Investments

Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 9, “Variable interest entities,” for further details.

The amortized cost (or cost) and fair value of the Company’s investments as at December 31, 2016 and 2015 were as follows:



	December 31, 2016				December 31, 2015
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
Managed investments
U.S. government and government agency	$	809,392	$	804,126	$	940,428	$	937,202
Non-U.S. government and government agency	245,651		240,791		241,549		237,968
U.S. states, municipalities and political subdivisions	271,742		271,830		299,929		301,289
Agency residential mortgage-backed securities	684,490		679,595		606,676		610,582
Non-agency residential mortgage-backed securities	15,858		15,477		27,025		26,920
U.S. corporate	1,540,036		1,534,508		1,503,614		1,489,951
Non-U.S. corporate	418,520		410,227		453,178		446,570
Bank loans	579,121		570,399		592,981		576,211
Asset-backed securities	528,563		526,814		440,363		437,124
Commercial mortgage-backed securities	333,740		330,932		263,310		260,135
Total fixed maturities	5,427,113		5,384,699		5,369,053		5,323,952
Short-term investments	228,574		228,386		237,349		237,369
Other investments
Fund of hedge funds	1,457		955		1,457		1,417
Hedge funds	11,292		17,381		14,018		20,980
Private equity investments	72,814		89,809		53,489		63,771
Fixed income investment funds	241,536		242,093		188,121		188,721
Overseas deposits	50,106		50,106		54,484		54,484
Mutual funds	2,925		5,368		4,394		7,483
Total other investments	380,130		405,712		315,963		336,856
Investments in investment affiliates^(a)	84,840		100,431		69,794		87,673
Total managed investments	$	6,120,657	$	6,119,228	$	5,992,159	$	5,985,850
Non-managed investments
Catastrophe bonds	$	157,486	$	158,331	$	187,847	$	186,379
Short-term investments	2,567,784		2,567,784		1,704,266		1,704,266
Total non-managed investments	2,725,270		2,726,115		1,892,113		1,890,645
Total investments	$	8,845,927	$	8,845,343	$	7,884,272	$	7,876,495


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

income as “Income (loss) from investment affiliates.”


(a)	Fixed maturity investments

The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investments as at December 31, 2016 and 2015:



	December 31, 2016				December 31, 2015
	Fair Value		% of Total		Fair Value		% of Total
Managed fixed maturities
AAA	$	2,405,597	43.4	%	$	2,367,642	43.0	%
AA	538,289		9.7	%	569,386		10.3	%
A	1,081,949		19.5	%	1,031,326		18.7	%
BBB	740,861		13.4	%	691,538		12.6	%
Total investment grade managed fixed maturities	4,766,696		86.0	%	4,659,892		84.6	%

BB	213,568		3.9	%	235,724		4.3	%
B	177,737		3.2	%	179,069		3.2	%
CCC	13,371		0.2	%	5,706		0.1	%
CC	—		0.0	%	1,015		0.0	%
NR	213,327		3.8	%	242,546		4.4	%
Total non-investment grade managed fixed maturities	618,003		11.1	%	664,060		12.0	%
Total managed fixed maturities	$	5,384,699	97.1	%	$	5,323,952	96.6	%

Non-managed fixed maturities
BBB	$	—	0.0	%	$	1,911	0.0	%
Total investment grade non-managed catastrophe bonds	—		0.0	%	1,911		0.0	%

BB	29,731		0.6	%	70,962		1.3	%
B	4,524		0.1	%	30,698		0.6	%
NR	124,076		2.2	%	82,808		1.5	%
Total non-investment grade non-managed catastrophe bonds	158,331		2.9	%	184,468		3.4	%
Total non-managed fixed maturities	158,331		2.9	%	186,379		3.4	%
Total fixed maturities	$	5,543,030	100.0	%	$	5,510,331	100.0	%

The amortized cost and estimated fair value amounts for the Company’s fixed maturity investments held at December 31, 2016 and 2015 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.



	December 31, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Managed fixed maturities
Due in one year or less	$	350,733	$	346,161	$	367,132	$	366,019
Due after one year through five years	2,954,856		2,933,146		2,965,920		2,936,053
Due after five years through ten years	430,365		426,647		548,183		539,083
Due after ten years	128,508		125,927		150,444		148,036
	3,864,462		3,831,881		4,031,679		3,989,191
Asset-backed and mortgage-backed securities	1,562,651		1,552,818		1,337,374		1,334,761
Total managed fixed maturities	$	5,427,113	$	5,384,699	$	5,369,053	$	5,323,952

Non-managed catastrophe bonds
Due in one year or less	$	43,664	$	45,418	$	7,504	$	7,544
Due after one year through five years	112,572		111,656		165,093		163,575
Due after five years through ten years	1,250		1,257		15,250		15,260
Due after ten years	—		—		—		—
Total non-managed fixed maturities	157,486		158,331		187,847		186,379
Total fixed maturities	$	5,584,599	$	5,543,030	$	5,556,900	$	5,510,331


(b)	Other investments

The following tables set forth certain information regarding the Company’s other investments as at December 31, 2016 and 2015:



	December 31, 2016
	Fair Value		Investments with redemption restrictions		Investments without redemption restrictions		Redemption frequency ^(a)	Redemption notice period ^(a)
Fund of hedge funds	$	955	$	955	$	—
Hedge funds	17,381		17,381		—
Private equity investments	89,809		89,809		—
Fixed income investment funds	242,093		211,151		30,942		Daily	2 days
Overseas deposits	50,106		50,106		—
Mutual funds	5,368		—		5,368		Daily	Daily
Total other investments	$	405,712	$	369,402	$	36,310

	December 31, 2015
	Fair Value		Investments with redemption restrictions		Investments without redemption restrictions		Redemption frequency ^(a)	Redemption notice period ^(a)
Fund of hedge funds	$	1,417	$	1,417	$	—
Hedge funds	20,980		20,980		—
Private equity investments	63,771		63,771		—
Fixed income investment funds	188,721		167,910		20,811		Daily	2 days
Overseas deposits	54,484		54,484		—
Mutual funds	7,483		—		7,483		Daily	Daily
Total other investments	$	336,856	$	308,562	$	28,294

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

Other investments include alternative investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities.

Certain securities included in other investments are subject to redemption restrictions and are unable to be redeemed from the funds. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments would liquidate over five to ten years from inception of the funds. In addition, one of the fixed income investment funds with a fair value of $184,749 (December 31, 2015: $167,910), has a lock-up period of three years as at December 31, 2016 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by an annual and quarterly, funding and release process for Lloyd’s market participants.

The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 23, “Commitments and contingencies,” for further details. As at December 31, 2016, the Company does not have any plans to sell any of the other investments listed above.


(c)	Investments in investment affiliates

Aquiline Financial Services Fund II L.P.

On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the “Agreement”) with Aquiline Capital Partners LLC, a Delaware limited liability company (the “Assignor”) and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the “Aquiline II General Partner”) pursuant to which the Company has assumed 100% of the Assignor’s interest in Aquiline Financial Services Fund II L.P. (the “Aquiline II Partnership”) representing a total capital commitment of $50,000 (the “Aquiline II Commitment”), as a limited partner in the Partnership (the “Transferred Interest”). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement of the Fund.

On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is also governed by the terms of the Aquiline II Limited Partnership Agreement.

The Aquiline II Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company’s investment in the Aquiline II Partnership has been treated as an equity method investment. The Aquiline II Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.

In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline II Partnership or to withdraw any part of its capital account without prior consent from the Aquiline II General Partner. The Company’s maximum exposure to the Aquiline II Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 23, “Commitments and contingencies,” for further details.

Aquiline Financial Services Fund III L.P.

On November 7, 2014, the Company, entered into a Subscription Agreement (the “Subscription Agreement”) with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the “Aquiline III General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests (the “Limited Partnership Interests”) in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the “Aquiline III Partnership”), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the “Fund” or the “Entities”) with a capital commitment (the “Aquiline III Commitment”) in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement.

The Aquiline III Partnership is a VIE and the Company is not the primary beneficiary. Therefore, the Company’s investment in the Aquiline III Partnership has been treated as an equity method investment. The Aquiline III Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company’s share of partnership income for the period.

In accordance with the terms of the Agreement, no limited partner has the right to withdraw from the Aquiline III Partnership or to withdraw any part of its capital account without prior consent from the Aquiline III General Partner. The Company’s maximum exposure to the Aquiline III Partnership is limited to the amount invested and any remaining capital commitment. Refer to Note 23, “Commitments and contingencies,” for further details.

The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for the years ended December 31, 2016 and 2015:



	Years Ended December 31,
	2016			2015
Investment affiliates, beginning of year	$	87,673		$	63,506
Net capital contributions	14,841			19,886
(Loss) income from investment affiliate	(2,083		)	4,281
Investment affiliates, end of year	$	100,431		$	87,673

The following table presents the Company’s investments in the partnerships as at December 31, 2016 and 2015:



	December 31, 2016
	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline II Partnership	$	46,871	—	%	8.1	%	$	61,999
Aquiline III Partnership	37,969		—	%	9.0	%	38,432
Total	$	84,840					$	100,431

	December 31, 2015
	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline II Partnership	$	55,904	—	%	8.1	%	$	73,880
Aquiline III Partnership	13,890		—	%	13.7	%	13,793
Total	$	69,794					$	87,673


(d)	Net investment income

Net investment income was derived from the following sources:



	Years Ended December 31,
	2016			2015			2014
Managed investments
Fixed maturities and short-term investments	$	119,085		$	113,627		$	93,044
Other investments	27,860			13,307			5,111
Cash and cash equivalents and restricted cash	2,939			1,911			5,106
Securities lending income	55			16			11
Total gross investment income	149,939			128,861			103,272
Investment expenses	(8,221		)	(7,695		)	(7,472		)
Total managed net investment income	$	141,718		$	121,166		$	95,800
Non managed investments
Fixed maturities and short-term investments	$	6,931		$	6,528		$	4,204
Cash and cash equivalents and restricted cash	1,736			130			82
Total non-managed net investment income	8,667			6,658			4,286
Total net investment income	$	150,385		$	127,824		$	100,086

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


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

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



	Years Ended December 31,
	2016			2015			2014
Managed fixed maturities, short-term and other investments
Gross realized gains	$	22,491		$	15,678		$	20,201
Gross realized (losses)	(7,811		)	(13,980		)	(8,041		)
Net realized gains on investments	14,680			1,698			12,160
Change in net unrealized gains (losses) on investments	14,106			(32,007		)	(1,030		)
Total net realized and change in net unrealized gains (losses) on managed investments	$	28,786		$	(30,309	)	$	11,130
Non-managed fixed maturities, short-term and other investments
Gross realized gains	$	1,086		$	611		$	2,757
Gross realized (losses)	(9		)	(11		)	—
Net realized gains on investments	1,077			600			2,757
Change in net unrealized gains (losses) on investments	2,765			(388		)	(1,812		)
Total net realized and change in net unrealized gains on non-managed investments	3,842			212			945
Total net realized and change in net unrealized gains (losses) on total investments	$	32,628		$	(30,097	)	$	12,075


(f)	Pledged investments and cash

As at December 31, 2016, the Company had $5,173,966 (December 31, 2015: $4,056,788) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $5,068,092 were held in trust (December 31, 2015: $4,007,215). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions and to facilitate the accreditation of Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Talbot as an alien insurer/reinsurer by certain regulators.

In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $442,184 (December 31, 2015: $826,535). For further details on the credit facilities, refer to Note 20 “Debt and financing arrangements.”

During 2014, Validus Reinsurance, Ltd. established a Multi-Beneficiary Reinsurance Trust (“MBRT”) to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants who, as a result, will receive automatic credit in their regulatory filings for the reinsurance provided prospectively by the Company. As of December 31, 2016, Validus Reinsurance, Ltd. was approved as a trusteed reinsurer in 48 states as well as Puerto Rico and the District of Columbia. In addition, Validus Re Swiss established a MBRT in December 2015 and was approved as a trusteed reinsurer in 44 states as well as Puerto Rico and the District of Columbia as at December 31, 2016.


(g)	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.