7 million or 257.0%. Details of Validus Re reinsurance premiums ceded by line of business are
described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Reinsurance |
|
|
Reinsurance Premiums |
|
|
Reinsurance |
|
|
Reinsurance Premiums |
|
|
|
|
(Dollars in thousands) |
|
Premiums Ceded |
|
|
Ceded (%) |
|
|
Premiums Ceded |
|
|
Ceded (%) |
|
|
% Change |
|
Property |
|
$ |
46,680 |
|
|
|
99.7 |
% |
|
$ |
9,342 |
|
|
|
71.3 |
% |
|
|
399.7 |
% |
Marine |
|
|
(376 |
) |
|
|
(0.8 |
)% |
|
|
4,050 |
|
|
|
30.9 |
% |
|
|
(109.3 |
)% |
Specialty |
|
|
501 |
|
|
|
1.1 |
% |
|
|
(282 |
) |
|
|
(2.2 |
)% |
|
|
277.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,805 |
|
|
|
100.0 |
% |
|
$ |
13,110 |
|
|
|
100.0 |
% |
|
|
257.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded in the property lines increased by $37.3 million, primarily
due to the purchase of $39.8 million of additional and replacement retrocessional coverage on the
world wide catastrophe portfolio. The replacement retrocessional coverage was purchased following
the major loss events in the three months ended March 31, 2011. Reinsurance premiums ceded in the
marine lines decreased by $4.4 million, primarily due to $4.1 million of retrocessional coverage
purchased in the three months ended March 31, 2010.
43
There was a change
in renewal dates as a result of a notable loss in the three months ended June 30, 2010, and
this coverage is now expected to renew in the three months ended June 30, 2011.
Talbot. Talbot reinsurance premiums ceded for the three months ended March 31, 2011 were $87.4
million compared to $117.5 million for the three months ended March 31, 2010, a decrease of $30.1
million or 25.6%. Details of Talbot reinsurance premiums ceded by line of business are described
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
|
|
|
|
Reinsurance |
|
|
|
|
|
|
Reinsurance |
|
|
Premiums Ceded |
|
|
Reinsurance |
|
|
Premiums Ceded |
|
|
|
|
(Dollars in thousands) |
|
Premiums Ceded |
|
|
(%) |
|
|
Premiums Ceded |
|
|
(%) |
|
|
% Change |
|
Property |
|
$ |
38,362 |
|
|
|
43.9 |
% |
|
$ |
53,476 |
|
|
|
45.5 |
% |
|
|
(28.3 |
)% |
Marine |
|
|
18,162 |
|
|
|
20.8 |
% |
|
|
23,808 |
|
|
|
20.3 |
% |
|
|
(23.7 |
)% |
Specialty |
|
|
30,890 |
|
|
|
35.3 |
% |
|
|
40,247 |
|
|
|
34.2 |
% |
|
|
(23.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,414 |
|
|
|
100.0 |
% |
|
$ |
117,531 |
|
|
|
100.0 |
% |
|
|
(25.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded in the property lines decreased by $15.1 million. The decrease was
primarily due to a $14.6 million reduction in premiums ceded in property treaty business and the
onshore energy lines. Reinsurance premiums ceded in the marine lines decreased by $5.6 million,
primarily due to a $10.0 million decrease in premiums ceded on the surplus lines partially offset
by a $6.6 million reinstatement premium in relation to a large marine loss recorded in the three
months ended March 31, 2011. Reinsurance premiums ceded in the specialty lines decreased by $9.4
million, primarily due to a $7.6 million decrease in premiums ceded in the aviation treaty lines
relating to changes in the program inception date.
Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts
with Validus Re decreased by $4.3 million in the property lines, $10.0 million in the marine lines
and $1.2 million in its specialty lines as compared to the three months ended March 31, 2010. These
reinsurance agreements with Validus Re are eliminated upon consolidation.
Net Premiums Written
Net premiums written for the three months ended March 31, 2011 were $740.1 million compared to
$780.2 million for the three months ended March 31, 2010, a decrease of $40.1 million, or 5.1%. The
ratios of net premiums written to gross premiums written for the three months ended March 31, 2011
and 2010 were 87.1% and 89.6%, respectively. Details of net premiums written by line of business
are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
350,955 |
|
|
|
47.4 |
% |
|
$ |
435,464 |
|
|
|
55.8 |
% |
|
|
(19.4 |
)% |
Marine |
|
|
272,182 |
|
|
|
36.8 |
% |
|
|
245,001 |
|
|
|
31.4 |
% |
|
|
11.1 |
% |
Specialty |
|
|
116,939 |
|
|
|
15.8 |
% |
|
|
99,730 |
|
|
|
12.8 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
740,076 |
|
|
|
100.0 |
% |
|
$ |
780,195 |
|
|
|
100.0 |
% |
|
|
(5.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Re net premiums written for the three months ended March 31, 2011 were $564.4
million compared to $627.2 million for the three months ended March 31, 2010, a decrease of $62.8
million or 10.0%. Details of Validus Re net premiums written by line of business are provided
below.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
318,588 |
|
|
|
56.5 |
% |
|
$ |
403,066 |
|
|
|
64.2 |
% |
|
|
(21.0 |
)% |
Marine |
|
|
185,409 |
|
|
|
32.8 |
% |
|
|
165,936 |
|
|
|
26.5 |
% |
|
|
11.7 |
% |
Specialty |
|
|
60,436 |
|
|
|
10.7 |
% |
|
|
58,183 |
|
|
|
9.3 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,433 |
|
|
|
100.0 |
% |
|
$ |
627,185 |
|
|
|
100.0 |
% |
|
|
(10.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in Validus Re net premiums written was driven by the factors highlighted above in
respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums
written to gross premiums written were 92.3% and 98.0% for the three months ended March 31, 2011
and 2010, respectively, reflecting the increase in reinsurance premiums ceded as a result of the
purchase of additional and replacement retrocessional coverage described above.
Talbot. Talbot net premiums written for the three months ended March 31, 2011 were $175.6 million
compared to $153.0 million for the three months ended March 31, 2010, an increase of $22.6 million
or 14.8%. Details of Talbot net premiums written by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Written |
|
|
Written (%) |
|
|
Written |
|
|
Written (%) |
|
|
% Change |
|
Property |
|
$ |
32,367 |
|
|
|
18.4 |
% |
|
$ |
32,398 |
|
|
|
21.1 |
% |
|
|
(0.1 |
)% |
Marine |
|
|
86,773 |
|
|
|
49.4 |
% |
|
|
79,065 |
|
|
|
51.7 |
% |
|
|
9.7 |
% |
Specialty |
|
|
56,503 |
|
|
|
32.2 |
% |
|
|
41,547 |
|
|
|
27.2 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
175,643 |
|
|
|
100.0 |
% |
|
$ |
153,010 |
|
|
|
100.0 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net premiums written was driven by the factors highlighted above in respect of
gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross
premiums written for the three months ended March 31, 2011 and 2010 were 66.8% and 56.6%,
respectively, reflecting the lower reinsurance premiums ceded.
Change in Unearned Premiums
Net change in unearned premiums for the three months ended March 31, 2011 was ($310.5) million
compared to ($322.5) million for the three months ended March 31, 2010, a change of $12.0 million
or 3.7%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Change in Unearned |
|
|
Change in Unearned |
|
|
|
|
(Dollars in thousands) |
|
Premiums |
|
|
Premiums |
|
|
% Change |
|
Change in gross unearned premium |
|
$ |
(354,648 |
) |
|
$ |
(367,154 |
) |
|
|
(3.4 |
)% |
Change in prepaid reinsurance premium |
|
|
44,105 |
|
|
|
44,653 |
|
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net change in unearned premium |
|
$ |
(310,543 |
) |
|
$ |
(322,501 |
) |
|
|
(3.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Res net change in unearned premiums for the three months ended March 31, 2011
were ($312.1) million compared to ($343.3) million for the three months ended March 31, 2010, a
change of $31.1 million or 9.1%.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
|
|
|
Unearned |
|
|
Unearned |
|
|
|
|
(Dollars in thousands) |
|
Premiums |
|
|
Premiums |
|
|
% Change |
|
Change in gross unearned premium |
|
$ |
(320,176 |
) |
|
$ |
(331,600 |
) |
|
|
(3.4 |
)% |
Change in prepaid reinsurance premium |
|
|
8,052 |
|
|
|
(11,664 |
) |
|
|
(169.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net change in unearned premium |
|
$ |
(312,124 |
) |
|
$ |
(343,264 |
) |
|
|
(9.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
The Validus Re net change in unearned premium has decreased for the three months ended March 31,
2011 primarily due to the increased premiums ceded and a decrease in gross premiums written for the
three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Talbot. The Talbot net change in unearned premiums for the three months ended March 31, 2011 was
$1.6 million compared to $20.8 million for the three months ended March 31, 2010, a change of $19.2
million, or 92.4%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Change in Unearned |
|
|
Change in Unearned |
|
|
|
|
(Dollars in thousands) |
|
Premiums |
|
|
Premiums |
|
|
% Change |
|
Change in gross unearned premium |
|
$ |
(34,472 |
) |
|
$ |
(35,554 |
) |
|
|
3.0 |
% |
Change in prepaid reinsurance premium |
|
|
36,053 |
|
|
|
56,317 |
|
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net change in unearned premium |
|
$ |
1,581 |
|
|
$ |
20,763 |
|
|
|
92.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
The Talbot net change in unearned premium has decreased for the three months ended March
31, 2011 primarily due to the decrease in reinsurance premiums ceded and the decrease in gross
premiums written for the three months ended March 31, 2011 compared to the three months ended
March 31, 2010.
Net Premiums Earned
Net premiums earned for the three months ended March 31, 2011 were $429.5 million compared to
$457.7 million for the three months ended March 31, 2010, a decrease of $28.2 million or 6.2%. The
decrease in net premiums earned was driven by a decrease in net premiums earned of $31.6 million in
the Validus Re segment, partially offset by an increase of $3.5 million in the Talbot segment.
Details of net premiums earned by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Earned |
|
|
Earned (%) |
|
|
Earned |
|
|
Earned (%) |
|
|
% Change |
|
Property |
|
$ |
215,713 |
|
|
|
50.3 |
% |
|
$ |
249,485 |
|
|
|
54.5 |
% |
|
|
(13.5 |
)% |
Marine |
|
|
118,297 |
|
|
|
27.5 |
% |
|
|
104,253 |
|
|
|
22.8 |
% |
|
|
13.5 |
% |
Specialty |
|
|
95,523 |
|
|
|
22.2 |
% |
|
|
103,956 |
|
|
|
22.7 |
% |
|
|
(8.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
429,533 |
|
|
|
100.0 |
% |
|
$ |
457,694 |
|
|
|
100.0 |
% |
|
|
(6.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Re net premiums earned for the three months ended March 31, 2011 were $252.3
million compared to $283.9 million for the three months ended March 31, 2010, a decrease of $31.6
million or 11.1%. Details of Validus Re net premiums earned by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Earned |
|
|
Earned (%) |
|
|
Earned |
|
|
Earned (%) |
|
|
% Change |
|
Property |
|
$ |
176,770 |
|
|
|
70.1 |
% |
|
$ |
211,444 |
|
|
|
74.4 |
% |
|
|
(16.4 |
)% |
Marine |
|
|
53,858 |
|
|
|
21.3 |
% |
|
|
41,029 |
|
|
|
14.5 |
% |
|
|
31.3 |
% |
Specialty |
|
|
21,681 |
|
|
|
8.6 |
% |
|
|
31,448 |
|
|
|
11.1 |
% |
|
|
(31.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
252,309 |
|
|
|
100.0 |
% |
|
$ |
283,921 |
|
|
|
100.0 |
% |
|
|
(11.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
The decrease in net premiums earned is consistent with the decrease in net written premiums
and increase in premiums ceded for the three months ended March 31, 2011 compared to the three
months ended March 31, 2010.
Talbot. Talbot net premiums earned for the three months ended March 31, 2011 were $177.2 million
compared to $173.8 million for the three months ended March 31, 2010, an increase of $3.5 million
or 2.0%. Details of Talbot net premiums earned by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
Net Premiums |
|
|
|
|
(Dollars in thousands) |
|
Earned |
|
|
Earned (%) |
|
|
Earned |
|
|
Earned (%) |
|
|
% Change |
|
Property |
|
$ |
38,943 |
|
|
|
22.0 |
% |
|
$ |
38,041 |
|
|
|
21.9 |
% |
|
|
2.4 |
% |
Marine |
|
|
64,439 |
|
|
|
36.4 |
% |
|
|
63,224 |
|
|
|
36.4 |
% |
|
|
1.9 |
% |
Specialty |
|
|
73,842 |
|
|
|
41.6 |
% |
|
|
72,508 |
|
|
|
41.7 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
177,224 |
|
|
|
100.0 |
% |
|
$ |
173,773 |
|
|
|
100.0 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net premiums earned is a result of the increase in net premiums written over
the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, as
discussed above.
Losses and Loss Expenses
Losses and loss expenses for the three months ended March 31, 2011 were $476.2 million
compared to $478.5 million for the three months ended March 31, 2010, a decrease of $2.3 million or
0.5%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the
three months ended March 31, 2011 and 2010 were 110.9% and 104.6%, respectively. Details of loss
ratios by line of business are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
% Change |
|
Property |
|
|
136.0 |
% |
|
|
149.8 |
% |
|
|
(13.8 |
) |
Marine |
|
|
114.5 |
% |
|
|
55.3 |
% |
|
|
59.2 |
|
Specialty |
|
|
49.7 |
% |
|
|
45.4 |
% |
|
|
4.3 |
|
All lines |
|
|
110.9 |
% |
|
|
104.6 |
% |
|
|
6.3 |
|
At March 31, 2011 and 2010, gross and net reserves for losses and loss expenses were estimated
using the methodology as outlined in the critical accounting policies and estimates as discussed in
Item 7, Managements Discussion and Analysis of Results of Operations and Financial Condition in
the Companys Annual Report on Form 10-K for the year ended December 31, 2010. The Company did not
make any significant changes in the assumptions or methodology used in its reserving process for
the three months ended March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Total Gross Reserve |
|
|
|
|
|
|
|
|
|
|
|
for |
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss |
|
(Dollars in thousands) |
|
Gross Case Reserves |
|
|
Gross IBNR |
|
|
Expenses |
|
Property |
|
$ |
497,174 |
|
|
$ |
757,771 |
|
|
$ |
1,254,945 |
|
Marine |
|
|
353,938 |
|
|
|
400,951 |
|
|
|
754,889 |
|
Specialty |
|
|
224,704 |
|
|
|
299,877 |
|
|
|
524,581 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,075,816 |
|
|
$ |
1,458,599 |
|
|
$ |
2,534,415 |
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
Total Net Reserve for |
|
|
|
|
|
|
|
|
|
|
|
Losses and Loss |
|
(Dollars in thousands) |
|
Net Case Reserves |
|
|
Net IBNR |
|
|
Expenses |
|
Property |
|
$ |
446,059 |
|
|
$ |
580,627 |
|
|
$ |
1,026,686 |
|
Marine |
|
|
296,362 |
|
|
|
331,160 |
|
|
|
627,522 |
|
Specialty |
|
|
176,692 |
|
|
|
249,814 |
|
|
|
426,506 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
919,113 |
|
|
$ |
1,161,601 |
|
|
$ |
2,080,714 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a reconciliation of gross and net reserves for losses and loss
expenses by segment for the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 |
|
(Dollars in thousands) |
|
Validus Re |
|
|
Talbot |
|
|
Eliminations |
|
|
Total |
|
Gross reserves at period beginning |
|
$ |
998,165 |
|
|
$ |
1,191,548 |
|
|
$ |
(153,740 |
) |
|
$ |
2,035,973 |
|
Losses recoverable |
|
|
(80,219 |
) |
|
|
(356,655 |
) |
|
|
153,740 |
|
|
|
(283,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at period beginning |
|
|
917,946 |
|
|
|
834,893 |
|
|
|
|
|
|
|
1,752,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses current year |
|
|
321,822 |
|
|
|
180,892 |
|
|
|
|
|
|
|
502,714 |
|
Change in prior accident years |
|
|
(11,278 |
) |
|
|
(15,238 |
) |
|
|
|
|
|
|
(26,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses |
|
|
310,544 |
|
|
|
165,654 |
|
|
|
|
|
|
|
476,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
|
7,574 |
|
|
|
7,360 |
|
|
|
|
|
|
|
14,934 |
|
Paid losses |
|
|
(111,946 |
) |
|
|
(51,311 |
) |
|
|
|
|
|
|
(163,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at period end |
|
|
1,124,118 |
|
|
|
956,596 |
|
|
|
|
|
|
|
2,080,714 |
|
Losses recoverable |
|
|
216,300 |
|
|
|
368,371 |
|
|
|
(130,970 |
) |
|
|
453,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at period end |
|
$ |
1,340,418 |
|
|
$ |
1,324,967 |
|
|
$ |
(130,970 |
) |
|
$ |
2,534,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of recorded reserves represents managements best estimate of expected losses and
loss expenses on premiums earned. For the three months ended March 31, 2011, favorable loss reserve
development on prior years totaled $26.5 million. $11.3 million of the favorable loss reserve
development related to the Validus Re segment and $15.2 million related to the Talbot segment.
Favorable loss reserve development benefited the Companys loss ratio by 6.2 percentage points for
the three months ended March 31, 2011. For the three months
ended March 31, 2010, favorable loss
reserve development on prior years totaled $26.7 million. Of this, $11.5 million related to the Validus Re segment and $15.3 million related to the Talbot
segment. Favorable loss reserve development benefited the Companys loss ratio by 5.8 percentage
points for the three months ended March 31, 2010.
For the three months ended March 31, 2011, the Company incurred $293.8 million from notable
loss events, which represented 68.4 percentage points of the loss ratio, excluding reserve for
potential development on 2011 notable loss events, as described below. Net of $22.7 million of
reinstatement premiums, the effect of these events
on net income was $271.1 million. For the three months ended March 31, 2010, the Company
incurred $323.9 million from notable loss events, which represented 70.8 percentage points of the
loss ratio, excluding reserve for development on 2010 notable loss events, as described below. Net
of $17.0 million of reinstatement premiums, the effect of these events on net income was $306.9
million. The Companys loss ratio, excluding prior year development and notable loss events for the
three months ended March 31, 2011 and 2010 was 48.7% and 39.6%, respectively.
Management of insurance and reinsurance companies use significant judgment in the estimation
of reserves for losses and loss expenses. Given the magnitude of recent loss events and other
uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation
for recent notable loss events. The Companys actual ultimate net loss may vary materially from
these estimates. Validus Re ultimate losses for notable loss events
48
are estimated through detailed
review of contracts which are identified by the Company as potentially exposed to the specific
notable loss event. However, there can be no assurance that the ultimate loss amount estimated for
a specific contract will be accurate, or that all contracts with exposure to a specific notable
loss event will be identified in a timely manner. Potential losses in excess of the estimated
ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from
contracts not specifically included in the detailed review are reserved for in the reserve for
potential development on notable loss events. During the three months ended March 31, 2011, the
Company incurred $50.0 million for a reserve for potential development on 2011 notable loss events
as compared to a $19.2 million reserve for potential development on 2010 notable loss events
for the three months ended March 31, 2010. At December 31, 2010 the reserve for potential
development on 2010 notable loss events was $33.4 million, therefore as at March 31, 2011 the total
reserve for potential development on both 2010 and 2011 events was $83.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2011 |
|
|
|
(Dollars in thousands) |
|
First Quarter 2011 Notable Loss Events (a) |
|
Validus Re |
|
|
Talbot |
|
|
Total |
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
and Loss |
|
|
|
|
Description |
|
|
|
Expenses (b) |
|
|
% of NPE |
|
|
Expenses (b) |
|
|
% of NPE |
|
|
Expenses (b) |
|
|
% of NPE |
|
Tohoku earthquake |
|
Earthquake |
|
$ |
101,156 |
|
|
|
40.1 |
% |
|
$ |
47,770 |
|
|
|
26.9 |
% |
|
$ |
148,926 |
|
|
|
34.7 |
% |
Gryphon Alpha |
|
Mooring failure |
|
|
42,914 |
|
|
|
17.0 |
% |
|
|
9,520 |
|
|
|
5.4 |
% |
|
|
52,434 |
|
|
|
12.2 |
% |
Christchurch
earthquake |
|
Earthquake |
|
|
32,381 |
|
|
|
12.8 |
% |
|
|
9,500 |
|
|
|
5.4 |
% |
|
|
41,881 |
|
|
|
9.8 |
% |
Brisbane floods |
|
Floods |
|
|
25,023 |
|
|
|
9.9 |
% |
|
|
6,000 |
|
|
|
3.4 |
% |
|
|
31,023 |
|
|
|
7.2 |
% |
CNRL Horizon |
|
Explosion |
|
|
12,000 |
|
|
|
4.8 |
% |
|
|
7,500 |
|
|
|
4.2 |
% |
|
|
19,500 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
213,474 |
|
|
|
84.6 |
% |
|
$ |
80,290 |
|
|
|
45.3 |
% |
|
$ |
293,764 |
|
|
|
68.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2010 |
|
|
|
|
|
(Dollars in thousands) |
|
First Quarter 2010 Notable Loss Events (a) |
|
Validus Re |
|
|
Talbot |
|
|
Total |
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
Net Losses |
|
|
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
and Loss |
|
|
|
|
|
|
and Loss |
|
|
|
|
Description |
|
|
|
Expenses (b) |
|
|
% of NPE |
|
|
Expenses (b) |
|
|
% of NPE |
|
|
Expenses (b) |
|
|
% of NPE |
|
Chilean earthquake |
|
Earthquake |
|
$ |
243,670 |
|
|
|
85.8 |
% |
|
$ |
49,446 |
|
|
|
28.5 |
% |
|
$ |
293,116 |
|
|
|
64.0 |
% |
Windstorm Xynthia |
|
Windstorm |
|
|
12,558 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
12,558 |
|
|
|
2.8 |
% |
Melbourne hailstorm |
|
Hailstorm |
|
|
18,200 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
18,200 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
274,428 |
|
|
|
96.7 |
% |
|
$ |
49,446 |
|
|
|
28.5 |
% |
|
$ |
323,874 |
|
|
|
70.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These notable loss event amounts exclude the reserve for
potential development on 2010 and 2011 notable loss events and are based on managements estimates following a review of the Companys potential exposure and discussions with certain clients
and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding
losses from these events and the Companys actual ultimate net losses from these events may vary materially
from these estimates.
|
|
(b) |
|
Net of reinsurance but not net of reinstatement premiums. Reinstatement premiums were $22.7 million for the three months ended March 31, 2011 and $17.0 million for
the three months ended March 31, 2010. |
49
Validus Re. Validus Re losses and loss expenses for the three months ended March 31, 2011 were
$310.5 million compared to $348.9 million for the three months ended March 31, 2010, a decrease of
$38.4 million or 11.0%. The loss ratio, defined as losses and loss expenses divided by net premiums
earned, was 123.1% and 122.9% for the three months ended March 31, 2011 and 2010, respectively. For
the three months ended March 31, 2011, favorable loss development on prior years totaled $11.3
million and benefited the Validus Re loss ratio by 4.5 percentage points. For the three months
ended March 31, 2010, favorable loss development on prior years totaled $11.5 million and benefited
the Validus Re loss ratio by 4.0 percentage points.
For the three months ended March 31, 2011, Validus Re incurred notable loss events as
identified above of $213.5 million, which represented 84.6 percentage points of the loss ratio,
excluding the reserve for potential development on 2011 notable loss events. Net of reinstatement
premiums of $28.6 million, the effect of these events on Validus Re segment income was $184.9
million. For the three months ended March 31, 2010, Validus Re incurred notable loss events as
identified above of $274.4 million, which represented 96.7 percentage points of the loss ratio,
excluding the reserve for potential development on 2010 notable loss events. Net of reinstatement
premiums of $16.4 million, the effect of these events on Validus Re segment income was $258.0
million. Validus Re segment loss ratios, excluding prior year development and notable loss events
identified above, for the three months ended March 31, 2011 and 2010 were 43.0% and 30.2%,
respectively. Details of loss ratios by line of business and period of occurrence are provided
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
Property current year |
|
|
127.9 |
% |
|
|
152.2 |
% |
|
|
(24.3 |
) |
Property change in prior accident years |
|
|
(3.4 |
)% |
|
|
(3.9 |
)% |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Property loss ratio |
|
|
124.5 |
% |
|
|
148.3 |
% |
|
|
(23.8 |
) |
|
Marine current year |
|
|
157.0 |
% |
|
|
66.6 |
% |
|
|
90.4 |
|
Marine change in prior accident years |
|
|
0.2 |
% |
|
|
(9.7 |
)% |
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
Marine loss ratio |
|
|
157.2 |
% |
|
|
56.9 |
% |
|
|
100.3 |
|
|
Specialty current year |
|
|
51.7 |
% |
|
|
35.9 |
% |
|
|
15.8 |
|
Specialty change in prior accident years |
|
|
(25.0 |
)% |
|
|
2.5 |
% |
|
|
(27.5 |
) |
|
|
|
|
|
|
|
|
|
|
Specialty loss ratio |
|
|
26.7 |
% |
|
|
38.4 |
% |
|
|
(11.7 |
) |
|
All lines current year |
|
|
127.6 |
% |
|
|
126.9 |
% |
|
|
0.7 |
|
All lines change in prior accident years |
|
|
(4.5 |
)% |
|
|
(4.0 |
)% |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
All lines loss ratio |
|
|
123.1 |
% |
|
|
122.9 |
% |
|
|
0.2 |
|
For the three months ended March 31, 2011, Validus Re property lines losses and loss expenses
include $226.1 million related to current year losses and $6.0 million of favorable development
relating to prior accident years. This favorable development is attributable to lower than expected
claims development. For the three months ended March 31, 2010, Validus Re property lines losses and
loss expenses included $321.8 million related to current year
losses and $8.3 million of favorable development relating to prior accident years. This
favorable development was partially attributable to $3.7 million lower than expected claims
development on the Dublin Floods.
For the three months ended March 31, 2011, Validus Res property lines incurred $146.1 million
of notable losses, which represented 82.6 percentage points of the property lines loss ratio,
excluding the reserve for potential development on 2011 notable loss events. For the three months ended
March 31, 2010, Validus Res property lines incurred $266.1 million of notable losses, which
represented 125.9 percentage points of the property lines loss ratio, excluding reserve for
potential development on 2010 notable loss events. Validus Re property lines loss ratios, excluding
prior year development and notable loss events identified above, for the three months ended March
31, 2011 and 2010 were 45.3% and 26.3%, respectively.
50
For the three months ended March 31, 2011, Validus Re marine lines losses and loss expenses
include $84.5 million related to current year losses and $0.1 million of adverse development
relating to prior accident years. For the three months ended March 31, 2010, Validus Re marine
lines losses and loss expenses included $27.3 million related to current year losses and $4.0
million of favorable development relating to prior accident years.
For the three months ended March 31, 2011, Validus Res marine lines incurred $62.9 million of
notable losses which represented 116.8 percentage points of the marine lines loss ratio, excluding
the reserve for potential development on 2011 notable loss events. For the three months ended March 31,
2010, Validus Res marine lines incurred $8.3 million of notable losses, which represented 20.3
percentage points of the marine lines loss ratio, excluding the 2010 reserve for potential development
on notable loss events. Validus Re marine lines loss ratios, excluding prior year development and
notable loss events identified above, for the three months ended March 31, 2011 and 2010 were 40.2
% and 46.3%, respectively.
For the three months ended March 31, 2011, Validus Re specialty lines losses and loss expenses
include $11.2 million related to current year losses and $5.4 million of favorable development
relating to prior accident years. For the three months ended March 31, 2010, Validus Re specialty
lines losses and loss expenses included $11.3 million related to current year losses and $0.8
million of adverse development on a small number of losses relating to prior accident years.
For the three months ended March 31, 2011, Validus Res specialty lines incurred $4.5 million
of notable losses which represented 20.8 percentage points of the specialty lines loss ratio,
excluding the reserve for potential development on 2011 notable loss events. For the three months ended
March 31, 2010, Validus Res specialty lines did not incur any notable losses. Validus Re specialty
lines loss ratios, excluding prior year development, for the three months ended March 31, 2011 and
2010 were 30.9% and 35.9%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended March 31, 2011 were $165.7
million compared to $129.6 million for the three months ended March 31, 2010, an increase of $36.0
million, or 27.8%. The Talbot loss ratio was 93.5% and 74.6% for the three months ended March 31,
2011 and 2010, respectively. For the three months ended March 31, 2011, Talbot incurred losses of
$180.9 million related to current year losses and $15.2 million in favorable development relating
to prior accident years. For the three months ended March 31, 2010, Talbot incurred losses of
$144.9 million related to current year losses and $15.3 million in favorable development relating
to prior accident years. This favorable development was attributable to lower than expected claim
attritional loss development, plus a reduction in the ultimate losses from Hurricanes Ivan and
Katrina, offset by deterioration in large specialty and marine losses.
For the three months ended March 31, 2011, Talbot incurred $80.3 million of notable losses,
which represented 45.3 percentage points of the loss ratio. Net of reinstatement premiums of $(5.9)
million, the effect of these events on Talbot segment income is $86.2 million. For the three months
ended March 31, 2010, Talbot incurred $49.4 million of notable losses, which represented 28.5
percentage points of the Talbot loss ratio. Net of reinstatement premiums of $0.6 million, the
effect of these events on Talbot segment income was $48.8 million. Talbot loss ratios, excluding
prior year loss development and notable loss events identified above, for the three months ended
March 31, 2011 and three months ended March 31, 2010 were 56.8% and 54.9%, respectively. Details of
loss ratios by line of business and period of occurrence are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
% Change |
|
Property current year |
|
|
202.2 |
% |
|
|
169.4 |
% |
|
|
32.8 |
|
Property change in prior accident years |
|
|
(14.3 |
)% |
|
|
(11.1 |
)% |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
Property loss ratio |
|
|
187.9 |
% |
|
|
158.3 |
% |
|
|
29.6 |
|
|
Marine current year |
|
|
86.6 |
% |
|
|
67.8 |
% |
|
|
18.8 |
|
Marine change in prior accident years |
|
|
(7.9 |
)% |
|
|
(13.6 |
)% |
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
Marine loss ratio |
|
|
78.7 |
% |
|
|
54.2 |
% |
|
|
24.5 |
|
|
Specialty current year |
|
|
62.7 |
% |
|
|
51.8 |
% |
|
|
10.9 |
|
Specialty change in prior accident years |
|
|
(6.2 |
)% |
|
|
(3.4 |
)% |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
Specialty loss ratio |
|
|
56.5 |
% |
|
|
48.4 |
% |
|
|
8.1 |
|
|
All lines current year |
|
|
102.1 |
% |
|
|
83.4 |
% |
|
|
18.7 |
|
All lines change in prior accident years |
|
|
(8.6 |
)% |
|
|
(8.8 |
)% |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
All lines loss ratio |
|
|
93.5 |
% |
|
|
74.6 |
% |
|
|
18.9 |
|
51
For the three months ended March 31, 2011, Talbot property lines losses and loss expenses
include $78.8 million related to current year losses and $5.6 million of favorable development
relating to prior accident years. The prior year favorable development is attributable to lower
than expected claims development across most lines of business. For the three months ended March
31, 2010, Talbot property lines losses and loss expenses included $64.5 million related to current
year losses and $4.2 million of favorable development relating to prior accident years. The prior
year favorable development was attributable to a reduction in ultimate losses from Hurricanes Ivan
and Katrina, and lower than expected attritional loss development.
For the three months ended March 31, 2011, Talbots property lines incurred $56.3 million of
notable losses, which represented 144.5 percentage points of the property lines loss ratio. For the
three months ended March 31, 2010, Talbots property lines incurred $42.5 million of notable
losses, which represented 111.7 percentage points of the property lines loss ratio. Talbot property
line loss ratio, excluding prior year development and loss events noted above for the three months
ended March 31, 2011 and 2010 were 57.7% and 57.7%, respectively.
For the three months ended March 31, 2011, Talbot marine lines losses and loss expenses
include $55.9 million related to current year losses and $5.1 million of favorable development
relating to prior accident years. The prior year favorable development is primarily due to lower
than expected loss development across a number of lines. For the three months ended March 31, 2010,
Talbot marine lines losses and loss expenses included $42.9 million related to current year losses
and $8.6 million of favorable development relating to prior accident years. The prior year
favorable development was primarily due to lower than expected attritional losses partially offset
by deterioration in large losses.
For the three months ended March 31, 2011, Talbots marine lines incurred $20.2 million of
notable losses, which represented 31.3 percentage points of the marine lines loss ratio. For the
three months ended March 31, 2010, Talbots marine lines incurred $5.7 million of notable losses,
which represented 8.9 percentage points of the marine lines loss ratio. Talbot marine lines loss
ratios, excluding prior year development and loss events noted above, for the three months ended
March 31, 2011 and 2010 were 55.3% and 58.9%, respectively.
For the three months ended March 31, 2011, Talbot specialty lines losses and loss expenses
include $46.3 million relating to current year losses and $4.5 million of favorable development
relating to prior accident years. The prior year favorable development is attributable to lower
than expected claims development across some lines together with a reclassification of one loss the
from specialty to marine line. For the three months ended March 31, 2010, Talbot specialty lines
losses and loss expenses included $37.5 million relating to current year losses and $2.5 million of
favorable development relating to prior accident years. The prior
year favorable development was
primarily due to lower than expected attritional losses partially offset by deterioration in large
losses.
For the three months ended March 31, 2011, Talbots specialty lines incurred $3.8 million of
notable losses, which represented 5.2 percentage points of the specialty lines loss ratio. For the
three months ended March 31, 2010, Talbots specialty lines incurred $1.3 million of notable
losses, which represented 1.8 percentage points of the specialty lines loss ratio. Talbot specialty
lines loss ratios, excluding prior year development for the three months ended March 31, 2011 and
2010 were 57.5% and 50.0%, respectively.
Policy Acquisition Costs
Policy acquisition costs for the three months ended March 31, 2011 were $77.3 million
compared to $76.2 million for the three months ended March 31, 2010, an increase of $1.1 million or
1.5%.
52
Policy
acquisition costs as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 18.0%
and 16.6%, respectively. The changes in policy acquisition costs are due to the factors described
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
|
|
(Dollars in thousands) |
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
% Change |
|
Property |
|
$ |
29,184 |
|
|
|
37.8 |
% |
|
|
13.5 |
% |
|
$ |
37,102 |
|
|
|
48.7 |
% |
|
|
14.9 |
% |
|
|
(21.3 |
)% |
Marine |
|
|
27,083 |
|
|
|
35.0 |
% |
|
|
22.9 |
% |
|
|
18,163 |
|
|
|
23.8 |
% |
|
|
17.4 |
% |
|
|
49.1 |
% |
Specialty |
|
|
21,029 |
|
|
|
27.2 |
% |
|
|
22.0 |
% |
|
|
20,911 |
|
|
|
27.5 |
% |
|
|
20.1 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
77,296 |
|
|
|
100.0 |
% |
|
|
18.0 |
% |
|
$ |
76,176 |
|
|
|
100.0 |
% |
|
|
16.6 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re. Validus Re policy acquisition costs for the three months ended March 31, 2011 were
$40.1 million compared to $43.5 million for the three months ended March 31, 2010, a decrease of
$3.4 million or 7.9%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
|
|
(Dollars in thousands) |
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
% Change |
|
Property |
|
$ |
25,875 |
|
|
|
64.6 |
% |
|
|
14.6 |
% |
|
$ |
32,258 |
|
|
|
74.1 |
% |
|
|
15.3 |
% |
|
|
(19.8 |
)% |
Marine |
|
|
10,510 |
|
|
|
26.2 |
% |
|
|
19.5 |
% |
|
|
6,809 |
|
|
|
15.7 |
% |
|
|
16.6 |
% |
|
|
54.4 |
% |
Specialty |
|
|
3,681 |
|
|
|
9.2 |
% |
|
|
17.0 |
% |
|
|
4,436 |
|
|
|
10.2 |
% |
|
|
14.1 |
% |
|
|
(17.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,066 |
|
|
|
100.0 |
% |
|
|
15.9 |
% |
|
$ |
43,503 |
|
|
|
100.0 |
% |
|
|
15.3 |
% |
|
|
(7.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs include brokerage, commission, excise tax, are generally driven by
contract terms and are normally a set percentage of premiums and are also net of ceding commission
income on retrocessions. Validus Re policy acquisition costs as a percent of net premiums earned
for the three months ended March 31, 2011 and 2010 were 15.9% and 15.3%, respectively. The policy
acquisition cost ratio in the property lines has remained relatively
consistent for the three months
ended March 31, 2011 compared to the three months ended March 31, 2010. The policy acquisition
cost ratio in the marine lines increased by 2.9% primarily due to the largest single reinsurance
contract, by gross premium written, having an acquisition cost ratio of 36%. This contract
incepted in the three months ended March 31, 2010 on a risks attaching basis and therefore
has a higher earned premium impact in the three months ended March 31, 2011. Items such as ceded premium, earned premium adjustments and reinstatement
premiums that are recognized in the period have an effect on policy acquisition costs.
Talbot. Talbot policy acquisition costs for the three months ended March 31, 2011 were $37.2
million compared to $34.9 million for the three months ended March 31, 2010, an increase of $2.3
million or 6.5%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
Policy |
|
|
Policy |
|
|
|
|
|
|
|
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
Acquisition |
|
|
|
|
(Dollars in thousands) |
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
Costs |
|
|
Costs (%) |
|
|
Cost Ratio |
|
|
% Change |
|
Property |
|
$ |
3,366 |
|
|
|
9.0 |
% |
|
|
8.6 |
% |
|
$ |
7,056 |
|
|
|
20.2 |
% |
|
|
18.5 |
% |
|
|
(52.3 |
)% |
Marine |
|
|
16,593 |
|
|
|
44.6 |
% |
|
|
25.7 |
% |
|
|
11,395 |
|
|
|
32.6 |
% |
|
|
18.0 |
% |
|
|
45.6 |
% |
Specialty |
|
|
17,257 |
|
|
|
46.4 |
% |
|
|
23.4 |
% |
|
|
16,494 |
|
|
|
47.2 |
% |
|
|
22.7 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,216 |
|
|
|
100.0 |
% |
|
|
21.0 |
% |
|
$ |
34,945 |
|
|
|
100.0 |
% |
|
|
20.1 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The policy acquisition cost ratio in the Talbot property lines decreased due to increases in
intercompany policy acquisition costs on the property treaty line. The policy acquisition cost
ratio on the Talbot marine lines increased primarily due to acquisition cost rate increases in the
Hull, Cargo and other treaty lines. Policy acquisition costs as a percent of net premiums earned
for the three months ended March 31, 2011 and 2010 were 21.0% and 20.1%, respectively.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2011 were $48.5
million compared to $53.6 million for the three months ended March 31, 2010, a decrease of $5.1
million or 9.5%. The decrease was a result of decreased expenses in the Validus Re and Corporate
segments, offset by an increase in the Talbot segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
General and |
|
|
General and |
|
|
General and |
|
|
General and |
|
|
|
|
|
|
Administrative |
|
|
Administrative |
|
|
Administrative |
|
|
Administrative |
|
|
|
|
(Dollars in thousands) |
|
Expenses |
|
|
Expenses (%) |
|
|
Expenses |
|
|
Expenses (%) |
|
|
% Change |
|
Validus Re |
|
$ |
10,657 |
|
|
|
22.0 |
% |
|
$ |
16,312 |
|
|
|
30.4 |
% |
|
|
(34.7 |
)% |
Talbot |
|
|
28,722 |
|
|
|
59.2 |
% |
|
|
25,548 |
|
|
|
47.7 |
% |
|
|
12.4 |
% |
Corporate &
Eliminations |
|
|
9,098 |
|
|
|
18.8 |
% |
|
|
11,709 |
|
|
|
21.9 |
% |
|
|
(22.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,477 |
|
|
|
100.0 |
% |
|
$ |
53,569 |
|
|
|
100.0 |
% |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses of $48.5 million in the three months ended March 31, 2011
represents 11.3 percentage points of the expense ratio. Share compensation expense is discussed in
the following section.
Validus Re. Validus Re general and administrative expenses for the three months ended March 31,
2011 were $10.7 million compared to $16.3 million for the three months ended March 31, 2010, a
decrease of $5.7 million or 34.7%. General and administrative expenses have decreased primarily as
a result of a decrease in salaries and benefits driven by the absence of severance costs related to
IPC, which amounted to $3.0 million in the three months ended March 31, 2010. In addition, there
was a reduction in the performance bonus accrued during the quarter. General and administrative
expenses include salaries and benefits, professional fees, rent and office expenses. Validus Res
general and administrative expenses as a percent of net premiums earned for the three months ended
March 31, 2011 and 2010 were 4.2% and 5.7%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended March 31, 2011 were
$28.7 million compared to $25.5 million for the three months ended March 31, 2010, an increase of
$3.2 million or 12.4%. General and administrative expenses have increased primarily as a result of
a $1.7 million increase in syndicate costs. Talbots general and administrative expenses as a
percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 16.2% and
14.7%, respectively.
Corporate & Eliminations. Corporate general and administrative expenses for the three months
ended March 31, 2011 were $9.1 million compared to $11.7 million for the three months ended March
31, 2010, a decrease of $2.6 million or 22.3%.
Share Compensation Expenses
Share compensation expenses for the three months ended March 31, 2011 were $12.0 million
compared to $6.6 million for the three months ended March 31, 2010, an increase of $5.5 million or
83.2%. This expense is non-cash and has no net effect on total shareholders equity, as it is
balanced by an increase in additional paid-in capital.
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
Share |
|
|
Share |
|
|
Share |
|
|
Share |
|
|
|
|
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
|
|
(Dollars in thousands) |
|
Expenses |
|
|
Expenses (%) |
|
|
Expenses |
|
|
Expenses (%) |
|
|
% Change |
|
Validus Re |
|
$ |
3,105 |
|
|
|
25.7 |
% |
|
$ |
1,629 |
|
|
|
24.8 |
% |
|
|
90.6 |
% |
Talbot |
|
|
2,719 |
|
|
|
22.6 |
% |
|
|
1,559 |
|
|
|
23.7 |
% |
|
|
74.4 |
% |
Corporate & Eliminations |
|
|
6,225 |
|
|
|
51.7 |
% |
|
|
3,388 |
|
|
|
51.5 |
% |
|
|
83.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,049 |
|
|
|
100.0 |
% |
|
$ |
6,576 |
|
|
|
100.0 |
% |
|
|
83.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share compensation expenses of $12.0 million in the three months ended March 31, 2011
represents 2.8 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expenses for the three months ended March 31, 2011 were
$3.1 million compared to $1.6 million for the three months ended March 31, 2010 an increase of $1.5
million or 90.6%. During the three month ended March 31, 2011, a change in forfeiture rates
resulted in an increase of $1.2 million in share compensation expenses in the Validus Re segment
primarily relating to restricted share awards. Share compensation expense as a percent of net
premiums earned for the three months ended March 31, 2011 and 2010 were 1.2% and 0.6%,
respectively.
Talbot. Talbot share compensation expenses for the three months ended March 31, 2011 was $2.7
million compared to $1.6 million for the three months ended March 31, 2010 an increase of $1.2
million or 74.4%. This increase was primarily due to a change in forfeiture rates which resulted in
an increase of $0.5 million in share compensation expenses and an increase of $0.6 million in
restricted share award expenses due to a large number of grants being issued in 2010. Share
compensation expense as a percent of net premiums earned for the three months ended March 31, 2011
and 2010 were 1.5% and 0.9%, respectively.
Corporate & Eliminations. Corporate share compensation expenses for the three months ended March
31, 2011 were $6.2 million compared to $3.4 million for the three months ended March 31, 2010, an
increase of $2.8 million or 83.7%. During the three month ended March 31, 2011, a change in
forfeiture rates resulted in an increase of $2.3 million in share compensation expenses in the
Corporate segment primarily relating to restricted share awards.
Selected Ratios
The underwriting results of an insurance or reinsurance company are often measured by
reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The net
loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for
incurred but not reported losses) by net premiums earned. The expense ratio is calculated by
dividing acquisition costs combined with general and administrative expenses (including share
compensation expenses) by net premiums earned. The following table presents the losses and loss
expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense
ratio and combined ratio for the three months ended March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
%Change |
|
Losses and loss expense ratio |
|
|
110.9 |
% |
|
|
104.6 |
% |
|
|
6.3 |
|
Policy acquisition cost ratio |
|
|
18.0 |
% |
|
|
16.6 |
% |
|
|
1.4 |
|
General and administrative expense
ratio (a) |
|
|
14.1 |
% |
|
|
13.1 |
% |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
32.1 |
% |
|
|
29.7 |
% |
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
143.0 |
% |
|
|
134.3 |
% |
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
Validus Re |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
%Change |
|
Losses and loss expense ratio |
|
|
123.1 |
% |
|
|
122.9 |
% |
|
|
0.2 |
|
Policy acquisition cost ratio |
|
|
15.9 |
% |
|
|
15.3 |
% |
|
|
0.6 |
|
General and administrative
expense ratio (a) |
|
|
5.5 |
% |
|
|
6.3 |
% |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
21.4 |
% |
|
|
21.6 |
% |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
144.5 |
% |
|
|
144.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
Talbot |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
%Change |
|
Losses and loss expense ratio |
|
|
93.5 |
% |
|
|
74.6 |
% |
|
|
18.9 |
|
Policy acquisition cost ratio |
|
|
21.0 |
% |
|
|
20.1 |
% |
|
|
0.9 |
|
General and administrative
expense ratio (a) |
|
|
17.7 |
% |
|
|
15.6 |
% |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
Expense ratio |
|
|
38.7 |
% |
|
|
35.7 |
% |
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
132.2 |
% |
|
|
110.3 |
% |
|
|
21.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes general and administrative expenses and share compensation expenses. |
General and administrative expense ratios for the three months ended March 31, 2011 and
2010 were 14.1% and 13.1%, respectively. General and administrative expense ratio is the sum of
general and administrative expenses and share compensation expense divided by net premiums earned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Expenses as % of |
|
|
|
|
|
|
Expenses as % of |
|
|
|
|
|
|
|
Net Earned |
|
|
|
|
|
|
Net Earned |
|
(Dollars in thousands) |
|
Expenses |
|
|
Premiums |
|
|
Expenses |
|
|
Premiums |
|
General and administrative expenses |
|
$ |
48,477 |
|
|
|
11.3 |
% |
|
$ |
53,569 |
|
|
|
11.7 |
% |
Share compensation expenses |
|
|
12,049 |
|
|
|
2.8 |
% |
|
|
6,576 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60,526 |
|
|
|
14.1 |
% |
|
$ |
60,145 |
|
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting (Loss)
Underwriting (loss) for the three months ended March 31, 2011 was ($184.5) million compared to
underwriting (loss) of ($157.2) million for the three months ended March 31, 2010, an increase of
$27.3 million, or 17.4%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
Ended March 31, |
|
|
|
|
|
|
Ended March 31, |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
|
% of sub-total |
|
|
2010 |
|
|
% of sub-total |
|
|
% Change |
|
Validus Re |
|
$ |
(112,063 |
) |
|
|
66.3 |
% |
|
$ |
(126,443 |
) |
|
|
87.6 |
% |
|
|
(11.4 |
)% |
Talbot |
|
|
(57,087 |
) |
|
|
33.7 |
% |
|
|
(17,890 |
) |
|
|
12.4 |
% |
|
|
219.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
(169,150 |
) |
|
|
100.0 |
% |
|
|
(144,333 |
) |
|
|
100.0 |
% |
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & Eliminations |
|
|
(15,337 |
) |
|
|
|
|
|
|
(12,825 |
) |
|
|
|
|
|
|
19.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(184,487 |
) |
|
|
|
|
|
$ |
(157,158 |
) |
|
|
|
|
|
|
17.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The underwriting results of an insurance or reinsurance company are also often measured by
reference to its underwriting income, which is a non-GAAP financial measure. Underwriting income,
as set out in the table below, is reconciled to net income (the most directly comparable GAAP
financial measure) by the addition or subtraction of certain Consolidated Statement of Operations
and Comprehensive Income line items, as illustrated below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
(Dollars in thousands) |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
Underwriting (loss) |
|
$ |
(184,487 |
) |
|
$ |
(157,158 |
) |
Net investment income |
|
|
29,975 |
|
|
|
34,299 |
|
Other income |
|
|
1,606 |
|
|
|
888 |
|
Finance expenses |
|
|
(14,001 |
) |
|
|
(15,151 |
) |
Net realized gains on investments |
|
|
6,379 |
|
|
|
11,398 |
|
Net unrealized (losses) gains on investments |
|
|
(12,828 |
) |
|
|
15,413 |
|
Foreign exchange (losses) |
|
|
(467 |
) |
|
|
(8,764 |
) |
|
|
|
|
|
|
|
Net (loss) before tax |
|
$ |
(173,823 |
) |
|
$ |
(119,075 |
) |
|
|
|
|
|
|
|
56
Underwriting income indicates the performance of the Companys core underwriting function,
excluding revenues and expenses such as the reconciling items in the table above. The Company
believes the reporting of underwriting income enhances the understanding of our results by
highlighting the underlying profitability of the Companys core insurance and reinsurance business.
Underwriting profitability is influenced significantly by earned premium growth, adequacy of the
Companys pricing and loss frequency and severity. Underwriting profitability over time is also
influenced by the Companys underwriting discipline, which seeks to manage exposure to loss through
favorable risk selection and diversification, its management of claims, its use of reinsurance and
its ability to manage its expense ratio, which it accomplishes through its management of
acquisition costs and other underwriting expenses. The Company believes that underwriting income
provides investors with a valuable measure of profitability derived from underwriting activities.
The Company excludes the U.S. GAAP income statement line items noted above, from its
calculation of underwriting income. Net realized and unrealized gains and losses on investments are
excluded because the amount of these gains and losses is heavily influenced by, and fluctuates in
part, according to availability of investment market opportunities. The Company believes the other
line items excluded are largely independent of its underwriting business and including them
distorts the analysis of trends in its operations. In addition to presenting net income determined
in accordance with U.S. GAAP, the Company believes that showing underwriting income enables
investors, analysts, rating agencies and other users of its financial information to more easily
analyze the Companys results of operations in a manner similar to how management analyzes the
Companys underlying business performance. The Company uses underwriting income as a primary
measure of underwriting results in its analysis of historical financial information and when
performing its budgeting and forecasting processes. Analysts, investors and rating agencies who
follow the Company request this non-GAAP financial information on a regular basis. In addition,
underwriting income is one of the factors considered by the compensation committee of our Board of
Directors in determining the bonus component of the total annual incentive compensation.
Underwriting income should not be viewed as a substitute for U.S. GAAP net income as there are
inherent material limitations associated with the use of underwriting income as compared to using
net income, which is the most directly comparable U.S. GAAP financial measure. The most significant
limitation is the ability of users of the financial information to make comparable assessments of
underwriting income with other companies, particularly as underwriting income may be defined or
calculated differently by other companies. Therefore, the Company provides more prominence in this
filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes
the reconciling items in the table above. The Company compensates for these limitations by
providing both clear and transparent disclosure of net income and reconciliation of underwriting
income to net income.
Net Investment Income
Net investment income for the three months ended March 31, 2011 was $30.0 million compared to
$34.3 million for the three months ended March 31, 2010, a decrease of $4.3 million or 12.6%. Net
investment income decreased due to falling yields in fixed maturity investments. Net investment
income includes accretion of premium or discount on fixed maturities, interest on coupon-paying
bonds, short-term investments and cash and cash equivalents, partially offset by investment
management fees. The components of net investment income for the three months ended March 31, 2011
and 2010 are as presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
|
(Dollars in thousands) |
|
March 31, 2011 |
|
|
March 31, 2010 |
|
|
%Change |
|
Fixed maturities and short-term investments |
|
$ |
28,935 |
|
|
$ |
35,755 |
|
|
|
19.1 |
% |
Cash and cash equivalents |
|
|
2,581 |
|
|
|
586 |
|
|
|
340.4 |
% |
Securities lending income |
|
|
16 |
|
|
|
70 |
|
|
|
(77.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income |
|
|
31,532 |
|
|
|
36,411 |
|
|
|
13.4 |
% |
Investment expenses |
|
|
(1,557 |
) |
|
|
(2,112 |
) |
|
|
26.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
29,975 |
|
|
$ |
34,299 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
57
Annualized effective investment yield is based on the weighted average investments held
calculated on a simple period average and excludes net unrealized gains (losses), realized gains
(losses) on investments, foreign exchange gains (losses) on investments and the foreign exchange
effect of insurance balances. The Companys annualized effective investment yield was 2.06% and
2.33% for the three months ended March 31, 2011 and 2010, respectively, and the average duration of
the portfolio at March 31, 2011 was 1.83 years (December 31, 2010 2.27 years).
Other Income
Other income for the three months ended March 31, 2011 was $1.6 million compared to $0.9
million for the three months ended March 31, 2010.
Finance Expenses
Finance expenses for the three months ended March 31, 2011 were $14.0 million compared to
$15.2 million for the three months ended March 31, 2010, a decrease of $1.2 million or 7.6%. The
decrease was primarily driven by a $2.7 million decrease in payments under the Talbot third party
FAL facility which was closed as of December 31, 2009. This was offset by a $1.6 million increase
in interest in relation to the 2010 Senior Notes which were issued on January 26, 2010 and so did
not incur a full months interest expense in January 2010. Finance expenses also include the
amortization of debt offering costs and discounts, and fees related to our credit facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
%Change |
|
2006 Junior Subordinated Deferrable Debentures |
|
$ |
3,588 |
|
|
$ |
3,588 |
|
|
|
0.0 |
% |
2007 Junior Subordinated Deferrable Debentures |
|
|
3,029 |
|
|
|
3,029 |
|
|
|
0.0 |
% |
2010 Senior Notes due 2040 |
|
|
5,597 |
|
|
|
3,978 |
|
|
|
40.7 |
% |
Credit facilities |
|
|
1,724 |
|
|
|
1,311 |
|
|
|
31.5 |
% |
Talbot FAL Facility |
|
|
63 |
|
|
|
422 |
|
|
|
(85.2 |
)% |
Talbot other interest |
|
|
|
|
|
|
75 |
|
|
|
(100.0 |
)% |
Talbot third party FAL facility |
|
|
|
|
|
|
2,748 |
|
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Finance expenses |
|
$ |
14,001 |
|
|
$ |
15,151 |
|
|
|
(7.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Capital in Lloyds entities, whether personal or corporate, is required to be set annually for
the prospective year and held by Lloyds in trust (Funds at Lloyds or FAL). For underwriting
years up to and including 2007, Talbots FAL has been provided both by Talbot and by third parties,
thereafter Talbots FAL has been provided exclusively by the Company. As all of the underwriting
years up to and including 2007 are closed with effect from December 31, 2009, the FAL relating to
these years has been returned to the third party providers. There were some costs paid in 2010,
which are the final amounts payable under the Talbot third party FAL facility.
Tax Benefit
Tax benefit for the three months ended March 31, 2011 was $1.5 million compared to a benefit
of $0.7 million for the three months ended March 31, 2010, an increase of $0.8 million or 109.3%.
The increase is primarily due to adjustments to deferred tax balances in the Talbot segment
following the reduction in the effective U.K. tax rate from 28% to 26.5%.
Net Realized Gains on Investments
Net realized gains on investments for the three months ended March 31, 2011 were $6.4 million
compared to gains of $11.4 million for the three months ended March 31, 2010, a decrease of $5.0
million or 44.0%.
58
Net Unrealized (Losses) Gains on Investments
Net unrealized losses on investments for the three months ended March 31, 2011 were ($12.8)
million compared to gains of $15.4 million for the three months ended March 31, 2010 an unfavorable
movement of $28.2 million or 183.2%. The net unrealized losses in the three months ended March 31,
2011 experienced an unfavorable movement due to increasing interest rates which reduced the value
of the fixed income portfolio.
Net unrealized gains on investments are recorded as a component of net income. The Company has
adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance
sheet date. Consistent with these standards, certain market conditions allow for fair value
measurements that incorporate unobservable inputs where active market transaction based
measurements are unavailable. Certain non-Agency RMBS securities were previously identified as
trading in inactive markets.
Foreign Exchange (Losses) Gains
Foreign exchange losses for the three months ended March 31, 2011 were ($0.5) million compared
to losses of ($8.8) million for the three months ended March 31, 2010, a favorable movement of $8.3
million or 94.7%. The favorable movement in foreign exchange was due primarily to the increased
value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency
for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010.
For the three months ended March 31, 2011, Validus Re recognized foreign exchange losses of ($4.4)
million, Talbot recognized foreign exchange gains of $3.9 million.
For the three months ended March 31, 2011, Validus Re segment foreign exchange losses were
($4.4) million compared to losses of ($5.1) million for the three months ended March 31, 2010, a
favorable movement of $0.8 million. The losses in the current quarter were primarily driven by a
($3.8) million loss on forward exchange contracts to hedge currency movements for the Chilean peso,
Australian dollar and Euro.
For the three months ended March 31, 2011, Talbot segment foreign exchange gains were $3.9
million compared to (losses) of $(3.6) million for the three months ended March 31, 2010, a
favorable movement of $7.5 million. The favorable movement in Talbot segment foreign exchange was
due primarily to the appreciation of the British pound sterling during the three months ended March
31, 2011. Certain premiums receivable and liabilities for losses incurred in currencies other than
the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign
exchange rates and may affect financial results in the future.
The Euro to U.S. dollar exchange rates were 1.33 and 1.41 at December 31, 2010 and March 31,
2011, respectively. The British pound sterling to U.S. dollar exchange rates were 1.55 and 1.60 at
December 31, 2010 and March 31, 2011, respectively. During the quarter, the Euro appreciated by 6.0
percent, while the British pound sterling appreciated by 3.2 percent.
At March 31, 2011, Talbots balance sheet includes net unearned premiums and deferred
acquisition costs denominated in foreign currencies of approximately $100.1 million and $22.7
million, respectively. These balances consisted of British pound sterling and Canadian dollars of
$67.6 million and $9.8 million, respectively. Net unearned premiums and deferred acquisition costs
are classified as non-monetary items and are translated at historic exchange rates. All of Talbots
other balance sheet items are classified as monetary items and are translated at period end
exchange rates. Additional foreign exchange gains (losses) may be incurred on the translation of
net unearned premiums and deferred acquisition costs arising from insurance and reinsurance
premiums written in future periods.
Other Non-GAAP Financial Measures
In presenting the Companys results, management has included and discussed certain schedules
containing net operating income, underwriting income (loss), annualized return on average equity
and diluted book value per common share that are not calculated under standards or rules that
comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or
calculated differently by other companies. These measures should not be viewed as a substitute for
those determined in accordance with U.S. GAAP. The calculation of annualized return on average
equity is discussed in the section above entitled Financial Measures. A reconciliation of
underwriting income to net income, the most comparable U.S. GAAP financial measure, is presented
above in the section entitled Underwriting Income. A reconciliation of diluted book value per
share to book value per share, the most comparable U.S. GAAP financial measure, is presented below.
59
Operating income is calculated based on net income (loss) excluding net realized gains (losses),
net unrealized gains (losses) on investments, gains (losses) arising from translation of non-US$
denominated balances and non-recurring items. A reconciliation of operating income to net income,
the most comparable U.S. GAAP financial measure, is embedded in the table presenting results of
operations for the three months ended March 31, 2011 and 2010 in the section above entitled
Results of Operations. Realized gains (losses) from the sale of investments are driven by the
timing of the disposition of investments, not by our operating performance. Gains (losses) arising
from translation of non-US$ denominated balances are unrelated to our underlying business.
The following tables present reconciliations of diluted book value per share to book value per
share, the most comparable U.S. GAAP financial measure, at March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at March 31, 2011 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per |
|
|
|
Equity Amount |
|
|
Shares |
|
|
Exercise Price |
|
|
Share |
|
Book value per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
3,315,321 |
|
|
|
98,288,177 |
|
|
|
|
|
|
$ |
33.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted book value per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,315,321 |
|
|
|
98,288,177 |
|
|
|
|
|
|
|
|
|
Assumed exercise of outstanding warrants |
|
|
139,272 |
|
|
|
7,934,860 |
|
|
$ |
17.55 |
|
|
|
|
|
Assumed exercise of outstanding stock options |
|
|
50,571 |
|
|
|
2,521,975 |
|
|
$ |
20.05 |
|
|
|
|
|
Unvested restricted shares |
|
|
|
|
|
|
3,177,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted book value per common share |
|
$ |
3,505,164 |
|
|
|
111,922,763 |
|
|
|
|
|
|
$ |
31.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value Per |
|
|
|
Equity Amount |
|
|
Shares |
|
|
Exercise Price |
|
|
Share |
|
Book value per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
3,504,831 |
|
|
|
98,001,226 |
|
|
|
|
|
|
$ |
35.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted book value per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
3,504,831 |
|
|
|
98,001,226 |
|
|
|
|
|
|
|
|
|
Assumed exercise of outstanding warrants |
|
|
139,272 |
|
|
|
7,934,860 |
|
|
$ |
17.55 |
|
|
|
|
|
Assumed exercise of outstanding stock options |
|
|
54,997 |
|
|
|
2,723,684 |
|
|
$ |
20.19 |
|
|
|
|
|
Unvested restricted shares |
|
|
|
|
|
|
3,496,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted book value per common share |
|
$ |
3,699,100 |
|
|
|
112,155,866 |
|
|
|
|
|
|
$ |
32.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition and Liquidity
Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company
relies primarily on cash dividends and other permitted payments from Validus Re and Talbot to pay
finance expenses and other holding company expenses. There are restrictions on the payment of
dividends from Validus Re and Talbot to the Company. Please refer to Part II, Item 5, Market for
Registrants, Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 for further
discussion of the Companys dividend policy.
Three main sources provide cash flows for the Company: operating activities, investing
activities and financing activities. Cash flow from operating activities is derived primarily from
the net receipt of premiums less claims and expenses related to underwriting activities. Cash flow
from investing activities is derived primarily from the receipt of net proceeds on the Companys
total investment portfolio. Cash flow from financing activities is derived primarily from the
issuance of common shares and debentures payable. The movement in net cash provided by operating
activities, net cash provided by (used in) investing activities, net cash (used in) provided by
financing
60
activities and the effect of foreign currency rate changes on cash and cash equivalents
for the three months ended March 31, 2011 and 2010 is described in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
%Change |
|
Net cash provided by operating activities |
|
$ |
168,557 |
|
|
$ |
183,966 |
|
|
|
(8.4 |
)% |
Net cash (used in) investing activities |
|
|
(62,779 |
) |
|
|
(186,214 |
) |
|
|
66.3 |
% |
Net cash (used in) provided by financing activities |
|
|
(19,267 |
) |
|
|
98,934 |
|
|
|
119.5 |
% |
Effect of foreign currency rate changes on cash
and cash equivalents |
|
|
10,193 |
|
|
|
(5,795 |
) |
|
|
(275.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
$ |
96,704 |
|
|
$ |
90,891 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2011, net cash provided by operating activities of
$168.6 million was driven primarily by a significant portion of the 2011 incurred losses which have
yet to be paid. Net cash used in investing activities of $62.8 million was driven primarily by
a net purchase of investments of $52.0 million and an increase in securities lending collateral of
$10.8 million. Net cash used in financing activities of $19.3 million was driven primarily by the
payment of $27.2 million in quarterly dividends, partially offset by a $10.8 million increase in
securities lending payables.
During the three months ended March 31, 2010, net cash provided by operating activities of
$184.0 million was driven primarily by a $366.2 million increase in reserve for losses and loss
expenses primarily due to the Chilean earthquake, windstorm Xynthia and the Melbourne hailstorm and
a $359.5 million increase in unearned premiums offset by a $255.4 million decrease in premiums
receivable, a net loss of $118.4 million, a combined $122.5 million decrease in deferred
acquisition costs, prepaid reinsurance premiums, reinsurance balances payable and accounts payable.
Net cash used in investing activities of $186.2 million was driven primarily by the investment of
operating surpluses. Net cash provided by financing activities of $98.9 million was driven
primarily by the issuance $246.8 million of Senior Notes, offset by share repurchases of $128.2
million and quarterly dividend payments of $29.9 million.
As at March 31, 2011, the Companys portfolio was composed of fixed income investments
including; short-term investments, agency securities and sovereign securities amounting to $5,175.2
million or 87.8% of total cash and investments. Details of the Companys debt and financing
arrangements at March 31, 2011 are provided below.
|
|
|
|
|
|
|
|
|
|
|
Maturity Date / |
|
|
In Use/ |
|
(Dollars in thousands) |
|
Term |
|
|
Outstanding |
|
2006 Junior Subordinated Deferrable Debentures |
|
June 15, 2036 |
|
$ |
150,000 |
|
2007 Junior Subordinated Deferrable Debentures |
|
June 15, 2037 |
|
|
139,800 |
|
2010 Senior Notes due 2040 |
|
January 26, 2040 |
|
|
250,000 |
|
$340,000 syndicated unsecured letter of credit facility |
|
March 12, 2013 |
|
|
|
|
$60,000 bilateral unsecured letter of credit facility |
|
March 12, 2013 |
|
|
|
|
$500,000 secured letter of credit facility |
|
March 12, 2012 |
|
|
285,048 |
|
Talbot FAL facility |
|
April 13, 2011 |
|
|
25,000 |
|
IPC Bi-Lateral Facility |
|
December 31, 2010 |
|
|
64,368 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
914,216 |
|
|
|
|
|
|
|
|
|
Capital Resources
Shareholders equity at March 31, 2011 was $3,315.3 million.
On February 9, 2011, the Company announced that its Board of Directors (the Board) had
increased the Companys annual dividend by 13.6% from $0.88 to $1.00 per common share and common
share equivalent for which each outstanding warrant is exercisable.
61
On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per common share and
$0.25 per common share equivalent for which each outstanding warrant is exercisable, payable on
June 30, 2011 to holders of record on June 5, 2011.
The timing and amount of any future cash dividends, however, will be at the discretion of the Board
and will depend upon our results of operations and cash flows, our 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. In November 2009, the Board of Directors of
the Company authorized an initial $400.0 million share repurchase program. On February 17, 2010,
the Board of Directors of the Company authorized the Company to return up to $750.0 million to
shareholders. This amount was in addition to, and in excess of, the $135.5 million of common shares
purchased by the Company through February 17, 2010 under its previously authorized $400.0 million
share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer
pursuant to which the Company has repurchased $300.0 million in common shares. On November 4, 2010,
the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased
$238.4 million in common shares. In addition, the Board of Directors authorized separate repurchase
agreements with funds affiliated with or managed by each of Aquiline Capital Partners LLC, New
Mountain Capital LLC, and Vestar Capital Partners pursuant to which the Company has repurchased
$61.6 million in common shares. On December 20, 2010, the Board of Directors authorized the Company
to return up to $400.0 million to shareholders. This amount is in addition to the $929.2 million of
common shares purchased by the Company through December 23, 2010 under its previously authorized
share repurchase program.
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 Companys 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.
On November 4, 2010, the Company announced that its Board of Directors had approved share
repurchase transactions aggregating $300.0 million. These repurchases were effected by a tender
offer.
The Company repurchased 35.0 million shares at a cost of $947.2 million under the share
repurchase programs for the period November 4, 2009 through May 3, 2011.
On August 7, 2008, the Company filed a shelf registration statement on Form S-3 (No.
333-152856) with the U.S Securities Exchange Committee in which we may offer from time to time
common shares, preference shares, depository shares representing common shares or preference
shares, senior or subordinated debt securities, warrants to purchase common shares, preference
shares and debt securities, share purchase contracts, share purchase units and units which may
consist of any combination of the securities listed above. In addition, the shelf registration
statement will provide for secondary sales of common shares sold by the Companys shareholders. The
registration statement is intended to provide the Company with additional flexibility to access
capital markets for general corporate purposes, subject to market conditions and the Companys
capital needs.
The following table details the capital resources of the Companys more significant
subsidiaries on an unconsolidated basis.
|
|
|
|
|
|
|
Capital at |
|
(Dollars in thousands) |
|
March 31, 2011 |
|
Validus Reinsurance, Ltd. (consolidated), excluding IPCRe, Ltd. |
|
$ |
2,931,084 |
|
IPCRe, Ltd |
|
|
304,379 |
|
|
|
|
|
Total Validus Reinsurance, Ltd. (consolidated) |
|
|
3,235,463 |
|
Talbot Holdings, Ltd |
|
|
679,564 |
|
Other subsidiaries, net |
|
|
8,741 |
|
|
|
|
|
Total consolidated capitalization |
|
|
3,923,768 |
|
Other, net |
|
|
(11,546 |
) |
Senior notes payable |
|
|
(246,901 |
) |
Debentures payable |
|
|
(350,000 |
) |
|
|
|
|
Total shareholders equity |
|
$ |
3,315,321 |
|
|
|
|
|
62
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 May 6,
2011:
|
|
|
|
|
|
|
|
|
|
|
A.M. Best (a) |
|
S&P (b) |
|
Moodys (c) |
|
Fitch (d) |
Validus Holdings, Ltd. |
|
|
|
|
|
|
|
|
Issuer credit rating |
|
bbb- |
|
BBB |
|
Baa2 |
|
BBB+ |
Senior debt |
|
bbb- |
|
BBB |
|
|
|
BBB |
Subordinated debt |
|
bb+ |
|
BBB- |
|
|
|
BB+ |
Preferred stock |
|
bb |
|
BB+ |
|
|
|
|
Outlook on ratings |
|
Positive |
|
Stable |
|
Stable |
|
Stable |
|
|
|
|
|
|
|
|
|
Validus Reinsurance, Ltd. |
|
|
|
|
|
|
|
|
Financial strength rating |
|
A- |
|
A- |
|
A3 |
|
A- |
Issuer credit rating |
|
a- |
|
|
|
|
|
|
Outlook on ratings |
|
Positive |
|
Stable |
|
Stable |
|
Stable |
|
|
|
|
|
|
|
|
|
IPCRe Ltd. |
|
|
|
|
|
|
|
|
Financial strength rating |
|
A- |
|
|
|
|
|
|
Issuer credit rating |
|
a- |
|
|
|
|
|
|
Outlook on rating |
|
Stable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Validus Re Europe Ltd. |
|
|
|
|
|
|
|
|
Financial strength rating |
|
A- |
|
|
|
|
|
|
Issuer credit rating |
|
a- |
|
|
|
|
|
|
Outlook on rating |
|
Stable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Talbot |
|
|
|
|
|
|
|
|
Financial strength
rating applicable to all
Lloyds syndicates |
|
A |
|
A+ |
|
|
|
A+ |
|
|
|
(a) |
|
The A.M. Best ratings were most recently affirmed on November 3, 2010 |
|
(b) |
|
The S&P ratings were upgraded to the levels noted above on August 24, 2010 |
|
(c) |
|
All Moodys ratings were most recently referred to in a November 16, 2010 Credit opinion on the
Validus Holdings, Ltd. |
|
(d) |
|
All Fitch ratings were most recently affirmed on January 10, 2011 |
Recent accounting pronouncements
63
Please refer to Note 2 to the Consolidated Financial Statements (Part I, Item I) for
further discussion of relevant recent accounting pronouncements.
Debt and Financing Arrangements
The following table details the Companys borrowings and credit facilities as at March 31,
2011.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Commitments |
|
|
Outstanding(a) |
|
2006 Junior Subordinated Deferrable Debentures |
|
$ |
150,000 |
|
|
$ |
150,000 |
|
2007 Junior Subordinated Deferrable Debentures |
|
|
200,000 |
|
|
|
139,800 |
|
2010 Senior Notes due 2040 |
|
|
250,000 |
|
|
|
250,000 |
|
$340,000 syndicated unsecured letter of credit facility |
|
|
340,000 |
|
|
|
|
|
$60,000 bilateral unsecured letter of credit facility |
|
|
60,000 |
|
|
|
|
|
$500,000 secured letter of credit facility |
|
|
500,000 |
|
|
|
285,048 |
|
Talbot FAL facility (b) |
|
|
25,000 |
|
|
|
25,000 |
|
IPC Bi-Lateral Facility |
|
|
80,000 |
|
|
|
64,368 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,605,000 |
|
|
$ |
914,216 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Indicates utilization of commitment amount, not drawn borrowings. |
|
(b) |
|
Talbot operates in Lloyds through a corporate member, Talbot 2002 Underwriting Capital Ltd
(T02), which is the sole participant in Syndicate 1183. Lloyds sets T02s required capital
annually based on syndicate 1183s business plan, rating environment, reserving environment
together with input arising from Lloyds discussions with, inter alia, regulatory and rating
agencies. Such capital, called Funds at Lloyds (FAL), comprises: cash, investments and
undrawn letters of credit provided by various banks. |
Please refer to Note 9 the Consolidated Financial Statements (Part I, Item I) for
further discussion of the Companys debt and financing arrangements.
Investments
A significant portion of contracts written provide short-tail reinsurance coverage for losses
resulting mainly from natural and man-made catastrophes, which could result in a significant amount
of losses on short notice. Accordingly, the Companys investment portfolio is structured to provide
significant liquidity and preserve capital, which means the investment portfolio contains a
significant amount of relatively short-term fixed maturity investments, such as U.S. government
securities, U.S. government-sponsored enterprises securities, corporate debt securities and
mortgage-backed and asset-backed securities.
Substantially all of the fixed maturity investments held at March 31, 2011 were publicly
traded. At March 31, 2011, the average duration of the Companys fixed maturity portfolio was 1.83
years (December 31, 2010: 2.27 years) and the average rating of the portfolio was AA (December 31,
2010: AA+). At March 31, 2011, the total fixed maturity portfolio was $4,589.8 million (December
31, 2010: $4,823.9 million), of which $2,437.8 million (December 31, 2010: $2,946.5 million) were
rated AAA.
With the exception of the bank loan portfolio, the Companys investment guidelines require
that investments be rated BBB- or higher at the time of purchase. The Company reports the ratings
of its investment portfolio securities at the lower of Moodys or Standard & Poors rating for each
investment security and, as a result, the Companys investment portfolio now has $36.3 million of
non-agency mortgage backed securities rated less than investment grade. The other components of
less than investment grade securities held by the Company at March 31, 2011 were $58.1 million of
catastrophe bonds, $200.1 million of bank loans and $2.3 million of corporate bonds.
Cash and cash equivalents and investments in Talbot of $1,553.8 million at March 31, 2011 were
held in trust for the benefit of cedants and policyholders and to facilitate the accreditation as
an alien insurer/reinsurer by certain regulators (December 31, 2010: $1,489.2 million). Total cash
and cash equivalents and investments in Talbot were $1,668.8 million at March 31, 2011 (December
31, 2010: $1,592.1 million).
64
As of March 31, 2011, the Company had approximately $1.3 million of asset-backed securities
with sub-prime collateral (December 31, 2010: $1.6 million) and $9.2 million of Alt-A RMBS
(December 31, 2010: $9.9 million).
Cash Flows
During the three months ended March 31, 2011 and 2010, the Company generated net cash from
operating activities of $168.6 million and $184.0 million, respectively. Cash flows from operations
generally represent premiums collected,
less losses and loss expenses paid and underwriting and other expenses paid. Cash flows from
operations may differ substantially from net income.
As of March 31, 2011 and December 31, 2010, the Company had cash and cash equivalents of
$717.4 million and $620.7 million, respectively.
The Company has written certain 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 Companys unused
credit facility amounts and highly liquid investment portfolio are sufficient to support any
potential operating cash flow deficiencies. Please refer to the table detailing the Companys
borrowings and credit facilities as at March 31, 2011, presented above.
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.
65
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 Companys Annual Report
to shareholders, any proxy statement, any other 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 Companys 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.
We believe 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 by our ability to raise
additional equity or debt financings, as well as other factors described herein; |
|
|
|
|
adequacy of the Companys risk management and loss limitation methods; |
|
|
|
|
cyclicality of demand and pricing in the insurance and reinsurance markets; |
|
|
|
|
the Companys ability to implement its business strategy during soft as well as
hard markets; |
|
|
|
|
adequacy of the Companys loss reserves; |
|
|
|
|
continued availability of capital and financing; |
|
|
|
|
the Companys 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; |
|
|
|
|
the Companys 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; |
|
|
|
|
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 |
66
|
|
|
company, are even more difficult to make than those made in a mature company because of
limited historical information; |
|
|
|
|
the effect on the Companys 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;
and |
|
|
|
|
the other factors set forth herein under Part I Item 1A Risk Factors and under Part
II Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations and the other sections of the Companys Annual Report on Form 10-K for the year
ended December 31, 2010, as well as the risk and other factors set forth in the Companys
other filings with the SEC, as well as managements response to any of the aforementioned
factors. |
In addition, other general factors could affect our results, including: (a) developments in
the worlds financial and capital markets and our access to such markets; (b) changes in
regulations or tax laws applicable to us, including, without limitation, any such changes resulting
from the recent investigations relating to the insurance industry and any attendant litigation; 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 us will be
realized or, even if substantially realized, that they will have the expected consequences to, or
effects on, us or our business or operations. We undertake 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
We believe we are principally exposed to five types of market risk:
|
|
interest rate risk; |
|
|
|
foreign currency risk; |
|
|
|
credit risk; |
|
|
|
liquidity risk; and |
|
|
|
effects of inflation. |
67
Interest Rate Risk: The Companys primary market risk exposure is to changes in interest
rates. The Companys fixed maturity portfolio is exposed to interest rate risk. Fluctuations in
interest rates have a direct impact on the market valuation of these investments. As interest rates
rise, the market value of the Companys fixed maturity portfolio falls and the Company has the risk
that cash outflows will have to be funded by selling assets, which will be trading at depreciated
values. As interest rates decline, the market value of the Companys fixed income portfolio
increases and the Company has reinvestment risk, as funds reinvested will earn less than is
necessary to match anticipated liabilities. We manage interest rate risk by selecting investments
with characteristics such as duration, yield, currency and liquidity tailored to the anticipated
cash outflow characteristics of the insurance and reinsurance liabilities the Company assumes.
As at March 31, 2011, the impact on the Companys fixed maturity and short-term investments
from an immediate 100 basis point increase in market interest rates (based on U.S. treasury yield)
would have resulted in an estimated decrease in market value of 1.9%, or approximately $96.0
million. As at March 31, 2011, the impact on the Companys fixed maturity portfolio from an
immediate 100 basis point decrease in market interest rates would have resulted in an estimated
increase in market value of 1.6% or approximately $83.5 million.
As at March 31, 2010, the impact on the Companys fixed maturity and short-term investments
from an immediate 100 basis point increase in market interest rates would have resulted in an
estimated decrease in market value of 2.4%, or approximately $133.1 million. As at March 31, 2010,
the impact on the Companys fixed maturity portfolio from an immediate 100 basis point decrease in
market interest rates would have resulted in an estimated increase in market value of 2.2% or
approximately $121.3 million.
As at March 31, 2011, the Company held $728.1 million (December 31, 2010: $644.4 million), or
15.9% (December 31, 2010: 13.4%), of the Companys fixed maturity portfolio in asset-backed and
mortgage-backed securities. These assets are exposed to prepayment risk, which occurs when holders
of underlying loans increase the frequency with which they prepay the outstanding principal before
the maturity date and refinance at a lower interest rate cost. The adverse impact of prepayment is
more evident in a declining interest rate environment. As a result, the Company will be exposed to
reinvestment risk, as cash flows received by the Company will be accelerated and will be reinvested
at the prevailing interest rates.
Foreign Currency Risk: Certain of the Companys reinsurance contracts provide that ultimate losses
may be payable in foreign currencies depending on the country of original loss. Foreign currency
exchange rate risk exists to the extent that there is an increase in the exchange rate of the
foreign currency in which losses are ultimately owed. Therefore, we attempt to manage our foreign
currency risk by seeking to match our liabilities under insurance and reinsurance policies that are
payable in foreign currencies with cash and investments that are denominated in such currencies. As
of March 31, 2011, $688.7 million, or 8.8% of our total assets and $838.0 million, or 18.6% of our
total liabilities were held in foreign currencies. As of March 31, 2011, $104.2 million, or 2.3% of
our total liabilities held in foreign currencies was non-monetary items which do not require
revaluation at each reporting date. As of December 31, 2010, $545.2 million, or 7.7% of our total
assets and $638.3 million, or 18.0% of our total liabilities were held in foreign currencies. As of
December 31, 2010, $87.0 million, or 2.4% of our total liabilities held in foreign currencies were
non-monetary items which do not require revaluation at each reporting date.
Credit Risk: We are exposed to credit risk primarily from the possibility that counterparties
may default on their obligations to us. We attempt to limit our credit exposure by purchasing high
quality fixed income investments to maintain an average portfolio credit quality of AA- or higher
with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit
quality of AAA. In addition, we have limited our exposure to any single issuer to 3.0% or less of
total investments, excluding treasury and agency securities. With the exception of the bank loan
portfolio, the minimum credit rating of any security purchased is BBB-/Baa3 and where investments
are downgraded below BBB-/Baa3, we permit our investment managers to hold up to 2.0% in aggregate
market value, or up to 10.0% with written authorization of the Company. At March 31, 2011, 1.8% of
the portfolio, excluding bank loans was below BBB-/Baa3 and we did not have an aggregate exposure
to any single issuer of more than 1.1% of total investments, other than with respect to government
securities.
The amount of the maximum exposure to credit risk is indicated by the carrying value of the
Companys financial assets. The Companys primary credit risks reside in investment in U.S.
corporate bonds and recoverables from reinsurers. The Company evaluates the financial condition of
its reinsurers and monitors concentration of
68
credit risk arising from its exposure to individual reinsurers. The reinsurance program is
generally placed with
reinsurers whose rating, at the time of placement, was A- or better rated by S & P or the
equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with
restrictions dependent on rating. At March 31, 2011, 97.4% of reinsurance recoverables (which
includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A-
or above, or from reinsurers posting full collateral (December 31, 2010: 97.4%, rated A-).
Liquidity risk: Certain of the Companys investments may become illiquid. Disruption in the
credit markets may materially affect the liquidity of the Companys investments, including
residential mortgage-backed securities which represent 9.1% (December 31, 2010: 8.8%) of total cash
and investments. If the Company requires significant amounts of cash on short notice in excess of
normal cash requirements (which could include claims on a major catastrophic event) in a period of
market illiquidity, the investments may be difficult to sell in a timely manner and may have to be
disposed of for less than what may otherwise have been possible under other conditions. At March
31, 2011, the Company had $1,827.5 million of unrestricted, liquid assets, defined as unpledged
cash and cash equivalents, short term investments, government and government agency securities.
Details of the Companys debt and financing arrangements at March 31, 2011 are provided below.
|
|
|
|
|
|
|
|
|
|
|
Maturity Date / |
|
|
In Use/ |
|
(Dollars in thousands) |
|
Term |
|
|
Outstanding |
|
2006 Junior Subordinated Deferrable Debentures |
|
June 15, 2036 |
|
$ |
150,000 |
|
2007 Junior Subordinated Deferrable Debentures |
|
June 15, 2037 |
|
|
139,800 |
|
2010 Senior Notes due 2040 |
|
January 26, 2040 |
|
|
250,000 |
|
$340,000 syndicated unsecured letter of credit facility |
|
March 12, 2013 |
|
|
|
|
$60,000 bilateral unsecured letter of credit facility |
|
March 12, 2013 |
|
|
|
|
$500,000 secured letter of credit facility |
|
March 12, 2012 |
|
|
285,048 |
|
Talbot FAL facility |
|
April 13, 2011 |
|
|
25,000 |
|
IPC Bi-Lateral Facility |
|
December 31,2010 |
|
|
64,368 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
914,216 |
|
|
|
|
|
|
|
|
|
Effects of Inflation: We do not believe that inflation has had or will have a material effect
on our combined results of operations, except insofar as (a) inflation may affect interest rates,
and (b) losses and loss expenses may be affected by inflation.
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
Companys management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of disclosure controls and procedures 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 Companys 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 Companys
internal control over financial reporting.
69
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We anticipate that, similar to the rest of the insurance and reinsurance industry, we will be
subject to litigation and arbitration in the ordinary course of business.
ITEM 1A. RISK FACTORS
Please refer to the discussion of Risk Factors in Item 1A of the Companys Annual Report on
Form 10-K for the year ended December 31, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In November 2009, the Board of Directors of the Company authorized an initial $400.0 million
share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized
the Company to return up to $750.0 million to shareholders. This amount was in addition to, and in
excess of, the $135.5 million of common shares purchased by the Company through February 17, 2010
under its previously authorized $400.0 million share repurchase program. On May 6, 2010, the Board
of Directors authorized a self tender offer pursuant to which the Company has repurchased $300.0
million in common shares.
On November 4, 2010, the Company announced that its Board of Directors had approved share
repurchase transactions aggregating $300.0 million. These repurchases were effected by a tender
offer which the Company commenced on Monday November 8, 2010, for up to 7,945,400 of its common
shares at a price of $30.00 per share. In addition, the Board of Directors authorized separate
repurchase agreements with funds affiliated with or managed by each of Aquiline Capital Partners
LLC, New Mountain Capital, LLC and Vestar Capital Partners pursuant to which the Company has
repurchased $61.6 million in common shares. On December 20, 2010, the Board of Directors authorized
the Company to return up to $400.0 million to shareholders. This amount was in addition to the
$929.2 million of common shares purchased by the Company through December 23, 2010 under its
previously authorized share repurchase program.
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 Companys capital position relative to internal and rating agency targets, legal
requirements and other factors. The repurchase program may be modified, extended or terminated by
the Board of Directors at any time.
The Company has repurchased approximately 35.0 million common shares for an aggregate purchase
price of $947.2 million from the inception of the share repurchase program to May 3, 2011.
Share repurchases include repurchases by the Company of shares, from time to time, from
employees in order to facilitate the payment of withholding taxes on restricted shares granted and
the exercise of stock appreciation rights. We purchased these shares at their fair market value, as
determined by reference to the closing price of our common shares on the day the restricted shares
vested or the stock appreciation rights were exercised.
70
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|
|
|
|
|
|
|
|
|
|
|
Share Repurchase Activity |
|
|
|
|
|
|
|
(Expressed in thousands of U.S. dollars except for share and per share information) |
|
|
|
As at December 31, |
|
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|
|
|
|
|
|
|
|
|
|
Effect of share repurchases: |
|
2010 (cumulative) |
|
|
January |
|
|
February |
|
|
March |
|
|
As at March 31, 2011 |
|
Aggregate purchase price (a) |
|
$ |
941,170 |
|
|
$ |
6,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,000 |
|
Shares repurchased |
|
|
34,836,885 |
|
|
|
195,100 |
|
|
|
|
|
|
|
|
|
|
|
195,100 |
|
Average price (a) |
|
$ |
27.02 |
|
|
$ |
30.75 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30.75 |
|
Estimated net accretive
(dilutive) impact on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted BV per common share (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.02 |
|
Diluted EPS Quarter (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
n/a |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchase Activity |
|
|
|
|
|
|
|
(Expressed in thousands of U.S. dollars except for share and per share information) |
|
|
|
As at March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative to Date |
|
Effect of share repurchases: |
|
2011 (cumulative) |
|
|
April |
|
|
May |
|
|
As at May 3, 2011 |
|
|
Effect |
|
Aggregate purchase price (a) |
|
$ |
947,170 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
947,170 |
|
Shares repurchased |
|
|
35,031,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,031,985 |
|
Average price (a) |
|
$ |
27.04 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
27.04 |
|
|
|
|
(a) |
|
Share transactions are on a trade date basis through May 4, 2011 and
are inclusive of commissions. Average share price is rounded to two decimal
places. |
|
(b) |
|
As the average price per share repurchased during the periods 2009, 2010
and 2011 was lower than the book value per common share, the repurchase of
shares increased the Companys period ending book value per share. |
|
(c) |
|
The estimated impact on diluted earnings per share was calculated by
comparing reported results versus i) net income per share plus an estimate of
lost net investment income on the cumulative share repurchases divided by ii)
weighted average diluted shares outstanding excluding the weighted average
impact of cumulative share repurchases. Due to the net loss incurred during the
three months ended March 31, 2011, there is no accretive (dilutive) impact on
Diluted EPS. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
None.
71
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
Description |
Exhibit 31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. |
|
|
|
Exhibit 32*
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002. |
|
|
|
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 |
72
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.
|
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|
|
|
|
VALIDUS HOLDINGS, LTD.
(Registrant)
|
|
Date: May 6, 2011 |
/s/ Edward J. Noonan
|
|
|
Edward J. Noonan |
|
|
Chief Executive Officer |
|
|
|
|
|
Date: May 6, 2011 |
/s/ Joseph E. (Jeff) Consolino
|
|
|
Joseph E. (Jeff) Consolino |
|
|
President and Chief Financial Officer |
|
73