Quick10K

Validus

Price	67.77		EPS	-2
Shares	81		P/E	-28
MCap	5,456		P/FCF	11
Net Debt	-221		EBIT	-141
TEV	5,235		TEV/EBIT	-37
TTM 2018-06-30, in MM, except price, ratios

10-Q	2018-06-30	Filed 2018-07-27 Print
10-Q	2018-03-31	Filed 2018-05-02 Print
10-K	2017-12-31	Filed 2018-02-28 Print
10-Q	2017-11-02	Filed 2017-11-02 Print
10-Q	2017-06-30	Filed 2017-08-02 Print
10-Q	2017-03-31	Filed 2017-05-05 Print
10-K	2016-12-31	Filed 2017-02-23 Print
10-Q	2016-09-30	Filed 2016-11-03 Print
10-Q	2016-06-30	Filed 2016-08-05 Print
10-Q	2016-03-31	Filed 2016-05-06 Print
10-K	2015-12-31	Filed 2016-02-22 Print
10-Q	2015-09-30	Filed 2015-11-06 Print
10-Q	2015-06-30	Filed 2015-08-07 Print
10-Q	2015-03-31	Filed 2015-05-08 Print
10-K	2014-12-31	Filed 2015-02-24 Print
10-Q	2014-09-30	Filed 2014-11-07 Print
10-Q	2014-06-30	Filed 2014-08-07 Print
10-Q	2014-03-31	Filed 2014-05-02 Print
10-K	2013-12-31	Filed 2014-02-19 Print
10-Q	2013-09-30	Filed 2013-11-08 Print
10-Q	2013-06-30	Filed 2013-08-08 Print
10-Q	2013-03-31	Filed 2013-05-06 Print
10-K	2012-12-31	Filed 2013-02-15 Print
10-Q	2012-09-30	Filed 2012-11-06 Print
10-Q	2012-06-30	Filed 2012-08-01 Print
10-Q	2012-03-31	Filed 2012-05-03 Print
10-K	2011-12-31	Filed 2012-02-17 Print
10-Q	2011-09-30	Filed 2011-11-04 Print
10-Q	2011-06-30	Filed 2011-08-05 Print
10-Q	2011-03-31	Filed 2011-05-06 Print
10-K	2010-12-31	Filed 2011-02-18 Print
10-Q	2010-09-30	Filed 2010-11-05 Print
10-Q	2010-06-30	Filed 2010-08-06 Print
10-Q	2010-03-31	Filed 2010-05-07 Print
10-K	2009-12-31	Filed 2010-03-01 Print

8-K	2018-07-26
8-K	2018-07-18
8-K	2018-05-30
8-K	2018-05-01
8-K	2018-04-27
8-K	2018-03-02
8-K	2018-02-28
8-K	2018-02-28
8-K	2018-02-01
8-K	2018-01-21

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Balance Sheet	Income Statement	Cash Flow
CopyHistoryView Assets, Equity	CopyHistoryView Rev, G Profit, Net Income	CopyHistoryView Ops, Inv, Fin

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10-Q 1 a20180630-10q.htm 10-Q

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 June 30, 2018

Commission file number 001-33606

__________________________________________________

VALIDUS HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

__________________________________________________

BERMUDA		98-0501001
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

29 Richmond Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

 (441) 278-9000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)
		Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of July 26, 2018, there were 79,329,027 outstanding common shares, $0.01 par value per share, of the registrant.

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Table of Contents

INDEX

 

Copy History

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3. Quantitative and Qualitative Disclosures About Market Risk	97
Item 4. Controls and Procedures	97
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	97
Item 1A. Risk Factors	97
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	98
Item 3. Defaults Upon Senior Securities	98
Item 4. Mine Safety Disclosure	98
Item 5. Other Information	98
Item 6. Exhibits	99
SIGNATURES	100

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Copy History

Table of Contents		Page
Consolidated Balance Sheets as at June 30, 2018 (unaudited) and December 31, 2017		3
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)		4
Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (unaudited)		5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)		6
Notes to the Consolidated Financial Statements (Unaudited)		7
Note 1 - Basis of preparation and consolidation		7
Note 2 - Recent accounting pronouncements		7
Note 3 - Business combinations		8
Note 4 - Investments		9
Note 5 - Fair value measurements		15
Note 6 - Variable interest entities		22
Note 7 - Noncontrolling interests		26
Note 8 - Derivative instruments		27
Note 9 - Reserve for losses and loss expenses		29
Note 10 - Reinsurance		30
Note 11 - Share capital		32
Note 12 - Stock plans		34
Note 13 - Debt and financing arrangements		36
Note 14 - Accumulated other comprehensive loss		39
Note 15 - Commitments and contingencies		40
Note 16 - Related party transactions		40
Note 17 - Earnings per common share		41
Note 18 - Segment information		42
Note 19 - Subsequent events		53

2

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Table of Contents

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at June 30, 2018 (unaudited) and December 31, 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

Copy History

	June 30, 2018				December 31, 2017
	(unaudited)
Assets
Fixed maturity investments trading, at fair value (amortized cost: 2018—$5,651,953; 2017—$5,876,261)	$	5,559,953			$	5,858,348
Short-term investments trading, at fair value (amortized cost: 2018—$3,728,930; 2017—$3,381,714)	3,728,894				3,381,757
Other investments, at fair value (cost: 2018—$341,883; 2017—$330,416)	366,184				355,218
Investments in investment affiliates, equity method (cost: 2018—$72,135; 2017—$61,944)	127,247				100,137
Cash and cash equivalents	719,219				754,990
Restricted cash	286,279				394,663
Total investments and cash	10,787,776				10,845,113
Premiums receivable	1,947,462				939,487
Deferred acquisition costs	317,834				213,816
Prepaid reinsurance premiums	336,384				132,938
Securities lending collateral	2,117				2,717
Loss reserves recoverable	970,950				1,233,997
Paid losses recoverable	71,876				46,873
Income taxes recoverable	11,023				9,044
Deferred tax asset	60,438				52,467
Receivable for investments sold	15,662				12,182
Intangible assets	167,052				171,411
Goodwill	229,573				229,573
Accrued investment income	31,082				29,096
Other assets	549,841				508,165
Total assets	$	15,499,070			$	14,426,879
Liabilities
Reserve for losses and loss expenses	$	4,699,599			$	4,831,390
Unearned premiums	2,190,884				1,147,186
Reinsurance balances payable	406,081				331,645
Securities lending payable	2,117				2,717
Deferred tax liability	2,142				4,600
Payable for investments purchased	60,275				74,496
Accounts payable and accrued expenses	576,260				1,225,875
Notes payable to AlphaCat investors	1,206,671				1,108,364
Senior notes payable	245,664				245,564
Debentures payable	538,751				539,158
Total liabilities	9,928,444				9,510,995
Commitments and contingent liabilities
Redeemable noncontrolling interests	1,390,233				1,004,094
Shareholders’ equity
Preferred shares (Issued and Outstanding: 2018—16,000; 2017—16,000)	400,000				400,000
Common shares (Issued: 2018—163,186,889; 2017—161,994,491; Outstanding: 2018—80,511,948; 2017—79,319,550)	28,558				28,349
Treasury shares (2018—82,674,941; 2017—82,674,941)	(14,468		)		(14,468		)
Additional paid-in capital	816,282				814,641
Accumulated other comprehensive income (loss)	9,859				(22,192		)
Retained earnings	2,568,905				2,688,742
Total shareholders’ equity available to Validus	3,809,136				3,895,072
Noncontrolling interests	371,257				16,718
Total shareholders’ equity	4,180,393				3,911,790
Total liabilities, noncontrolling interests and shareholders’ equity	$	15,499,070			$	14,426,879

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

3

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Table of Contents

Validus Holdings, Ltd.

Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income

For the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

Copy History

	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
	(unaudited)								(unaudited)
Revenues
Gross premiums written	$	847,206			$	792,902			$	2,679,662			$	1,983,759
Reinsurance premiums ceded	(107,567		)		(56,222		)		(483,861		)		(256,328		)
Net premiums written	739,639				736,680				2,195,801				1,727,431
Change in unearned premiums	(3,032		)		(105,653		)		(840,252		)		(521,028		)
Net premiums earned	736,607				631,027				1,355,549				1,206,403
Net investment income	57,560				44,241				109,632				84,455
Net realized (losses) gains on investments	(7,394		)		2,274				(5,194		)		1,110
Change in net unrealized (losses) gains on investments	(10,730		)		16,321				(68,111		)		29,669
Income from investment affiliates	2,178				9,466				15,246				14,654
Other insurance related (loss) income and other (loss) income	(16,116		)		1,339				9,424				2,669
Foreign exchange losses	(526		)		(7,329		)		(1		)		(5,760		)
Total revenues	761,579				697,339				1,416,545				1,333,200
Expenses
Losses and loss expenses	476,610				296,149				798,155				565,734
Policy acquisition costs	118,781				117,268				235,237				228,896
General and administrative expenses	120,862				96,349				235,588				184,273
Share compensation expenses	16,040				11,146				25,769				20,637
Finance expenses	14,310				14,209				28,573				28,152
Transaction expenses	3,837				4,427				11,593				4,427
Total expenses	750,440				539,548				1,334,915				1,032,119
Income before taxes and (income) attributable to AlphaCat investors	11,139				157,791				81,630				301,081
Tax benefit	7,151				987				13,984				4,536
(Income) attributable to AlphaCat investors	(29,849		)		(11,830		)		(40,711		)		(19,333		)
Net (loss) income	(11,559		)		146,948				54,903				286,284
Net (income) attributable to noncontrolling interests	(35,511		)		(43,650		)		(100,223		)		(86,222		)
Net (loss) income (attributable) available to Validus	(47,070		)		103,298				(45,320		)		200,062
Dividends on preferred shares	(5,828		)		(2,203		)		(11,656		)		(4,406		)
Net (loss) income (attributable) available to Validus common shareholders	$	(52,898	)		$	101,095			$	(56,976	)		$	195,656
Comprehensive (loss) income:
Net (loss) income	$	(11,559	)		$	146,948			$	54,903			$	286,284
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustments	(2,737		)		1,489				(900		)		2,086
Change in minimum pension liability	342				1,184				304				1,252
Change in fair value of cash flow hedges	3,035				(144		)		31,798				(46		)
Other comprehensive income, net of tax	640				2,529				31,202				3,292
Comprehensive (income) attributable to noncontrolling interests	(35,511		)		(43,650		)		(100,223		)		(86,222		)
Comprehensive (loss) income (attributable) available to Validus	$	(46,430	)		$	105,827			$	(14,118	)		$	203,354
(Loss) earnings per common share
Basic (loss) earnings per share (attributable) available to Validus common shareholders	$	(0.66	)		$	1.28			$	(0.72	)		$	2.47
(Loss) earnings per diluted share (attributable) available to Validus common shareholders	$	(0.66	)		$	1.25			$	(0.72	)		$	2.42
Cash dividends declared per common share	$	0.38			$	0.38			$	0.76			$	0.76
Weighted average number of common shares and common share equivalents outstanding:
Basic	79,650,474				79,270,561				79,488,081				79,202,116
Diluted	79,650,474				80,872,451				79,488,081				80,861,998

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

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Table of Contents

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Six Months Ended June 30, 2018 and 2017 (unaudited)

(Expressed in thousands of U.S. dollars)

Copy History

	Six Months Ended June 30,
	2018				2017
	(unaudited)
Preferred shares
Balance, beginning of period	$	400,000			$	150,000
Preferred shares issued	—				250,000
Balance, end of period	$	400,000			$	400,000
Common shares
Balance, beginning of period	$	28,349			$	28,224
Common shares issued, net	209				115
Balance, end of period	$	28,558			$	28,339
Treasury shares
Balance, beginning of period	$	(14,468	)		$	(14,376	)
Repurchase of common shares	—				(47		)
Balance, end of period	$	(14,468	)		$	(14,423	)
Additional paid-in capital
Balance, beginning of period	$	814,641			$	821,023
Offering expenses on preferred shares	—				(8,314		)
Common shares redeemed, net	(24,128		)		(12,076		)
Repurchase of common shares	—				(13,949		)
Share compensation expenses	25,769				20,637
Balance, end of period	$	816,282			$	807,321
Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(22,192	)		$	(23,216	)
Other comprehensive income	31,202				3,292
Amounts reclassified from accumulated other comprehensive income (loss)	849				—
Balance, end of period	$	9,859			$	(19,924	)
Retained earnings
Balance, beginning of period	$	2,688,742			$	2,876,636
Net income	54,903				286,284
Net (income) attributable to noncontrolling interests	(100,223		)		(86,222		)
Dividends on common shares	(62,861		)		(62,174		)
Dividends on preferred shares	(11,656		)		(4,406		)
Balance, end of period	$	2,568,905			$	3,010,118
Total shareholders’ equity available to Validus	$	3,809,136			$	4,211,431
Noncontrolling interests	371,257				415,658
Total shareholders’ equity	$	4,180,393			$	4,627,089

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

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Table of Contents

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2018 and 2017 (unaudited)

(Expressed in thousands of U.S. dollars)

Copy History

	Six Months Ended June 30,
	2018				2017
	(unaudited)
Cash flows provided by (used in) operating activities
Net income	$	54,903			$	286,284
Adjustments to reconcile net income to cash provided by operating activities:
Share compensation expenses	25,769				20,637
Loss on redemption of AlphaCat ILS fund	—				402
Amortization of discount on Senior Notes	54				54
(Income) from investment and operating affiliates	(15,246		)		(14,654		)
Net realized and change in net unrealized losses (gains) on investments	73,305				(30,779		)
Amortization of intangible assets	4,359				3,995
Foreign exchange losses (gains) included in net income	8,837				(9,686		)
Amortization of premium on fixed maturity investments	6,853				7,012
Change in operational balance sheet items:
Premiums receivable	(1,010,121		)		(648,195		)
Deferred acquisition costs	(104,018		)		(97,746		)
Prepaid reinsurance premiums	(203,446		)		(30,684		)
Loss reserves recoverable	261,992				(113,508		)
Paid losses recoverable	(24,994		)		17,500
Reserve for losses and loss expenses	(125,377		)		199,985
Unearned premiums	1,043,698				488,198
Reinsurance balances payable	75,018				111,488
Other operational balance sheet items, net	91,562				(137,618		)
Net cash provided by operating activities	163,148				52,685
Cash flows provided by (used in) investing activities
Proceeds on sales of fixed maturity investments	1,739,391				1,632,371
Proceeds on maturities of fixed maturity investments	316,335				247,394
Purchases of fixed maturity investments	(1,867,720		)		(1,682,609		)
Purchases of short-term investments, net	(347,138		)		(88,623		)
Purchases of other investments, net	(12,487		)		(33,870		)
Decrease in securities lending collateral	600				7,265
(Investments in) distributions from investment affiliates, net	(11,864		)		11,708
Purchase of subsidiary, net of cash	—				(183,923		)
Net cash used in investing activities	(182,883		)		(90,287		)
Cash flows provided by (used in) financing activities
Net proceeds on issuance of notes payable to AlphaCat investors	98,720				269,645
Net proceeds on issuance of preferred shares	—				241,686
Redemption of common shares, net	(23,919		)		(11,961		)
Purchases of common shares under share repurchase program	—				(13,996		)
Dividends paid on preferred shares	(11,656		)		(4,406		)
Dividends paid on common shares	(68,518		)		(63,286		)
Decrease in securities lending payable	(600		)		(7,265		)
Third party investments in redeemable noncontrolling interests	466,550				210,200
Third party redemptions of redeemable noncontrolling interests	(233,478		)		(79,334		)
Third party investments in noncontrolling interests	321,900				258,300
Third party distributions of noncontrolling interests	(20,118		)		(96,125		)
Third party subscriptions deployed on funds and sidecars, net	(645,233		)		(171,952		)
Net cash (used in) provided by financing activities	(116,352		)		531,506
Effect of foreign currency rate changes on cash and cash equivalents and restricted cash	(8,068		)		10,608
Net (decrease) increase in cash and cash equivalents and restricted cash	(144,155		)		504,512
Cash and cash equivalents and restricted cash—beginning of period	1,149,653				490,932
Cash and cash equivalents and restricted cash—end of period	$	1,005,498			$	995,444
Supplemental disclosure of cash flow information:
Taxes paid during the year	$	868			$	568
Interest paid during the year	$	25,090			$	27,186

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

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Table of Contents

Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

1. Basis of preparation and consolidation

These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

During the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” The change in reportable segments and primary lines of business had no impact on the Company’s historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.

The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of every voting interest entity (“VOE”) in which the Company has a controlling financial interest and variable interest entity (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.

The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the amounts included in the Consolidated Financial Statements reflect management’s best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

•the reserve for losses and loss expenses;

•the premium written on a line slip or proportional basis;

•the valuation of goodwill and intangible assets;

•the loss reserves recoverable, including the provision for uncollectible amounts; and

•the valuation of invested assets and other financial instruments.

The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).

2. Recent accounting pronouncements

There have been no accounting pronouncements issued or adopted during the quarter ended June 30, 2018 that warrant disclosure in the Consolidated Financial Statements.

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Table of Contents

Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

3. Business combinations

American International Group, Inc. (“AIG”)

On July 18, 2018, the Company completed its previously announced definitive agreement and plan of merger (the “Merger Agreement”) with American International Group, Inc. (“AIG”) in accordance with Section 105 of the Bermuda Companies Act 1981. Pursuant to the Merger Agreement the Company merged with an existing AIG subsidiary in accordance with the Bermuda Companies Act 1981 (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of AIG.

Pursuant to the Merger Agreement, each issued and outstanding common share, par value $0.175 per common share, of the Company, other than shares that were owned by the Company as treasury shares, owned by a subsidiary of the Company, owned by AIG or any of its subsidiaries or that were subject to any Company Award (as defined in the Merger Agreement), were converted into the right to receive $68.00 in cash, without interest and subject to any applicable tax withholdings. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares remains issued and outstanding, and continues to be listed on the NYSE and registered under the Exchange Act.

Also on July 18, 2018, in connection with the consummation of the Merger, the Company notified the New York Stock Exchange (“NYSE”) of the completion of the Merger and requested that trading in the Common Shares be withdrawn from listing on the NYSE. The NYSE filed a notification of removal from listing on Form 25 with the Securities and Exchange Commission (“SEC”) with respect to the Common Shares to report the delisting of the Common Shares from the NYSE and to suspend trading of the Common Shares on the NYSE prior to the opening of trading on July 18, 2018.

On July 26, 2018 the Company filed with the SEC a certificate of notice of termination on Form 15 with respect to its Common Shares, requesting that the Common Shares be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the reporting obligations of the Company with respect to the Common Shares under Sections 13 and 15(d) of the Exchange Act be suspended.

Crop Risk Services (“CRS”)

On May 1, 2017, Western World, a wholly–owned subsidiary of the Company acquired all of the outstanding capital stock of CRS for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford, a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    

The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.

For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Insurance segment in the Consolidated Financial Statements from the date of acquisition.

For further information regarding the acquisition of CRS please refer to Note 5, “Business combinations,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

4. Investments

Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” for further details.

The amortized cost (or cost) and fair values of the Company’s investments as at June 30, 2018 and December 31, 2017 were as follows:

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	June 30, 2018								December 31, 2017
	Amortized  Cost or Cost				Fair Value				Amortized  Cost or Cost				Fair Value
Managed investments
U.S. government and government agency	$	613,130			$	604,392			$	733,510			$	727,397
Non-U.S. government and government agency	285,514				282,263				310,845				312,239
U.S. states, municipalities and political subdivisions	191,065				189,437				201,347				201,303
Agency residential mortgage-backed securities	956,254				929,859				984,387				978,049
Non-agency residential mortgage-backed securities	48,061				47,600				40,264				40,373
U.S. corporate	1,459,190				1,436,885				1,531,498				1,533,395
Non-U.S. corporate	410,287				403,385				420,522				422,249
Bank loans	480,593				471,212				450,320				442,951
Asset-backed securities	719,803				714,434				657,234				658,303
Commercial mortgage-backed securities	309,080				301,544				315,002				312,395
Total fixed maturities	5,472,977				5,381,011				5,644,929				5,628,654
Short-term investments	218,071				218,035				229,968				230,011
Other investments
Hedge funds	6,954				15,888				6,954				15,774
Private equity investments	64,921				79,185				63,684				78,407
Fixed income investment funds	208,400				209,503				203,167				204,426
Overseas deposits	61,608				61,608				56,611				56,611
Total other investments	341,883				366,184				330,416				355,218
Investments in investment affiliates (a)	72,135				127,247				61,944				100,137
Total managed investments	$	6,105,066			$	6,092,477			$	6,267,257			$	6,314,020
Non-managed investments
Catastrophe bonds	$	178,976			$	178,942			$	231,332			$	229,694
Short-term investments	3,510,859				3,510,859				3,151,746				3,151,746
Total non-managed investments	3,689,835				3,689,801				3,383,078				3,381,440
Total investments	$	9,794,901			$	9,782,278			$	9,650,335			$	9,695,460

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

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

(a)	Fixed maturity investments

The following table sets forth certain information regarding Standard & Poor’s credit quality ratings (or an equivalent rating with another recognized rating agency) of the Company’s fixed maturity investments as at June 30, 2018 and December 31, 2017:

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	June 30, 2018							December 31, 2017
	Fair Value				% of Total			Fair Value				% of Total
Managed fixed maturities
AAA	$	2,560,857			46.2	%		$	2,715,074			46.4	%
AA	417,814				7.5	%		442,397				7.6	%
A	1,102,419				19.8	%		1,137,795				19.4	%
BBB	797,698				14.3	%		828,392				14.1	%
Total investment grade managed fixed maturities	4,878,788				87.8	%		5,123,658				87.5	%
BB	157,241				2.8	%		168,967				2.9	%
B	227,954				4.1	%		237,131				4.0	%
CCC	20,219				0.4	%		18,217				0.3	%
CC	564				—	%		—				—	%
NR	96,245				1.7	%		80,681				1.4	%
Total non-investment grade managed fixed maturities	502,223				9.0	%		504,996				8.6	%
Total managed fixed maturities	$	5,381,011			96.8	%		$	5,628,654			96.1	%
Non-managed catastrophe bonds
AAA	$	250			—	%		$	—			—	%
Total investment grade non-managed catastrophe bonds	250				—	%		—				—	%
BB	$	6,632			0.2	%		$	22,110			0.3	%
B	2,626				—	%		3,265				0.1	%
NR	169,434				3.0	%		204,319				3.5	%
Total non-investment grade non-managed catastrophe bonds	178,692				3.2	%		229,694				3.9	%
Total non-managed catastrophe bonds	178,942				3.2	%		229,694				3.9	%
Total fixed maturities	$	5,559,953			100.0	%		$	5,858,348			100.0	%

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

The amortized cost and fair values for the Company’s fixed maturity investments held at June 30, 2018 and December 31, 2017 are shown below by contractual maturity. Actual maturity may differ from contractual maturity due to prepayment rights associated with certain investments.

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	June 30, 2018								December 31, 2017
	Amortized Cost or Cost				Fair Value				Amortized Cost or Cost				Fair Value
Managed fixed maturities
Due in one year or less	$	361,061			$	359,094			$	343,360			$	343,541
Due after one year through five years	2,333,731				2,295,728				2,527,018				2,513,620
Due after five years through ten years	556,784				547,685				577,347				577,109
Due after ten years	188,203				185,067				200,317				205,264
	3,439,779				3,387,574				3,648,042				3,639,534
Asset-backed and mortgage-backed securities	2,033,198				1,993,437				1,996,887				1,989,120
Total managed fixed maturities	$	5,472,977			$	5,381,011			$	5,644,929			$	5,628,654
Non-managed catastrophe bonds
Due in one year or less	$	47,918			$	46,922			$	88,797			$	88,367
Due after one year through five years	130,433				131,395				140,035				138,844
Due after five years through ten years	625				625				2,500				2,483
Total non-managed catastrophe bonds	178,976				178,942				231,332				229,694
Total fixed maturities	$	5,651,953			$	5,559,953			$	5,876,261			$	5,858,348

(b)	Other investments

The following tables set forth certain information regarding the Company’s other investment portfolio as at June 30, 2018 and December 31, 2017:

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		June 30, 2018
		Fair Value				Investments with redemption restrictions				Investments without redemption restrictions				Redemption frequency (a)		Redemption notice period (a)
Hedge funds		$	15,888			$	15,888			$	—
Private equity investments		79,185				79,185				—
Fixed income investment funds		209,503				209,503				—
Overseas deposits		61,608				61,608				—
Total other investments		$	366,184			$	366,184			$	—

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		December 31, 2017
		Fair Value				Investments with redemption restrictions				Investments without redemption restrictions				Redemption frequency (a)		Redemption notice period (a)
Hedge funds		15,774				15,774				—
Private equity investments		78,407				78,407				—
Fixed income investment funds		204,426				200,532				3,894				Daily		Daily to 2 days
Overseas deposits		56,611				56,611				—
Total other investments		$	355,218			$	351,324			$	3,894

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

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

Other investments include investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $196,379 (December 31, 2017: $186,734) are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $169,805 (December 31, 2017: $168,484) are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.

Certain securities included in other investments are subject to redemption restrictions. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known by the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments will liquidate over five to ten-year periods from inception of the funds. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by annual and quarterly funding and release processes for Lloyd’s market participants.

The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details. As at June 30, 2018, the Company does not have any plans to sell any of the other investments listed above.

(c)	Investments in investment affiliates

Included in the Company’s managed investment portfolio as at June 30, 2018 are investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”), Aquiline Technology Growth Fund L.P. (“Aquiline Tech”) and Aquiline Armour Co-Invest L.P. (“Aquiline Armour”) (collectively the “Aquiline partnerships”).

For further information regarding the Company’s Aquiline partnerships refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for three and six months ended June 30, 2018 and 2017:

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	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
Investment affiliates, beginning of period	$	113,471			$	94,697			$	100,137			$	100,431
Net capital contributions (distributions)	11,598				(786		)		11,864				(11,708		)
Income from investment affiliates	2,178				9,466				15,246				14,654
Investment affiliates, end of period	$	127,247			$	103,377			$	127,247			$	103,377

As at June 30, 2018, the Company’s total unfunded investment commitment to the Aquiline partnerships was $95,788 (December 31, 2017: $125,996).

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

The following table presents the Company’s investments in the Aquiline partnerships as at June 30, 2018 and December 31, 2017:

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	June 30, 2018
	Investment at cost				Voting ownership %			Equity ownership %			Carrying value
Aquiline II	$	28,529			—	%		8.1	%		$	49,248
Aquiline III	25,501				—	%		9.0	%		59,900
Aquiline Tech	4,406				—	%		10.6	%		4,400
Aquiline Armour	13,699				—	%		15.2	%		13,699
Total investments in investment affiliates	$	72,135									$	127,247
	December 31, 2017
	Investment at cost				Voting ownership %			Equity ownership %			Carrying value
Aquiline II	$	33,349			—	%		8.1	%		$	51,914
Aquiline III	24,737				—	%		9.0	%		44,733
Aquiline Tech	3,858				—	%		10.6	%		3,490
Total investments in investment affiliates	$	61,944									$	100,137

(d)	Net investment income

Net investment income was derived from the following sources:

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	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
Managed investments
Fixed maturities and short-term investments	$	39,224			$	31,212			$	76,993			$	62,883
Other investments	4,846				7,571				9,069				14,441
Cash and cash equivalents and restricted cash	1,744				716				2,883				1,326
Securities lending income	4				7				7				20
Total gross investment income	45,818				39,506				88,952				78,670
Investment expenses	(3,066		)		(1,443		)		(6,409		)		(4,415		)
Total managed net investment income	$	42,752			$	38,063			$	82,543			$	74,255
Non managed investments
Fixed maturities and short-term investments	$	5,842			$	4,500			$	9,990			$	7,560
Cash and cash equivalents and restricted cash	8,966				1,678				17,099				2,640
Total non-managed net investment income	14,808				6,178				27,089				10,200
Total net investment income	$	57,560			$	44,241			$	109,632			$	84,455

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

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

(e)	Net realized (losses) gains and change in net unrealized (losses) gains on investments

The following table sets forth an analysis of net realized (losses) gains and the change in net unrealized gains and losses on investments:

Copy History

	Three Months Ended June 30,								Six Months Ended June 30,
	2018				2017				2018				2017
Managed investments
Gross realized gains	$	3,048			$	5,175			$	9,878			$	7,865
Gross realized (losses)	(10,480		)		(2,906		)		(16,168		)		(8,488		)
Net realized (losses) gains on investments	(7,432		)		2,269				(6,290		)		(623		)
Change in net unrealized (losses) gains on investments	(11,392		)		15,942				(68,169		)		30,291
Total net realized and change in net unrealized (losses) gains on managed investments	$	(18,824	)		$	18,211			$	(74,459	)		$	29,668
Non-managed investments
Gross realized gains	$	175			$	5			$	1,410			$	1,733
Gross realized (losses)	(137		)		—				(314		)		—
Net realized gains on investments	38				5				1,096				1,733
Change in net unrealized gains (losses) on investments	662				379				58				(622		)
Total net realized and change in net unrealized gains on non-managed investments	700				384				1,154				1,111
Total net realized and change in net unrealized (losses) gains on total investments	$	(18,124	)		$	18,595			$	(73,305	)		$	30,779

(f)	Pledged investments and cash

As at June 30, 2018, the Company had $6,310,851 (December 31, 2017: $5,853,744) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $6,282,368 were held in trust (December 31, 2017: $5,789,081). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions, as collateral for derivative instruments and to facilitate the accreditation of Validus Reinsurance, Ltd. (“Validus Re”), Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Lloyd’s Syndicate 1183 (the “Talbot Syndicate”) as alien (re)insurers by certain regulators.

In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $539,627 (December 31, 2017: $576,864). For further details on the credit facilities, refer to Note 13 “Debt and financing arrangements.”

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

5. Fair value measurements

(a)	Classification within the fair value hierarchy

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The three levels of the fair value hierarchy are described below:

Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

Level 3 - Fair values are measured based on unobservable inputs that reflect the Company’s own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of the valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.

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Validus Holdings, Ltd.

Notes to the Consolidated Financial Statements (unaudited)

(Expressed in thousands of U.S. dollars, except share and per share information)

At June 30, 2018, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

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	Level 1				Level 2				Level 3				Fair value based on NAV practical expedient (a)				Total
Managed investments
U.S. government and government agency	$	—			$	604,392			$	—			$	—			$	604,392
Non-U.S. government and government agency	—				282,263				—				—				282,263
U.S. states, municipalities and political subdivisions	—				189,437				—				—				189,437
Agency residential mortgage-backed securities	—				929,859				—				—				929,859
Non-agency residential mortgage-backed securities	—				47,600				—				—				47,600