10-Q 1 y88921e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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
incorporation or organization)
  (I.R.S. Employer
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 278-9000
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
     As of August 3, 2011 there were 99,032,232 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

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 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2011 (unaudited) and December 31, 2010
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30,     December 31,  
    2011     2010  
    (unaudited)          
Assets
               
Fixed maturities, at fair value (amortized cost: 2011 - $4,539,998; 2010 - $4,772,037)
  $ 4,603,534     $ 4,823,867  
Short-term investments, at fair value (amortized cost: 2011 - $725,230; 2010 - $273,444)
    725,258       273,514  
Other investments, at fair value (amortized cost: 2011 - $15,018; 2010 - $18,392)
    18,746       21,478  
Cash and cash equivalents
    815,921       620,740  
 
           
Total investments and cash
    6,163,459       5,739,599  
Premiums receivable
    1,046,775       568,761  
Deferred acquisition costs
    176,724       123,897  
Prepaid reinsurance premiums
    177,729       71,417  
Securities lending collateral
    21,409       22,328  
Loss reserves recoverable
    439,805       283,134  
Paid losses recoverable
    30,854       27,996  
Income taxes recoverable
    3,503       1,142  
Intangible assets
    116,813       118,893  
Goodwill
    20,393       20,393  
Accrued investment income
    21,320       33,726  
Other assets
    41,004       49,592  
 
           
Total assets
  $ 8,259,788     $ 7,060,878  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 2,620,360     $ 2,035,973  
Unearned premiums
    1,192,772       728,516  
Reinsurance balances payable
    181,013       63,667  
Securities lending payable
    22,133       23,093  
Deferred income taxes
    22,122       24,908  
Net payable for investments purchased
    49,479       43,896  
Accounts payable and accrued expenses
    91,969       99,320  
Senior notes payable
    246,928       246,874  
Debentures payable
    289,800       289,800  
 
           
Total liabilities
  $ 4,716,576     $ 3,556,047  
 
           
 
               
Commitments and contingent liabilities
               
 
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2011 - 133,795,913; 2010 - 132,838,111; Outstanding: 2011 - 98,763,928; 2010 - 98,001,226)
  $ 23,414     $ 23,247  
Treasury shares (2011 - 35,031,985; 2010 - 34,836,885)
    (6,131 )     (6,096 )
Additional paid-in-capital
    1,880,748       1,860,960  
Accumulated other comprehensive (loss)
    (4,519 )     (5,455 )
Retained earnings
    1,514,805       1,632,175  
 
           
Total shareholders’ equity available to Validus
    3,408,317       3,504,831  
Noncontrolling interest
    134,895        
 
           
Total shareholders’ equity
  $ 3,543,212     $ 3,504,831  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 8,259,788     $ 7,060,878  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues
                               
Gross premiums written
  $ 605,387     $ 516,861     $ 1,455,283     $ 1,387,795  
Reinsurance premiums ceded
    (132,346 )     (67,726 )     (242,166 )     (158,465 )
 
                       
Net premiums written
    473,041       449,135       1,213,117       1,229,330  
Change in unearned premiums
    (47,401 )     (11,191 )     (357,944 )     (333,692 )
 
                       
Net premiums earned
    425,640       437,944       855,173       895,638  
Net investment income
    26,494       34,809       56,469       69,108  
Net realized gains on investments
    11,552       12,441       17,931       23,839  
Net unrealized gains on investments
    18,526       41,640       5,698       57,053  
Other income
    595       2,697       2,201       3,585  
Foreign exchange (losses)
    (1,991 )     (4,099 )     (2,458 )     (12,863 )
 
                       
Total revenues
    480,816       525,432       935,014       1,036,360  
 
                       
 
                               
Expenses
                               
Losses and loss expenses
    207,307       194,894       683,505       673,425  
Policy acquisition costs
    78,230       74,126       155,526       150,302  
General and administrative expenses
    60,841       52,379       109,318       105,948  
Share compensation expenses
    7,628       6,846       19,677       13,422  
Finance expenses
    16,361       13,218       30,362       28,369  
 
                       
Total expenses
    370,367       341,463       998,388       971,466  
 
                       
 
                               
Net income (loss) before taxes
    110,449       183,969       (63,374 )     64,894  
Tax benefit (expense)
    29       (4,187 )     1,488       (3,490 )
 
                       
Net income (loss)
  $ 110,478     $ 179,782     $ (61,886 )   $ 61,404  
 
                               
Net income attributable to noncontrolling interest
    (594 )           (594 )      
 
                       
Net income (loss) available (attributable) to Validus
  $ 109,884     $ 179,782     $ (62,480 )   $ 61,404  
 
                       
 
                               
Comprehensive income
                               
Foreign currency translation adjustments
    (21 )     (68 )     936       (1,875 )
 
                       
Comprehensive income (loss) available (attributable) to Validus
  $ 109,863     $ 179,714     $ (61,544 )   $ 59,529  
 
                       
 
                               
Earnings per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    98,385,924       121,009,553       98,165,132       123,821,415  
Diluted
    104,562,450       125,152,300       98,165,132       125,661,729  
 
                               
Basic earnings (loss) per share available (attributable) to common shareholders
  $ 1.10     $ 1.47     $ (0.68 )   $ 0.47  
 
                       
Diluted earnings (loss) per share available (attributable) to common shareholders
  $ 1.05     $ 1.44     $ (0.68 )   $ 0.46  
 
                       
 
                               
Cash dividends declared per share
  $ 0.25     $ 0.22     $ 0.50     $ 0.44  
 
                       
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30, 2011     June 30, 2010  
    (unaudited)     (unaudited)  
Common shares
               
Balance — Beginning of period
  $ 23,247     $ 23,033  
Common shares issued, net
    167       68  
 
           
Balance — End of period
  $ 23,414     $ 23,101  
 
           
 
               
Treasury shares
               
Balance — Beginning of period
  $ (6,096 )   $ (553 )
Repurchase of common shares
    (35 )     (3,052 )
 
           
Balance — End of period
  $ (6,131 )   $ (3,605 )
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 1,860,960     $ 2,675,680  
Common shares issued, net
    6,071       (80 )
Repurchase of common shares
    (5,960 )     (441,027 )
Share compensation expenses
    19,677       13,422  
 
           
Balance — End of period
  $ 1,880,748     $ 2,247,995  
 
           
 
               
Accumulated other comprehensive (loss)
               
Balance — Beginning of period
  $ (5,455 )   $ (4,851 )
Foreign currency translation adjustments
    936       (1,875 )
 
           
Balance — End of period
  $ (4,519 )   $ (6,726 )
 
           
 
               
Retained earnings
               
Balance — Beginning of period
  $ 1,632,175     $ 1,337,811  
Dividends
    (54,890 )     (57,054 )
Net (loss) income
    (61,886 )     61,404  
Net income attributable to noncontrolling interest
    (594 )      
 
           
Balance — End of period
  $ 1,514,805     $ 1,342,161  
 
           
 
               
Total shareholders’ equity available to Validus
  $ 3,408,317     $ 3,602,926  
 
               
Noncontrolling interest
    134,895        
 
               
 
           
Total shareholders’ equity
  $ 3,543,212     $ 3,602,926  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30,     June 30,  
    2011     2010  
    (unaudited)     (unaudited)  
Cash flows provided by (used in) operating activities
               
Net (loss) income
  $ (61,886 )   $ 61,404  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expenses
    19,677       13,422  
Amortization of discount on senior notes
    54       27  
Net realized (gains) on investments
    (17,931 )     (23,839 )
Net unrealized (gains) on investments
    (5,698 )     (57,053 )
Amortization of intangible assets
    2,080       2,080  
Foreign exchange (gains) losses on cash and cash equivalents included in net income
    (12,729 )     17,129  
Amortization of premium on fixed maturities
    16,247       8,410  
Change in:
               
Premiums receivable
    (475,119 )     (383,671 )
Deferred acquisition costs
    (52,827 )     (53,628 )
Prepaid reinsurance premiums
    (106,312 )     (112,607 )
Loss reserves recoverable
    (155,002 )     (13,488 )
Paid losses recoverable
    (2,825 )     (9,364 )
Income taxes recoverable
    (2,400 )     860  
Accrued investment income
    12,406       (653 )
Other assets
    9,351       (11,550 )
Reserve for losses and loss expenses
    575,832       367,779  
Unearned premiums
    464,256       452,499  
Reinsurance balances payable
    116,080       35,240  
Deferred income taxes
    (2,611 )     1,452  
Accounts payable and accrued expenses
    (11,029 )     (30,867 )
 
           
Net cash provided by operating activities
    309,614       263,582  
 
           
 
               
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    2,654,804       2,933,352  
Proceeds on maturities of investments
    195,055       198,637  
Purchases of fixed maturities
    (2,613,981 )     (3,244,072 )
(Purchases) sales of short-term investments, net
    (451,706 )     211,801  
Sales of other investments
    3,809       11,610  
Decrease (increase) in securities lending collateral
    960       (9,894 )
 
           
Net cash (used in) provided by investing activities
    (211,059 )     101,434  
 
           
 
               
Cash flows provided by (used in) financing activities
               
Net proceeds on issuance of senior notes
          246,793  
Issuance (redemption) of common shares, net
    6,238       (12 )
Purchases of common shares under share repurchase program
    (5,995 )     (444,079 )
Dividends paid
    (54,000 )     (55,994 )
(Decrease) increase in securities lending payable
    (960 )     9,894  
Third party investment in noncontrolling interest
    134,301        
 
           
Net cash provided by (used in) by financing activities
    79,584       (243,398 )
 
           
 
               
Effect of foreign currency rate changes on cash and cash equivalents
    17,042       (16,714 )
 
               
Net increase in cash
    195,181       104,904  
 
               
Cash and cash equivalents — beginning of period
  $ 620,740     $ 387,585  
 
           
 
               
Cash and cash equivalents — end of period
  $ 815,921     $ 492,489  
 
           
 
               
Taxes (recovered) paid during the period
  $ (3,373 )   $ 1,335  
 
           
 
               
Interest paid during the period
  $ 23,823     $ 12,729  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
1. Basis of preparation and consolidation
     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the financial statements included in the Company’s 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 Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, the valuation of goodwill and intangible assets, reinsurance recoverable balances including the provision for unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year. The term “ASC” used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board (“FASB”).
     On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, Ltd. (“AlphaCat Re 2011”) a new special purpose “sidecar” reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. Validus Reinsurance, Ltd. (“Validus Re”) has an equity interest in AlphaCat Re 2011 and as Validus Re holds a majority of AlphaCat Re 2011’s outstanding voting rights, the financial statements of AlphaCat Re 2011 are included in the consolidated financial statements of the Company. The portion of AlphaCat Re 2011’s earnings attributable to third party investors for the three months ended June 30, 2011 is recorded in the consolidated statement of operations and comprehensive income as net income attributable to noncontrolling interest. Refer to Note 4 “Noncontrolling interest” for further information.
2. Recent accounting pronouncements
     In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The objective of ASU 2011-04 is to provide common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the amendments do not result in a change in the application of the requirements in Topic 820 “Fair Value Measurements”.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this guidance, however it is not expected to have a material impact on the Company’s consolidated financial statements.
     In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have an impact on the Company’s consolidated financial statements.
3. Investments
     The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.
(a) Classification within the fair value hierarchy
     Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds, 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 June 30, 2011.
     The Company’s 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 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 $9,776 at June 30, 2011. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund’s administrator provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the funds administrator’s May 31, 2011 NAV was used as a partial basis for fair value measurement in the Company’s June 30, 2011 balance sheet. The fund manager provides an estimate of the performance of the fund for the following month based on the estimated performance provided from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund administrator’s NAV. Immaterial variances are recorded in the following reporting period.
     At June 30, 2011, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 838,912     $     $ 838,912  
Non-U.S. Government and Government Agency
          476,590             476,590  
States, municipalities, political subdivision
          29,576             29,576  
Agency residential mortgage-backed securities
          470,933             470,933  
Non-Agency residential mortgage-backed securities
          51,223             51,223  
U.S. corporate
          1,406,591             1,406,591  
Non-U.S. corporate
          628,045             628,045  
Bank Loans
          387,201             387,201  
Catastrophe bonds
          29,934             29,934  
Asset-backed securities
          276,273             276,273  
Commercial mortgage-backed securities
          8,256             8,256  
 
                       
Total fixed maturities
          4,603,534             4,603,534  
Short-term investments
    679,184       46,074             725,258  
Hedge fund
                9,776       9,776  
Mutual funds
          8,970             8,970  
 
                       
Total
  $ 679,184     $ 4,658,578     $ 9,776     $ 5,347,538  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At December 31, 2010, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 1,677,166     $     $ 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 June 30, 2011, Level 3 investments totaled $9,776, 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 tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six month periods ending June 30, 2011 and 2010:
                         
    Three Months Ended June 30, 2011  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $     $ 10,713     $ 10,713  
Purchases
                 
Sales
          (1,247 )     (1,247 )
Issuances
                 
Settlements
                 
Realized gains
          175       175  
Unrealized gains
          135       135  
Amortization
                 
Transfers
                 
 
                 
Level 3 investments — End of period
  $     $ 9,776     $ 9,776  
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                         
    Three Months Ended June 30, 2010  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $ 76,943     $ 21,919     $ 98,862  
Purchases
                 
Sales
          (2,710 )     (2,710 )
Issuances
                 
Settlements
                 
Realized gains
          170       170  
Unrealized gains (losses)
    2,632       (249 )     2,383  
Amortization
    (3,997 )           (3,997 )
Transfers
                 
 
                 
Level 3 investments — End of period
  $ 75,578     $ 19,130     $ 94,708  
 
                 
                         
    Six Months Ended June 30, 2011  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $     $ 12,892     $ 12,892  
Purchases
                 
Sales
          (3,809 )     (3,809 )
Issuances
                 
Settlements
                 
Realized gains
          435       435  
Unrealized gains
          258       258  
Amortization
                 
Transfers
                 
 
                 
Level 3 investments — End of period
  $     $ 9,776     $ 9,776  
 
                 
                         
    Six Months Ended June 30, 2010  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments - Beginning of period
  $ 85,336     $ 25,670     $ 111,006  
Purchases
                 
Sales
          (7,094 )     (7,094 )
Issuances
                 
Settlements
                 
Realized gains
          344       344  
Unrealized (losses) gains
    (1,634 )     210       (1,424 )
Amortization
    (8,124 )           (8,124 )
Transfers
                 
 
                 
Level 3 investments — End of period
  $ 75,578     $ 19,130     $ 94,708  
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(b) Net investment income
     Net investment income was derived from the following sources:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
Fixed maturities and short-term investments
  $ 27,535     $ 36,346     $ 56,470     $ 72,101  
Cash and cash equivalents
    687       311       3,268       897  
Securities lending income
    8       49       24       119  
 
                       
Total gross investment income
    28,230       36,706       59,762       73,117  
Investment expenses
    (1,736 )     (1,897 )     (3,293 )     (4,009 )
 
                       
Net investment income
  $ 26,494     $ 34,809     $ 56,469     $ 69,108  
 
                       
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized gains  and the change in net unrealized gains on investments:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
Fixed maturities, short-term and other investments and cash equivalents
                               
Gross realized gains
  $ 13,032     $ 15,120     $ 28,797     $ 27,885  
Gross realized (losses)
    (1,480 )     (2,679 )     (10,866 )     (4,046 )
 
                       
Net realized gains on investments
    11,552       12,441       17,931       23,839  
Net unrealized gains (losses) on securities lending
    11       (6 )     41       (1,020 )
Change in net unrealized gains on investments
    18,515       41,646       5,657       58,073  
 
                       
Total net realized gains and change in net unrealized gains on investments
  $ 30,078     $ 54,081     $ 23,629     $ 80,892  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at June 30, 2011 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair Value  
U.S. Government and Government Agency
  $ 828,627     $ 10,656     $ (371 )   $ 838,912  
Non-U.S. Government and Government Agency
    470,438       9,551       (3,399 )     476,590  
States, municipalities, political subdivision
    29,199       394       (17 )     29,576  
Agency residential mortgage-backed securities
    454,517       16,899       (483 )     470,933  
Non-Agency residential mortgage-backed securities
    57,678       148       (6,603 )     51,223  
U.S. corporate
    1,378,760       29,227       (1,396 )     1,406,591  
Non-U.S. corporate
    618,411       10,615       (981 )     628,045  
Bank loans
    389,193       702       (2,694 )     387,201  
Catastrophe bonds
    29,550       445       (61 )     29,934  
Asset-backed securities
    275,417       1,142       (286 )     276,273  
Commercial mortgage-backed securities
    8,208       48             8,256  
 
                       
 
Total fixed maturities
    4,539,998       79,827       (16,291 )     4,603,534  
Total short-term investments
    725,230       57       (29 )     725,258  
Total other investments
    15,018       3,728             18,746  
 
                       
Total
  $ 5,280,246     $ 83,612     $ (16,320 )   $ 5,347,538  
 
                       
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2010 were as follows:
                                 
            Gross Unrealized     Gross Unrealized        
    Amortized Cost     Gains     Losses     Estimated Fair 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  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2011 and December 31, 2010. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    June 30, 2011     December 31, 2010  
    Estimated Fair           Estimated Fair        
    Value     % of Total     Value     % of Total  
AAA
  $ 2,237,017       48.6 %   $ 2,946,514       61.2 %
AA
    400,177       8.7 %     428,972       8.9 %
A
    1,193,431       25.9 %     1,077,389       22.3 %
BBB
    331,145       7.2 %     219,523       4.6 %
 
                       
Investment grade
    4,161,770       90.4 %     4,672,398       97.0 %
BB
    218,227       4.7 %     74,475       1.5 %
B
    199,649       4.3 %     45,660       0.9 %
CCC
    21,548       0.5 %     29,219       0.6 %
CC
          0.0 %           0.0 %
D/NR
    2,340       0.1 %     2,115       0.0 %
 
                       
Non-Investment grade
    441,764       9.6 %     151,469       3.0 %
 
                       
Total Fixed Maturities
  $ 4,603,534       100.0 %   $ 4,823,867       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 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.
                                 
    June 30, 2011     December 31, 2010  
    Amortized Cost     Estimated Fair
Value
    Amortized Cost     Estimated Fair
Value
 
Due in one year or less
  $ 427,713     $ 431,200     $ 424,327     $ 426,167  
Due after one year through five years
    2,965,528       3,015,190       3,498,334       3,540,408  
Due after five years through ten years
    344,337       343,859       207,918       206,317  
Due after ten years
    6,600       6,600       6,965       6,534  
 
                       
 
    3,744,178       3,796,849       4,137,544       4,179,426  
Asset-backed and mortgage-backed securities
    795,820       806,685       634,493       644,441  
 
                       
Total
  $ 4,539,998     $ 4,603,534     $ 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 June 30, 2011, approximately $277,679 (December 31, 2010: $268,944) of letters of credit were issued and outstanding under this facility for which $352,636 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 Lloyd’s (the “Talbot FAL Facility”).

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Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 June 30, 2011, $25,000 (December 31, 2010: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,204 of investments were pledged as collateral (December 31, 2010: $45,504). In addition, $1,993,707 of investments were held in trust at June 30, 2011 (December 31, 2010: $1,729,631). Of those, $1,545,533 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2010: $1,489,243).
     The Company assumed two letters of credit facilities as part of the acquisition of IPC Holdings, Ltd. (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 June 30, 2011, the IPC Bi-Lateral Facility had $63,284 (December 31, 2010: $68,063) letters of credit issued and outstanding for which $106,216 (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 June 30, 2011, the Company had $21,604 (December 31, 2010: $22,566) in securities on loan. During the three months ended June 30, 2011, the Company recorded a $11 unrealized gain on this collateral on its Statements of Operations (June 30, 2010: unrealized loss $6). During the six months ended June 30, 2011, the Company recorded a $41 unrealized gain on this collateral in its Statements of Operations (June 30, 2010: unrealized loss $1,020).
     Securities lending collateral reinvested includes corporate floating rate securities and overnight repo with an average reset period of 1.1 days (December 31, 2010: 17.6 days). As at June 30, 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:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 257     $     $ 257  
Asset-backed securities
                       
Short-term investments
    20,979       173             21,152  
 
                       
Total
  $ 20,979     $ 430     $     $ 21,409  
 
                       
     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  
Asset-backed securities
          5,005             5,005  
Short-term investments
    2,644       14,450             17,094  
 
                       
Total
  $ 2,644     $ 19,684     $     $ 22,328  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at June 30, 2011 and December 31, 2010. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating.
For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    June 30, 2011     December 31, 2010  
    Estimated Fair Value     % of Total     Estimated Fair Value     % of Total  
AAA
  $ 173       0.8 %   $ 5,454       24.4 %
AA+
          0.0 %     11,003       49.3 %
AA
          0.0 %           0.0 %
AA-
          0.0 %     2,998       13.5 %
A+
          0.0 %           0.0 %
A
          0.0 %           0.0 %
NR
    257       1.2 %     229       1.0 %
 
                       
 
    430       2.0 %     19,684       88.2 %
NR- Short-term investments (a)
    20,979       98.0 %     2,644       11.8 %
 
                       
Total
  $ 21,409       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 June 30, 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.
                                 
    June 30, 2011     December 31, 2010  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 21,133     $ 21,152     $ 17,093     $ 17,095  
Due after one year through five years
    1,000       257       6,000       5,233  
 
                       
Total
  $ 22,133     $ 21,409     $ 23,093     $ 22,328  
 
                       
4. Noncontrolling interest
     On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011 Ltd. (AlphaCat Re 2011), a new special purpose “sidecar” reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. Validus Re has an equity interest in AlphaCat Re 2011 and as Validus Re holds a majority of AlphaCat Re 2011’s outstanding voting rights, the financial statements of AlphaCat Re 2011 are included in the consolidated financial statements of the Company. The portion of AlphaCat Re 2011’s earnings attributable to third party investors for the three months ended June 30, 2011 is recorded in the consolidated statement of operations and comprehensive income as net income attributable to noncontrolling interest.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The activity in net income attributable to noncontrolling interest is detailed in the table below as at June 30, 2011:
         
    Noncontrolling  
    interest  
Balance — April 1, 2011
  $  
Purchase of shares by noncontrolling interest
    134,301  
Net Income:
       
Net Income attributable to noncontrolling interest
    594  
 
     
Balance — June 30, 2011
  $ 134,895  
 
     
5. 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 June 30, 2011, the Company entered into a foreign currency forward exchange contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Japanese Yen. During the three months ended March 31, 2011, the Company entered into three foreign currency forward exchange contracts to mitigate the risk of fluctuations in the Euro and Australian dollar to U.S. dollar rates. Two of the contracts were renewed during the three months ended June 30, 2011. 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 June 30, 2011. The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at June 30, 2011:
                                         
            Asset Derivatives     Liability Derivatives  
Derivatives designated as           Balance Sheet             Balance Sheet        
hedging instruments:   Notional Amount     location     Fair value     location     Fair value  
 
                          Accounts payable        
 
                          and accrued        
Foreign exchange contracts
  $ 128,613     Other assets   $ 354     expenses   $ 173  
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  
Derivatives designated as           Balance Sheet             Balance Sheet        
hedging instruments:   Notional Amount     location     Fair value     location     Fair value  
 
                          Accounts payable        
 
                          and accrued        
Foreign exchange contract
  $ 75,000     Other assets   $ 2,905     expenses   $  
(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. 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(b) 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.
     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 and six months ended June 30, 2011:
                                 
            Three Months Ended June 30, 2011  
                    Amount of Gain     Amount of Gain  
                    (Loss)     (Loss) Recognized  
            Amount of Gain     on Hedged Item     in Income on  
Derivatives designated as   Location of Gain     (Loss) Recognized     Recognized in Income     Derivative  
fair value hedges and   (Loss) Recognized     in Income on     Attributable to Risk     (Ineffective  
related hedged item:   in Income     Derivative     Being Hedged     Portion)  
Foreign exchange
  Foreign exchange gains (losses)   $ 897     $ (897 )   $  
                                 
            Six Months Ended June 30, 2011  
                    Amount of Gain     Amount of Gain  
                    (Loss)     (Loss) Recognized  
            Amount of Gain     on Hedged Item     in Income on  
Derivatives designated as   Location of Gain     (Loss) Recognized     Recognized in Income     Derivative  
fair value hedges and   (Loss) Recognized     in Income on     Attributable to Risk     (Ineffective  
related hedged item:   in Income     Derivative     Being Hedged     Portion)  
Foreign exchange
  Foreign exchange (losses) gains   $ (2,925 )   $ 2,925     $  
There was no derivative activity for the three and six months ended June 30, 2010.
6. Reserve for losses and loss expenses
     Reserves for losses and loss expenses are based in part upon the estimation of case losses reported from brokers, insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed the total reserves.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses for the three and six months ended June 30, 2011 and 2010:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
Reserve for losses and loss expenses, beginning of period
  $ 2,534,415     $ 1,976,889     $ 2,035,973     $ 1,622,134  
Losses and loss expenses recoverable
    (453,701 )     (198,956 )     (283,134 )     (181,765 )
 
                       
Net reserves for losses and loss expenses, beginning of period
    2,080,714       1,777,933       1,752,839       1,440,369  
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
                               
Current year
    233,012       244,457       735,726       749,717  
Prior years
    (25,705 )     (49,563 )     (52,221 )     (76,292 )
 
                       
Total incurred losses and loss expenses
    207,307       194,894       683,505       673,425  
Total net paid losses
    (121,046 )     (178,431 )     (284,303 )     (306,084 )
 
                               
Foreign exchange
    13,580       (9,870 )     28,514       (23,184 )
 
                       
Net reserve for losses and loss expenses, end of period
    2,180,555       1,784,526       2,180,555       1,784,526  
Losses and loss expenses recoverable
    439,805       193,604       439,805       193,604  
 
                       
Reserve for losses and loss expenses, end of period
  $ 2,620,360     $ 1,978,130     $ 2,620,360     $ 1,978,130  
 
                       
7. 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
a) Credit risk
     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At June 30, 2011, 99.1% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $98,321 of IBNR recoverable (December 31, 2010: $146,519). Reinsurance recoverables by reinsurer are as follows:
                                 
    June 30, 2011     December 31, 2010  
    Reinsurance             Reinsurance        
    Recoverable     % of Total     Recoverable     % of Total  
Top 10 reinsurers
  $ 340,391       72.3 %   $ 222,420       71.5 %
Other reinsurers’ balances > $1 million
    119,899       25.5 %     80,221       25.8 %
Other reinsurers’ balances < $1 million
    10,369       2.2 %     8,489       2.7 %
 
                       
Total
  $ 470,659       100.0 %   $ 311,130       100.0 %
 
                       
                         
    June 30, 2011  
Top 10 Reinsurers   Rating     Reinsurance
Recoverable
    % of Total  
Lloyd’s Syndicates
    A+     $ 74,882       22.0 %
Allianz
  AA-     69,464       20.3 %
Hannover Re
  AA-     35,757       10.5 %
Manulife
    A-       35,000       10.3 %
Everest Re
    A+       29,812       8.8 %
Tokio Marine / Tokio Millennium
  AA-     26,106       7.7 %
Fully collateralized reinsurers
  NR     20,396       6.0 %
Transatlantic Re
    A+       17,049       5.0 %
Odyssey Reinsurance Company
    A-       16,195       4.8 %
Munich Re
  AA-     15,730       4.6 %
 
                   
Total
          $ 340,391       100.0 %
 
                   
                         
    December 31, 2010  
Top 10 Reinsurers   Rating     Reinsurance
recoverable
    % of Total  
Lloyd’s 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 %
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At June 30, 2011 and December 31, 2010, the provision for uncollectible reinsurance relating to losses recoverable was $6,200 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 $470,659 reinsurance recoverable at June 30, 2011, $20,396 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 reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
8. Share capital
a) Authorized and issued
     The Company’s authorized share capital is 571,428,571 voting and non-voting shares with a par value of $0.175 per share. The holders of common voting shares are entitled to receive dividends and are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.
     The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders. This amount 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 Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following table 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
    458,933  
Restricted share units vested, net of shares withheld
    9,496  
Employee seller shares vested
     
Options exercised
    455,033  
Warrants exercised
    34,340  
 
     
Common shares issued, June 30, 2011
    133,795,913  
Shares repurchased
    (35,031,985 )
 
     
Common shares outstanding, June 30, 2011
    98,763,928  
 
     
         
    Common Shares  
Common shares issued, December 31, 2009
    131,616,349  
Restricted share awards vested, net of shares withheld
    281,512  
Restricted share units vested, net of shares withheld
    57,192  
Employee seller shares vested
     
Options exercised
    51,534  
Warrants exercised
     
 
     
Common shares issued, June 30, 2010
    132,006,587  
Shares repurchased
    (20,598,594 )
 
     
Common shares outstanding, June 30, 2010
    111,407,993  
 
     
b) Warrants
     During the three and six months ended June 30, 2011, 72,598 warrants were exercised which resulted in the issuance of 34,340 common shares. During the three and six months ended June 30, 2010, no warrants were exercised.
c) Deferred share units
     Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. The total outstanding deferred share units at June 30, 2011 were 4,802 (December 31, 2010: 4,727).
d) Dividends
     On February 9, 2011, the Company announced a quarterly cash dividend of $0.25 (2010: $0.22) 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 (2010: $0.22) per common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on June 30, 2011 to holders of record on June 15, 2011.
9. Stock plans
a) Long Term Incentive Plan and Short Term Incentive Plan
     The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. 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 4,141,021 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 Company’s common shares at the date of grant.
     i. Options
     Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either ratably or at the end of the required service period from the date of grant. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for all grants to date:
                                 
    Weighted average                    
    risk free     Weighted average     Expected life        
       Year   interest rate     dividend yield     (years)     Expected volatility  
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 six months ended June 30, 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.
     Share compensation expenses of $179 were recorded for the three months ended June 30, 2011 (2010: $1,036). Share compensation expenses of $1,426 were recorded for the six months ended June 30, 2011 (2010: $2,074).The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to options for the six months ended June 30, 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
    (455,033 )     6.96       20.56  
Options forfeited
    (1,850 )     10.30       20.39  
 
                 
Options outstanding, June 30, 2011
    2,266,801     $ 6.70     $ 20.12  
 
                 
Options exercisable at June 30, 2011
    2,178,828     $ 6.62     $ 20.02  
 
                 
     Activity with respect to options for the six months ended June 30, 2010 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2009
    3,278,015     $ 6.83     $ 19.88  
Options granted
                 
Options exercised
    (51,534 )     5.72       22.34  
Options forfeited
    (4,317 )     10.30       20.39  
 
                 
Options outstanding, June 30, 2010
    3,222,164     $ 6.84     $ 19.84  
 
                 
Options exercisable at June 30, 2010
    2,549,805     $ 6.05     $ 20.10  
 
                 
     At June 30, 2011, there were $482 (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 0.7 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 $5,792 were recorded for the three months ended June 30, 2011 (2010: $4,735). Share compensation expenses of $14,948 were recorded for the six months ended June 30, 2011 (2010: $9,061).The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested restricted share awards for the six months ended June 30, 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
    590,367       32.16  
Restricted share awards vested
    (553,615 )     25.46  
Restricted share awards forfeited
    (13,198 )     27.28  
 
           
Restricted share awards outstanding, June 30, 2011
    3,137,593     $ 25.60  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to unvested restricted share awards for the six months ended June 30, 2010 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2009
    2,525,958     $ 23.43  
Restricted share awards granted
    439,114       26.17  
Restricted share awards vested
    (323,520 )     23.91  
Restricted share awards forfeited
    (22,609 )     23.07  
 
           
Restricted share awards outstanding, June 30, 2010
    2,618,943     $ 23.83  
 
           
     At June 30, 2011, there were $50,710 (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 2.7 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 $97 were recorded for the three months ended June 30, 2011 (2010: $61). Share compensation expenses of $211 were recorded for the six months ended June 30, 2011 (2010: $234). 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 six months ended June 30, 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
    18,388       32.10  
Restricted share units vested
    (13,340 )     24.72  
Restricted share units reinvested
    296       25.45  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, June 30, 2011
    52,393     $ 27.60  
 
           
     Activity with respect to unvested restricted share units for the six months ended June 30, 2010 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2009
    78,591     $ 24.84  
Restricted share units granted
    7,952       26.07  
Restricted share units vested
    (59,019 )     24.76  
Restricted share units forfeited
    (1,094 )     21.49  
 
           
Restricted share units outstanding, June 30, 2010
    26,430     $ 25.51  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     At June 30, 2011, there were $1,192 (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 3.0 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 during the period, the grant date Diluted Book Value per Share (“DBVPS”) is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the consolidated statements of income in the period in which they are determined.
     Share compensation expenses of $528 were recorded for the three months ended June 30, 2011 (2010: $nil). Share compensation expenses of $872 were recorded for the six months ended June 30, 2011 (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 six months ended June 30, 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
    146,618       32.64  
Performance share awards vested
           
Performance share awards forfeited
           
 
           
Performance share awards outstanding, June 30, 2011
    279,019     $ 30.77  
 
           
     Activity with respect to unvested performance share awards for the six months ended June 30, 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, June 30, 2010
        $  
 
           
     At June 30, 2011, there were $7,071 (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 2.6 years (December 31, 2010: 2.4 years).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
b) Employee seller shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot Holdings, Ltd. (“Talbot”), the Company issued 1,209,741 restricted shares to Talbot employees (the “employee seller shares”). Upon consummation of the acquisition, the employee seller shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s Bye-laws. However, the employee seller shares are subject to a restricted period during which they are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of employee seller shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period ended for 25% of the employee seller shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that on July 2, 2011 the potential for forfeiture was completely extinguished.
     Share compensation expenses of $1,032 were recorded for the three months ended June 30, 2011 (2010: $1,014). Share compensation expenses of $2,220 were recorded for the six months ended June 30, 2011 (2010: $2,053).
     Activity with respect to unvested employee seller shares for the six months ended June 30, 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
    (705 )     22.01  
 
           
Employee seller shares outstanding, June 30, 2011
    197,174     $ 22.01  
 
           
     Activity with respect to unvested employee seller shares for six months ended June 30, 2010 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2009
    410,667     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
           
Employee seller shares forfeited
    (3,551 )     22.01  
 
           
Employee seller shares outstanding, June 30, 2010
    407,116     $ 22.01  
 
           
     At June 30, 2011, there were $71 (December 31, 2010: $2,141) of total unrecognized share compensation expenses in respect of employee seller shares that are expected to be recognized during the quarter ended September 30, 2011 (December 31, 2010: weighted average period of 0.5 year).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
c) Total share compensation expenses
     The breakdown of share compensation expenses by award type was as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
Options
  $ 179     $ 1,036     $ 1,426     $ 2,074  
Restricted share awards
    5,792       4,735       14,948       9,061  
Restricted share units
    97       61       211       234  
Performance share awards
    528             872        
Employee seller shares
    1,032       1,014       2,220       2,053  
 
                       
Total
  $ 7,628     $ 6,846     $ 19,677     $ 13,422  
 
                       
10. Debt and financing arrangements
a) Financing structure and finance expenses
          The financing structure at June 30, 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       246,928  
$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       277,679        
Talbot FAL Facility (b)
    25,000       25,000        
IPC Bi-Lateral Facility
    80,000       63,284        
 
                 
Total
  $ 1,605,000     $ 905,763     $ 536,728  
 
                 
          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 Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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, fees relating to the capitalization of AlphaCat Re 2011 and the costs of FAL as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
2006 Junior Subordinated Deferrable Debentures
  $ 3,228     $ 3,589     $ 6,816     $ 7,177  
2007 Junior Subordinated Deferrable Debentures
    3,028       3,028       6,057       6,057  
2010 Senior Notes due 2040
    5,597       5,597       11,194       9,575  
Credit facilities
    1,589       1,109       3,313       2,420  
AlphaCat Re 2011 fees (a)
    2,919             2,919        
Talbot FAL Facility
          (89 )     63       333  
Talbot other interest
          (16 )           59  
Talbot third party FAL facility
                      2,748  
 
                       
Total
  $ 16,361     $ 13,218     $ 30,362     $ 28,369  
 
                       
 
(a)   Includes finance expenses attributable to noncontrolling interest.
(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 Company’s option in whole any time or in part from time to time at a make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 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 Company’s existing and future unsecured and unsubordinated indebtedness. The 2010 Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 2010 Senior Notes will be structurally subordinated to all obligations of the Company’s subsidiaries.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 Company’s 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 Company’s 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
  $ 5,928  
2012
    5,928  
2013
     
2014
     
2015 and thereafter
    289,800  
 
     
Total minimum future payments
  $ 301,656  
 
     

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
(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 Company’s 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 Company’s other subsidiaries (the “Five Year Facility” and, together with the Three Year Facilities, the “Credit Facilities”). The Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. On October 25, 2007, the Company entered into the First Amendment to the Credit Facilities to provide for, among other things, additional capacity to incur up to $100,000 under a new Funds at Lloyd’s Letter of Credit Facility (as described below) to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2008 and 2009 underwriting years of account. The amendment also modified certain provisions in the Credit Facilities in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default.
     On September 4, 2009, the Company announced that it had entered into Amendments to 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 Company’s junior subordinated deferrable debentures. The credit facilities also contain restrictions on our ability to pay dividends and other payments in respect of equity interests at any time that we are otherwise in default with respect to certain provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others.
     As of June 30, 2011, there was $277,679 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 June 30, 2011, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
     (ii) Talbot FAL Facility
     On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility (the “Talbot FAL Facility”) to provide Funds at Lloyd’s for the 2008 and 2009 underwriting years of account; this facility is guaranteed by the Company and is secured against the assets of Validus Re. The Talbot FAL Facility was provided by a syndicate of commercial banks arranged by Lloyds TSB Bank plc and ING Bank N.V., London Branch.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     On November 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 June 30, 2011, the Company had $25,000 in outstanding letters of credit under this facility.
     As of June 30, 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 IPC’s ability to increase existing letters of credit or to issue new letters of credit. Effective March 31, 2010, the IPC Syndicated Facility was closed. As of June 30, 2011, $63,284 of outstanding letters of credit were issued under the IPC Bi-Lateral Facility (December 31, 2010: $68,063).
     As of June 30, 2011, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC Bi-Lateral Facility.
11. Commitments and contingencies
a) Concentrations of credit risk
     The Company’s investments are managed following prudent standards of diversification. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In addition, the Company limits its exposure to any single issuer to 3% or less, excluding treasury and agency securities. With the exception of the Company’s 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
At June 30, 2011, 1.0% 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.
b) Funds at Lloyd’s
     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 Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks. The amounts of cash, investments and letters of credit at June 30, 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) Lloyd’s Central Fund
     Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2011 estimated premium income at Lloyd’s of £560,000, the June 30, 2011 exchange rate of £1 equals $1.6018 and assuming the maximum 3% assessment, the Company would be assessed approximately $26,910.
12. 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 Company’s investment portfolio. For the three and six months ended June 30, 2010, GSAM was deemed to be a related party due to a combination of GSAM being a shareholder in the Company and having an employee on the Company’s Board of Directors during this period. For the three and six months ended June 30, 2011, GSAM was no longer a related party due to the resignation of Sumit Rajpal from the Board of Directors effective February 7, 2011. Investment management fees earned by GSAM for the three and six months ended June 30, 2010 were $241 and $733, respectively. Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties.
     b) 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 Company’s Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Christopher E. Watson, a director of the Company, also serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the three and six months ended June 30, 2011 of $900 (2010: $601) and $1,411 (2010: $1,341), respectively, of which $1,038 was included in premiums receivable at June 30, 2011 (December 31, 2010: $378). The Company also recognized reinsurance premiums ceded during the three and six months ended June 30, 2011 of $nil (2010: $nil) and $163 (2010: $606), respectively, of which $49 was included in reinsurance balances payable at June 30, 2011 (December 31, 2010: $132). Earned premium adjustments of $344 (2010: $213) and $678 (2010: $881) were incurred during the three and six months ended June 30, 2011.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     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 for the three and six months ended June 30, 2011 of $628 (2010: $1,432) and $1,081 (2010: $1,469), respectively, of which $829 was included in accounts payable and accrued expenses at June 30, 2011 (December 31, 2010: $792).
     d) On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. (“Conning”) to manage a portion of the Company’s investment portfolio. Aquiline acquired Conning on June 16, 2009. John J. Hendrickson and Jeffrey W. Greenberg, directors of the Company, each serve as a director of Conning Holdings Corp., the parent company of Conning and Michael Carpenter, the Chairman of Talbot Holdings, Ltd. serves as a director of a subsidiary company of Conning Holdings Corp. Investment management fees earned by Conning for the three and six months ended June 30, 2011 were $234 (2010: $100) and $380 (2010: $186), respectively, of which $203 (December 31, 2010: $97) was included in accounts payable and accrued expenses at June 30, 2011.
13. Earnings per share
     The following table sets forth the computation of basic and diluted earnings (loss) per share available (attributable) to common shareholders for the three and six months ended June 30, 2011 and 2010:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
Basic earnings per share
                               
Income (loss) available (attributable) to Validus
  $ 109,884     $ 179,782     $ (62,480 )   $ 61,404  
 
                               
less: Dividends and distributions declared on outstanding warrants
    (1,966 )     (1,749 )     (3,950 )     (3,498 )
 
                       
Income (loss) available (attributable) to common shareholders
  $ 107,918     $ 178,033     $ (66,430 )   $ 57,906  
 
                       
 
                               
Weighted average number of common shares outstanding
    98,385,924       121,009,553       98,165,132       123,821,415  
 
                       
 
                               
Basic earnings (loss) per share available (attributable) to common shareholders
  $ 1.10     $ 1.47     $ (0.68 )   $ 0.47  
 
                       
 
                               
Diluted earnings per share
                               
Income (loss) available (attributable) to Validus
  $ 109,884     $ 179,782     $ (62,480 )   $ 61,404  
 
                               
less: Dividends and distributions declared on outstanding warrants
                (3,950 )     (3,498 )
 
                       
Income (loss) available (attributable) to common shareholders
  $ 109,884     $ 179,782     $ (66,430 )   $ 57,906  
 
                       
 
                               
Weighted average number of common shares outstanding
    98,385,924       121,009,553       98,165,132       123,821,415  
Share equivalents:
                               
Warrants
    3,561,096       2,339,922              
Stock options
    908,590       794,625             840,067  
Unvested restricted shares
    1,706,840       1,008,200             1,000,247  
 
                               
Weighted average number of common shares outstanding
    104,562,450       125,152,300       98,165,132       125,661,729  
 
                       
 
                               
Diluted earnings (loss) per share available (attributable) to common shareholders
  $ 1.05     $ 1.44     $ (0.68 )   $ 0.46  
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Share equivalents that would result in the issuance of common shares of 479,104 (2010: 218,497) and 247,550 (2010: 194,812) were outstanding for the three and six months ended June 30, 2011, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
14. Subsequent events
     Transatlantic Acquisition Proposal
     On June 12, 2011, Transatlantic Holdings, Inc. (“Transatlantic”) and Allied World Assurance Company Holdings, AG (“Allied World”) entered into an Agreement and Plan of Merger (the “Transatlantic-Allied World Merger Agreement”).
     On July 12, 2011, the Company announced that it had delivered to the Board of Directors of Transatlantic a proposal to merge the businesses of the Company and Transatlantic. Pursuant to the proposal, Transatlantic stockholders would receive 1.5564 Validus voting common shares in the merger and $8.00 in cash per share pursuant to a one-time special dividend from Transatlantic immediately prior to closing of the merger for each share of Transatlantic common stock they own.
     On July 20, 2011, the Company filed a preliminary proxy statement with the SEC in connection with the special meeting of stockholders of Transatlantic, urging the Transatlantic shareholders to vote against the Transatlantic-Allied World Merger Agreement.
     On July 25, 2011, the Company commenced an exchange offer for all of the outstanding shares of common stock of Transatlantic. Under the terms of the exchange offer, Transatlantic stockholders would receive 1.5564 Validus voting common shares and $8.00 in cash for each share of Transatlantic common stock they own. The terms and conditions of the exchange offer are set forth in the offering documents that the Company has filed with the SEC.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     Quarterly Dividend
     On August 3, 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 September 30, 2011 to holders of record on September 15, 2011.
15. Segment information
     The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments have been determined under U.S. GAAP segment reporting. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each business requires different strategies.
Validus Re
     The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace 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.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following tables summarize the results of our operating segments and corporate segment:
                                 
                    Corporate &        
Three Months Ended June 30, 2011   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 341,651     $ 276,886     $ (13,150 )   $ 605,387  
Reinsurance premiums ceded
    (98,218 )     (47,278 )     13,150       (132,346 )
 
                       
Net premiums written
    243,433       229,608             473,041  
Change in unearned premiums
    (10,755 )     (36,646 )           (47,401 )
 
                       
Net premiums earned
    232,678       192,962             425,640  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    94,035       113,272             207,307  
Policy acquisition costs
    35,769       42,307       154       78,230  
General and administrative expenses
    15,458       34,718       10,665       60,841  
Share compensation expenses
    1,823       2,026       3,779       7,628  
 
                       
Total underwriting deductions
    147,085       192,323       14,598       354,006  
 
                       
 
                               
Underwriting income (loss)
  $ 85,593     $ 639     $ (14,598 )   $ 71,634  
 
                               
Net investment income
    22,389       6,372       (2,267 )     26,494  
Other income
    854       1,967       (2,226 )     595  
Finance expenses
    (4,502 )           (11,859 )     (16,361 )
 
                       
Operating income (loss) before taxes
    104,334       8,978       (30,950 )     82,362  
Tax (expense) benefit
    (4 )     (208 )     241       29  
 
                       
Net operating income (loss)
  $ 104,330     $ 8,770     $ (30,709 )   $ 82,391  
 
                               
Net realized gains on investments
    9,552       2,000             11,552  
Net unrealized gains on investments
    14,557       3,969             18,526  
Foreign exchange (losses) gains
    (5,337 )     3,410       (64 )     (1,991 )
 
                               
 
                       
Net income (loss)
  $ 123,102     $ 18,149     $ (30,773 )   $ 110,478  
 
                               
Net income attributable to noncontrolling interest
    (594 )                 (594 )
 
                       
Net income available (attributable) to Validus
  $ 122,508     $ 18,149     $ (30,773 )   $ 109,884  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    71.3 %     82.9 %             78.1 %
 
                               
Losses and loss expenses
    40.4 %     58.7 %             48.7 %
 
                               
Policy acquisition costs
    15.4 %     21.9 %             18.4 %
General and administrative expenses (a)
    7.4 %     19.0 %             16.1 %
 
                         
Expense ratio
    22.8 %     40.9 %             34.5 %
 
                         
 
                               
Combined ratio
    63.2 %     99.6 %             83.2 %
 
                         
 
                               
Total assets
  $ 5,411,663     $ 2,759,850     $ 88,275     $ 8,259,788  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Three Months Ended June 30, 2010   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 284,328     $ 253,710     $ (21,177 )   $ 516,861  
Reinsurance premiums ceded
    (41,175 )     (47,728 )     21,177       (67,726 )
 
                       
Net premiums written
    243,153       205,982             449,135  
Change in unearned premiums
    18,888       (30,079 )           (11,191 )
 
                       
Net premiums earned
    262,041       175,903             437,944  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    123,793       71,101             194,894  
Policy acquisition costs
    37,979       38,647       (2,500 )     74,126  
General and administrative expenses
    10,983       24,960       16,436       52,379  
Share compensation expenses
    1,749       1,468       3,629       6,846  
 
                       
Total underwriting deductions
    174,504       136,176       17,565       328,245  
 
                       
 
                               
Underwriting income (loss)
  $ 87,537     $ 39,727     $ (17,565 )   $ 109,699  
 
                               
Net investment income
    29,914       7,251       (2,356 )     34,809  
Other income
    1,477       3,084       (1,864 )     2,697  
Finance expenses
    (1,107 )     105       (12,216 )     (13,218 )
 
                       
Operating income (loss) before taxes
    117,821       50,167       (34,001 )     133,987  
Tax (expense) benefit
    (94 )     (4,094 )     1       (4,187 )
 
                       
Net operating income (loss)
  $ 117,727     $ 46,073     $ (34,000 )   $ 129,800  
 
                               
Net realized gains on investments
    10,363       2,078             12,441  
Net unrealized gains on investments
    35,697       5,943             41,640  
Foreign exchange (losses)
    (843 )     (3,243 )     (13 )     (4,099 )
 
                               
 
                       
Net income (loss)
  $ 162,944     $ 50,851     $ (34,013 )   $ 179,782  
 
                               
Net income attributable to noncontrolling interest
                   
 
                       
Net income (loss) available (attributable) to Validus
  $ 162,944     $ 50,851     $ (34,013 )   $ 179,782  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    85.5 %     81.2 %             86.9 %
 
                               
Losses and loss expenses
    47.2 %     40.4 %             44.5 %
 
                               
Policy acquisition costs
    14.5 %     22.0 %             16.9 %
General and administrative expenses (a)
    4.9 %     15.0 %             13.5 %
 
                         
Expense ratio
    19.4 %     37.0 %             30.4 %
 
                         
 
                               
Combined ratio
    66.6 %     77.4 %             74.9 %
 
                         
 
                               
Total assets
  $ 5,057,693     $ 2,507,586     $ 49,344     $ 7,614,623  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Six Months Ended June 30, 2011   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 952,889     $ 539,943     $ (37,549 )   $ 1,455,283  
Reinsurance premiums ceded
    (145,023 )     (134,692 )     37,549       (242,166 )
 
                       
Net premiums written
    807,866       405,251             1,213,117  
Change in unearned premiums
    (322,879 )     (35,065 )           (357,944 )
 
                       
Net premiums earned
    484,987       370,186             855,173  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    404,579       278,926             683,505  
Policy acquisition costs
    75,835       79,523       168       155,526  
General and administrative expenses
    26,115       63,440       19,763       109,318  
Share compensation expenses
    4,928       4,745       10,004       19,677  
 
                       
Total underwriting deductions
    511,457       426,634       29,935       968,026  
 
                       
 
                               
Underwriting (loss)
  $ (26,470 )   $ (56,448 )   $ (29,935 )   $ (112,853 )
 
                               
Net investment income
    48,040       12,962       (4,533 )     56,469  
Other income
    2,287       4,984       (5,070 )     2,201  
Finance expenses
    (6,215 )     (63 )     (24,084 )     (30,362 )
 
                       
Operating income (loss) before taxes
    17,642       (38,565 )     (63,622 )     (84,545 )
Tax (expense) benefit
    (6 )     1,585       (91 )     1,488  
 
                       
Net operating income (loss)
  $ 17,636     $ (36,980 )   $ (63,713 )   $ (83,057 )
 
                               
Net realized gains on investments
    13,471       4,460             17,931  
Net unrealized gains (losses) on investments
    6,042       (344 )           5,698  
Foreign exchange (losses) gains
    (9,697 )     7,311       (72 )     (2,458 )
 
                       
 
                               
Net income (loss)
  $ 27,452     $ (25,553 )   $ (63,785 )   $ (61,886 )
 
                               
Net income attributable to noncontrolling interest
    (594 )                 (594 )
 
                       
Net income (loss) available (attributable) to Validus
  $ 26,858     $ (25,553 )   $ (63,785 )   $ (62,480 )
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    84.8 %     75.1 %             83.4 %
 
                               
Losses and loss expenses
    83.4 %     75.3 %             79.9 %
 
                               
Policy acquisition costs
    15.6 %     21.5 %             18.2 %
General and administrative expenses (a)
    6.4 %     18.4 %             15.1 %
 
                         
Expense ratio
    22.0 %     39.9 %             33.3 %
 
                         
 
                               
Combined ratio
    105.4 %     115.2 %             113.2 %
 
                         
 
                               
Total assets
  $ 5,411,663     $ 2,759,850     $ 88,275     $ 8,259,788  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate &        
Six Months Ended June 30, 2010   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 924,623     $ 524,251     $ (61,079 )   $ 1,387,795  
Reinsurance premiums ceded
    (54,285 )     (165,259 )     61,079       (158,465 )
 
                       
Net premiums written
    870,338       358,992             1,229,330  
Change in unearned premiums
    (324,376 )     (9,316 )           (333,692 )
 
                       
Net premiums earned
    545,962       349,676             895,638  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    472,713       200,712             673,425  
Policy acquisition costs
    81,482       73,592       (4,772 )     150,302  
General and administrative expenses
    27,295       50,508       28,145       105,948  
Share compensation expenses
    3,378       3,027       7,017       13,422  
 
                       
Total underwriting deductions
    584,868       327,839       30,390       943,097  
 
                       
 
                               
Underwriting (loss) income
  $ (38,906 )   $ 21,837     $ (30,390 )   $ (47,459 )
 
                               
Net investment income
    59,159       14,571       (4,622 )     69,108  
Other income
    2,555       5,059       (4,029 )     3,585  
Finance expenses
    (2,400 )     (3,140 )     (22,829 )     (28,369 )
 
                       
Operating income (loss) before taxes
    20,408       38,327       (61,870 )     (3,135 )
Tax (expense)
    (185 )     (3,299 )     (6 )     (3,490 )
 
                       
Net operating income (loss)
  $ 20,223     $ 35,028     $ (61,876 )   $ (6,625 )
 
                               
Net realized gains on investments
    20,142       3,697             23,839  
Net unrealized gains (losses) on investments
    47,892       9,161             57,053  
Foreign exchange (losses)
    (5,982 )     (6,842 )     (39 )     (12,863 )
 
                       
 
                               
Net income (loss)
  $ 82,275     $ 41,044     $ (61,915 )   $ 61,404  
 
                               
Net income attributable to noncontrolling interest
                       
 
                       
Net income (loss) available (attributable) to Validus
  $ 82,275     $ 41,044     $ (61,915 )   $ 61,404  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    94.1 %     68.5 %             88.6 %
 
                               
Losses and loss expenses
    86.6 %     57.4 %             75.2 %
 
                               
Policy acquisition costs
    14.9 %     21.0 %             16.8 %
General and administrative expenses (a)
    5.6 %     15.3 %             13.3 %
 
                         
Expense ratio
    20.5 %     36.3 %             30.1 %
 
                         
Combined ratio
    107.1 %     93.7 %             105.3 %
 
                         
 
                               
Total assets
  $ 5,057,693     $ 2,507,586     $ 49,344     $ 7,614,623  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Three Months Ended June 30, 2011  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 261,364     $ 34,181     $ (2,307 )   $ 293,238       48.5 %
Worldwide excluding United States (a)
    2,580       57,204       (257 )     59,527       9.8 %
Europe
    10,729       18,935       (59 )     29,605       4.9 %
Latin America and Caribbean
    11,432       22,265       (8,942 )     24,755       4.1 %
Japan
    23,871       2,216             26,087       4.3 %
Canada
    10       2,443       (10 )     2,443       0.4 %
Rest of the world (b)
    8,939                   8,939       1.5 %
 
                             
Sub-total, non United States
    57,561       103,063       (9,268 )     151,356       25.0 %
Worldwide including United States (a)
    12,584       15,506       (40 )     28,050       4.6 %
Marine and Aerospace (c)
    10,142       124,136       (1,535 )     132,743       21.9 %
 
                             
Total
  $ 341,651     $ 276,886     $ (13,150 )   $ 605,387       100.0 %
 
                             
                                         
    Three Months Ended June 30, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 186,653     $ 29,691     $ (2,020 )   $ 214,324       41.5 %
Worldwide excluding United States (a)
    4,830       58,806       (2,086 )     61,550       11.9 %
Europe
    10,757       12,832       (504 )     23,085       4.4 %
Latin America and Caribbean
    15,036       29,368       (12,766 )     31,638       6.1 %
Japan
    19,250       2,901       (72 )     22,079       4.3 %
Canada
    72       3,367       (72 )     3,367       0.7 %
Rest of the world (b)
    25,168                   25,168       4.9 %
 
                             
Sub-total, non United States
    75,113       107,274       (15,500 )     166,887       32.3 %
Worldwide including United States (a)
    2,032       15,911       (504 )     17,439       3.3 %
Marine and Aerospace (c)
    20,530       100,834       (3,153 )     118,211       22.9 %
 
                             
Total
  $ 284,328     $ 253,710     $ (21,177 )   $ 516,861       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.
 
   

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Six Months Ended June 30, 2011  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 453,729     $ 62,012     $ (4,204 )   $ 511,537       35.2 %
Worldwide excluding United States (a)
    29,558       125,171       (2,969 )     151,760       10.4 %
Europe
    69,695       34,944       (561 )     104,078       7.2 %
Latin America and Caribbean
    36,551       40,533       (22,571 )     54,513       3.7 %
Japan
    34,069       2,756       (100 )     36,725       2.5 %
Canada
    110       6,251       (110 )     6,251       0.4 %
Rest of the world (b)
    44,996                   44,996       3.1 %
 
                             
Sub-total, non United States
    214,979       209,655       (26,311 )     398,323       27.3 %
Worldwide including United States (a)
    80,780       26,036       (542 )     106,274       7.3 %
Marine and Aerospace (c)
    203,401       242,240       (6,492 )     439,149       30.2 %
 
                             
Total
  $ 952,889     $ 539,943     $ (37,549 )   $ 1,455,283       100.0 %
 
                             
                                         
    Six Months Ended June 30, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 420,220     $ 54,974     $ (5,491 )   $ 469,703       33.8 %
Worldwide excluding United States (a)
    44,594       134,824       (5,918 )     173,500       12.5 %
Europe
    91,233       28,370       (961 )     118,642       8.5 %
Latin America and Caribbean
    43,775       46,595       (28,553 )     61,817       4.5 %
Japan
    19,900       3,609       (137 )     23,372       1.7 %
Canada
    137       7,003       (137 )     7,003       0.5 %
Rest of the world (b)
    25,168                   25,168       1.8 %
 
                             
Sub-total, non United States
    224,807       220,401       (35,706 )     409,502       29.5 %
Worldwide including United States (a)
    78,267       28,687       (2,234 )     104,720       7.6 %
Marine and Aerospace (c)
    201,329       220,189       (17,648 )     403,870       29.1 %
 
                             
Total
  $ 924,623     $ 524,251     $ (61,079 )   $ 1,387,795       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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following is a discussion and analysis of the Company’s consolidated results of operations for the three and six months ended June 30, 2011 and 2010 and the Company’s consolidated financial condition, liquidity and capital resources at June 30, 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
     For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 Company’s principal reinsurance operating segment, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating segment, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd’s of London (“Lloyd’s”) and which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yacht and onshore energy business on behalf of the Talbot syndicate and others.
     The Company’s strategy has been to concentrate primarily on short-tail risks, which has been an area where management believes current prices and terms provide an attractive risk adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”) in exchange for common shares and cash. IPC’s operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to increase the Company’s capital base and gain a strategic advantage in the then current reinsurance market. This acquisition created a leading Bermuda carrier in the short-tail reinsurance market that facilitates stronger relationships with major reinsurance intermediaries.
     On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, a new special purpose “sidecar” reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. Validus Re has an equity interest in AlphaCat Re 2011 and as Validus Re holds a majority of AlphaCat Re 2011’s outstanding voting rights, the financial statements of AlphaCat Re 2011 are included in the consolidated financial statements of the Company. The portion of AlphaCat Re 2011’s earnings attributable to third party investors for the three months ended June 30, 2011 is recorded in the consolidated statement of operations and comprehensive income as net income attributable to noncontrolling interest.
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 Company’s financial condition and results and ability to write new business.

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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.
     Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. 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 2010’s Deepwater Horizon loss, Validus Re saw additional opportunities and rate increases in the marine lines. Within its 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 receiving improved pricing in the energy, property and political risk lines as a result of recent loss events. The significant worldwide elevated 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. Rate levels in both the U.S. and International property catastrophe business continued to improve for mid-year 2011 renewals due to the magnitude of the worldwide loss activity.
Financial Measures
     The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders:
     Annualized return on average equity represents the level of net income available to shareholders generated from the average shareholders’ equity during the period. Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. Percentages for the quarter and interim periods are annualized. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.

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    Three Months Ended     Year Ended  
    June 30,     December 31,  
    2011     2010     2010  
Annualized return on average equity
    13.1 %     19.5 %     10.8 %
 
                 
     The decrease in annualized return on average equity for the three months ended June 30, 2011 was driven primarily by a reduction in net income. Net income available to Validus for the three months ended June 30, 2011 decreased by $69.9 million, or 38.9% compared to the three months ended June 30, 2010. This unfavorable movement was primarily due to large loss events coupled with an unfavorable movement in unrealized gains 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 $1.07, or 3.2%, from $32.98 at December 31, 2010 to $31.91 at June 30, 2011. The decrease was due to the loss generated in the six months ended June 30, 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 August 3, 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 September 30, 2011 to holders of record on September 15, 2011.
     Underwriting income (loss) measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments and foreign exchange gains (losses). The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the three months ended June 30, 2011 and 2010 was $71.6 million and $109.7 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, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two significant operating segments are Validus Re and Talbot.
Results of Operations
     Validus Re commenced operations on December 16, 2005. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information.

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     The following table presents results of operations for the three and six months ended June 30, 2011 and 2010:
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(Dollars in thousands)   2011     2010     2011     2010  
Gross premiums written
  $ 605,387     $ 516,861     $ 1,455,283     $ 1,387,795  
Reinsurance premiums ceded
    (132,346 )     (67,726 )     (242,166 )     (158,465 )
 
                       
Net premiums written
    473,041       449,135       1,213,117       1,229,330  
Change in unearned premiums
    (47,401 )     (11,191 )     (357,944 )     (333,692 )
 
                       
Net premiums earned
    425,640       437,944       855,173       895,638  
 
                               
Losses and loss expenses
    207,307       194,894       683,505       673,425  
Policy acquisition costs
    78,230       74,126       155,526       150,302  
General and administrative expenses
    60,841       52,379       109,318       105,948  
Share compensation expenses
    7,628       6,846       19,677       13,422  
 
                       
Total underwriting deductions
    354,006       328,245       968,026       943,097  
 
                               
Underwriting income (loss) (a)
    71,634       109,699       (112,853 )     (47,459 )
 
                               
Net investment income
    26,494       34,809       56,469       69,108  
Other income
    595       2,697       2,201       3,585  
Finance expenses
    (16,361 )     (13,218 )     (30,362 )     (28,369 )
 
                       
Operating income (loss) before taxes
    82,362       133,987       (84,545 )     (3,135 )
Tax benefit (expense)
    29       (4,187 )     1,488       (3,490 )
 
                       
Net operating income (loss) (a)
    82,391       129,800       (83,057 )     (6,625 )
 
                               
Net realized gains on investments
    11,552       12,441       17,931       23,839  
Net unrealized gains on investments
    18,526       41,640       5,698       57,053  
Foreign exchange (losses)
    (1,991 )     (4,099 )     (2,458 )     (12,863 )
 
                       
Net income (loss)
    110,478       179,782       (61,886 )     61,404  
 
                       
 
                               
Net income attributable to noncontrolling interest
    (594 )           (594 )      
 
                       
Net income (loss) available (attributable) to Validus
  $ 109,884     $ 179,782     $ (62,480 )   $ 61,404  
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    78.1 %     86.9 %     83.4 %     88.6 %
 
                               
Losses and loss expenses
    48.7 %     44.5 %     79.9 %     75.2 %
 
                               
Policy acquisition costs
    18.4 %     16.9 %     18.2 %     16.8 %
General and administrative expenses (b)
    16.1 %     13.5 %     15.1 %     13.3 %
 
                       
Expense ratio
    34.5 %     30.4 %     33.3 %     30.1 %
 
                       
Combined ratio
    83.2 %     74.9 %     113.2 %     105.3 %
 
                       
 
a)   Non-GAAP Financial Measures: In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of underwriting income 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.

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    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
Validus Re
                               
Gross premiums written
  $ 341,651     $ 284,328     $ 952,889     $ 924,623  
Reinsurance premiums ceded
    (98,218 )     (41,175 )     (145,023 )     (54,285 )
 
                       
Net premiums written
    243,433       243,153       807,866       870,338  
Change in unearned premiums
    (10,755 )     18,888       (322,879 )     (324,376 )
 
                       
Net premiums earned
    232,678       262,041       484,987       545,962  
 
                               
Losses and loss expenses
    94,035       123,793       404,579       472,713  
Policy acquisition costs
    35,769       37,979       75,835       81,482  
General and administrative expenses
    15,458       10,983       26,115       27,295  
Share compensation expenses
    1,823       1,749       4,928       3,378  
 
                       
Total underwriting deductions
    147,085       174,504       511,457       584,868  
 
                       
 
                               
Underwriting income (loss) (a)
    85,593       87,537       (26,470 )     (38,906 )
 
                       
 
                               
Talbot
                               
Gross premiums written
  $ 276,886     $ 253,710     $ 539,943     $ 524,251  
Reinsurance premiums ceded
    (47,278 )     (47,728 )     (134,692 )     (165,259 )
 
                       
Net premiums written
    229,608       205,982       405,251       358,992  
Change in unearned premiums
    (36,646 )     (30,079 )     (35,065 )     (9,316 )
 
                       
Net premiums earned
    192,962       175,903       370,186       349,676  
 
                               
Losses and loss expenses
    113,272       71,101       278,926       200,712  
Policy acquisition costs
    42,307       38,647       79,523       73,592  
General and administrative expenses
    34,718       24,960       63,440       50,508  
Share compensation expenses
    2,026       1,468       4,745       3,027  
 
                       
Total underwriting deductions
    192,323       136,176       426,634       327,839  
 
                       
 
                               
Underwriting income (loss) (a)
    639       39,727       (56,448 )     21,837  
 
                       
 
                               
Corporate & Eliminations
                               
Gross premiums written
  $ (13,150 )   $ (21,177 )   $ (37,549 )   $ (61,079 )
Reinsurance premiums ceded
    13,150       21,177       37,549       61,079  
 
                       
Net premiums written
                       
Change in unearned premiums
                       
 
                       
Net premiums earned
                       
 
                               
Losses and loss expenses
                       
Policy acquisition costs
    154       (2,500 )     168       (4,772 )
General and administrative expenses
    10,665       16,436       19,763       28,145  
Share compensation expenses
    3,779       3,629       10,004       7,017  
 
                       
Total underwriting deductions
    14,598       17,565       29,935       30,390  
 
                       
 
                               
Underwriting (loss) (a)
    (14,598 )     (17,565 )     (29,935 )     (30,390 )
 
                       
 
                               
Total underwriting income (loss) (a)
  $ 71,634     $ 109,699     $ (112,853 )   $ (47,459 )
 
                       
 
a)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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Three Months Ended June 30, 2011 compared to Three Months Ended June 30, 2010
     Net income available to Validus for the three months ended June 30, 2011 was $109.9 million compared to $179.8 million for the three months ended June 30, 2010, a decrease of $69.9 million or 38.9%. The primary factors driving the decrease in net income were:
  Decrease in underwriting income of $38.1 million due to:
    A $12.3 million decrease in net premiums earned.
 
    A $13.3 million increase in other underwriting deductions including policy acquisition costs, general and administrative expenses and share compensation expenses.
 
    A $12.4 million increase in loss and loss expenses due to increased catastrophe losses.
  An unfavorable movement of $23.1 million in net unrealized (losses) gains on investments.
 
  Decrease in net investment income of $8.3 million.
The change in net income available to Validus for the three months ended June 30, 2011 of $69.9 million as compared to the three months ended June 30, 2010 is described in the following table:
                                 
    Three Months Ended June 30, 2011  
    Increase (Decrease) Over the Three Months Ended June 30, 2010  
                    Corporate and        
(Dollars in thousands)   Validus Re     Talbot     Eliminations     Total  
Notable losses — (increase) decrease in net loss and loss expenses (a)
  $ (2,852 )   $ (16,952 )   $     $ (19,804 )
Less: Notable losses — (decrease) increase in net reinstatement premiums (a)
    (1,452 )     5,087             3,635  
Other underwriting income (loss)
    2,360       (27,223 )     2,967       (21,896 )
 
                       
Underwriting (loss) income (b)
    (1,944 )     (39,088 )     2,967       (38,065 )
Net investment income
    (7,525 )     (879 )     89       (8,315 )
Other income
    (623 )     (1,117 )     (362 )     (2,102 )
Finance expenses
    (3,395 )     (105 )     357       (3,143 )
 
                       
 
    (13,487 )     (41,189 )     3,051       (51,625 )
Taxes
    90       3,886       240       4,216  
 
                       
 
    (13,397 )     (37,303 )     3,291       (47,409 )
 
                               
Net realized (losses) on investments
    (811 )     (78 )           (889 )
Net unrealized (losses) on investments
    (21,140 )     (1,974 )           (23,114 )
Net foreign exchange (losses) gains
    (4,494 )     6,653       (51 )     2,108  
 
                       
 
                               
Net (loss) income
    (39,842 )     (32,702 )     3,240       (69,304 )
 
                       
 
                               
Net income attributable to noncontrolling interest
    (594 )                 (594 )
 
                       
Net (loss) income (attributable) available to Validus
  $ (40,436 )   $ (32,702 )   $ 3,240     $ (69,898 )
 
                       
 
(a)   Notable losses for the three months ended June 30, 2011 include: Cat 46, Cat 48 and Jupiter 1. Notable losses for the three months ended June 30, 2010 include Deepwater Horizon, Aban Pearl, Bangkok riots and Perth hailstorm. Excludes the reserve for potential development on 2010 and 2011 notable loss events.

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(b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”
Gross Premiums Written
     Gross premiums written for the three months ended June 30, 2011 were $605.4 million compared to $516.9 million for the three months ended June 30, 2010, an increase of $88.5 million or 17.1%. Gross premiums written on the property lines increased by $68.5 million, while the marine and specialty lines increased by $4.9 million and $15.2 million, respectively. Details of gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 408,785       67.5 %   $ 340,290       65.8 %     20.1 %
Marine
    97,243       16.1 %     92,380       17.9 %     5.3 %
Specialty
    99,359       16.4 %     84,191       16.3 %     18.0 %
 
                               
Total
  $ 605,387       100.0 %   $ 516,861       100.0 %     17.1 %
 
                               
Validus Re. Validus Re gross premiums written for the three months ended June 30, 2011 were $341.7 million compared to $284.3 million for the three months ended June 30, 2010, an increase of $57.3 million or 20.2%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 323,108       94.6 %   $ 261,568       92.0 %     23.5 %
Marine
    4,846       1.4 %     15,410       5.4 %     (68.6 )%
Specialty
    13,697       4.0 %     7,350       2.6 %     86.4 %
 
                               
Total
  $ 341,651       100.0 %   $ 284,328       100.0 %     20.2 %
 
                               
     The increase in gross premiums written in the property lines of $61.5 million was due primarily to $42.6 million of gross premiums written by AlphaCat Re 2011 and a $23.8 million increase in catastrophe excess of loss gross premiums written. The increase in catastrophe excess of loss premiums written was due primarily to an improving US property rate environment increasing premiums on existing business and providing attractive opportunities that resulted in growth. The decrease in gross premiums written of $10.6 million in the marine lines was due primarily to a $5.1 million decrease in estimated premium income adjustments and a $5.8 milllion decrease in reinstatement premiums due to higher losses in 2010 attributable to the Deepwater Horizon loss. The increase in gross premiums written in the specialty lines of $6.3 million was primarily due to a $6.2 million increase in gross premiums written on a proportional basis.
     Gross premiums written under the quota share, surplus treaty and excess of loss contracts between Validus Re and Talbot for three months ended June 30, 2011 decreased by $8.0 million as compared to the three months ended June 30, 2010. The decrease in premiums written was due to a $6.7 million decrease in the property lines and a $1.3 million decrease in the marine lines. These reinsurance agreements with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended June 30, 2011 were $276.9 million compared to $253.7 million for the three months ended June 30, 2010, an increase of $23.2 million or 9.1%. The $276.9 million of gross premiums written translated at 2010 rates of exchange would have been $273.9 million during the three months ended June 30, 2011, giving an effective increase of $20.2 million or 8.0%. Details of Talbot gross premiums written by line of business are provided below.

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    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 97,732       35.3 %   $ 97,529       38.4 %     0.2 %
Marine
    93,492       33.8 %     79,355       31.3 %     17.8 %
Specialty
    85,662       30.9 %     76,826       30.3 %     11.5 %
 
                               
Total
  $ 276,886       100.0 %   $ 253,710       100.0 %     9.1 %
 
                               
     The increase in gross premiums written in the marine lines of $14.1 million was due primarily to a $9.8 million increase in premiums written in the marine liability lines and a $5.2 million increase in premiums written in the cargo lines. The increase in gross premiums written in the specialty lines of $8.8 million was primarily due to a $6.3 million increase in premiums written in the political violence lines.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended June 30, 2011 were $132.3 million compared to $67.7 million for the three months ended June 30, 2010, an increase of $64.6 million or 95.4%. Details of reinsurance premiums ceded by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 112,299       84.9 %   $ 53,828       79.5 %     108.6 %
Marine
    16,034       12.1 %     10,923       16.1 %     46.8 %
Specialty
    4,013       3.0 %     2,975       4.4 %     34.9 %
 
                               
Total
  $ 132,346       100.0 %   $ 67,726       100.0 %     95.4 %
 
                               
Validus Re. Validus Re reinsurance premiums ceded for the three months ended June 30, 2011 were $98.2 million compared to $41.2 million for the three months ended June 30, 2010, an increase of $57.0 million or 138.5%. Details of Validus Re reinsurance premiums ceded by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Reinsurance     Reinsurance     Reinsurance     Reinsurance        
    Premiums     Premiums     Premiums     Premiums        
(Dollars in thousands)   Ceded     Ceded (%)     Ceded     Ceded (%)     % Change  
Property
  $ 85,389       86.9 %   $ 33,933       82.4 %     151.6 %
Marine
    12,829       13.1 %     7,242       17.6 %     77.1 %
 
                             
Total
  $ 98,218       100.0 %   $ 41,175       100.0 %     138.5 %
 
                               
     Reinsurance premiums ceded in the property lines increased by $51.5 million, due primarily to the purchase of $60.4 million of additional retrocessional coverage on the U.S. catastrophe portfolio, partially offset by a $4.8 million decrease in non-proportional retrocessional coverage on the worldwide catastrophe portfolio. The additional U.S. retrocessional coverage was purchased to ensure that the Company would be well positioned to take advantage of opportunities in a post loss environment.

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Reinsurance premiums ceded in the marine lines increased by $5.6 million, due primarily to $5.1 million of additional retrocessional coverage purchased in the three months ended June 30, 2011.
Talbot. Talbot reinsurance premiums ceded for the three months ended June 30, 2011 were $47.3 million compared to $47.7 million for the three months ended June 30, 2010, a decrease of $0.5 million or 0.9%. Details of Talbot reinsurance premiums ceded by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 38,965       82.4 %   $ 38,702       81.1 %     0.7 %
Marine
    4,300       9.1 %     6,066       12.7 %     (29.1 )%
Specialty
    4,013       8.5 %     2,960       6.2 %     35.6 %
 
                               
Total
  $ 47,278       100.0 %   $ 47,728       100.0 %     (0.9 )%
 
                               
     Reinsurance premiums ceded across the property, marine and specialty lines are generally consistent with the three months ended June 30, 2010. There was a reduction in reinsurance premiums ceded to Validus Re, which is described above. This reduction was offset by an increase of $7.6 million in reinsurance premiums ceded to third parties.
Net Premiums Written
     Net premiums written for the three months ended June 30, 2011 were $473.0 million compared to $449.1 million for the three months ended June 30, 2010, an increase of $23.9 million, or 5.3%. The ratios of net premiums written to gross premiums written for the three months ended June 30, 2011 and 2010 were 78.1% and 86.9%, respectively. Details of net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 296,486       62.7 %   $ 286,463       63.8 %     3.5 %
Marine
    81,209       17.2 %     81,455       18.1 %     (0.3 )%
Specialty
    95,346       20.1 %     81,217       18.1 %     17.4 %
 
                               
Total
  $ 473,041       100.0 %   $ 449,135       100.0 %     5.3 %
 
                               
Validus Re. Validus Re net premiums written for the three months ended June 30, 2011 were $243.4 million compared to $243.2 million for the three months ended June 30, 2010, an increase of $0.3 million or 0.1%. Details of Validus Re net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended          
    June 30, 2011     June 30, 2010          
    Net Premiums     Net Premiums     Net Premiums     Net Premiums          
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 237,719       97.7 %   $ 227,635       93.6 %     4.4 %
Marine
    (7,983 )     (3.3 )%     8,168       3.4 %     (197.7 )%
Specialty
    13,697       5.6 %     7,350       3.0 %     86.4 %
 
                               
Total
  $ 243,433       100.0 %   $ 243,153       100.0 %     0.1 %
 
                               

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     The increase in Validus Re net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. Negative net written premiums in the marine lines is the result of premium adjustments on gross premiums written and the timing of purchases of retrocessional coverage. The ratios of net premiums written to gross premiums written were 71.3% and 85.5% for the three months ended June 30, 2011 and 2010, respectively, reflecting the increase in reinsurance premiums ceded as a result of the purchase of additional retrocessional coverage described above.
Talbot. Talbot net premiums written for the three months ended June 30, 2011 were $229.6 million compared to $206.0 million for the three months ended June 30, 2010, an increase of $23.6 million or 11.5%. Details of Talbot net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended          
    June 30, 2011     June 30, 2010          
    Net Premiums     Net Premiums     Net Premiums     Net Premiums          
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 58,767       25.6 %   $ 58,827       28.5 %     (0.1 )%
Marine
    89,192       38.8 %     73,289       35.6 %     21.7 %
Specialty
    81,649       35.6 %     73,866       35.9 %     10.5 %
 
                               
Total
  $ 229,608       100.0 %   $ 205,982       100.0 %     11.5 %
 
                               
     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 June 30, 2011 and 2010 were 82.9% and 81.2%, respectively.
Change in Unearned Premiums
     Net change in unearned premiums for the three months ended June 30, 2011 was ($47.4) million compared to ($11.2) million for the three months ended June 30, 2010, a change of $36.2 million or 323.6%.
                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (109,608 )   $ (93,012 )     17.8 %
Change in prepaid reinsurance premium
    62,207       81,821       (24.0 )%
 
                   
Net change in unearned premium
  $ (47,401 )   $ (11,191 )     323.6 %
 
                   
Validus Re. Validus Re’s net change in unearned premiums for the three months ended June 30, 2011 were ($10.8) million compared to $18.9 million for the three months ended June 30, 2010, a change of $29.6 million or 156.9%.
                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (83,079 )   $ (75,680 )     9.8 %
Change in prepaid reinsurance premium
    72,324       94,568       (23.5 )%
 
                   
Net change in unearned premium
  $ (10,755 )   $ 18,888       (156.9 )%
 
                   
The Validus Re net change in unearned premium has decreased for the three months ended June 30, 2011 due primarily to the timing differences in purchases of retrocessional coverage during the three months ended June 30, 2011 compared to the three months ended June 30, 2010.

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Talbot. The Talbot net change in unearned premiums for the three months ended June 30, 2011 was ($36.6) million compared to ($30.1) million for the three months ended June 30, 2010, a change of $6.6 million or 21.8%.
                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (26,529 )   $ (17,332 )     53.1 %
Change in prepaid reinsurance premium
    (10,117 )     (12,747 )     (20.6 )%
 
                   
Net change in unearned premium
  $ (36,646 )   $ (30,079 )     21.8 %
 
                   
     The Talbot net change in unearned premium is generally consistent for the three months ended June 30, 2011 compared to the three months ended June 30, 2010.
Net Premiums Earned
     Net premiums earned for the three months ended June 30, 2011 were $425.6 million compared to $437.9 million for the three months ended June 30, 2010, a decrease of $12.3 million or 2.8%. The decrease in net premiums earned was driven by a decrease in net premiums earned of $29.4 million in the Validus Re segment, partially offset by an increase of $17.1 million in the Talbot segment. Details of net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 204,624       48.1 %   $ 223,596       51.0 %     (8.5 )%
Marine
    125,496       29.5 %     111,567       25.5 %     12.5 %
Specialty
    95,520       22.4 %     102,781       23.5 %     (7.1 )%
 
                               
Total
  $ 425,640       100.0 %   $ 437,944       100.0 %     (2.8 )%
 
                               
Validus Re. Validus Re net premiums earned for the three months ended June 30, 2011 were $232.7 million compared to $262.0 million for the three months ended June 30, 2010, a decrease of $29.4 million or 11.2%. Details of Validus Re net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended          
    June 30, 2011     June 30, 2010          
    Net Premiums     Net Premiums     Net Premiums     Net Premiums          
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 166,779       71.7 %   $ 186,444       71.1 %     (10.5 )%
Marine
    46,549       20.0 %     48,154       18.4 %     (3.3 )%
Specialty
    19,350       8.3 %     27,443       10.5 %     (29.5 )%
 
                               
Total
  $ 232,678       100.0 %   $ 262,041       100.0 %     (11.2 )%
 
                               
     The decrease in net premiums earned is consistent with the relevant patterns of net written premiums influencing the earned premiums for the three months ended June 30, 2011 compared to the three months ended June 30, 2010.
Talbot. Talbot net premiums earned for the three months ended June 30, 2011 were $193.0 million compared to $175.9 million for the three months ended June 30, 2010, an increase of $17.1 million or 9.7%. Details of Talbot net premiums earned by line of business are provided below.

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    Three Months Ended     Three Months Ended          
    June 30, 2011     June 30, 2010          
    Net Premiums     Net Premiums     Net Premiums     Net Premiums          
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 37,845       19.6 %   $ 37,152       21.1 %     1.9 %
Marine
    78,947       40.9 %     63,413       36.1 %     24.5 %
Specialty
    76,170       39.5 %     75,338       42.8 %     1.1 %
 
                               
Total
  $ 192,962       100.0 %   $ 175,903       100.0 %     9.7 %
 
                               
     The increase in net premiums earned is consistent with the relevant patterns of net written premiums influencing the earned premium for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, as discussed above.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended June 30, 2011 were $207.3 million compared to $194.9 million for the three months ended June 30, 2010, an increase of $12.4 million or 6.4%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended June 30, 2011 and 2010 were 48.7% and 44.5%, respectively. Details of loss ratios by line of business are provided below.
                         
    Three Months Ended     Three Months Ended     Percentage   
    June 30, 2011     June 30, 2010     Point Change  
Property
    52.8 %     31.3 %     21.5  
Marine
    59.5 %     76.0 %     (16.5 )
Specialty
    25.8 %     38.9 %     (13.1 )
All lines
    48.7 %     44.5 %     4.2  
     For the three months ended June 30, 2011, the Company incurred $90.3 million from notable loss events, which represented 21.2 percentage points of the loss ratio as described below. Net of $6.9 million of reinstatement premiums, the effect of these events on net income was $83.4 million. For the three months ended June 30, 2010, the Company incurred $70.5 million from notable loss events, which represented 16.1 percentage points of the loss ratio, excluding reserve for development on notable loss events, as described below. Net of $3.3 million of reinstatement premiums, the effect of these events on net income was $67.2 million. The Company’s loss ratio, excluding prior year development and notable loss events for the three months ended June 30, 2011 and 2010 was 33.5% and 39.7%, respectively.
                                                         
            Three months ended June 30, 2011  
            (Dollars in thousands)  
Second 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  
Cat 46
  Tornado   $ 36,584       15.7 %   $ 7,222       3.7 %   $ 43,806       10.3 %
Cat 48
  Tornado     20,869       9.0 %     10,612       5.5 %     31,481       7.4 %
Jupiter 1
  Platform failure     4,970       2.1 %     10,038       5.2 %     15,008       3.5 %
 
                                           
Total
          $ 62,423       26.8 %   $ 27,872       14.4 %   $ 90,295       21.2 %
 
                                           

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            Three months ended June 30, 2010  
            (Dollars in thousands)  
Second 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  
Deepwater Horizon
  Oil rig and spill   $ 33,681       12.9 %   $ 10,420       5.9 %   $ 44,101       10.1 %
Aban Pearl
  Oil rig     10,000       3.8 %     500       0.3 %     10,500       2.4 %
Bangkok riots
  Terrorism     7,500       2.9 %                 7,500       1.7 %
Perth hailstorm
  Hailstorm     8,390       3.1 %                 8,390       1.9 %
 
                                           
Total
          $ 59,571       22.7 %   $ 10,920       6.2 %   $ 70,491       16.1 %
 
                                           
 
(a)   These notable loss event amounts exclude the reserve for potential development on 2010 and 2011 notable loss events and are based on management’s estimates following a review of the Company’s potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events may vary materially from these estimates.
 
(b)   Net of reinsurance but not net of reinstatement premiums. Total reinstatement premiums were $6.9 million for the three months ended June 30, 2011 and $3.3 million for the three months ended June 30, 2010.
                         
    Three Months Ended June 30,  
          Percentage  
    2011     2010     Point Change  
Property — current period — excluding notable losses
    21.9 %     38.0 %     (16.1 )
Property — current period — notable losses
    33.7 %     3.8 %     29.9  
Property — change in prior accident years
    (2.8 )%     (10.5 )%     7.7  
 
                 
Property — loss ratio
    52.8 %     31.3 %     21.5  
                         
Marine — current period — excluding notable losses
    50.9 %     40.1 %     10.8  
Marine — current period — notable losses
    16.5 %     48.9 %     (32.4 )
Marine — change in prior accident years
    (7.9 )%     (13.0 )%     5.1  
 
                 
Marine — loss ratio
    59.5 %     76.0 %     (16.5 )
                         
Specialty — current period — excluding notable losses
    35.8 %     43.0 %     (7.2 )
Specialty — current period — notable losses
    0.6 %     7.3 %     (6.7 )
Specialty — change in prior accident years
    (10.6 )%     (11.3 )%     0.7  
 
                 
Specialty — loss ratio
    25.8 %     38.9 %     (13.2 )
                         
All lines — current period — excluding notable losses
    33.5 %     39.7 %     (6.2 )
All lines — current period — notable losses
    21.2 %     16.1 %     5.1  
All lines — change in prior accident years
    (6.0 )%     (11.3 )%     5.3  
 
                 
All lines — loss ratio
    48.7 %     44.5 %     4.2  
Validus Re. Validus Re losses and loss expenses for the three months ended June 30, 2011 were $94.0 million compared to $123.8 million for the three months ended June 30, 2010, a decrease of $29.8 million or 24.0%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 40.4% and 47.2% for the three months ended June 30, 2011 and 2010, respectively. For the three months ended June 30, 2011, favorable loss development on prior years totaled $12.3 million and benefited the Validus Re loss ratio by 5.3 percentage points. For the three months ended June 30, 2010, favorable loss development on prior years totaled $17.9 million and benefited the Validus Re loss ratio by 6.9 percentage points.

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     For the three months ended June 30, 2011, Validus Re incurred notable loss events as identified above of $62.4 million, which represented 26.8 percentage points of the loss ratio. Net of reinstatement premiums of $6.3 million, the effect of these events on Validus Re segment income was $56.1 million. For the three months ended June 30, 2010, Validus Re incurred notable loss events as identified above of $59.6 million, which represented 22.7 percentage points of the loss ratio, excluding the reserve for potential development on notable loss events. Net of reinstatement premiums of $7.7 million, the effect of these events on Validus Re segment income was $51.9 million. Validus Re segment loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2011 and 2010 were 18.9% and 31.4%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended June 30,
                    Percentage  
    2011     2010     Point Change  
Property — current period excluding notable losses
    13.4 %     36.1 %     (22.7 )
Property — current period — notable losses
    34.4 %     4.5 %     29.9  
Property — change in prior accident years
    (3.9 )%     (7.3 )%     3.4  
 
                 
Property — loss ratio
    43.9 %     33.3 %     10.6  
                         
Marine — current period excluding notable losses
    41.7 %     26.8 %     14.9  
Marine — current period — notable losses
    10.7 %     90.7 %     (80.0 )
Marine — change in prior accident years
    (9.7 )%     (7.5 )%     (2.2 )
 
                 
Marine — loss ratio
    42.7 %     110.0 %     (67.3 )
                         
Specialty — current period excluding notable losses
    11.3 %     7.0 %     4.3  
Specialty — current period — notable losses
    0.0 %     27.3 %     (27.3 )
Specialty — change in prior accident years
    (6.6 )%     (2.3 )%     (4.3 )
 
                 
Specialty — loss ratio
    4.7 %     32.0 %     (27.3 )
                         
All lines — current period excluding notable losses
    18.9 %     31.4 %     (12.5 )
All lines — current period — notable losses
    26.8 %     22.7 %     4.1  
All lines — change in prior accident years
    (5.3 )%     (6.9 )%     1.6  
 
                 
All lines — loss ratio
    40.4 %     47.2 %     (6.8 )
     For the three months ended June 30, 2011, Validus Re property lines losses and loss expenses include $79.8 million related to current year losses and $6.5 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 June 30, 2010, Validus Re property lines losses and loss expenses included $75.7 million related to current year losses and $13.6 million of favorable development relating to prior accident years. This favorable development is attributable to reduced loss estimates for the U.K. flood loss and windstorm Kyrill, as well as lower than expected claim development elsewhere.
     For the three months ended June 30, 2011, Validus Re’s property lines incurred $57.4 million of notable losses, which represented 34.4 percentage points of the property lines loss ratio. For the three months ended June 30, 2010, Validus Re’s property lines incurred $8.4 million of notable losses, which represented 4.5 percentage points of the property lines loss ratio, excluding reserve for potential development on notable loss events. Validus Re property lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2011 and 2010 were 13.4% and 36.1%, respectively.
     For the three months ended June 30, 2011, Validus Re marine lines losses and loss expenses include $24.4 million related to current year losses and $4.5 million of favorable development relating to prior accident years. For the three months ended June 30, 2010, Validus Re marine lines losses and loss expenses included $56.6 million related to current year losses and $3.7 million of favorable development relating to prior accident years.

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     For the three months ended June 30, 2011, Validus Re’s marine lines incurred $5.0 million of notable losses which represented 10.7 percentage points of the marine lines loss ratio. For the three months ended June 30, 2010, Validus Re’s marine lines incurred $43.7 million of notable losses, which represented 90.7 percentage points of the marine lines loss ratio, excluding the 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 June 30, 2011 and 2010 were 41.7% and 26.8%, respectively.
     For the three months ended June 30, 2011, Validus Re specialty lines losses and loss expenses include $2.1 million related to current year losses and $1.3 million of favorable development relating to prior accident years. For the three months ended June 30, 2010, Validus Re specialty lines losses and loss expenses included $9.4 million related to current year losses and $0.6 million of favorable development relating to prior accident years.
     For the three months ended June 30, 2011, Validus Re’s specialty lines did not incur any notable losses. For the three months ended June 30, 2010, Validus Re’s specialty lines incurred $7.5 million of notable losses, which represented 27.3 percentage points of the specialty lines loss ratio. Validus Re specialty lines loss ratios, excluding prior year development, for the three months ended June 30, 2011 and 2010 were 11.3% and 7.0%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended June 30, 2011 were $113.3 million compared to $71.1 million for the three months ended June 30, 2010, an increase of $42.2 million or 59.3%. The Talbot loss ratio was 58.7% and 40.4% for the three months ended June 30, 2011 and 2010, respectively. For the three months ended June 30, 2011, Talbot incurred losses of $126.7 million related to current year losses and $13.4 million in favorable development relating to prior accident years. For the three months ended June 30, 2010, Talbot incurred losses of $102.8 million related to current year losses and $31.7 million in favorable development relating to prior accident years.
          For the three months ended June 30, 2011, Talbot incurred $27.9 million of notable losses, which represented 14.4 percentage points of the loss ratio. Net of reinstatement premiums of $0.7 million, the effect of these events on Talbot segment income is $27.2 million. For the three months ended June 30, 2010, Talbot incurred $10.9 million of notable losses, which represented 6.2 percentage points of the Talbot loss ratio. Net of reinstatement premiums of ($4.4) million, the effect of these events on Talbot segment income was $15.3 million. Talbot loss ratios, excluding prior year loss development and notable loss events identified above, for the three months ended June 30, 2011 and 2010 were 51.2% and 52.2%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended June 30,  
    2011     2010     Percentage
Point Change
 
Property — current period excluding notable losses
    58.9 %     48.0 %     10.9  
Property — current period — notable losses
    30.5 %     0.0 %     30.5  
Property — change in prior accident years
    2.3 %     (26.5 )%     28.8  
 
                 
Property — loss ratio
    91.7 %     21.5 %     70.2  
 
                       
Marine — current period excluding notable losses
    56.3 %     50.1 %     6.2  
Marine — current period — notable losses
    20.0 %     17.2 %     2.8  
Marine — change in prior accident years
    (6.8 )%     (17.0 )%     10.2  
 
                 
Marine — loss ratio
    69.5 %     50.3 %     19.2  
 
                       
Specialty — current period excluding notable losses
    42.0 %     56.1 %     (14.1 )
Specialty — current period — notable losses
    0.7 %     0.0 %     0.7  
Specialty — change in prior accident years
    (11.6 )%     (14.7 )%     3.1  
 
                 
Specialty – loss ratio
    31.1 %     41.4 %     (10.3 )
 
                       
All lines — current period excluding notable losses
    51.2 %     52.2 %     (1.0 )
All lines — current period — notable losses
    14.4 %     6.2 %     8.2  
All lines — change in prior accident years
    (6.9 )%     (18.0 )%     11.1  
 
                 
All lines — loss ratio
    58.7 %     40.4 %     18.3  

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     For the three months ended June 30, 2011, Talbot property lines losses and loss expenses include $33.8 million related to current year losses and $0.9 million of adverse development relating to prior accident years. The prior year adverse development is attributable to higher than expected claims development on the onshore energy lines, largely offset by lower than expected claims on the property treaty and property facultative lines. For the three months ended June 30, 2010, Talbot property lines losses and loss expenses included $17.8 million related to current year losses and $9.8 million of favorable development relating to prior accident years. The prior year favorable development was attributable to lower than expected claim development on the property facultative and binder accounts, together with favorable development on hurricanes Katrina and Ike.
     For the three months ended June 30, 2011, Talbot’s property lines incurred $11.5 million of notable losses, which represented 30.5 percentage points of the property lines loss ratio. For the three months ended June 30, 2010, Talbot’s property lines did not incur any notable losses. Talbot property line loss ratio, excluding prior year development and notable loss events identified above for the three months ended June 30, 2011 and 2010 were 58.9% and 48.0%, respectively.
     For the three months ended June 30, 2011, Talbot marine lines losses and loss expenses include $60.3 million related to current year losses and $5.4 million of favorable development relating to prior accident years. The prior year favorable development is due primarily to lower than expected claims development across most lines of business, partially offset by adverse claims development on the offshore energy lines. For the three months ended June 30, 2010, Talbot marine lines losses and loss expenses included $42.7 million related to current year losses and $10.8 million of favorable development relating to prior accident years. The prior year favorable development was primarily due to lower than expected loss development on the Hull lines.
     For the three months ended June 30, 2011, Talbot’s marine lines incurred $15.8 million of notable losses, which represented 20.0 percentage points of the marine lines loss ratio. For the three months ended June 30, 2010, Talbot’s marine lines incurred $10.9 million of notable losses, which represented 17.2 percentage points of the marine lines loss ratio. Talbot marine lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended June 30, 2011 and 2010 were 56.3% and 50.1%, respectively.
     For the three months ended June 30, 2011, Talbot specialty lines losses and loss expenses include $32.6 million relating to current year losses and $8.9 million of favorable development relating to prior accident years. The prior year favorable development is due primarily to lower than expected claims development across most lines of business, partially offset by adverse claims development on the financial institutions lines. For the three months ended June 30, 2010, Talbot specialty lines losses and loss expenses included $42.3 million relating to current year losses and $11.0 million of favorable development relating to prior accident years. The prior year favorable development was primarily due to lower than expected claims across most specialty sub classes.
     For the three months ended June 30, 2011, Talbot’s specialty lines incurred $0.6 million of notable losses, which represented 0.7 percentage points of the specialty lines loss ratio. For the three months ended June 30, 2010, Talbot’s specialty lines did not incur any notable losses. Talbot specialty lines loss ratios, excluding prior year development and notable loss events identified above for the three months ended June 30, 2011 and 2010 were 42.0% and 56.1%, respectively.
     At June 30, 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, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company did not make any significant changes in the assumptions or methodology used in its reserving process for the three months ended June 30, 2011.

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    As at June 30, 2011  
                    Total Gross Reserve for  
(Dollars in thousands)   Gross Case Reserves     Gross IBNR     Losses and Loss Expenses  
Property
  $ 757,858     $ 556,685     $ 1,314,543  
Marine
    404,886       372,778       777,664  
Specialty
    236,659       291,494       528,153  
 
                 
Total
  $ 1,399,403     $ 1,220,957     $ 2,620,360  
 
                 
                         
    As at June 30, 2011  
                    Total Net Reserve for  
(Dollars in thousands)   Net Case Reserves     Net IBNR     Losses and Loss Expenses  
Property
  $ 544,165     $ 522,391     $ 1,066,556  
Marine
    328,987       356,046       685,033  
Specialty
    184,767       244,199       428,966  
 
                 
Total
  $ 1,057,919     $ 1,122,636     $ 2,180,555  
 
                 
     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended June 30, 2011:
                                 
    Three Months Ended June 30, 2011  
(Dollars in thousands)   Validus Re     Talbot     Eliminations     Total  
Gross reserves at period beginning
  $ 1,340,418     $ 1,324,967     $ (130,970 )   $ 2,534,415  
Losses recoverable
    (216,300 )     (368,371 )     130,970       (453,701 )
 
                       
Net reserves at period beginning
    1,124,118       956,596             2,080,714  
 
                       
 
                               
Incurred losses- current year
    106,347       126,665             233,012  
Change in prior accident years
    (12,312 )     (13,393 )           (25,705 )
 
                       
Incurred losses
    94,035       113,272             207,307  
 
                       
 
                               
Foreign exchange
    14,050       (470 )           13,580  
Paid losses
    (38,070 )     (82,976 )           (121,046 )
 
                       
Net reserves at period end
    1,194,133       986,422             2,180,555  
Losses recoverable
    182,306       384,268       (126,769 )     439,805  
 
                       
Gross reserves at period end
  $ 1,376,439     $ 1,370,690     $ (126,769 )   $ 2,620,360  
 
                       
     The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. For the three months ended June 30, 2011, favorable loss reserve development on prior years totaled $25.7 million. Of this $12.3 million of the favorable loss reserve development related to the Validus Re segment and $13.4 million related to the Talbot segment. Favorable loss reserve development benefited the Company’s loss ratio by 6.0 percentage points for the three months ended June 30, 2011. For the three months ended June 30, 2010, favorable loss reserve development on prior years totaled $49.6 million. Of this $17.9 million related to the Validus Re segment and $31.7 million related to the Talbot segment. Favorable loss reserve development benefited the Company’s loss ratio by 11.3 percentage points for the three months ended June 30, 2010.
     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 Company’s actual ultimate net loss may vary materially from these estimates. Validus Re ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event.

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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. As at March 31, 2011, the total reserve for development on both 2010 and 2011 events was $83.4 million. During the three months ended June 30, 2011 $8.9 million, $20.1 million and $20.2 million of the reserve for potential development on 2010 and 2011 notable loss events was allocated to the Deepwater Horizon loss, the Tohoku earthquake and the Christchurch earthquake, respectively. Therefore as at June 30, 2011 the total reserve for potential development on both 2010 and 2011 events was $34.2 million.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended June 30, 2011 were $78.2 million compared to $74.1 million for the three months ended June 30, 2010, an increase of $4.1 million or 5.5%. Policy acquisition costs as a percent of net premiums earned for the three months ended June 30, 2011 and 2010 were 18.4% and 16.9%, respectively. The changes in policy acquisition costs are due to the factors provided below.
                                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 30,032       38.4 %     14.7 %   $ 30,614       41.3 %     13.7 %     (1.9 )%
Marine
    26,977       34.5 %     21.5 %     22,982       31.0 %     20.6 %     17.4 %
Specialty
    21,221       27.1 %     22.2 %     20,530       27.7 %     20.0 %     3.4 %
 
                                         
Total
  $ 78,230       100.0 %     18.4 %   $ 74,126       100.0 %     16.9 %     5.5 %
 
                                         
Validus Re. Validus Re policy acquisition costs for the three months ended June 30, 2011 were $35.8 million compared to $38.0 million for the three months ended June 30, 2010, a decrease of $2.2 million or 5.8%.
                                                         
    Three Months Ended     Three Months Ended        
    June 30, 2011     June 30, 2010        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 22,546       63.0 %     13.5 %   $ 27,182       71.6 %     14.6 %     (17.1 )%
Marine
    10,147       28.4 %     21.8 %     7,707       20.3 %     16.0 %     31.7 %
Specialty
    3,076       8.6 %     15.9 %     3,090       8.1 %     11.3 %     (0.5 )%