Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
Form 10-Q 
__________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Commission file number 001-33606
__________________________________________________

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

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

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

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

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

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

 


Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2018 (unaudited) and December 31, 2017
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2018—$5,651,953; 2017—$5,876,261)
$
5,559,953

 
$
5,858,348

Short-term investments trading, at fair value (amortized cost: 2018—$3,728,930; 2017—$3,381,714)
3,728,894

 
3,381,757

Other investments, at fair value (cost: 2018—$341,883; 2017—$330,416)
366,184

 
355,218

Investments in investment affiliates, equity method (cost: 2018—$72,135; 2017—$61,944)
127,247

 
100,137

Cash and cash equivalents
719,219

 
754,990

Restricted cash
286,279

 
394,663

Total investments and cash
10,787,776

 
10,845,113

Premiums receivable
1,947,462

 
939,487

Deferred acquisition costs
317,834

 
213,816

Prepaid reinsurance premiums
336,384

 
132,938

Securities lending collateral
2,117

 
2,717

Loss reserves recoverable
970,950

 
1,233,997

Paid losses recoverable
71,876

 
46,873

Income taxes recoverable
11,023

 
9,044

Deferred tax asset
60,438

 
52,467

Receivable for investments sold
15,662

 
12,182

Intangible assets
167,052

 
171,411

Goodwill
229,573

 
229,573

Accrued investment income
31,082

 
29,096

Other assets
549,841

 
508,165

Total assets
$
15,499,070

 
$
14,426,879

Liabilities
 

 
 

Reserve for losses and loss expenses
$
4,699,599

 
$
4,831,390

Unearned premiums
2,190,884

 
1,147,186

Reinsurance balances payable
406,081

 
331,645

Securities lending payable
2,117

 
2,717

Deferred tax liability
2,142

 
4,600

Payable for investments purchased
60,275

 
74,496

Accounts payable and accrued expenses
576,260

 
1,225,875

Notes payable to AlphaCat investors
1,206,671

 
1,108,364

Senior notes payable
245,664

 
245,564

Debentures payable
538,751

 
539,158

Total liabilities
9,928,444

 
9,510,995

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,390,233

 
1,004,094

Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2018—16,000; 2017—16,000)
400,000

 
400,000

Common shares (Issued: 2018—163,186,889; 2017—161,994,491; Outstanding: 2018—80,511,948; 2017—79,319,550)
28,558

 
28,349

Treasury shares (2018—82,674,941; 2017—82,674,941)
(14,468
)
 
(14,468
)
Additional paid-in capital
816,282

 
814,641

Accumulated other comprehensive income (loss)
9,859

 
(22,192
)
Retained earnings
2,568,905

 
2,688,742

Total shareholders’ equity available to Validus
3,809,136

 
3,895,072

Noncontrolling interests
371,257

 
16,718

Total shareholders’ equity
4,180,393

 
3,911,790

Total liabilities, noncontrolling interests and shareholders’ equity
$
15,499,070

 
$
14,426,879


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

3
Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
For the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(unaudited)
Revenues
 
 
 
 
 
Gross premiums written
$
847,206

 
$
792,902

 
$
2,679,662

 
$
1,983,759

Reinsurance premiums ceded
(107,567
)
 
(56,222
)
 
(483,861
)
 
(256,328
)
Net premiums written
739,639

 
736,680

 
2,195,801

 
1,727,431

Change in unearned premiums
(3,032
)
 
(105,653
)
 
(840,252
)
 
(521,028
)
Net premiums earned
736,607

 
631,027

 
1,355,549

 
1,206,403

Net investment income
57,560

 
44,241

 
109,632

 
84,455

Net realized (losses) gains on investments
(7,394
)
 
2,274

 
(5,194
)
 
1,110

Change in net unrealized (losses) gains on investments
(10,730
)
 
16,321

 
(68,111
)
 
29,669

Income from investment affiliates
2,178

 
9,466

 
15,246

 
14,654

Other insurance related (loss) income and other (loss) income
(16,116
)
 
1,339

 
9,424

 
2,669

Foreign exchange losses
(526
)
 
(7,329
)
 
(1
)
 
(5,760
)
Total revenues
761,579

 
697,339

 
1,416,545

 
1,333,200

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
476,610

 
296,149

 
798,155

 
565,734

Policy acquisition costs
118,781

 
117,268

 
235,237

 
228,896

General and administrative expenses
120,862

 
96,349

 
235,588

 
184,273

Share compensation expenses
16,040

 
11,146

 
25,769

 
20,637

Finance expenses
14,310

 
14,209

 
28,573

 
28,152

Transaction expenses
3,837

 
4,427

 
11,593

 
4,427

Total expenses
750,440

 
539,548

 
1,334,915

 
1,032,119

Income before taxes and (income) attributable to AlphaCat investors
11,139

 
157,791

 
81,630

 
301,081

Tax benefit
7,151

 
987

 
13,984

 
4,536

(Income) attributable to AlphaCat investors
(29,849
)
 
(11,830
)
 
(40,711
)
 
(19,333
)
Net (loss) income
(11,559
)
 
146,948

 
54,903

 
286,284

Net (income) attributable to noncontrolling interests
(35,511
)
 
(43,650
)
 
(100,223
)
 
(86,222
)
Net (loss) income (attributable) available to Validus
(47,070
)
 
103,298

 
(45,320
)
 
200,062

Dividends on preferred shares
(5,828
)
 
(2,203
)
 
(11,656
)
 
(4,406
)
Net (loss) income (attributable) available to Validus common shareholders
$
(52,898
)
 
$
101,095

 
$
(56,976
)
 
$
195,656

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(11,559
)
 
$
146,948

 
$
54,903

 
$
286,284

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustments
(2,737
)
 
1,489

 
(900
)
 
2,086

Change in minimum pension liability
342

 
1,184

 
304

 
1,252

Change in fair value of cash flow hedges
3,035

 
(144
)
 
31,798

 
(46
)
Other comprehensive income, net of tax
640

 
2,529

 
31,202

 
3,292

Comprehensive (income) attributable to noncontrolling interests
(35,511
)
 
(43,650
)
 
(100,223
)
 
(86,222
)
Comprehensive (loss) income (attributable) available to Validus
$
(46,430
)
 
$
105,827

 
$
(14,118
)
 
$
203,354

 
 
 
 
 
 
 
 
(Loss) earnings per common share
 
 
 
 
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.28

 
$
(0.72
)
 
$
2.47

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.25

 
$
(0.72
)
 
$
2.42

Cash dividends declared per common share
$
0.38

 
$
0.38

 
$
0.76

 
$
0.76

 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 
Basic
79,650,474

 
79,270,561

 
79,488,081

 
79,202,116

Diluted
79,650,474

 
80,872,451

 
79,488,081

 
80,861,998

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

4
Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2018
 
2017
 
(unaudited)
Preferred shares
 
 
 
Balance, beginning of period
$
400,000

 
$
150,000

Preferred shares issued
—

 
250,000

Balance, end of period
$
400,000

 
$
400,000

 
 
 
 
Common shares
 
 
 
Balance, beginning of period
$
28,349

 
$
28,224

Common shares issued, net
209

 
115

Balance, end of period
$
28,558

 
$
28,339

 
 
 
 
Treasury shares
 
 
 
Balance, beginning of period
$
(14,468
)
 
$
(14,376
)
Repurchase of common shares
—

 
(47
)
Balance, end of period
$
(14,468
)
 
$
(14,423
)
 
 
 
 
Additional paid-in capital
 
 
 
Balance, beginning of period
$
814,641

 
$
821,023

Offering expenses on preferred shares
—

 
(8,314
)
Common shares redeemed, net
(24,128
)
 
(12,076
)
Repurchase of common shares
—

 
(13,949
)
Share compensation expenses
25,769

 
20,637

Balance, end of period
$
816,282

 
$
807,321

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance, beginning of period
$
(22,192
)
 
$
(23,216
)
Other comprehensive income
31,202

 
3,292

Amounts reclassified from accumulated other comprehensive income (loss)
849

 
—

Balance, end of period
$
9,859

 
$
(19,924
)
 
 
 
 
Retained earnings
 
 
 
Balance, beginning of period
$
2,688,742

 
$
2,876,636

Net income
54,903

 
286,284

Net (income) attributable to noncontrolling interests
(100,223
)
 
(86,222
)
Dividends on common shares
(62,861
)
 
(62,174
)
Dividends on preferred shares
(11,656
)
 
(4,406
)
Balance, end of period
$
2,568,905

 
$
3,010,118

 
 
 
 
Total shareholders’ equity available to Validus
$
3,809,136

 
$
4,211,431

Noncontrolling interests
371,257

 
415,658

Total shareholders’ equity
$
4,180,393

 
$
4,627,089

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

5
Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2018
 
2017
 
(unaudited)
Cash flows provided by (used in) operating activities
 
 
 
Net income
$
54,903

 
$
286,284

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share compensation expenses
25,769

 
20,637

Loss on redemption of AlphaCat ILS fund
—

 
402

Amortization of discount on Senior Notes
54

 
54

(Income) from investment and operating affiliates
(15,246
)
 
(14,654
)
Net realized and change in net unrealized losses (gains) on investments
73,305

 
(30,779
)
Amortization of intangible assets
4,359

 
3,995

Foreign exchange losses (gains) included in net income
8,837

 
(9,686
)
Amortization of premium on fixed maturity investments
6,853

 
7,012

Change in operational balance sheet items:
 
 
 
Premiums receivable
(1,010,121
)
 
(648,195
)
Deferred acquisition costs
(104,018
)
 
(97,746
)
Prepaid reinsurance premiums
(203,446
)
 
(30,684
)
Loss reserves recoverable
261,992

 
(113,508
)
Paid losses recoverable
(24,994
)
 
17,500

Reserve for losses and loss expenses
(125,377
)
 
199,985

Unearned premiums
1,043,698

 
488,198

Reinsurance balances payable
75,018

 
111,488

Other operational balance sheet items, net
91,562

 
(137,618
)
Net cash provided by operating activities
163,148

 
52,685

 
 
 
 
Cash flows provided by (used in) investing activities
 
 
 
Proceeds on sales of fixed maturity investments
1,739,391

 
1,632,371

Proceeds on maturities of fixed maturity investments
316,335

 
247,394

Purchases of fixed maturity investments
(1,867,720
)
 
(1,682,609
)
Purchases of short-term investments, net
(347,138
)
 
(88,623
)
Purchases of other investments, net
(12,487
)
 
(33,870
)
Decrease in securities lending collateral
600

 
7,265

(Investments in) distributions from investment affiliates, net
(11,864
)
 
11,708

Purchase of subsidiary, net of cash
—

 
(183,923
)
Net cash used in investing activities
(182,883
)
 
(90,287
)
 
 
 
 
Cash flows provided by (used in) financing activities
 
 
 
Net proceeds on issuance of notes payable to AlphaCat investors
98,720

 
269,645

Net proceeds on issuance of preferred shares
—

 
241,686

Redemption of common shares, net
(23,919
)
 
(11,961
)
Purchases of common shares under share repurchase program
—

 
(13,996
)
Dividends paid on preferred shares
(11,656
)
 
(4,406
)
Dividends paid on common shares
(68,518
)
 
(63,286
)
Decrease in securities lending payable
(600
)
 
(7,265
)
Third party investments in redeemable noncontrolling interests
466,550

 
210,200

Third party redemptions of redeemable noncontrolling interests
(233,478
)
 
(79,334
)
Third party investments in noncontrolling interests
321,900

 
258,300

Third party distributions of noncontrolling interests
(20,118
)
 
(96,125
)
Third party subscriptions deployed on funds and sidecars, net
(645,233
)
 
(171,952
)
Net cash (used in) provided by financing activities
(116,352
)
 
531,506

Effect of foreign currency rate changes on cash and cash equivalents and restricted cash
(8,068
)
 
10,608

Net (decrease) increase in cash and cash equivalents and restricted cash
(144,155
)
 
504,512

Cash and cash equivalents and restricted cash—beginning of period
1,149,653

 
490,932

Cash and cash equivalents and restricted cash—end of period
$
1,005,498

 
$
995,444

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the year
$
868

 
$
568

Interest paid during the year
$
25,090

 
$
27,186

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


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


1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
During the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” The change in reportable segments and primary lines of business had no impact on the Company’s historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of every voting interest entity (“VOE”) in which the Company has a controlling financial interest and variable interest entity (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the amounts included in the Consolidated Financial Statements reflect management’s best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
•the reserve for losses and loss expenses;
•the premium written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•the loss reserves recoverable, including the provision for uncollectible amounts; and
•the valuation of invested assets and other financial instruments.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).
2. Recent accounting pronouncements
There have been no accounting pronouncements issued or adopted during the quarter ended June 30, 2018 that warrant disclosure in the Consolidated Financial Statements.

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

3. Business combinations
American International Group, Inc. (“AIG”)
On July 18, 2018, the Company completed its previously announced definitive agreement and plan of merger (the “Merger Agreement”) with American International Group, Inc. (“AIG”) in accordance with Section 105 of the Bermuda Companies Act 1981. Pursuant to the Merger Agreement the Company merged with an existing AIG subsidiary in accordance with the Bermuda Companies Act 1981 (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of AIG.
Pursuant to the Merger Agreement, each issued and outstanding common share, par value $0.175 per common share, of the Company, other than shares that were owned by the Company as treasury shares, owned by a subsidiary of the Company, owned by AIG or any of its subsidiaries or that were subject to any Company Award (as defined in the Merger Agreement), were converted into the right to receive $68.00 in cash, without interest and subject to any applicable tax withholdings. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares remains issued and outstanding, and continues to be listed on the NYSE and registered under the Exchange Act.
Also on July 18, 2018, in connection with the consummation of the Merger, the Company notified the New York Stock Exchange (“NYSE”) of the completion of the Merger and requested that trading in the Common Shares be withdrawn from listing on the NYSE. The NYSE filed a notification of removal from listing on Form 25 with the Securities and Exchange Commission (“SEC”) with respect to the Common Shares to report the delisting of the Common Shares from the NYSE and to suspend trading of the Common Shares on the NYSE prior to the opening of trading on July 18, 2018.
On July 26, 2018 the Company filed with the SEC a certificate of notice of termination on Form 15 with respect to its Common Shares, requesting that the Common Shares be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the reporting obligations of the Company with respect to the Common Shares under Sections 13 and 15(d) of the Exchange Act be suspended.
Crop Risk Services (“CRS”)
On May 1, 2017, Western World, a wholly–owned subsidiary of the Company acquired all of the outstanding capital stock of CRS for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford, a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Insurance segment in the Consolidated Financial Statements from the date of acquisition.
For further information regarding the acquisition of CRS please refer to Note 5, “Business combinations,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

4. Investments
Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” for further details.
The amortized cost (or cost) and fair values of the Company’s investments as at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Amortized 
Cost or Cost
 

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
613,130

 
$
604,392

 
$
733,510

 
$
727,397

Non-U.S. government and government agency
285,514

 
282,263

 
310,845

 
312,239

U.S. states, municipalities and political subdivisions
191,065

 
189,437

 
201,347

 
201,303

Agency residential mortgage-backed securities
956,254

 
929,859

 
984,387

 
978,049

Non-agency residential mortgage-backed securities
48,061

 
47,600

 
40,264

 
40,373

U.S. corporate
1,459,190

 
1,436,885

 
1,531,498

 
1,533,395

Non-U.S. corporate
410,287

 
403,385

 
420,522

 
422,249

Bank loans
480,593

 
471,212

 
450,320

 
442,951

Asset-backed securities
719,803

 
714,434

 
657,234

 
658,303

Commercial mortgage-backed securities
309,080

 
301,544

 
315,002

 
312,395

Total fixed maturities
5,472,977

 
5,381,011

 
5,644,929

 
5,628,654

Short-term investments
218,071

 
218,035

 
229,968

 
230,011

Other investments
 
 
 
 
 
 
 
Hedge funds
6,954

 
15,888

 
6,954

 
15,774

Private equity investments
64,921

 
79,185

 
63,684

 
78,407

Fixed income investment funds
208,400

 
209,503

 
203,167

 
204,426

Overseas deposits
61,608

 
61,608

 
56,611

 
56,611

Total other investments
341,883

 
366,184

 
330,416

 
355,218

Investments in investment affiliates (a)
72,135

 
127,247

 
61,944

 
100,137

Total managed investments
$
6,105,066

 
$
6,092,477

 
$
6,267,257

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
178,976

 
$
178,942

 
$
231,332

 
$
229,694

Short-term investments
3,510,859

 
3,510,859

 
3,151,746

 
3,151,746

Total non-managed investments
3,689,835

 
3,689,801

 
3,383,078

 
3,381,440

Total investments
$
9,794,901

 
$
9,782,278

 
$
9,650,335

 
$
9,695,460

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


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

(a)
Fixed maturity investments
The following table sets forth certain information regarding Standard & Poor’s credit quality ratings (or an equivalent rating with another recognized rating agency) of the Company’s fixed maturity investments as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,560,857

 
46.2
%
 
$
2,715,074

 
46.4
%
AA
417,814

 
7.5
%
 
442,397

 
7.6
%
A
1,102,419

 
19.8
%
 
1,137,795

 
19.4
%
BBB
797,698

 
14.3
%
 
828,392

 
14.1
%
Total investment grade managed fixed maturities
4,878,788

 
87.8
%
 
5,123,658

 
87.5
%
BB
157,241

 
2.8
%
 
168,967

 
2.9
%
B
227,954

 
4.1
%
 
237,131

 
4.0
%
CCC
20,219

 
0.4
%
 
18,217

 
0.3
%
CC
564

 
—
%
 
—

 
—
%
NR
96,245

 
1.7
%
 
80,681

 
1.4
%
Total non-investment grade managed fixed maturities
502,223

 
9.0
%
 
504,996

 
8.6
%
Total managed fixed maturities
$
5,381,011

 
96.8
%
 
$
5,628,654

 
96.1
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
AAA
$
250

 
—
%
 
$
—

 
—
%
Total investment grade non-managed catastrophe bonds
250

 
—
%
 
—

 
—
%
BB
$
6,632

 
0.2
%
 
$
22,110

 
0.3
%
B
2,626

 
—
%
 
3,265

 
0.1
%
NR
169,434

 
3.0
%
 
204,319

 
3.5
%
Total non-investment grade non-managed catastrophe bonds
178,692

 
3.2
%
 
229,694

 
3.9
%
Total non-managed catastrophe bonds
178,942

 
3.2
%
 
229,694

 
3.9
%
Total fixed maturities
$
5,559,953

 
100.0
%
 
$
5,858,348

 
100.0
%


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

The amortized cost and fair values for the Company’s fixed maturity investments held at June 30, 2018 and December 31, 2017 are shown below by contractual maturity. Actual maturity may differ from contractual maturity due to prepayment rights associated with certain investments.
 
June 30, 2018
 
December 31, 2017
 
Amortized Cost or Cost
 
Fair Value
 
Amortized Cost or Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
361,061

 
$
359,094

 
$
343,360

 
$
343,541

Due after one year through five years
2,333,731

 
2,295,728

 
2,527,018

 
2,513,620

Due after five years through ten years
556,784

 
547,685

 
577,347

 
577,109

Due after ten years
188,203

 
185,067

 
200,317

 
205,264

 
3,439,779

 
3,387,574

 
3,648,042

 
3,639,534

Asset-backed and mortgage-backed securities
2,033,198

 
1,993,437

 
1,996,887

 
1,989,120

Total managed fixed maturities
$
5,472,977

 
$
5,381,011

 
$
5,644,929

 
$
5,628,654

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
47,918

 
$
46,922

 
$
88,797

 
$
88,367

Due after one year through five years
130,433

 
131,395

 
140,035

 
138,844

Due after five years through ten years
625

 
625

 
2,500

 
2,483

Total non-managed catastrophe bonds
178,976

 
178,942

 
231,332

 
229,694

Total fixed maturities
$
5,651,953

 
$
5,559,953

 
$
5,876,261

 
$
5,858,348

(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
$
15,888

 
$
15,888

 
$
—

 
 
 
 
Private equity investments
 
79,185

 
79,185

 
—

 
 
 
 
Fixed income investment funds
 
209,503

 
209,503

 
—

 

 

Overseas deposits
 
61,608

 
61,608

 
—

 
 
 
 
Total other investments
 
$
366,184

 
$
366,184

 
$
—

 
 
 
 
 
 
December 31, 2017
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
15,774

 
15,774

 
—

 
 
 
 
Private equity investments
 
78,407

 
78,407

 
—

 
 
 
 
Fixed income investment funds
 
204,426

 
200,532

 
3,894

 
Daily
 
Daily to 2 days
Overseas deposits
 
56,611

 
56,611

 
—

 
 
 
 
Total other investments
 
$
355,218

 
$
351,324

 
$
3,894

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

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

Other investments include investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $196,379 (December 31, 2017: $186,734) are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $169,805 (December 31, 2017: $168,484) are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.
Certain securities included in other investments are subject to redemption restrictions. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known by the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments will liquidate over five to ten-year periods from inception of the funds. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by annual and quarterly funding and release processes for Lloyd’s market participants.
The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details. As at June 30, 2018, the Company does not have any plans to sell any of the other investments listed above.
(c)
Investments in investment affiliates
Included in the Company’s managed investment portfolio as at June 30, 2018 are investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”), Aquiline Technology Growth Fund L.P. (“Aquiline Tech”) and Aquiline Armour Co-Invest L.P. (“Aquiline Armour”) (collectively the “Aquiline partnerships”).
For further information regarding the Company’s Aquiline partnerships refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Investment affiliates, beginning of period
$
113,471

 
$
94,697

 
$
100,137

 
$
100,431

Net capital contributions (distributions)
11,598

 
(786
)
 
11,864

 
(11,708
)
Income from investment affiliates
2,178

 
9,466

 
15,246

 
14,654

Investment affiliates, end of period
$
127,247

 
$
103,377

 
$
127,247

 
$
103,377

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


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

The following table presents the Company’s investments in the Aquiline partnerships as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
28,529

 
—
%
 
8.1
%
 
$
49,248

Aquiline III
25,501

 
—
%
 
9.0
%
 
59,900

Aquiline Tech
4,406

 
—
%
 
10.6
%
 
4,400

Aquiline Armour
13,699

 
—
%
 
15.2
%
 
13,699

Total investments in investment affiliates
$
72,135

 
 
 
 
 
$
127,247

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,349

 
—
%
 
8.1
%
 
$
51,914

Aquiline III
24,737

 
—
%
 
9.0
%
 
44,733

Aquiline Tech
3,858

 
—
%
 
10.6
%
 
3,490

Total investments in investment affiliates
$
61,944

 
 
 
 
 
$
100,137

(d)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
39,224

 
$
31,212

 
$
76,993

 
$
62,883

Other investments
4,846

 
7,571

 
9,069

 
14,441

Cash and cash equivalents and restricted cash
1,744

 
716

 
2,883

 
1,326

Securities lending income
4

 
7

 
7

 
20

Total gross investment income
45,818

 
39,506

 
88,952

 
78,670

Investment expenses
(3,066
)
 
(1,443
)
 
(6,409
)
 
(4,415
)
Total managed net investment income
$
42,752

 
$
38,063

 
$
82,543

 
$
74,255

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
5,842

 
$
4,500

 
$
9,990

 
$
7,560

Cash and cash equivalents and restricted cash
8,966

 
1,678

 
17,099

 
2,640

Total non-managed net investment income
14,808

 
6,178

 
27,089

 
10,200

Total net investment income
$
57,560

 
$
44,241

 
$
109,632

 
$
84,455

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

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

(e)
Net realized (losses) gains and change in net unrealized (losses) gains on investments
The following table sets forth an analysis of net realized (losses) gains and the change in net unrealized gains and losses on investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Managed investments
 
 
 
 
 
 
 
Gross realized gains
$
3,048

 
$
5,175

 
$
9,878

 
$
7,865

Gross realized (losses)
(10,480
)
 
(2,906
)
 
(16,168
)
 
(8,488
)
Net realized (losses) gains on investments
(7,432
)
 
2,269

 
(6,290
)
 
(623
)
Change in net unrealized (losses) gains on investments
(11,392
)
 
15,942

 
(68,169
)
 
30,291

Total net realized and change in net unrealized (losses) gains on managed investments
$
(18,824
)
 
$
18,211

 
$
(74,459
)
 
$
29,668

Non-managed investments
 
 
 
 
 
 
 
Gross realized gains
$
175

 
$
5

 
$
1,410

 
$
1,733

Gross realized (losses)
(137
)
 
—

 
(314
)
 
—

Net realized gains on investments
38

 
5

 
1,096

 
1,733

Change in net unrealized gains (losses) on investments
662

 
379

 
58

 
(622
)
Total net realized and change in net unrealized gains on non-managed investments
700

 
384

 
1,154

 
1,111

Total net realized and change in net unrealized (losses) gains on total investments
$
(18,124
)
 
$
18,595

 
$
(73,305
)
 
$
30,779

(f)
Pledged investments and cash
As at June 30, 2018, the Company had $6,310,851 (December 31, 2017: $5,853,744) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $6,282,368 were held in trust (December 31, 2017: $5,789,081). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions, as collateral for derivative instruments and to facilitate the accreditation of Validus Reinsurance, Ltd. (“Validus Re”), Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Lloyd’s Syndicate 1183 (the “Talbot Syndicate”) as alien (re)insurers by certain regulators.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $539,627 (December 31, 2017: $576,864). For further details on the credit facilities, refer to Note 13 “Debt and financing arrangements.”

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

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

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

At June 30, 2018, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
604,392

 
$
—

 
$
—

 
$
604,392

Non-U.S. government and government agency
—

 
282,263

 
—

 
—

 
282,263

U.S. states, municipalities and political subdivisions
—

 
189,437

 
—

 
—

 
189,437

Agency residential mortgage-backed securities
—

 
929,859

 
—

 
—

 
929,859

Non-agency residential mortgage-backed securities
—

 
47,600

 
—

 
—

 
47,600

U.S. corporate
—

 
1,436,885

 
—

 
—

 
1,436,885

Non-U.S. corporate
—

 
403,385

 
—

 
—

 
403,385

Bank loans
—

 
245,476

 
225,736

 
—

 
471,212

Asset-backed securities
—

 
613,169

 
101,265

 
—

 
714,434

Commercial mortgage-backed securities
—

 
301,544

 
—

 
—

 
301,544

Total fixed maturities
—

 
5,054,010

 
327,001

 
—

 
5,381,011

Short-term investments
187,231

 
30,804

 
—

 
—

 
218,035

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds
—

 
—

 
—

 
15,888

 
15,888

Private equity investments
—

 
—

 
—

 
79,185

 
79,185

Fixed income investment funds
—

 
9,576

 
18,807

 
181,120

 
209,503

Overseas deposits
—

 
—

 
—

 
61,608

 
61,608

Total other investments
—

 
9,576

 
18,807

 
337,801

 
366,184

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
127,247

Total managed investments
$
187,231

 
$
5,094,390

 
$
345,808

 
$
337,801

 
$
6,092,477

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
127,380

 
$
51,562

 
$
—

 
$
178,942

Short-term investments
3,510,859

 
—

 
—

 
—

 
3,510,859

Total non-managed investments
3,510,859

 
127,380

 
51,562

 
—

 
3,689,801

Total investments
$
3,698,090

 
$
5,221,770

 
$
397,370

 
$
337,801

 
$
9,782,278

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



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

At December 31, 2017, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
—

 
$
727,397

 
$
—

 
$
—

 
$
727,397

Non-U.S. government and government agency
—

 
312,239

 
—

 
—

 
312,239

U.S. states, municipalities and political subdivisions
—

 
201,303

 
—

 
—

 
201,303

Agency residential mortgage-backed securities
—

 
978,049

 
—

 
—

 
978,049

Non-agency residential mortgage-backed securities
—

 
40,373

 
—

 
—

 
40,373

U.S. corporate
—

 
1,533,395

 
—

 
—

 
1,533,395

Non-U.S. corporate
—

 
422,249

 
—

 
—

 
422,249

Bank loans
—

 
232,886

 
210,065

 
—

 
442,951

Asset-backed securities
—

 
554,490

 
103,813

 
—

 
658,303

Commercial mortgage-backed securities
—

 
312,395

 
—

 
—

 
312,395

Total fixed maturities
—

 
5,314,776

 
313,878

 
—

 
5,628,654

Short-term investments
198,054

 
31,957

 
—

 
—

 
230,011

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds
—

 
—

 
—

 
15,774

 
15,774

Private equity investments
—

 
—

 
—

 
78,407

 
78,407

Fixed income investment funds
—

 
13,351

 
17,404

 
173,671

 
204,426

Overseas deposits
—

 
—

 
—

 
56,611

 
56,611

Total other investments
—

 
13,351

 
17,404

 
324,463

 
355,218

Investments in investment affiliates (b)
—

 
—

 
—

 
—

 
100,137

Total managed investments
$
198,054

 
$
5,360,084

 
$
331,282

 
$
324,463

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$
—

 
$
152,233

 
$
77,461

 
$
—

 
$
229,694

Short-term investments
3,151,746

 
—

 
—

 
—

 
3,151,746

Total non-managed investments
3,151,746

 
152,233

 
77,461

 
—

 
3,381,440

Total investments
$
3,349,800

 
$
5,512,317

 
$
408,743

 
$
324,463

 
$
9,695,460

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At June 30, 2018, managed Level 3 investments totaled $345,808 (December 31, 2017: $331,282), representing 5.7% (December 31, 2017: 5.2%) of total managed investments.

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

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

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

Non-agency residential mortgage-backed securities
The Company’s non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company holds no sub-prime fixed maturity investments in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
U.S. corporate
U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company’s non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Bank loans
The Company’s bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company’s bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair values of these investments are classified as Level 3.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair values of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity

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

and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.
Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Catastrophe bonds
Catastrophe bonds are priced based on broker or underwriter bid indications. Level 2 catastrophe bonds are those traded over-the-counter; catastrophe bonds available only via private issuances are classified as Level 3.
Short-term investments
Short-term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair values of these investments are classified as Level 2.
Other investments
Hedge funds
The hedge fund’s administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Fixed income investment funds
The Company’s investment funds classified as Level 2 consist of a pooled investment fund. The pooled investment is invested in fixed income securities with high credit ratings and is available only to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund, which is traded on a daily basis.
Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure. Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.
The fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation. The fair value of these investments is measured using the NAV practical expedient and therefore it has not been categorized within the fair value hierarchy.
None of these investments are probable of being sold at amounts different than their NAVs.

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

Overseas deposits
The Company’s share of a portfolio of Lloyd’s overseas deposits is managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair values of the deposits are based on the portfolio level reporting that is provided by Lloyd’s. The fair values of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
(c)
Level 3 investments
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30, 2018
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
227,503

 
$
65,697

 
$
17,933

 
$
101,816

 
$
412,949

Purchases
14,422

 
—

 
874

 
—

 
15,296

Sales
—

 
—

 
—

 
(70
)
 
(70
)
Settlements
(14,698
)
 
(15,001
)
 
—

 
—

 
(29,699
)
Change in net unrealized (losses) gains
(1,491
)
 
866

 
—

 
(481
)
 
(1,106
)
Level 3 investments, end of period
$
225,736

 
$
51,562

 
$
18,807

 
$
101,265

 
$
397,370

 
Three Months Ended June 30, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
236,694

 
$
72,676

 
$
12,560

 
$
23,882

 
$
345,812

Purchases
16,757

 
5,000

 
3,432

 
11,053

 
36,242

Sales
—

 
—

 
—

 
(53
)
 
(53
)
Settlements
(28,893
)
 
(10,216
)
 
408

 
—

 
(38,701
)
Realized gains
—

 
216

 
—

 
—

 
216

Change in net unrealized (losses) gains
(386
)
 
349

 
—

 
1,039

 
1,002

Level 3 investments, end of period
$
224,172

 
$
68,025

 
$
16,400

 
$
35,921

 
$
344,518

 
Six Months Ended June 30, 2018
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
210,065

 
$
77,461

 
$
17,404

 
$
103,813

 
$
408,743

Purchases
45,207

 
18,825

 
1,403

 
—

 
65,435

Sales
—

 
—

 
—

 
(140
)
 
(140
)
Settlements
(28,540
)
 
(46,485
)
 
—

 
—

 
(75,025
)
Realized gains
—

 
1,235

 
—

 
—

 
1,235

Change in net unrealized (losses) gains
(996
)
 
526

 
—

 
(2,408
)
 
(2,878
)
Level 3 investments, end of period
$
225,736

 
$
51,562

 
$
18,807

 
$
101,265

 
$
397,370


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

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

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

Purchases
39,933

 
66,091

 
3,432

 
11,053

 
120,509

Sales
—

 
—

 
—

 
(53
)
 
(53
)
Settlements
(62,003
)
 
(48,996
)
 
800

 
—

 
(110,199
)
Realized gains
—

 
3,350

 
—

 
—

 
3,350

Change in net unrealized (losses) gains
(254
)
 
(795
)
 
—

 
990

 
(59
)
Level 3 investments, end of period
$
224,172

 
$
68,025

 
$
16,400

 
$
35,921

 
$
344,518

There were no transfers into or out of Level 3 during the three and six months ended June 30, 2018 or 2017.
(d)
Financial instruments not carried at fair value
ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at June 30, 2018, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
6. Variable interest entities
The Company consolidates all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs are primarily entities in the AlphaCat segment.
(a)
Consolidated VIEs
AlphaCat sidecars
Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of reinsurance and investment entities, referred to as “sidecars,” for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities returns capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company. The Company’s maximum exposure to any of these sidecars is the amount of capital invested at any given time.
AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the maximum permitted portfolio expected loss of the fund. The permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7%, whereas higher risk ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). All of the AlphaCat ILS funds are VIEs and were consolidated by the Company through May 31, 2017. However, on June 1, 2017, the Company redeemed its investment in one of the lower risk AlphaCat ILS funds. As a result, the Company was no longer deemed to be the primary beneficiary and therefore this fund was deconsolidated effective June 1, 2017.
The Company’s maximum exposure to any of the AlphaCat ILS funds is the amount of capital invested at any given time and any remaining capital commitments.

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

AlphaCat Re and AlphaCat Master Fund
The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “Master Funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the Asset Management segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “Feeder Funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated to the Feeder Funds and direct third party investors using variable funding notes. The Master Funds are VIEs and are consolidated by the Company.
Notes Payable to AlphaCat Investors
The Master Funds issue variable funding notes to the Feeder Funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the Feeder Funds, together with investments made by third parties in the Feeder Funds and on a direct basis, are provided as consideration for the notes to the Master Funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months; however, the variable funding notes do not have a stated maturity date since repayment is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the Feeder Funds and direct third party investors via the variable funding notes.
Any notes issued by the Master Funds to the consolidated Feeder Funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re directly to third party investors and non-consolidated Feeder Funds remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income as (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
One of the AlphaCat ILS funds (the “Fund”) issued both common shares and structured notes to the Company and third party investors in order to capitalize the fund. The Fund deploys its capital through AlphaCat Re; therefore, the structured notes do not have a stated maturity date since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares of the Fund and earn an interest rate of 6.5% (2017: 7%) per annum, payable on a cumulative basis in arrears.
As the Fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors, with any related interest included in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income as (income) attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

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

The following tables present reconciliations of the beginning and ending notes payable to AlphaCat investors during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30, 2018
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
916,022

 
$
352,172

 
$
1,268,194

Issuance of notes payable to AlphaCat investors
305,039

 
280

 
305,319

Redemption of notes payable to AlphaCat investors
(362,565
)
 
—

 
(362,565
)
Foreign exchange gains
(4,277
)
 
—

 
(4,277
)
Notes payable to AlphaCat investors, end of period
$
854,219

 
$
352,452

 
$
1,206,671

 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
343,256

 
$
103,320

 
$
446,576

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

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
267,867

 
68,880

 
336,747

Redemption of notes payable to AlphaCat investors
(140,150
)
 
—

 
(140,150
)
Foreign exchange gains
(283
)
 
—

 
(283
)
Notes payable to AlphaCat investors, end of period
$
893,959

 
$
172,200

 
$
1,066,159

 
Six Months Ended June 30, 2018
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
936,164

 
$
172,200

 
$
1,108,364

Issuance of notes payable to AlphaCat investors
811,579

 
180,252

 
991,831

Redemption of notes payable to AlphaCat investors
(893,111
)
 
—

 
(893,111
)
Foreign exchange gains
(413
)
 
—

 
(413
)
Notes payable to AlphaCat investors, end of period
$
854,219

 
$
352,452

 
$
1,206,671

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

 
$
—

 
$
278,202

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

 
—

 
423,269

Issuance of notes payable to AlphaCat investors
541,877

 
172,200

 
714,077

Redemption of notes payable to AlphaCat investors
(349,106
)
 
—

 
(349,106
)
Foreign exchange gains
(283
)
 
—

 
(283
)
Notes payable to AlphaCat investors, end of period
$
893,959

 
$
172,200

 
$
1,066,159

The income attributable to AlphaCat investors for the three and six months ended June 30, 2018 was $29,849 and $40,711, respectively (2017: $11,830 and $19,333). As at June 30, 2018, amounts due to AlphaCat investors totaling $66,259 (December 31, 2017: $18,054) were included in accounts payable and accrued expenses.

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

BetaCat ILS funds
The BetaCat ILS funds follow a passive buy-and-hold investment strategy, investing exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, referred to collectively as “Cat Bonds”) focused on property and casualty risks and issued under Rule 144A of the Securities Act of 1933, as amended. Two of the three BetaCat ILS funds are VIEs, one of which is consolidated by the Company. The remaining fund is a VOE and is consolidated by the Company as it owns all of the fund’s voting equity interests. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time.
The following table presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
15,647

 
$
3,102

 
$
25,975

 
$
3,267

AlphaCat ILS funds - Lower Risk
1,205,476

 
86,339

 
1,107,503

 
259,630

AlphaCat ILS funds - Higher Risk
1,162,492

 
383,231

 
1,310,071

 
912,341

AlphaCat Re and AlphaCat Master Fund
3,830,442

 
3,830,272

 
3,398,082

 
3,397,912

BetaCat ILS funds
89,161

 
210

 
77,221

 
261

Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 4, “Investments,” as non-managed investments.
(b)
Non-Consolidated VIEs
The Company invests in private equity and other investment vehicles as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company’s involvement in these entities is passive in nature. The Company’s maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs. Refer to Note 4, “Investments,” for further details.

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

7. Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. Such investments held by third parties are therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests, a mezzanine item between liabilities and shareholders’ equity. If and when a redemption notice is received, the fair value of the redemption is reclassified to accounts payable and accrued expenses.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the three and six months ended June 30, 2018 and 2017:
 
Redeemable
Noncontrolling Interests
 
Noncontrolling Interests
 
Total
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
1,423,110

 
$
1,657,630

 
$
334,357

 
$
330,597

 
$
1,757,467

 
$
1,988,227

Issuance of shares
81,250

 
106,501

 
40,600

 
103,320

 
121,850

 
209,821

Adjustment to noncontrolling interests as a result of deconsolidation
—

 
(459,021
)
 
—

 
—

 
—

 
(459,021
)
Income attributable to noncontrolling interests
19,255

 
28,555

 
16,256

 
15,095

 
35,511

 
43,650

Redemption of shares / Distributions
(133,382
)
 
(82,005
)
 
(19,956
)
 
(33,354
)
 
(153,338
)
 
(115,359
)
Balance, end of period
$
1,390,233

 
$
1,251,660

 
$
371,257

 
$
415,658

 
$
1,761,490

 
$
1,667,318

 
Redeemable
Noncontrolling Interests
 
Noncontrolling Interests
 
Total
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
1,004,094

 
$
1,528,001

 
$
16,718

 
$
165,977

 
$
1,020,812

 
$
1,693,978

Issuance of shares
466,550

 
210,200

 
321,900

 
258,300

 
788,450

 
468,500

Adjustment to noncontrolling interests as a result of deconsolidation
—

 
(459,021
)
 
—

 
—

 
—

 
(459,021
)
Income attributable to noncontrolling interests
47,628

 
54,485

 
52,595

 
31,737

 
100,223

 
86,222

Redemption of shares / Distributions
(128,039
)
 
(82,005
)
 
(19,956
)
 
(40,356
)
 
(147,995
)
 
(122,361
)
Balance, end of period
$
1,390,233

 
$
1,251,660

 
$
371,257

 
$
415,658

 
$
1,761,490

 
$
1,667,318

As at June 30, 2018, redemptions payable of $80,315 (December 31, 2017: $180,104) relating to redeemable noncontrolling interests were included within accounts payable and accrued expenses in the Company’s Consolidated Balance Sheets.



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

8. Derivative instruments
The Company enters into various derivative instruments in the form of foreign currency forward exchange contracts, interest rate swap contracts and weather derivative instruments. These derivative instruments are used to manage exposures to currency and interest rate risks, to enhance the efficiency of the Company’s investment portfolio and to provide protection against cedants’ financial exposure to variability in weather patterns. All of the Company’s outstanding derivative financial instruments are recognized in the Consolidated Balance Sheets at their fair values. The effect on earnings from recognizing the fair values of these derivative financial instruments depends on each instrument’s intended use, hedge designation, and effectiveness in offsetting the exposure it is intended to hedge.
(a)
Derivatives not designated as hedging instruments
The following tables summarize information on the classification and amount of the fair value of derivatives not designated as hedging instruments within the Company’s Consolidated Balance Sheets as at June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
December 31, 2017
Derivatives not designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
190,952

 
$
3,880

 
$
3,310

 
$
283,765

 
$
1,147

 
$
906

Interest rate swap contracts
 
$
200,000

 
$
10,306

 
$
—

 
$
200,000

 
$
1,589

 
$
—

Weather derivative contracts
 
$
4,825

 
$
8,380

 
$
—

 
$
4,825

 
$
853

 
$
—

(a)
Asset and liability derivative positions are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s Consolidated Balance Sheets.
The foreign currency forward contracts and interest rate swap contracts are valued on the basis of standard industry valuation models. The inputs to these models are based on observable market inputs, and as such the fair values of these contracts are classified as Level 2. The weather derivative contracts are valued on the basis of modeled and other information provided by Validus’ counterparties. Validus reviews this information, which represents Level 3 inputs, as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s financial statements are appropriate.
The following table summarizes information on the classification and net impact on earnings recognized in the Company’s Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income relating to derivatives that were not designated as hedging instruments during the three and six months ended June 30, 2018 and 2017:
Derivatives not designated as hedging instruments
 
Classification of gains recognized in earnings
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Foreign currency forward contracts
 
Foreign exchange (losses) gains
 
$
4,843

 
$
(6,525
)
 
$
(358
)
 
$
(6,072
)
Foreign currency forward contracts
 
Other insurance related income and other income
 
$
—

 
$
(874
)
 
$
—

 
$
(979
)
Interest rate swap contracts
 
Net realized gains on investments
 
$
2,123

 
$
(319
)
 
$
8,067

 
$
(319
)
Weather derivative contracts
 
Other insurance related income and other income
 
$
(17,910
)
 
$
—

 
$
8,863

 
$
—

(b)
Derivatives designated as hedging instruments
Derivative instruments designated as cash flow hedges
During 2012 and 2013, the Company entered into several swap agreements with third parties in order to convert the floating interest rates associated with its Junior Subordinated Deferrable Debentures into fixed rates. See Note 13, “Debt and financing arrangements,” for further details. The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign currency-denominated sales or purchases.

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

The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments on the Consolidated Balance Sheets as at June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
December 31, 2017
Derivatives designated as hedging instruments
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Interest rate swap contracts
 
$
552,263

 
$
28,982

 
$
2,627

 
$
552,263

 
$
9,806

 
$
18,840

Foreign currency forward contracts
 
$
64,405

 
$
—

 
$
546

 
$
96,293

 
$
1,891

 
$
—

(a)
Asset and liability derivative positions are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s Consolidated Balance Sheets.
The interest rate swap contracts and foreign currency forward contracts are valued on the basis of Level 2 inputs.
The following tables provide the total impact on other comprehensive income and earnings relating to the derivative instruments formally designated as cash flow hedges for the three and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Interest rate swap contracts
 
2018
 
2017
 
2018
 
2017
Amount recognized in other comprehensive income
 
$
7,200

 
$
(144
)
 
$
33,043

 
$
(46
)
Amount reclassified to finance expenses
 
$
698

 
$
—

 
$
2,041

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Foreign currency forward contracts
 
2018
 
2017
 
2018
 
2017
Amount recognized in other comprehensive income
 
$
(4,165
)
 
$
—

 
$
(1,245
)
 
$
—

Amount reclassified to general and administrative expenses
 
$
(884
)
 
$
—

 
$
(1,192
)
 
$
—

(c)
Balance sheet offsetting
There was no balance sheet offsetting activity as at June 30, 2018 or December 31, 2017.
The Company provides investments as collateral for interest rate swap contracts and weather derivative contracts. The Company does not provide collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.
The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.

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

9. Reserve for losses and loss expenses
The following table summarizes the Company’s reserve for losses and loss expenses as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
Case reserves
$
1,836,130

 
$
1,753,844

IBNR
2,863,469

 
3,077,546

Reserve for losses and loss expenses
$
4,699,599

 
$
4,831,390

The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Reserve for losses and loss expenses, beginning of period
$
4,632,629

 
$
3,052,745

 
$
4,831,390

 
$
2,995,195

Loss reserves recoverable
(979,944
)
 
(451,856
)
 
(1,233,997
)
 
(430,421
)
Net reserves for losses and loss expenses, beginning of period
3,652,685

 
2,600,889

 
3,597,393

 
2,564,774

 
 
 
 
 
 
 
 
Net reserves acquired
—

 
23,753

 
—

 
23,753

 
 
 
 
 
 
 
 
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year
489,181

 
339,439

 
818,296

 
670,255

Prior years
(12,571
)
 
(43,290
)
 
(20,141
)
 
(104,521
)
Total incurred losses and loss expenses 
476,610

 
296,149

 
798,155

 
565,734

 
 
 
 
 
 
 
 
Foreign exchange (gain) loss
(30,348
)
 
20,216

 
(14,721
)
 
32,533

Less net losses and loss expenses paid in respect of losses occurring in:
Current year
(61,340
)
 
(42,758
)
 
(81,075
)
 
(50,456
)
Prior years
(308,958
)
 
(193,265
)
 
(571,103
)
 
(431,354
)
Total net paid losses
(370,298
)
 
(236,023
)
 
(652,178
)
 
(481,810
)
 
 
 
 
 
 
 
 
Net reserve for losses and loss expenses, end of period
3,728,649

 
2,704,984

 
3,728,649

 
2,704,984

Loss reserves recoverable
970,950

 
600,207

 
970,950

 
600,207

Reserve for losses and loss expenses, end of period
$
4,699,599

 
$
3,305,191

 
$
4,699,599

 
$
3,305,191

Incurred losses and loss expenses comprise:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Gross losses and loss expenses
$
535,438

 
$
410,421

 
$
784,219

 
$
746,863

Reinsurance recoveries
(58,828
)
 
(114,272
)
 
13,936

 
(181,129
)
Net incurred losses and loss expenses
$
476,610

 
$
296,149

 
$
798,155

 
$
565,734


29
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

The net (favorable) adverse development on prior accident years by segment and line of business for the three and six months ended June 30, 2018 and 2017 was as follows:
 
Three Months Ended June 30, 2018
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(9,634
)
 
$
(10,273
)
 
$
5,097

 
$
(14,810
)
Insurance Segment
4,792

 
4,986

 
(4,814
)
 
4,964

Asset Management Segment
(1,666
)
 
(1,059
)
 
—

 
(2,725
)
Net (favorable) adverse development
$
(6,508
)
 
$
(6,346
)
 
$
283

 
$
(12,571
)
 
Three Months Ended June 30, 2017
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(697
)
 
$
(14,344
)
 
$
(667
)
 
$
(15,708
)
Insurance Segment
(5,347
)
 
(9,349
)
 
(9,034
)
 
(23,730
)
Asset Management Segment
(3,097
)
 
(755
)
 
—

 
(3,852
)
Net favorable development
$
(9,141
)
 
$
(24,448
)
 
$
(9,701
)
 
$
(43,290
)
The net favorable development on prior accident years for the three months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses.
 
Six Months Ended June 30, 2018
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(14,456
)
 
$
(23,724
)
 
$
5,532

 
$
(32,648
)
Insurance Segment
8,860

 
(7,215
)
 
(12,229
)
 
(10,584
)
Asset Management Segment
23,534

 
(443
)
 
—

 
23,091

Net adverse (favorable) development
$
17,938

 
$
(31,382
)
 
$
(6,697
)
 
$
(20,141
)
 
Six Months Ended June 30, 2017
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Reinsurance Segment
$
(4,759
)
 
$
(41,092
)
 
$
(981
)
 
$
(46,832
)
Insurance Segment
(14,013
)
 
(21,112
)
 
(15,294
)
 
(50,419
)
Asset Management Segment
(7,492
)
 
222

 
—

 
(7,270
)
Net favorable development
$
(26,264
)
 
$
(61,982
)
 
$
(16,275
)
 
$
(104,521
)
The net favorable development on prior accident years for the six months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses.
10. Reinsurance
The Company’s reinsurance balances recoverable at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
Loss reserves recoverable on unpaid:
 
 
 
Case reserves
$
287,141

 
$
275,450

IBNR
683,809

 
958,547

Total loss reserves recoverable
970,950

 
1,233,997

Paid losses recoverable
71,876

 
46,873

Total reinsurance recoverable
$
1,042,826

 
$
1,280,870


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

(a)
Credit risk
The cession of reinsurance does not legally discharge the Company from its primary liability for the full amount of the (re)insurance policies it writes, and the Company is required to pay the loss and bear collection risk regarding reinsurers’ obligations under reinsurance and retrocession agreements. Validus records provisions for uncollectible reinsurance recoverable when collection becomes unlikely due to the reinsurer’s inability to pay.
To the extent the creditworthiness of the Company’s reinsurers were to deteriorate due to adverse events affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying loss reserves.
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, is A- or better as rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. As at June 30, 2018, $1,033,890 or 99.1% (December 31, 2017: $1,270,503 or 99.2%) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.
Information regarding the Company’s concentration of credit risk arising from its exposure to individual reinsurers as at June 30, 2018 and December 31, 2017 is as follows:
 
June 30, 2018
 
December 31, 2017
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
857,819

 
82.2
%
 
$
1,055,445

 
82.5
%
Other reinsurers’ balances > $1 million
176,212

 
17.0
%
 
218,226

 
17.0
%
Other reinsurers’ balances < $1 million
8,795

 
0.8
%
 
7,199

 
0.5
%
Total
$
1,042,826

 
100.0
%
 
$
1,280,870

 
100.0
%
 
 
June 30, 2018
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Fully collateralized reinsurers
 
NR
 
$
400,415

 
38.4
%
Everest Re
 
A+
 
120,146

 
11.5
%
Lloyd's Syndicates
 
A+
 
75,841

 
7.3
%
Swiss Re
 
AA-
 
49,857

 
4.8
%
Munich Re
 
AA-
 
46,444

 
4.5
%
Hannover Re
 
AA-
 
46,353

 
4.4
%
Transatlantic Re
 
A+
 
43,050

 
4.1
%
Qatar Insurance Company
 
A
 
31,107

 
3.0
%
Partner Re
 
A+
 
23,283

 
2.2
%
Markel
 
A
 
21,323

 
2.0
%
Total
 
 
 
$
857,819

 
82.2
%
NR:    Not rated

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

 
 
December 31, 2017
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Fully collateralized reinsurers
 
NR
 
$
459,339

 
35.9
%
Everest Re
 
A+
 
128,206

 
10.0
%
Munich Re
 
AA-
 
94,180

 
7.4
%
Lloyd's Syndicates
 
A+
 
74,277

 
5.8
%
Federal Crop Insurance Corporation
 
(a)
 
68,745

 
5.4
%
Swiss Re
 
AA-
 
65,218

 
5.1
%
Hannover Re
 
AA-
 
53,523

 
4.2
%
Qatar Insurance Company
 
A
 
50,160

 
3.9
%
Transatlantic Re
 
A+
 
33,729

 
2.6
%
Markel
 
A
 
28,068

 
2.2
%
Total
 
 
 
$
1,055,445

 
82.5
%
NR:
Not rated
(a)
The Company participates in a crop reinsurance program sponsored by the U.S. federal government. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the Insurance segment agriculture line of business.
At June 30, 2018 and December 31, 2017, the provision for uncollectible reinsurance relating to reinsurance recoverables was $8,003 and $8,848, respectively.
11. Share capital
Prior to July 18, 2018, the Company’s share capital consisted of preferred shares and common shares, each with a par value of $0.175 per share. On July 18, 2018, in connection with the consummation of the Merger, the NYSE suspended trading of the Company’s common shares. The preferred shares will continue to be listed on the NYSE and registered under the Exchange Act. For further details on the Merger, please refer to Note 3, “Business combinations.”
Holders of the Company’s preferred shares have no voting rights with respect to matters that generally require the approval of voting shareholders but are entitled to vote in certain extraordinary instances. Holders of common shares were entitled to one vote for each share held, subject to certain voting limitations.
The Company is authorized to issue up to an aggregate of 80,000,000 common shares with a par value of $0.01, and 16,000 preferred shares with a par value of $0.175 per share.
(a)
Preferred shares
5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”)
On June 13, 2016, the Company issued 6,000 shares of its 5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) (equivalent to 6,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series A Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series A Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $144,852 which were used for general corporate purposes.
The Depositary Shares, representing the Series A Preferred Shares, are traded on the New York Stock Exchange (“NYSE”) under the symbol “VRPRA.” Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.

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

5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”)
On June 12, 2017, the Company issued 10,000 shares of its 5.800% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”) (equivalent to 10,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series B Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). The Series B Preferred Shares were registered and sold under the Securities Act of 1933, as amended, and were issued at a price to the public of $25,000 per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, the Company received net proceeds of $241,686 which were used for general corporate purposes.
The Depositary Shares, representing the Series B Preferred Shares, are traded on the New York Stock Exchange (“NYSE”) under the symbol “VRPRB.” Holders of the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.
The Company had 6,000 Series A Preferred Shares and 10,000 Series B Preferred Shares issued and outstanding as at June 30, 2018 and December 31, 2017.
For further information regarding the Company’s preferred shares refer to Note 16(a), “Share capital,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
(b)
Common shares
The holders of common shares were 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 constituted more than 9.09 percent of the outstanding common shares of the Company, their voting power would be reduced to 9.09 percent.
The Company has repurchased 81,035,969 common shares for an aggregate purchase price of $2,730,975 from the inception of its share repurchase program to June 30, 2018. The Company had $293,426 remaining under its authorized share repurchase program as of June 30, 2018.
The following table is a summary of the common shares issued and outstanding during the six months ended June 30, 2018 and 2017:
 
Six Months Ended June 30,
 
2018
 
2017
Common shares issued, beginning of period
161,994,491

 
161,279,976

Restricted share awards vested, net of shares withheld
1,015,069

 
597,021

Restricted share units vested, net of shares withheld
63,702

 
14,948

Performance shares vested, net of shares withheld
113,627

 
42,410

Common shares issued, end of period
163,186,889

 
161,934,355

Treasury shares, end of period
(82,674,941
)
 
(82,415,774
)
Common shares outstanding, end of period
80,511,948

 
79,518,581

(c)
Dividends
On May 4, 2018, the Company announced a quarterly cash dividend of $0.38 (2017: $0.38) per common share and cash dividends of $0.3671875 (2017: $0.3671875) and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The common share dividend was paid on May 30, 2018 to holders of record on May 15, 2018. The preferred share dividends were paid on June 15, 2018 to shareholders of record on June 1, 2018.
On February 7, 2018, the Company announced a quarterly cash dividend of $0.38 (2017: $0.38) per common share and cash dividends of $0.3671875 (2017: $0.3671875) and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The common share dividend was paid on March 29, 2018 to holders of record on March 15, 2018. The preferred share dividends were paid on March 15, 2018 to shareholders of record on March 1, 2018.

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

12. Stock plans
(a)
Long Term Incentive Plan
The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provided for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. As at June 30, 2018, the total number of shares reserved for issuance under the LTIP were 2,753,292, of which 479,086 shares were remaining. The LTIP was administered by the Compensation Committee of the Board of Directors. No SARs were granted. The grant date fair value of each award was established at the fair market value of the Company’s common shares at the date of grant.
(i)    Options
The Company did not grant any stock option awards after September 4, 2009. These stock option awards were fully amortized as at December 31, 2012, and the final options outstanding were exercised during the year ended December 31, 2017.
While outstanding, the Company’s options could be exercised for voting common shares upon vesting and had a term of ten years. The fair value of the option awards at the date of grant was determined using the Black-Scholes option-pricing model. Expected volatility was based on the 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.
Activity with respect to options for the six months ended June 30, 2017 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, beginning and end of period
26,136

 
$
6.78

 
$
23.48

(ii)    Restricted share awards
Restricted shares granted under the LTIP vested either pro rata or 100% at the end of the required service period and contained certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment, and transferability. The Company recognized share compensation expenses in respect of restricted share awards during the three and six months ended June 30, 2018 of $7,190 (2017: $9,745) and $15,303 (2017: $18,789), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share awards for the six months ended June 30, 2018 and 2017 was as follows:
 
Six Months Ended June 30,
 
2018
 
2017
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, beginning of period
2,080,397

 
$
43.66

 
2,469,982

 
$
40.89

Restricted share awards granted
1,552

 
67.64

 
481,619

 
53.42

Restricted share awards vested
(1,322,774
)
 
40.13

 
(803,764
)
 
41.31

Restricted share awards forfeited
(15,985
)
 
47.32

 
(39,617
)
 
41.98

Restricted share awards outstanding, end of period
743,190

 
$
49.92

 
2,108,220

 
$
43.58

At June 30, 2018, there were $33,551 (December 31, 2017: $48,907) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.1 years (December 31, 2017: 2.3 years).

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

(iii)    Restricted share units
Restricted share units under the LTIP vested either ratably or 100% at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment, and transferability. The Company recognized share compensation expenses in respect of restricted share units during the three and six months ended June 30, 2018 of $284 (2017: $327) and $616 (2017: $642), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share units for the six months ended June 30, 2018 and 2017 was as follows:
 
Six Months Ended June 30,
 
2018
 
2017
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, beginning of period
109,394

 
$
42.20

 
112,808

 
$
40.95

Restricted share units granted
—

 
—

 
12,236

 
53.40

Restricted share units vested
(81,139
)
 
39.27

 
(18,241
)
 
41.66

Restricted share units issued in lieu of cash dividends
2,105

 
42.25

 
1,468

 
40.98

Restricted share units forfeited
(17
)
 
44.63

 
—

 
—

Restricted share units outstanding, end of period
30,343

 
$
50.04

 
108,271

 
$
42.24

At June 30, 2018, there were $1,319 (December 31, 2017: $1,909) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.3 years (December 31, 2017: 2.4 years).
(iv)    Performance share awards
Performance share awards vested three years after the grant date, with the grant date fair value of each share awarded recognized evenly over this period. The number of performance shares initially granted was adjusted via “conversion adjustments” to reflect the compounded growth in the Dividend-Adjusted Book Value per Diluted Share over the three years as determined by the Company’s Compensation Committee. The cumulative compensation expense recognized and unrecognized as at any reporting period date represented the adjusted estimate of performance shares that would ultimately be awarded, valued at their original grant date fair values.
The Company recognized share compensation expenses in respect of performance share awards during the three and six months ended June 30, 2018 of $8,566 (2017: $1,074) and $9,850 (2017: $1,206), respectively. The share compensation expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

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

Activity with respect to unvested performance share awards for the six months ended June 30, 2018 and 2017 was as follows:
 
Six Months Ended June 30,
 
2018
 
2017
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, beginning of period
314,068

 
$
49.37

 
285,820

 
$
44.53

Performance share awards granted
—

 
—

 
107,209

 
53.40

Performance share awards vested
(142,749
)
 
45.03

 
(52,639
)
 
37.33

Performance share awards conversion adjustment
235,564

 
49.37

 
(26,322
)
 
36.82

Performance share awards outstanding, end of period
406,883

 
$
50.89

 
314,068

 
$
49.37

At June 30, 2018, there were $9,501 (December 31, 2017: $7,813) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 1.6 years (December 31, 2017: 1.9 years).
(b)
Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Restricted share awards
$
7,190

 
$
9,745

 
$
15,303

 
$
18,789

Restricted share units
284

 
327

 
616

 
642

Performance share awards
8,566

 
1,074

 
9,850

 
1,206

Total
$
16,040

 
$
11,146

 
$
25,769

 
$
20,637

13. Debt and financing arrangements
The Company’s financing structure is composed of debentures and senior notes payable along with credit and other facilities. For further information regarding the Company’s financing structure refer to Note 19, “Debt and financing arrangements,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
(a)
Senior Notes and Junior Subordinated Deferrable Debentures
The Company’s outstanding debentures and senior notes payable as at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
Deferrable debentures
 
 
 
2006 Junior Subordinated
$
150,000

 
$
150,000

2007 Junior Subordinated
139,800

 
139,800

Flagstone 2006 Junior Subordinated
135,201

 
135,608

Flagstone 2007 Junior Subordinated
113,750

 
113,750

Total debentures payable
538,751

 
539,158

2010 Senior Notes due 2040
250,000

 
250,000

Less: Unamortized debt issuance costs
(4,336
)
 
(4,436
)
Total senior notes payable
245,664

 
245,564

Total debentures and senior notes payable
$
784,415

 
$
784,722


36
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

The following table summarizes the key terms of the Company’s Senior Notes and Junior Subordinated deferrable debentures:
Description
 
Issuance date
 
Issued
 
Maturity date
 
Interest Rate as at
 
Interest payments due
 
Issuance Date
 
June 30, 2018
 
2006 Junior Subordinated Deferrable Debentures
 
June 15, 2006
 
$
150,000

 
June 15, 2036
 
9.069
%
(a) 
 
5.831
%
(e) 
 
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
 
August 23, 2006
 
$
135,201

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

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

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

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

 
January 26, 2040
 
8.875
%
(d) 
 
8.875
%
(d) 
 
Semi-annually in arrears
(a)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 3.550% thereafter, reset quarterly.
(b)
Floating interest rate of three-month LIBOR plus amount stated, reset quarterly.
(c)
Fixed interest rate for 5 years, floating interest rate of three-month LIBOR plus 2.950% thereafter, reset quarterly.
(d)
Fixed interest rate.
(e)
Fixed interest rate as a result of interest rate swap contracts entered into by the Company.
(b)
Credit and other facilities
The Company’s outstanding credit facilities as at June 30, 2018 and December 31, 2017 were as follows:
 
 
June 30, 2018
Credit facility
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

 
$
—

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

 
98,267

 
—

 
123,632

$100,000 secured bi-lateral letter of credit facility
 
100,000

 
4,238

 
—

 
22,432

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

 
7,702

 
—

 
—

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

 
107,506

 
—

 
155,064

$65,000 unsecured revolving credit facility
 
65,000

 
—

 
—

 
—

$100,000 unsecured revolving credit facility
 
100,000

 
—

 
—

 
—

FHLB secured facility
 
548,898

 
206,000

 
206,000

 
238,499

Total credit facilities
 
$
1,459,898

 
$
423,713

 
$
206,000

 
$
539,627

(a)
Indicates utilization of commitment amount.
(b)
Represents drawn borrowings included in accounts payable and accrued expenses.

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

 
 
December 31, 2017
Credit facility
 
Commitment
 
Outstanding (a)
 
Drawn (b)
 
Cash and investments pledged as collateral
$85,000 syndicated unsecured letter of credit facility
 
$
85,000

 
$
—

 
$
—

 
$
—

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

 
92,979

 
—

 
118,188

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

 
5,765

 
—

 
22,340

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

 
7,754

 
—

 
—

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

 
115,682

 
—

 
184,569

$65,000 unsecured revolving credit facility
 
65,000

 
—

 
—

 
—

$100,000 unsecured revolving credit facility
 
100,000

 
—

 
—

 
—

FHLB secured facility
 
484,096

 
206,000

 
206,000

 
251,767

Total credit facilities
 
$
1,319,096

 
$
428,180

 
$
206,000

 
$
576,864

(a)
Indicates utilization of commitment amount.
(b)
Represents drawn borrowings included in accounts payable and accrued expenses.
On January 24, 2018, the Company increased the size of the secured bi-lateral letter of credit facility with Citibank Europe plc (the “Secured bi-lateral LOC facility”) from $24,000 to $100,000. All covenants and restrictions under the Secured bi-lateral LOC facility remain unchanged. As of June 30, 2018, $4,238 (December 31, 2017: $5,765) of letters of credit were outstanding under the Secured bi-lateral LOC facility.
As of June 30, 2018 and December 31, 2017, the Company was in compliance with all covenants and restrictions under its credit facilities.
(c)
Finance expenses
Finance expenses consist of interest on the Junior Subordinated Deferrable Debentures and the 2010 Senior Notes, the amortization of debt offering costs, credit facility fees, bank and other charges and AlphaCat financing fees as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
2006 Junior Subordinated Deferrable Debentures
$
2,212

 
$
2,211

 
$
4,398

 
$
4,398

2007 Junior Subordinated Deferrable Debentures
1,831

 
1,831

 
3,641

 
3,641

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,246

 
2,248

 
4,473

 
4,469

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,722

 
1,751

 
3,435

 
3,474

2010 Senior Notes
5,598

 
5,598

 
11,195

 
11,195

Credit facilities
464

 
403

 
880

 
621

Bank and other charges
207

 
131

 
470

 
282

AlphaCat fees (a)
30

 
36

 
81

 
72

Total finance expenses
$
14,310

 
$
14,209

 
$
28,573

 
$
28,152

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

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

14. Accumulated other comprehensive income (loss)
The changes in accumulated other comprehensive income (loss), by component for the three and six months ended June 30, 2018 and 2017 are as follows:
 
Three Months Ended June 30, 2018
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(16,380
)
 
$
2,681

 
$
23,104

 
$
9,405

Other comprehensive (loss) income, net of tax
(2,737
)
 
342

 
3,035

 
640

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

 
(186
)
 
(186
)
Balance, net of tax, end of period
$
(19,117
)
 
$
3,023

 
$
25,953

 
$
9,859

 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(21,677
)
 
$
(82
)
 
$
(694
)
 
$
(22,453
)
Other comprehensive income (loss), net of tax
1,489

 
1,184

 
(144
)
 
2,529

Balance, net of tax, end of period
$
(20,188
)
 
$
1,102

 
$
(838
)
 
$
(19,924
)
 
Six Months Ended June 30, 2018
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(18,217
)
 
$
2,719

 
$
(6,694
)
 
$
(22,192
)
Other comprehensive (loss) income, net of tax
(900
)
 
304

 
31,798

 
31,202

Amounts reclassified from accumulated other comprehensive income (loss)
—

 
—

 
849

 
849

Balance, net of tax, end of period
$
(19,117
)
 
$
3,023

 
$
25,953

 
$
9,859

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance, net of tax, beginning of period
$
(22,274
)
 
$
(150
)
 
$
(792
)
 
$
(23,216
)
Other comprehensive income (loss), net of tax
2,086

 
1,252

 
(46
)
 
3,292

Balance, net of tax, end of period
$
(20,188
)
 
$
1,102

 
$
(838
)
 
$
(19,924
)


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

15. Commitments and contingencies
(a)
Funds at Lloyd’s
The Company operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Lloyd’s Syndicate 1183 (the “Talbot Syndicate”). Lloyd’s sets T02’s Economic Capital Assessment (“ECA”) annually based on the Talbot Syndicate’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with regulatory and rating agencies, and other parties. This ECA is satisfied by syndicate net assets determined on a basis consistent with Solvency II, an EU directive covering capital adequacy, risk management and regulatory reporting for insurers. Any syndicate net liabilities on a Solvency II basis are required to be funded in addition to the ECA. Such additional funds, known as Funds at Lloyd’s (“FAL”), comprises cash and investments. The Company provided FAL in the amount of $661,600 during the fourth quarter of 2017 (2016: $583,600).
The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. T02 may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.
(b)
Lloyd’s Central Fund
Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2018 estimated premium income at Lloyd’s of £650,000, at June 30, 2018 using an exchange rate of £1 equals $1.32 and assuming the maximum 3% assessment, the Company would be assessed approximately $25,740 (December 31, 2017: $26,325).
(c)
Unfunded investment commitments
As at June 30, 2018 and December 31, 2017, the Company had total unfunded investment commitments related to the following:
 
 
Unfunded investment commitments
 
 
June 30, 2018
 
December 31, 2017
Fixed maturity investments (a)
 
$
26,477

 
$
22,082

Other investments (b)
 
83,894

 
86,697

Investments in investment affiliates (c)
 
95,788

 
125,996

Total unfunded investment commitments
 
$
206,159

 
$
234,775

(a)
The Company has an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator.
(b)
The Company’s total capital commitments related to other investments as at June 30, 2018 was $268,000 (December 31, 2017: $268,000).
(c)
Refer to Note 4(c), “Investments in investment affiliates.”
16. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counterparty were members of the Company’s board of directors as at June 30, 2018.
(a)
Aquiline Capital Partners LLC (“Aquiline Capital”)
Wellington
Aquiline Capital are shareholders of Wellington Insurance Company (“Wellington”) and Christopher E. Watson serves as a director of Wellington.
Pursuant to reinsurance agreements with a subsidiary of Wellington, the Company recognized gross premiums written during the three and six months ended June 30, 2018 of $16 and $798 (2017: $1,144 and $4,118) with $542 included in premiums receivable at June 30, 2018 (December 31, 2017: $211). The Company also recognized premium adjustments during the three and six months ended June 30, 2018 of $(282) and $496 (2017: $1,676 and $2,537).

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

Aquiline II, Aquiline III, Aquiline Tech and Aquiline Armour
Jeffrey W. Greenberg and Christopher E. Watson, directors of the Company as at June 30, 2018, serve as managing principal and senior principal, respectively, of Aquiline Capital. Additional information related to the Company’s investments in Aquiline II, III, Tech and Armour is disclosed in Note 4(c), “Investments in investment affiliates.”
The Company had, as of June 30, 2018 and December 31, 2017, investments in Aquiline II, III, Tech and Armour with a total value of $127,247 and $100,137 and outstanding unfunded commitments of $95,788 and $125,996, respectively. For the three and six months ended June 30, 2018, the Company incurred $3,767 and $3,899 (2017: $130 and $486), respectively, in partnership fees associated with these investments.
(b)    Other
Certain shareholders of the Company and their affiliates, as well as employees of entities associated with directors and officers may have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company does not believe these transactions to be material.
17. Earnings per common share
The following table sets forth the computation of basic (loss) earnings per common share and (loss) earnings per diluted common share available to Validus common shareholders for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic (loss) earnings per common share
 
 
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
(52,898
)
 
101,095

 
(56,976
)
 
195,656

Weighted average number of common shares outstanding
79,650,474

 
79,270,561

 
79,488,081

 
79,202,116

Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.28

 
$
(0.72
)
 
$
2.47

 
 
 
 
 
 
 
 
(Loss) earnings per diluted common share
 
 
 
 
 
 
 
Net (loss) income (attributable) available to Validus common shareholders
$
(52,898
)
 
$
101,095

 
$
(56,976
)
 
$
195,656

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
79,650,474

 
79,270,561

 
79,488,081

 
79,202,116

Share equivalents:
 
 
 
 
 
 
 
Stock options
—

 
14,739

 
—

 
15,059

Unvested restricted shares
—

 
1,587,151

 
—

 
1,644,823

Weighted average number of diluted common shares outstanding
79,650,474

 
80,872,451

 
79,488,081

 
80,861,998

(Loss) earnings per diluted common share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.25

 
$
(0.72
)
 
$
2.42

Earnings per diluted common share assumes the exercise of all dilutive stock options and restricted stock grants. Due to the net loss incurred during the three and six months ended June 30, 2018, share equivalents were not included in the computation of loss per diluted share due to their anti-dilutive effect. Share equivalents that would result in the issuance of common shares of 412,603 and 207,054 were outstanding for the three and six months ended June 30, 2017, respectively, but were not included in the computation of earnings per diluted share because the effect would be anti-dilutive.

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

18. Segment information
The Company conducts its operations worldwide through three reportable segments, which have been determined under ASC Topic 280 “Segment Reporting” to be Reinsurance, Insurance and Asset Management. The Company’s reportable segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment undertakes different strategies.
A description of each of the Company’s reportable segments and its Corporate and Investments function is as follows:
Reinsurance Segment
The Reinsurance segment operates globally and is primarily focused on treaty reinsurance within the following lines and classes of business:
•
Property: catastrophe excess of loss, per risk excess of loss, proportional and treaty;
•
Specialty - Short-tail: aerospace and aviation, agriculture, composite, marine, other specialty (including contingency, crisis management and life and accident & health), technical lines, terrorism, trade credit and workers’ compensation; and
•
Specialty - Other: casualty and financial lines of business.
Insurance Segment
The Insurance segment operates globally and focuses on specialty insurance within both the Lloyd’s and the U.S. commercial insurance markets and is focused on a wide range of insurance products within the following lines and classes of business:
•
Property: direct property and downstream energy and power;
•
Specialty - Short-tail: accident & health, agriculture, aviation, contingency, marine, and political lines (including war and political violence); and
•
Specialty - Other: financial, liability (including general liability, professional liability, products liability and miscellaneous malpractice), marine and energy, political risk and products and airports.
Asset Management Segment
The Asset Management segment leverages the Company’s underwriting and analytical expertise and earns management and performance fees primarily through the management of ILS funds and sidecars.
Corporate and Investments
The Company’s Corporate and Investments function, which includes the activities of the parent company, carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Transaction expenses are primarily composed of legal and financial advisory services incurred in connection with the Company’s Merger with AIG in 2018, and the acquisition of CRS in 2017. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered a reportable segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of certain inter segment revenues and expenses and other items that are not allocated to the reportable segments.



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

The following tables summarize the results of our reportable segments and “Corporate and Investments” function:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Reinsurance Segment Information
 
2018
 
2017
 
2018
 
2017
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
360,588

 
$
330,534

 
$
1,126,161

 
$
973,675

Reinsurance premiums ceded
 
(16,368
)
 
(10,278
)
 
(206,562
)
 
(124,724
)
Net premiums written
 
344,220

 
320,256

 
919,599

 
848,951

Change in unearned premiums
 
(106,697
)
 
(61,948
)
 
(457,324
)
 
(358,988
)
Net premiums earned
 
237,523

 
258,308

 
462,275

 
489,963

Other insurance related income
 
—

 
1

 
2

 
3

Total underwriting revenues
 
237,523

 
258,309

 
462,277

 
489,966

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
117,338

 
114,341

 
220,811

 
195,222

Policy acquisition costs
 
52,157

 
49,966

 
100,497

 
93,501

General and administrative expenses
 
26,522

 
22,204

 
55,437

 
42,173

Share compensation expenses
 
3,972

 
2,725

 
6,635

 
5,348

Total underwriting deductions
 
199,989

 
189,236

 
383,380

 
336,244

Underwriting income
 
$
37,534

 
$
69,073

 
$
78,897

 
$
153,722

 
 
 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
95.5
%
 
96.9
%
 
81.7
%
 
87.2
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
49.4
%
 
44.3
%
 
47.8
%
 
39.8
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
22.0
%
 
19.3
%
 
21.7
%
 
19.1
%
General and administrative expense ratio
 
12.8
%
 
9.7
%
 
13.4
%
 
9.7
%
Expense ratio
 
34.8
%
 
29.0
%
 
35.1
%
 
28.8
%
Combined ratio
 
84.2
%
 
73.3
%
 
82.9
%
 
68.6
%

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Insurance Segment Information
 
2018
 
2017
 
2018
 
2017
Underwriting revenues
 
 
 
 
 
 
 
 
Gross premiums written
 
$
384,240

 
$
360,057

 
$
1,170,035

 
$
742,847

Reinsurance premiums ceded
 
(81,887
)
 
(49,315
)
 
(273,524
)
 
(128,315
)
Net premiums written
 
302,353

 
310,742

 
896,511

 
614,532

Change in unearned premiums
 
97,446

 
(5,875
)
 
(197,174
)
 
(30,571
)
Net premiums earned
 
399,799

 
304,867

 
699,337

 
583,961

Other insurance related income
 
35

 
728

 
2,205

 
1,724

Total underwriting revenues
 
399,834

 
305,595

 
701,542

 
585,685

Underwriting deductions
 
 
 
 
 
 
 
 
Losses and loss expenses
 
342,854

 
180,741

 
526,243

 
367,351

Policy acquisition costs
 
57,650

 
60,137

 
117,707

 
121,329

General and administrative expenses
 
75,110

 
53,596

 
143,160

 
98,872

Share compensation expenses
 
4,242

 
3,702

 
7,231

 
7,075

Total underwriting deductions
 
479,856

 
298,176

 
794,341

 
594,627

Underwriting (loss) income
 
$
(80,022
)
 
$
7,419

 
$
(92,799
)
 
$
(8,942
)
 
 
 
 
 
 
 
 
 
Selected ratios:
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
78.7
%
 
86.3
%
 
76.6
%
 
82.7
%
 
 
 
 
 
 
 
 
 
Losses and loss expense ratio
 
85.8
%
 
59.3
%
 
75.2
%
 
62.9
%
 
 
 
 
 
 
 
 
 
Policy acquisition cost ratio
 
14.4
%
 
19.7
%
 
16.8
%
 
20.8
%
General and administrative expense ratio
 
19.8
%
 
18.8
%
 
21.5
%
 
18.1
%
Expense ratio
 
34.2
%
 
38.5
%
 
38.3
%
 
38.9
%
Combined ratio
 
120.0
%
 
97.8
%
 
113.5
%
 
101.8
%

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Asset Management Segment Information
 
2018
 
2017
 
2018
 
2017
Fee revenues
 
 
 
 
 
 
 
 
Third party
 
$
5,685

 
$
5,549

 
$
11,894

 
$
10,193

Related party
 
436

 
644

 
879

 
1,275

Total fee revenues
 
6,121

 
6,193

 
12,773

 
11,468

Expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
4,835

 
3,549

 
9,382

 
7,393

Share compensation expenses
 
30

 
83

 
71

 
165

Finance expenses
 
18

 
44

 
96

 
75

Tax expense (benefit)
 
2

 
135

 
(5
)
 
134

Foreign exchange losses
 
—

 
1

 
1

 
—

Total expenses
 
4,885

 
3,812

 
9,545

 
7,767

Income before investment income from funds and sidecars
 
1,236

 
2,381

 
3,228

 
3,701

Investment income (loss) from funds and sidecars (a)
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
102

 
(21
)
 
134

 
(133
)
AlphaCat ILS Funds - Lower Risk (b)
 
1,773

 
1,301

 
3,007

 
3,490

AlphaCat ILS Funds - Higher Risk (b)
 
(796
)
 
2,600

 
3,024

 
4,967

BetaCat ILS Funds
 
363

 
263

 
549

 
631

Validus' share of investment income from funds and sidecars
 
1,442

 
4,143

 
6,714

 
8,955

Asset Management segment income
 
$
2,678

 
$
6,524

 
$
9,942

 
$
12,656

 
 
 
 
 
 
 
 
 
Gross premiums written
 
 
 
 
 
 
 
 
AlphaCat Sidecars
 
$
9

 
$
—

 
$
(134
)
 
$
66

AlphaCat ILS Funds - Lower Risk (b)
 
62,577

 
53,632

 
172,527

 
106,540

AlphaCat ILS Funds - Higher Risk (b)
 
37,514

 
43,672

 
203,410

 
137,208

AlphaCat Direct (c)
 
2,278

 
8,378

 
13,200

 
26,794

Total
 
$
102,378

 
$
105,682

 
$
389,003

 
$
270,608

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

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Corporate and Investments
 
2018
 
2017
 
2018
 
2017
Managed investments
 
 
 
 
 
 
 
 
Managed net investment income (a)
 
$
42,752

 
$
38,063

 
$
82,543

 
$
74,255

Net realized (losses) gains on managed investments (a)
 
(7,432
)
 
2,269

 
(6,290
)
 
(623
)
Change in net unrealized (losses) gains on managed investments (a)
 
(11,392
)
 
15,942

 
(68,169
)
 
30,291

Income from investment affiliates
 
2,178

 
9,466

 
15,246

 
14,654

Total managed investment return
 
$
26,106

 
$
65,740

 
$
23,330

 
$
118,577

 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
13,523

 
$
16,219

 
$
25,832

 
$
34,180

Share compensation expenses
 
7,796

 
4,636

 
11,832

 
8,049

Finance expenses (a)
 
14,249

 
14,149

 
28,339

 
28,013

Dividends on preferred shares
 
5,828

 
2,203

 
11,656

 
4,406

Tax (benefit) (a)
 
(7,153
)
 
(1,122
)
 
(13,979
)
 
(4,670
)
Total Corporate expenses
 
$
34,243

 
$
36,085

 
$
63,680

 
$
69,978

 
 
 
 
 
 
 
 
 
Other items
 
 
 
 
 
 
 
 
Foreign exchange losses (a)
 
(1,652
)
 
(7,323
)
 
(1,655
)
 
(6,220
)
Other income
 
538

 
174

 
582

 
268

Transaction expenses
 
(3,837
)
 
(4,427
)
 
(11,593
)
 
(4,427
)
Total other items
 
$
(4,951
)
 
$
(11,576
)
 
$
(12,666
)
 
$
(10,379
)
Total Corporate and Investments
 
$
(13,088
)
 
$
18,079

 
$
(53,016
)
 
$
38,220

(a)
These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from VIEs.

46
Table of Contents
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

The following tables reconcile the results of our reportable segments and “Corporate & Investments” function to the Consolidated results of the Company for the periods indicated:
 
Three Months Ended June 30, 2018
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
360,588

 
$
384,240

 
$
102,378

 
$
—

 
$
—

 
$
847,206

Reinsurance premiums ceded
(16,368
)
 
(81,887
)
 
(9,312
)
 
—

 
—

 
(107,567
)
Net premiums written
344,220

 
302,353

 
93,066

 
—

 
—

 
739,639

Change in unearned premiums
(106,697
)
 
97,446

 
6,219

 
—

 
—

 
(3,032
)
Net premiums earned
237,523

 
399,799

 
99,285

 
—

 
—

 
736,607

Other insurance related income (loss)
—

 
35

 
(12,261
)
 
—

 
(4,428
)
 
(16,654
)
Total underwriting revenues
237,523

 
399,834

 
87,024

 
—

 
(4,428
)
 
719,953

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
117,338

 
342,854

 
16,418

 
—

 
—

 
476,610

Policy acquisition costs
52,157

 
57,650

 
8,974

 
—

 
—

 
118,781

General and administrative expenses
26,522

 
75,110

 
10,135

 
13,523

 
(4,428
)
 
120,862

Share compensation expenses
3,972

 
4,242

 
30

 
7,796

 
—

 
16,040

Total underwriting deductions
199,989

 
479,856

 
35,557

 
21,319

 
(4,428
)
 
732,293

Underwriting income (loss)
$
37,534

 
$
(80,022
)
 
$
51,467

 
$
(21,319
)
 
$
—

 
$
(12,340
)
Net investment return (a)
—

 
—

 
15,508

 
26,106

 
—

 
41,614

Other items (b)
—

 
—

 
1,063

 
(17,875
)
 
—

 
(16,812
)
(Income) attributable to AlphaCat investors
—

 
—

 
(29,849
)
 
—

 
—

 
(29,849
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(35,511
)
 
—

 
—

 
(35,511
)
Net income (loss) available (attributable) to Validus common shareholders
$
37,534

 
$
(80,022
)
 
$
2,678

 
$
(13,088
)
 
$
—

 
$
(52,898
)
(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).

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

 
Three Months Ended June 30, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
330,534

 
$
360,057

 
$
105,682

 
$
—

 
$
(3,371
)
 
$
792,902

Reinsurance premiums ceded
(10,278
)
 
(49,315
)
 
—

 
—

 
3,371

 
(56,222
)
Net premiums written
320,256

 
310,742

 
105,682

 
—

 
—

 
736,680

Change in unearned premiums
(61,948
)
 
(5,875
)
 
(37,830
)
 
—

 
—

 
(105,653
)
Net premiums earned
258,308

 
304,867

 
67,852

 
—

 
—

 
631,027

Other insurance related income
1

 
728

 
5,874

 
—

 
(5,438
)
 
1,165

Total underwriting revenues
258,309

 
305,595

 
73,726

 
—

 
(5,438
)
 
632,192

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
114,341

 
180,741

 
1,067

 
—

 
—

 
296,149

Policy acquisition costs
49,966

 
60,137

 
7,165

 
—

 
—

 
117,268

General and administrative expenses
22,204

 
53,596

 
9,768

 
16,219

 
(5,438
)
 
96,349

Share compensation expenses
2,725

 
3,702

 
83

 
4,636

 
—

 
11,146

Total underwriting deductions
189,236

 
298,176

 
18,083

 
20,855

 
(5,438
)
 
520,912

Underwriting income (loss)
$
69,073

 
$
7,419

 
$
55,643

 
$
(20,855
)
 
$
—

 
$
111,280

Net investment return (a)
—

 
—

 
6,562

 
65,740

 
—

 
72,302

Other items (b)
—

 
—

 
(201
)
 
(26,806
)
 
—

 
(27,007
)
(Income) attributable to AlphaCat investors
—

 
—

 
(11,830
)
 
—

 
—

 
(11,830
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(43,650
)
 
—

 
—

 
(43,650
)
Net income available to Validus common shareholders
$
69,073

 
$
7,419

 
$
6,524

 
$
18,079

 
$
—

 
$
101,095

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

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

 
Six Months Ended June 30, 2018
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,126,161

 
$
1,170,035

 
$
389,003

 
$
—

 
$
(5,537
)
 
$
2,679,662

Reinsurance premiums ceded
(206,562
)
 
(273,524
)
 
(9,312
)
 
—

 
5,537

 
(483,861
)
Net premiums written
919,599

 
896,511

 
379,691

 
—

 
—

 
2,195,801

Change in unearned premiums
(457,324
)
 
(197,174
)
 
(185,754
)
 
—

 
—

 
(840,252
)
Net premiums earned
462,275

 
699,337

 
193,937

 
—

 
—

 
1,355,549

Other insurance related income
2

 
2,205

 
15,819

 
—

 
(9,184
)
 
8,842

Total underwriting revenues
462,277

 
701,542

 
209,756

 
—

 
(9,184
)
 
1,364,391

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
220,811

 
526,243

 
51,101

 
—

 
—

 
798,155

Policy acquisition costs
100,497

 
117,707

 
17,033

 
—

 
—

 
235,237

General and administrative expenses
55,437

 
143,160

 
20,343

 
25,832

 
(9,184
)
 
235,588

Share compensation expenses
6,635

 
7,231

 
71

 
11,832

 
—

 
25,769

Total underwriting deductions
383,380

 
794,341

 
88,548

 
37,664

 
(9,184
)
 
1,294,749

Underwriting income (loss)
$
78,897

 
$
(92,799
)
 
$
121,208

 
$
(37,664
)
 
$
—

 
$
69,642

Net investment return (a)
—

 
—

 
28,243

 
23,330

 
—

 
51,573

Other items (b)
—

 
—

 
1,425

 
(38,682
)
 
—

 
(37,257
)
(Income) attributable to AlphaCat investors
—

 
—

 
(40,711
)
 
—

 
—

 
(40,711
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(100,223
)
 
—

 
—

 
(100,223
)
Net income (loss) available (attributable) to Validus common shareholders
$
78,897

 
$
(92,799
)
 
$
9,942

 
$
(53,016
)
 
$
—

 
$
(56,976
)
(a)
Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)
Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).

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

 
Six Months Ended June 30, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment and Consolidated VIEs
 
Corporate & Investments
 
Eliminations
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
973,675

 
$
742,847

 
$
270,608

 
$
—

 
$
(3,371
)
 
$
1,983,759

Reinsurance premiums ceded
(124,724
)
 
(128,315
)
 
(6,660
)
 
—

 
3,371

 
(256,328
)
Net premiums written
848,951

 
614,532

 
263,948

 
—

 
—

 
1,727,431

Change in unearned premiums
(358,988
)
 
(30,571
)
 
(131,469
)
 
—

 
—

 
(521,028
)
Net premiums earned
489,963

 
583,961

 
132,479

 
—

 
—

 
1,206,403

Other insurance related income
3

 
1,724

 
11,035

 
—

 
(10,361
)
 
2,401

Total underwriting revenues
489,966

 
585,685

 
143,514

 
—

 
(10,361
)
 
1,208,804

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
195,222

 
367,351

 
3,161

 
—

 
—

 
565,734

Policy acquisition costs
93,501

 
121,329

 
14,066

 
—

 
—

 
228,896

General and administrative expenses
42,173

 
98,872

 
19,409

 
34,180

 
(10,361
)
 
184,273

Share compensation expenses
5,348

 
7,075

 
165

 
8,049

 
—

 
20,637

Total underwriting deductions
336,244

 
594,627

 
36,801

 
42,229

 
(10,361
)
 
999,540

Underwriting income (loss)
$
153,722

 
$
(8,942
)
 
$
106,713

 
$
(42,229
)
 
$
—

 
$
209,264

Net investment return (a)
—

 
—

 
11,311

 
118,577

 
—

 
129,888

Other items (b)
—

 
—

 
187

 
(38,128
)
 
—

 
(37,941
)
(Income) attributable to AlphaCat investors
—

 
—

 
(19,333
)
 
—

 
—

 
(19,333
)
Net (income) attributable to noncontrolling interests
—

 
—

 
(86,222
)
 
—

 
—

 
(86,222
)
Net income (loss) available (attributable) to Validus common shareholders
$
153,722

 
$
(8,942
)
 
$
12,656

 
$
38,220

 
$
—

 
$
195,656

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


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

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:
 
Gross Premiums Written
 
Three Months Ended June 30, 2018
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
149,298

 
$
188,253

 
$
70,762

 
$
—

 
$
408,313

 
48.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
12,962

 
41,430

 
(102
)
 
—

 
54,290

 
6.4
 %
Australia and New Zealand
33

 
(2,992
)
 
—

 
—

 
(2,959
)
 
(0.3
)%
Europe
3,091

 
7,048

 
—

 
—

 
10,139

 
1.2
 %
Latin America and Caribbean
10,581

 
25,429

 
—

 
—

 
36,010

 
4.3
 %
Japan
43,467

 
2,213

 
1,833

 
—

 
47,513

 
5.6
 %
Canada
4,955

 
931

 
359

 
—

 
6,245

 
0.7
 %
Rest of the world (b)
5,971

 
24,559

 
—

 
—

 
30,530

 
3.6
 %
Sub-total, non United States
81,060

 
98,618

 
2,090

 
—

 
181,768

 
21.5
 %
Worldwide including United States (a)
59,259

 
30,789

 
29,526

 
—

 
119,574

 
14.1
 %
Other locations non-specific (c)
70,971

 
66,580

 
—

 
—

 
137,551

 
16.2
 %
Total
$
360,588

 
$
384,240

 
$
102,378

 
$
—

 
$
847,206

 
100.0
 %

 
Gross Premiums Written
 
Three Months Ended June 30, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
108,727

 
$
157,048

 
$
70,048

 
$
(3,371
)
 
$
332,452

 
41.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
5,378

 
37,295

 
870

 
—

 
43,543

 
5.5
%
Australia and New Zealand
3,388

 
1,764

 
2,003

 
—

 
7,155

 
0.9
%
Europe
1,168

 
5,711

 
(15
)
 
—

 
6,864

 
0.9
%
Latin America and Caribbean
11,320

 
24,092

 
46

 
—

 
35,458

 
4.5
%
Japan
40,832

 
1,848

 
2,662

 
—

 
45,342

 
5.7
%
Canada
3,267

 
995

 
130

 
—

 
4,392

 
0.6
%
Rest of the world (b)
5,062

 
22,940

 
—

 
—

 
28,002

 
3.5
%
Sub-total, non United States
70,415

 
94,645

 
5,696

 
—

 
170,756

 
21.6
%
Worldwide including United States (a)
56,169

 
24,005

 
29,937

 
—

 
110,111

 
13.9
%
Other locations non-specific (c)
95,223

 
84,359

 
1

 
—

 
179,583

 
22.6
%
Total
$
330,534

 
$
360,057

 
$
105,682

 
$
(3,371
)
 
$
792,902

 
100.0
%


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

 
Gross Premiums Written
 
Six Months Ended June 30, 2018
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
349,472

 
$
748,975

 
$
101,785

 
$
(1,525
)
 
$
1,198,707

 
44.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
52,287

 
93,662

 
2,777

 
—

 
148,726

 
5.6
%
Australia and New Zealand
1,169

 
5,185

 
—

 
—

 
6,354

 
0.2
%
Europe
41,073

 
12,608

 
338

 
—

 
54,019

 
2.0
%
Latin America and Caribbean
17,120

 
43,874

 
—

 
—

 
60,994

 
2.3
%
Japan
45,567

 
3,129

 
2,264

 
—

 
50,960

 
1.9
%
Canada
8,690

 
1,864

 
359

 
—

 
10,913

 
0.4
%
Rest of the world (b)
24,269

 
51,779

 
—

 
—

 
76,048

 
2.9
%
Sub-total, non United States
190,175

 
212,101

 
5,738

 
—

 
408,014

 
15.3
%
Worldwide including United States (a)
178,068

 
57,444

 
277,640

 
(4,012
)
 
509,140

 
19.0
%
Other locations non-specific (c)
408,446

 
151,515

 
3,840

 
—

 
563,801

 
21.0
%
Total
$
1,126,161

 
$
1,170,035

 
$
389,003

 
$
(5,537
)
 
$
2,679,662

 
100.0
%

 
Gross Premiums Written
 
Six Months Ended June 30, 2017
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
 
%
United States
$
332,655

 
$
347,236

 
$
98,251

 
$
(3,371
)
 
$
774,771

 
39.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Worldwide excluding United States (a)
40,586

 
69,833

 
7,905

 
—

 
118,324

 
5.9
%
Australia and New Zealand
4,177

 
4,938

 
2,003

 
—

 
11,118

 
0.6
%
Europe
33,113

 
14,392

 
451

 
—

 
47,956

 
2.4
%
Latin America and Caribbean
21,280

 
44,779

 
46

 
—

 
66,105

 
3.3
%
Japan
42,783

 
2,853

 
3,855

 
—

 
49,491

 
2.5
%
Canada
5,625

 
1,444

 
130

 
—

 
7,199

 
0.4
%
Rest of the world (b)
20,165

 
43,332

 
—

 
—

 
63,497

 
3.2
%
Sub-total, non United States
167,729

 
181,571

 
14,390

 
—

 
363,690

 
18.3
%
Worldwide including United States (a)
151,970

 
51,192

 
153,246

 
—

 
356,408

 
18.0
%
Other locations non-specific (c)
321,321

 
162,848

 
4,721

 
—

 
488,890

 
24.6
%
Total
$
973,675

 
$
742,847

 
$
270,608

 
$
(3,371
)
 
$
1,983,759

 
100.0
%
(a)
Represents risks in two or more geographic zones.
(b)
Represents risks in one geographic zone.
(c)
The other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.



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

19. Subsequent events
On July 18, 2018, the Company completed its previously announced Merger with AIG. Refer to Note 3, “Business combinations,” for further details.
On July 26, 2018, AIG executed a guarantee (the “Preference Shares Guarantee”) with respect to the Series A Preferred Shares and the Series B Preferred Shares of the Company. Under the terms of the Preference Shares Guarantee, AIG provided a full and unconditional guarantee of the Company’s obligations under the certificates of designation governing the Series A Preferred Shares and the Series B Preferred Shares, as applicable. Additionally on July 26, 2018, AIG executed a guarantee with respect to the Company’s aggregate outstanding 8.875% Senior Notes due 2040, pursuant to which AIG provided a full and unconditional guarantee of the Company’s obligations under the related indentures.

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Table of Contents

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, 2018 and 2017 and the Company’s consolidated financial condition, liquidity and capital resources as at June 30, 2018 and December 31, 2017. This discussion and analysis should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company’s audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2017, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
For a number of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 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.
Table of Contents
Section
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

Executive Overview
During the fourth quarter of 2017, we changed our reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” Furthermore, to better align our disclosures with our current strategy, we also changed our primary lines of business to “Property,” “Specialty - Short-tail” and “Specialty - Other.” The change in reportable segments and primary lines of business had no impact on our historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
In addition, we have a corporate and investments function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation, finance and transaction expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered a reportable segment. Our corporate expenses, capital servicing and debt costs and investment results are presented separately within the Corporate and Investments discussion.
Our strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. Our profitability in any given period is a function of net earned premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the (re)insurance 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 (re)insurance capacity and changes in legal, regulatory and judicial environments.
Merger Agreement
On July 18, 2018, we completed the Merger Agreement with AIG. Pursuant to the Merger Agreement, the Company merged with an existing AIG subsidiary in accordance with the Bermuda Companies Act 1981 (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of AIG.
Pursuant to the Merger Agreement, each issued and outstanding common share, par value $0.175 per common share, of the Company, other than shares that were owned by the Company as treasury shares, owned by a subsidiary of the Company, owned by AIG or any of its subsidiaries or that were subject to any Company Award (as defined in the Merger Agreement), were converted into the right to receive $68.00 in cash, without interest and subject to any applicable tax withholdings. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares remains issued and outstanding, and continues to be listed on the NYSE and registered under the Exchange Act.
Also on July 18, 2018, the Company notified the NYSE of the completion of the Merger and requested that trading in the Common Shares be withdrawn from listing on the NYSE. The NYSE filed a notification of removal from listing on Form 25 with the SEC with respect to the Common Shares to report the delisting of the Common Shares from the NYSE and to suspend trading of the Common Shares on the NYSE prior to the opening of trading on July 18, 2018.
On July 26, 2018 the Company filed with the SEC a certificate of notice of termination on Form 15 with respect to its Common Shares, requesting that the Common Shares be deregistered under the Exchange Act, and that the reporting obligations of the Company with respect to the Common Shares under Sections 13 and 15(d) of the Exchange Act be suspended.
Also on July 26, 2018, AIG executed a guarantee (the “Preference Shares Guarantee”) with respect to the Series A Preferred Shares and the Series B Preferred Shares of the Company. Under the terms of the Preference Shares Guarantee, AIG provided a full and unconditional guarantee of the Company’s obligations under the certificates of designation governing the Series A Preferred Shares and the Series B Preferred Shares, as applicable. Additionally on July 26, 2018, AIG executed a guarantee with respect to the Company’s aggregate outstanding 8.875% Senior Notes due 2040, pursuant to which AIG provided a full and unconditional guarantee of the Company’s obligations under the related indentures.
Business Outlook and Trends
We underwrite global property (re)insurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit (re)insurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.

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Table of Contents

Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. The global property and casualty (re)insurance industry has historically been highly cyclical. Since 2007, increased capital and the relative infrequency of significant catastrophic events resulted in a softening of rates on most lines. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy; however, the impact of these events in the aggregate were not severe enough to increase rates. As such, the Company continued to see increased competition and decreased premium rates in most classes of business. Following the significant catastrophic events of 2017 - Hurricanes Harvey, Irma and Maria and the Northern and Southern California Wildfires - the Company has seen rate increases across certain loss affected classes, some of which are noted in the renewal commentary below.
During the Reinsurance and Asset Management segments’ mid year 2018 renewal periods, the Company maintained its strategic position across all major markets with terms and conditions across the market remaining generally unchanged. The U.S. property markets saw a continuation of the rate trends observed at the January 1 renewals where rate increases were in the low single-digits with higher increases on loss impacted business.
Business written by the Insurance segment is distributed evenly throughout the year. Through June 30, 2018, the Insurance segment experienced a whole account rate increase of 6.9% on business written through the Talbot Syndicate, primarily driven by rate increases on loss impacted accounts in the property and specialty - other classes, and a whole account rate increase of 5.4% on business written through Western World, primarily driven by increases in the property classes.
Non-GAAP Financial Measures
In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
Book value financial indicators
In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.
The following tables present reconciliations of book value per common share to book value per diluted common share plus accumulated dividends and other non-GAAP book value financial indicators:
 
June 30, 2018
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,409,136

 
80,511,948

 
$
42.34

Non-GAAP Adjustments:
 
 
 
 
 
Unvested restricted shares
—

 
1,180,416

 
 
Book value per diluted common share (c)
3,409,136

 
81,692,364

 
$
41.73

Goodwill
(229,573
)
 
—

 
 
Intangible assets
(167,052
)
 
—

 
 
Tangible book value per diluted common share (c)
$
3,012,511

 
81,692,364

 
$
36.88

 
 
 
 
 
 
Book value per diluted common share (c)
 
 
 
 
$
41.73

Accumulated dividends
 
 
 
 
13.84

Book value per diluted common share plus accumulated dividends (c)
 
 
 
 
$
55.57


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Table of Contents

 
December 31, 2017
 
Equity Amount
 
Common Shares
 
Per Share
Amount (a)
Book value per common share (b)
$
3,495,072

 
79,319,550

 
$
44.06

Non-GAAP Adjustments:
 
 
 
 
 
Unvested restricted shares
—

 
2,503,859

 
 
Book value per diluted common share (c)
3,495,072

 
81,823,409

 
$
42.71

Goodwill
(229,573
)
 
—

 
 
Intangible assets
(171,411
)
 
—

 
 
Tangible book value per diluted common share (c)
$
3,094,088

 
81,823,409

 
$
37.81

 
 
 
 
 
 
Book value per diluted common share (c)
 
 
 
 
$
42.71

Accumulated dividends
 
 
 
 
13.08

Book value per diluted common share plus accumulated dividends (c)
 
 
 
 
$
55.79

(a)
Per share amounts are calculated by dividing the equity amount by the common shares.
(b)
The equity amount used in the calculation of book value per common share represents total shareholders' equity available to Validus excluding the liquidation value of the preferred shares.
(c)
Non-GAAP financial measure.
Book value per common share, a GAAP financial measure, decreased by $1.72, or 3.9%, from $44.06 at December 31, 2017 to $42.34 at June 30, 2018.
Book value per diluted common share plus accumulated dividends, a non-GAAP financial measure, is considered by management to be the key financial indicator of performance, as the Company believes growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends decreased by $0.22, or 0.4%, from $55.79 at December 31, 2017 to $55.57 at June 30, 2018. Cash dividends per common share are an integral part of the value created for shareholders. During the six months ended June 30, 2018, the Company paid cash dividends of $0.76 (2017: $0.76) per common share.
Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid decreased by $0.98, or 2.3%, from $42.71 at December 31, 2017 to $41.73 at June 30, 2018.
The change in book value per diluted common share inclusive of dividends paid was (0.5)% and 5.0% for the six months ended June 30, 2018 and 2017, respectively.
Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share decreased by $0.93, or 2.5%, from $37.81 at December 31, 2017 to $36.88 at June 30, 2018.

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Table of Contents

Other financial indicators
In addition to presenting net (loss) income (attributable) available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating (loss) income (attributable) available to Validus common shareholders, a non-GAAP financial measure, provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.
Net operating (loss) income (attributable) available to Validus common shareholders is calculated by the addition or subtraction of certain Consolidated Statement of (Loss) Income and Comprehensive (Loss) Income line items from net (loss) income (attributable) available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net (loss) income (attributable) available to Validus common shareholders
$
(52,898
)
 
$
101,095

 
$
(56,976
)
 
$
195,656

Non-GAAP Adjustments:
 
 
 
 
 
 
 
Net realized losses (gains) on investments
7,394

 
(2,274
)
 
5,194

 
(1,110
)
Change in net unrealized losses (gains) on investments
10,730

 
(16,321
)
 
68,111

 
(29,669
)
(Income) from investment affiliates
(2,178
)
 
(9,466
)
 
(15,246
)
 
(14,654
)
Foreign exchange losses
526

 
7,329

 
1

 
5,760

Other (income)
(538
)
 
(174
)
 
(582
)
 
(268
)
Transaction expenses
3,837

 
4,427

 
11,593

 
4,427

Net income attributable to noncontrolling interests
1,028

 
2,102

 
1,457

 
2,830

Tax (benefit) expense (a)
(767
)
 
1,748

 
(3,861
)
 
2,328

Net operating (loss) income (attributable) available to Validus common shareholders (b)
$
(32,866
)
 
$
88,466

 
$
9,691

 
$
165,300

 
 
 
 
 
 
 
 
Average shareholders' equity available to Validus common shareholders (c)
$
3,455,184

 
$
3,786,654

 
$
3,468,480

 
$
3,753,866

 
 
 
 
 
 
 
 
Annualized return on average equity
(6.1
%)
 
10.7
%
 
(6.6
%)
 
10.4
%
Annualized net operating return on average equity (b)
(3.8
%)
 
9.3
%
 
1.1
%
 
8.8
%
(a)
Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
(b)
Non-GAAP financial measure.
(c)
Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares. Average shareholders’ equity for the six months ended is the average of the beginning, ending and intervening quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares.

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Table of Contents

Second Quarter 2018 Results of Operations - Consolidated
The following table presents the results of operations for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Revenues
 
 
 
 
Gross premiums written
 
$
847,206

 
$
792,902

Reinsurance premiums ceded
 
(107,567
)
 
(56,222
)
Net premiums written
 
739,639

 
736,680

Change in unearned premiums
 
(3,032
)
 
(105,653
)
Net premiums earned
 
736,607

 
631,027

Net investment income
 
57,560

 
44,241

Net realized (losses) gains on investments
 
(7,394
)
 
2,274

Change in net unrealized (losses) gains on investments
 
(10,730
)
 
16,321

Income from investment affiliates
 
2,178

 
9,466

Other insurance related (loss) income and other (loss) income
 
(16,116
)
 
1,339

Foreign exchange (losses)
 
(526
)
 
(7,329
)
Total revenues
 
761,579

 
697,339

Expenses
 
 
 
 
Losses and loss expenses
 
476,610

 
296,149

Policy acquisition costs
 
118,781

 
117,268

General and administrative expenses
 
120,862

 
96,349

Share compensation expenses
 
16,040

 
11,146

Finance expenses
 
14,310

 
14,209

Transaction expenses
 
3,837

 
4,427

Total expenses
 
750,440

 
539,548

Income before taxes and (income) attributable to AlphaCat investors
 
11,139

 
157,791

Tax benefit
 
7,151

 
987

(Income) attributable to AlphaCat investors
 
(29,849
)
 
(11,830
)
Net (loss) income
 
(11,559
)
 
146,948

Net (income) attributable to noncontrolling interests
 
(35,511
)
 
(43,650
)
Net (loss) income (attributable) available to Validus
 
(47,070
)
 
103,298

Dividends on preferred shares
 
(5,828
)
 
(2,203
)
Net (loss) income (attributable) available to Validus common shareholders
 
$
(52,898
)
 
$
101,095

 
 
 
 
 
Supplemental information:
 
 
 
 
Losses and loss expenses:
 
 
 
 
Current period excluding items below
 
$
472,771

 
$
331,871

Current period—notable loss events
 
—

 
—

Current period—non-notable loss events
 
16,410

 
7,568

Change in prior accident years
 
(12,571
)
 
(43,290
)
Total losses and loss expenses
 
$
476,610

 
$
296,149

Selected ratios:
 
 
 
 
Ratio of net to gross premiums written
 
87.3
 %
 
92.9
 %
Losses and loss expense ratio:
 
 
 
 
Current period excluding items below
 
64.2
 %
 
52.6
 %
Current period—notable loss events
 
—
 %
 
—
 %
Current period—non-notable loss events
 
2.2
 %
 
1.2
 %
Change in prior accident years
 
(1.7
)%
 
(6.9
)%
Losses and loss expense ratio
 
64.7
 %
 
46.9
 %
Policy acquisition cost ratio
 
16.1
 %
 
18.6
 %
General and administrative expense ratio
 
18.6
 %
 
17.0
 %
Expense ratio
 
34.7
 %
 
35.6
 %
Combined ratio
 
99.4
 %
 
82.5
 %



59
Table of Contents

Highlights for the second quarter 2018 were as follows:
•
Gross premiums written for the three months ended June 30, 2018 were $847.2 million compared to $792.9 million for the three months ended June 30, 2017, an increase of $54.3 million, or 6.8% driven by increases in the Reinsurance and Insurance segments.
•
Reinsurance premiums ceded for the three months ended June 30, 2018 were $107.6 million compared to $56.2 million for the three months ended June 30, 2017, an increase of $51.3 million, or 91.3% primarily driven by an increase in the Insurance segment.
•
Net premiums earned for the three months ended June 30, 2018 were $736.6 million compared to $631.0 million for the three months ended June 30, 2017, an increase of $105.6 million, or 16.7%. The increase was primarily driven by an increase in the Asset Management and Insurance segments and was partially offset by a decrease in the Reinsurance segment.
•
Losses and loss expenses for the three months ended June 30, 2018 were $476.6 million compared to $296.1 million for the three months ended June 30, 2017, an increase of $180.5 million or 60.9% and included the following:
Notable and Non-notable Loss Events
•
The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million.
Notable Loss Events
•
There were no notable loss events occurring during the three months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the three months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $16.4 million, or 2.2 percentage points of the loss ratio.
•
There were no non-notable loss events occurring during the three months ended June 30, 2017, however during the three months ended June 30, 2017, the Company increased its loss estimate on a first quarter 2017 energy non-notable loss event by $7.6 million, or 1.2 percentage points of the loss ratio.
Attritional losses
•
Attritional losses of $472.8 million, or 64.2 percentage points of the loss ratio during the three months ended June 30, 2018 compared to $331.9 million, or 52.6 percentage points of the loss ratio during the three months ended June 30, 2017. The increase in the attritional loss ratio was primarily driven by a higher frequency of low severity events which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the three months ended June 30, 2018 and 2017 was as follows:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
(Favorable) development on event losses
 
$
(3,507
)
 
$
(5,069
)
(Favorable) development on attritional losses
 
(9,064
)
 
(38,221
)
Change in prior accident years
 
$
(12,571
)
 
$
(43,290
)
The favorable development during the three months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses in the Reinsurance segment.

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Table of Contents

•
Loss ratio for the three months ended June 30, 2018 and 2017 was 64.7% and 46.9%, respectively, an increase of 17.8 percentage points.
◦
Loss ratios by line of business for the three months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended June 30,
 
2018
 
2017
Property
47.1
%
 
35.2
%
Specialty - Short-tail
74.7
%
 
51.9
%
Specialty - Other
73.9
%
 
58.6
%
All lines
64.7
%
 
46.9
%
•
Policy acquisition cost ratio for the three months ended June 30, 2018 was 16.1% compared to 18.6% for the three months ended June 30, 2017, a decrease of 2.5 percentage points. The decrease was primarily driven by additional agriculture business written in the Insurance segment which carries low acquisition costs.
•
General and administrative (“G&A”) expenses for the three months ended June 30, 2018 were $120.9 million compared to $96.3 million for the three months ended June 30, 2017, an increase of $24.5 million or 25.4%. The increase was driven by (i) CRS, which was acquired approximately midway through the second quarter of 2017, and (ii) higher staff-related expenses.
•
Share compensation expenses for the three months ended June 30, 2018 were $16.0 million compared to $11.1 million for the three months ended June 30, 2017, an increase of $4.9 million or 43.9%. The increase was driven by an increase in the performance share award conversion ratio.
•
Combined ratio for the three months ended June 30, 2018 and 2017 was 99.4% and 82.5%, respectively, an increase of 16.9 percentage points.

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Table of Contents

Second Quarter 2018 Results of Operations - Reinsurance Segment
The following table presents underwriting results by line of business for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
 
 
2018
 
2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
231,244

 
$
86,390

 
$
42,954

 
$
360,588

 
$
186,703

 
$
91,604

 
$
52,227

 
$
330,534

Reinsurance premiums ceded
 
(2,092
)
 
(5,689
)
 
(8,587
)
 
(16,368
)
 
(2,569
)
 
(7,421
)
 
(288
)
 
(10,278
)
Net premiums written
 
229,152

 
80,701

 
34,367

 
344,220

 
184,134

 
84,183

 
51,939

 
320,256

Change in unearned premiums
 
(141,310
)
 
27,688

 
6,925

 
(106,697
)
 
(80,103
)
 
39,515

 
(21,360
)
 
(61,948
)
Net premiums earned
 
87,842

 
108,389

 
41,292

 
237,523

 
104,031

 
123,698

 
30,579

 
258,308

Other insurance related income
 
 
 
 
 
 
 
—

 
 
 
 
 
 
 
1

Total underwriting revenues
 
 
 
 
 
 
 
237,523

 
 
 
 
 
 
 
258,309

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
21,895

 
57,820

 
37,623

 
117,338

 
31,017

 
64,635

 
18,689

 
114,341

Policy acquisition costs
 
19,414

 
21,561

 
11,182

 
52,157

 
18,451

 
22,054

 
9,461

 
49,966

Total underwriting deductions before G&A
 
41,309

 
79,381

 
48,805

 
169,495

 
49,468

 
86,689

 
28,150

 
164,307

Underwriting income (loss) before G&A
 
$
46,533

 
$
29,008

 
$
(7,513
)
 
$
68,028

 
$
54,563

 
$
37,009

 
$
2,429

 
$
94,002

General and administrative expenses
 
 
 
 
 
 
 
26,522

 
 
 
 
 
 
 
22,204

Share compensation expenses
 
 
 
 
 
 
 
3,972

 
 
 
 
 
 
 
2,725

Total underwriting deductions
 
 
 
 
 
 
 
199,989

 
 
 
 
 
 
 
189,236

Underwriting income
 
 
 
 
 
 
 
$
37,534

 
 
 
 
 
 
 
$
69,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
29,029

 
$
65,593

 
$
32,526

 
$
127,148

 
$
28,440

 
$
76,472

 
$
19,356

 
$
124,268

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
2,500

 
2,500

 
—

 
5,000

 
3,274

 
2,507

 
—

 
5,781

Change in prior accident years
 
(9,634
)
 
(10,273
)
 
5,097

 
(14,810
)
 
(697
)
 
(14,344
)
 
(667
)
 
(15,708
)
Total losses and loss expenses
 
$
21,895

 
$
57,820

 
$
37,623

 
$
117,338

 
$
31,017

 
$
64,635

 
$
18,689

 
$
114,341

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
99.1
 %
 
93.4
 %
 
80.0
%
 
95.5
 %
 
98.6
 %
 
91.9
 %
 
99.4
 %
 
96.9
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
33.1
 %
 
60.5
 %
 
78.8
%
 
53.5
 %
 
27.4
 %
 
61.9
 %
 
63.3
 %
 
48.2
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
2.8
 %
 
2.3
 %
 
—
%
 
2.1
 %
 
3.1
 %
 
2.0
 %
 
—
 %
 
2.2
 %
Change in prior accident years
 
(11.0
)%
 
(9.5
)%
 
12.3
%
 
(6.2
)%
 
(0.7
)%
 
(11.6
)%
 
(2.2
)%
 
(6.1
)%
Losses and loss expense ratio
 
24.9
 %
 
53.3
 %
 
91.1
%
 
49.4
 %
 
29.8
 %
 
52.3
 %
 
61.1
 %
 
44.3
 %
Policy acquisition cost ratio
 
22.1
 %
 
19.9
 %
 
27.1
%
 
22.0
 %
 
17.7
 %
 
17.8
 %
 
30.9
 %
 
19.3
 %
General and administrative expense ratio
 
 
 
 
 
 
 
12.8
 %
 
 
 
 
 
 
 
9.7
 %
Expense ratio
 
 
 
 
 
 
 
34.8
 %
 
 
 
 
 
 
 
29.0
 %
Combined ratio
 
 
 
 
 
 
 
84.2
 %
 
 
 
 
 
 
 
73.3
 %



62
Table of Contents

Highlights for the second quarter 2018 were as follows:
•
Gross premiums written for the three months ended June 30, 2018 were $360.6 million compared to $330.5 million for the three months ended June 30, 2017, an increase of $30.1 million, or 9.1% and included the following:
◦
Property premiums of $231.2 million during the three months ended June 30, 2018, compared to $186.7 million during the three months ended June 30, 2017, an increase of $44.5 million, or 23.9%, primarily driven by increased participation and new business written on catastrophe excess of loss programs;
◦
Specialty - short-tail premiums of $86.4 million during the three months ended June 30, 2018, compared to $91.6 million during the three months ended June 30, 2017, a decrease of $5.2 million, or 5.7%; and
◦
Specialty - other premiums of $43.0 million during the three months ended June 30, 2018, compared to $52.2 million during the three months ended June 30, 2017, a decrease of $9.3 million, or 17.8%, primarily driven by the timing of renewals.
•
Reinsurance premiums ceded for the three months ended June 30, 2018 were $16.4 million compared to $10.3 million for the three months ended June 30, 2017, an increase of $6.1 million, or 59.3%. The increase was primarily driven by an increase in the specialty - other lines of $8.3 million as a result of a new casualty retrocession cover.
•
Net premiums earned for the three months ended June 30, 2018 were $237.5 million compared to $258.3 million for the three months ended June 30, 2017, a decrease of $20.8 million, or 8.0%. The decrease is primarily driven by the earning of new reinsurance covers purchased during the fourth quarter of 2017 and the first quarter of 2018.
•
Losses and loss expenses for the three months ended June 30, 2018 were $117.3 million compared to $114.3 million for the three months ended June 30, 2017, an increase of $3.0 million or 2.6% and included the following:
Notable Loss Events
•
There were no notable loss events occurring during the three months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the three months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $5.0 million, or 2.1 percentage points of the loss ratio and related to the property and specialty - short-tail lines.
•
There were no non-notable loss events occurring during the three months ended June 30, 2017, however during the three months ended June 30, 2017, the Company increased its loss estimate on a first quarter 2017 energy non-notable loss event by $5.8 million, or 2.2 percentage points of the loss ratio.
Attritional losses
•
Attritional losses of $127.1 million, or 53.5 percentage points of the loss ratio during the three months ended June 30, 2018 compared to $124.3 million, or 48.2 percentage points of the loss ratio during the three months ended June 30, 2017.
Change in prior accident years
◦
Loss reserve development for the three months ended June 30, 2018 and 2017 was as follows:
 
 
Three Months Ended June 30, 2018
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(1,433
)
 
$
995

 
$
37

 
$
(401
)
(Favorable) adverse development on attritional losses
 
(8,201
)
 
(11,268
)
 
5,060

 
(14,409
)
Change in prior accident years
 
$
(9,634
)
 
$
(10,273
)
 
$
5,097

 
$
(14,810
)
 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(880
)
 
$
571

 
$
13

 
$
(296
)
Adverse (favorable) development on attritional losses
 
183

 
(14,915
)
 
(680
)
 
(15,412
)
Change in prior accident years
 
$
(697
)
 
$
(14,344
)
 
$
(667
)
 
$
(15,708
)
The net favorable development for the three months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses.

63
Table of Contents

•
Loss ratio for the three months ended June 30, 2018 and 2017 was 49.4% and 44.3%, respectively, an increase of 5.1 percentage points, primarily driven by the attritional specialty - other losses noted above.
•
Policy acquisition cost ratio for the three months ended June 30, 2018 was 22.0% compared to 19.3% for the three months ended June 30, 2017, an increase of 2.7 percentage points. The increase was primarily driven by the earned impact of higher retrocession purchases, which did not incorporate significant ceding commissions.
•
General and administrative expenses for the three months ended June 30, 2018 were $26.5 million compared to $22.2 million for the three months ended June 30, 2017, an increase of $4.3 million or 19.4%. The increase was primarily driven by a higher allocation of costs to the segment and higher staff related expenses.
•
Share compensation expenses for the three months ended June 30, 2018 were $4.0 million compared to $2.7 million for the three months ended June 30, 2017, an increase of $1.2 million or 45.8%. The increase was driven by an increase in the performance share award conversion ratio.
•
Combined ratio for the three months ended June 30, 2018 and 2017 was 84.2% and 73.3%, respectively, an increase of 10.9 percentage points.
•
Underwriting income for the three months ended June 30, 2018 was $37.5 million compared to $69.1 million for the three months ended June 30, 2017, a decrease of $31.5 million or 45.7%.

64
Table of Contents

Second Quarter 2018 Results of Operations - Insurance Segment
On May 1, 2017, the Company completed its acquisition of CRS. The results of CRS have been presented within the specialty - short-tail line of business in the Insurance segment from the date of acquisition.
The following table presents underwriting results by line of business for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
 
 
2018
 
2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
137,264

 
$
118,001

 
$
128,975

 
$
384,240

 
$
115,878

 
$
128,183

 
$
115,996

 
$
360,057

Reinsurance premiums ceded
 
(29,188
)
 
(37,274
)
 
(15,425
)
 
(81,887
)
 
(21,747
)
 
(22,659
)
 
(4,909
)
 
(49,315
)
Net premiums written
 
108,076

 
80,727

 
113,550

 
302,353

 
94,131

 
105,524

 
111,087

 
310,742

Change in unearned premiums
 
(29,451
)
 
130,386

 
(3,489
)
 
97,446

 
(21,909
)
 
28,153

 
(12,119
)
 
(5,875
)
Net premiums earned
 
78,625

 
211,113

 
110,061

 
399,799

 
72,222

 
133,677

 
98,968

 
304,867

Other insurance related income
 
 
 
 
 
 
 
35

 
 
 
 
 
 
 
728

Total underwriting revenues
 
 
 
 
 
 
 
399,834

 
 
 
 
 
 
 
305,595

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
93,924

 
174,766

 
74,164

 
342,854

 
52,809

 
70,636

 
57,296

 
180,741

Policy acquisition costs
 
16,888

 
19,087

 
21,675

 
57,650

 
15,728

 
23,944

 
20,465

 
60,137

Total underwriting deductions before G&A
 
110,812

 
193,853

 
95,839

 
400,504

 
68,537

 
94,580

 
77,761

 
240,878

Underwriting (loss) income before G&A
 
$
(32,187
)
 
$
17,260

 
$
14,222

 
$
(670
)
 
$
3,685

 
$
39,097

 
$
21,207

 
$
64,717

General and administrative expenses
 
 
 
 
 
 
 
75,110

 
 
 
 
 
 
 
53,596

Share compensation expenses
 
 
 
 
 
 
 
4,242

 
 
 
 
 
 
 
3,702

Total underwriting deductions
 
 
 
 
 
 
 
479,856

 
 
 
 
 
 
 
298,176

Underwriting (loss) income
 
 
 
 
 
 
 
$
(80,022
)
 
 
 
 
 
 
 
$
7,419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
78,777

 
$
168,725

 
$
78,978

 
$
326,480

 
$
56,369

 
$
79,985

 
$
66,330

 
$
202,684

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
10,355

 
1,055

 
—

 
11,410

 
1,787

 
—

 
—

 
1,787

Change in prior accident years
 
4,792

 
4,986

 
(4,814
)
 
4,964

 
(5,347
)
 
(9,349
)
 
(9,034
)
 
(23,730
)
Total losses and loss expenses
 
$
93,924

 
$
174,766

 
$
74,164

 
$
342,854

 
$
52,809

 
$
70,636

 
$
57,296

 
$
180,741

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
78.7
%
 
68.4
%
 
88.0
 %
 
78.7
%
 
81.2
 %
 
82.3
 %
 
95.8
 %
 
86.3
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
100.2
%
 
79.9
%
 
71.8
 %
 
81.7
%
 
78.0
 %
 
59.8
 %
 
67.0
 %
 
66.5
 %
Current period—notable loss events
 
—
%
 
—
%
 
—
 %
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
13.2
%
 
0.5
%
 
—
 %
 
2.9
%
 
2.5
 %
 
—
 %
 
—
 %
 
0.6
 %
Change in prior accident years
 
6.1
%
 
2.4
%
 
(4.4
)%
 
1.2
%
 
(7.4
)%
 
(7.0
)%
 
(9.1
)%
 
(7.8
)%
Losses and loss expense ratio
 
119.5
%
 
82.8
%
 
67.4
 %
 
85.8
%
 
73.1
 %
 
52.8
 %
 
57.9
 %
 
59.3
 %
Policy acquisition cost ratio
 
21.5
%
 
9.0
%
 
19.7
 %
 
14.4
%
 
21.8
 %
 
17.9
 %
 
20.7
 %
 
19.7
 %
General and administrative expense ratio
 
 
 
 
 
 
 
19.8
%
 
 
 
 
 
 
 
18.8
 %
Expense ratio
 
 
 
 
 
 
 
34.2
%
 
 
 
 
 
 
 
38.5
 %
Combined ratio
 
 
 
 
 
 
 
120.0
%
 
 
 
 
 
 
 
97.8
 %



65
Table of Contents

Highlights for the second quarter 2018 were as follows:
•
Gross premiums written for the three months ended June 30, 2018 were $384.2 million compared to $360.1 million for the three months ended June 30, 2017, an increase of $24.2 million, or 6.7% and included the following:
◦
Property premiums of $137.3 million during the three months ended June 30, 2018, compared to $115.9 million during the three months ended June 30, 2017, an increase of $21.4 million, or 18.5%. The increase was primarily driven by rate improvements on existing business and the continued build out of product offerings in the U.S. short-tail property lines;
◦
Specialty - short-tail premiums of $118.0 million during the three months ended June 30, 2018, compared to $128.2 million during the three months ended June 30, 2017, a decrease of $10.2 million, or 7.9%; and
◦
Specialty - other premiums of $129.0 million during the three months ended June 30, 2018, compared to $116.0 million during the three months ended June 30, 2017, an increase of $13.0 million, or 11.2%, primarily driven by increased participation on renewals and the build out of product offerings in U.S. liability lines.
•
Reinsurance premiums ceded for the three months ended June 30, 2018 were $81.9 million compared to $49.3 million for the three months ended June 30, 2017, an increase of $32.6 million, or 66.0%. The increase was primarily driven by an increase in the specialty - short-tail lines of $14.6 million driven by ceded agriculture premiums relating to new business written through CRS and an increase in the specialty - other lines of $10.5 million as a result of the continued build out of U.S. liability lines as noted above.
•
Net premiums earned for the three months ended June 30, 2018 were $399.8 million compared to $304.9 million for the three months ended June 30, 2017, an increase of $94.9 million, or 31.1%. The increase was primarily driven by agriculture net premiums earned relating to new business written through CRS.
•
Losses and loss expenses for the three months ended June 30, 2018 were $342.9 million compared to $180.7 million for the three months ended June 30, 2017, an increase of $162.1 million or 89.7% and included the following:
Notable Loss Events
•
There were no notable loss events occurring during the three months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the three months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $11.4 million, or 2.9 percentage points of the loss ratio and related to the property and specialty - short-tail lines.
•
There were no non-notable loss events occurring during the three months ended June 30, 2017, however during the three months ended June 30, 2017, the Company increased its loss estimate on a first quarter 2017 energy non-notable loss event by $1.8 million, or 0.6 percentage points of the loss ratio.
Attritional losses
•
Attritional losses of $326.5 million, or 81.7 percentage points of the loss ratio during the three months ended June 30, 2018 compared to $202.7 million, or 66.5 percentage points of the loss ratio during the three months ended June 30, 2017. The increase in the attritional loss ratio was primarily driven by a higher frequency of low severity events which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the three months ended June 30, 2018 and 2017 was as follows:
 
 
Three Months Ended June 30, 2018
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(1,333
)
 
$
(145
)
 
$
(136
)
 
$
(1,614
)
Adverse (favorable) development on attritional losses
 
6,125

 
5,131

 
(4,678
)
 
6,578

Change in prior accident years
 
$
4,792

 
$
4,986

 
$
(4,814
)
 
$
4,964

The adverse development during the three months ended June 30, 2018 in the property lines was primarily driven by unfavorable development relating to prior period losses which did not reach the non-notable threshold. The adverse development during the three months ended June 30, 2018 in the specialty - short tail lines primarily related to reserve strengthening in the property, hull and cargo accounts.

66
Table of Contents

 
 
Three Months Ended June 30, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(151
)
 
$
(3,096
)
 
$
—

 
$
(3,247
)
(Favorable) development on attritional losses
 
(5,196
)
 
(6,253
)
 
(9,034
)
 
(20,483
)
Change in prior accident years
 
$
(5,347
)
 
$
(9,349
)
 
$
(9,034
)
 
$
(23,730
)
The net favorable development for the three months ended June 30, 2017 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the three months ended June 30, 2018 and 2017 was 85.8% and 59.3%, respectively, an increase of 26.5 percentage points, primarily driven by the increase in attritional losses as noted above.
•
Policy acquisition cost ratio for the three months ended June 30, 2018 was 14.4% compared to 19.7% for the three months ended June 30, 2017, a decrease of 5.3 percentage points. The decrease was primarily driven by the earned impact of new agriculture business written during the twelve months ended June 30, 2018 which incorporates a relatively low acquisition cost ratio.
•
General and administrative expenses for the three months ended June 30, 2018 were $75.1 million compared to $53.6 million for the three months ended June 30, 2017, an increase of $21.5 million or 40.1%. The increase was driven by (i) CRS, which was acquired approximately midway through the second quarter of 2017, (ii) higher allocation of costs to the segment, and (iii) higher staff related expenses.
•
Share compensation expenses for the three months ended June 30, 2018 were $4.2 million compared to $3.7 million for the three months ended June 30, 2017, an increase of $0.5 million, or 14.6%. The increase was driven by an increase in the performance share award conversion ratio.
•
Combined ratio for the three months ended June 30, 2018 and 2017 was 120.0% and 97.8%, respectively, an increase of 22.2 percentage points.
•
Underwriting (loss) for the three months ended June 30, 2018 was $(80.0) million compared to income of $7.4 million for the three months ended June 30, 2017.





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Second Quarter 2018 Results of Operations - Asset Management Segment
The following table presents the Asset Management segment income on an asset manager basis for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Fee revenues
 
 
 
 
Third party
 
$
5,685

 
$
5,549

Related party
 
436

 
644

Total fee revenues
 
6,121

 
6,193

Expenses
 
 
 
 
General and administrative expenses
 
4,835

 
3,549

Share compensation expenses
 
30

 
83

Finance expenses
 
18

 
44

Tax expense
 
2

 
135

Foreign exchange losses
 
—

 
1

Total expenses
 
4,885

 
3,812

Income before investment income from funds and sidecars
 
1,236

 
2,381

Investment income (loss) from funds and sidecars (a)
 
 
 
 
AlphaCat Sidecars
 
102

 
(21
)
AlphaCat ILS Funds - Lower Risk (b)
 
1,773

 
1,301

AlphaCat ILS Funds - Higher Risk (b)
 
(796
)
 
2,600

BetaCat ILS Funds
 
363

 
263

Validus' share of investment income from funds and sidecars
 
1,442

 
4,143

Asset Management segment income
 
$
2,678

 
$
6,524

 
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
9

 
$
—

AlphaCat ILS Funds - Lower Risk (b)
 
62,577

 
53,632

AlphaCat ILS Funds - Higher Risk (b)
 
37,514

 
43,672

AlphaCat Direct (c)
 
2,278

 
8,378

Total
 
$
102,378

 
$
105,682

(a)
The investment income (loss) from funds and sidecars is based on equity accounting.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from a third party investor in AlphaCat Re.
Highlights for the second quarter 2018 were as follows:
•
Fee revenues earned for the three months ended June 30, 2018 were $6.1 million compared to $6.2 million during the three months ended June 30, 2017, a decrease of $0.1 million or 1.2%. Third party fee revenues earned during the three months ended June 30, 2018 were $5.7 million compared to $5.5 million during the three months ended June 30, 2017, an increase of $0.1 million or 2.5%.
•
Total expenses for the three months ended June 30, 2018 were $4.9 million compared to $3.8 million during the three months ended June 30, 2017, an increase of $1.1 million, or 28.1%. The increase was driven by a higher allocation of costs to the segment.
•
Validus’ share of investment income from AlphaCat Funds and Sidecars for the three months ended June 30, 2018 was $1.4 million compared to $4.1 million during the three months ended June 30, 2017, a decrease of $2.7 million, or 65.2%. The decrease was due to losses recognized during the second quarter of 2018 in certain higher risk AlphaCat ILS funds.
•
Asset Management segment income for the three months ended June 30, 2018 was $2.7 million compared to $6.5 million during the three months ended June 30, 2017, a decrease of $3.8 million, or 59.0%.



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Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2018
 
April 1, 2018
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
2,605

 
$
4,777

AlphaCat ILS Funds - Lower Risk (b)
 
68,348

 
75,283

AlphaCat ILS Funds - Higher Risk (b)
 
68,862

 
74,253

AlphaCat Direct (c)
 
—

 
—

BetaCat ILS Funds
 
25,470

 
25,104

Total
 
$
165,285

 
$
179,417

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
10,075

 
$
17,120

AlphaCat ILS Funds - Lower Risk (b)
 
1,732,177

 
1,741,804

AlphaCat ILS Funds - Higher Risk (b)
 
1,114,499

 
1,157,510

AlphaCat Direct (c)
 
405,613

 
490,716

BetaCat ILS Funds
 
63,482

 
77,547

Total
 
3,325,846

 
3,484,697

Total Assets Under Management (a)
 
$
3,491,131

 
$
3,664,114

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
•
Assets under management were $3.5 billion as at July 1, 2018, compared to $3.7 billion as at April 1, 2018, of which third party assets under management were $3.3 billion as at July 1, 2018, compared to $3.5 billion as at April 1, 2018. During the three months ended July 1, 2018, the Asset Management segment raised a total of $104.4 million of capital, $103.2 million of which was raised from third parties. During the three months ended July 1, 2018, $286.5 million was returned to investors, of which $270.6 million was returned to third party investors.


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Second Quarter 2018 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Managed investments
 
 
 
 
Managed net investment income (a)
 
$
42,752

 
$
38,063

Net realized (losses) gains on managed investments (a)
 
(7,432
)
 
2,269

Change in net unrealized (losses) gains on managed investments (a)
 
(11,392
)
 
15,942

Income from investment affiliates
 
2,178

 
9,466

Total managed investment return
 
26,106

 
65,740

Corporate expenses
 
 
 
 
General and administrative expenses
 
13,523

 
16,219

Share compensation expenses
 
7,796

 
4,636

Finance expenses (a)
 
14,249

 
14,149

Dividends on preferred shares
 
5,828

 
2,203

Tax (benefit) (a)
 
(7,153
)
 
(1,122
)
Total Corporate expenses
 
34,243

 
36,085

Other items
 
 
 
 
Foreign exchange (losses) (a)
 
(1,652
)
 
(7,323
)
Other income
 
538

 
174

Transaction expenses
 
(3,837
)
 
(4,427
)
Total other items
 
(4,951
)
 
(11,576
)
Total Corporate and Investments
 
$
(13,088
)
 
$
18,079

(a)
These items exclude the components which are included in the Asset Management segment income and amounts which are consolidated from VIEs.
Managed investments
Highlights for the second quarter 2018 were as follows:
•
Managed net investment income for the three months ended June 30, 2018 was $42.8 million compared to $38.1 million for the three months ended June 30, 2017, an increase of $4.7 million, or 12.3%.
•
Annualized effective yield on managed investments for the three months ended June 30, 2018 was 2.54%, compared to 2.35% for the three months ended June 30, 2017, an increase of 19 basis points.
•
Net realized (losses) on managed investments for the three months ended June 30, 2018 were $(7.4) million compared to gains of $2.3 million for the three months ended June 30, 2017.
•
Change in net unrealized (losses) on managed investments for the three months ended June 30, 2018 of $(11.4) million compared to gains of $15.9 million for the three months ended June 30, 2017. Changes in unrealized (losses) on managed investments during the three months ended June 30, 2018 were primarily driven by the impact of interest rate increases on the Company’s managed fixed maturity portfolio.
•
Income from investment affiliates for the three months ended June 30, 2018 was $2.2 million compared to $9.5 million for the three months ended June 30, 2017, a decrease of $7.3 million, or 77.0%. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

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Corporate expenses and other items
Highlights for the second quarter 2018 were as follows:
•
General and administrative expenses for the three months ended June 30, 2018 were $13.5 million compared to $16.2 million for the three months ended June 30, 2017, a decrease of $2.7 million, or 16.6%. The decrease was primarily driven by a higher allocation of costs to reporting segments during the three months ended June 30, 2018.
•
Share compensation expenses for the three months ended June 30, 2018 were $7.8 million compared to $4.6 million for the three months ended June 30, 2017, an increase of $3.2 million, or 68.2%. The increase was driven by an increase in the performance share award conversion ratio.
•
Finance expenses for the three months ended June 30, 2018 were $14.2 million compared to $14.1 million for the three months ended June 30, 2017, an increase of $0.1 million, or 0.7%.
•
Dividends on preferred shares for the three months ended June 30, 2018 were $5.8 million compared to $2.2 million for the three months ended June 30, 2017, an increase of $3.6 million, or 164.5%. The increase was due to the issuance of $250.0 million of new Series B preferred shares during the second quarter of 2017.
•
Tax (benefit) for the three months ended June 30, 2018 was $(7.2) million compared to $(1.1) million for the three months ended June 30, 2017. The tax (benefit) during the three months ended June 30, 2018 mainly related to operating losses in the Insurance segment and unrealized losses on the Company’s investment portfolio.
•
Foreign exchange (losses) for the three months ended June 30, 2018 were $(1.7) million compared to $(7.3) million for the three months ended June 30, 2017.
•
Transaction expenses for the three months ended June 30, 2018 were $3.8 million compared to $4.4 million for the three months ended June 30, 2017. These expenses were composed of legal and financial advisory services in relation to the Company’s Merger with AIG and its acquisition of CRS during the three months ended June 30, 2018 and 2017, respectively.

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Year to Date Results of Operations - Consolidated
The following table presents the results of operations for the six months ended June 30, 2018 and 2017:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Revenues
 
 
 
 
Gross premiums written
 
$
2,679,662

 
$
1,983,759

Reinsurance premiums ceded
 
(483,861
)
 
(256,328
)
Net premiums written
 
2,195,801

 
1,727,431

Change in unearned premiums
 
(840,252
)
 
(521,028
)
Net premiums earned
 
1,355,549

 
1,206,403

Net investment income
 
109,632

 
84,455

Net realized (losses) gains on investments
 
(5,194
)
 
1,110

Change in net unrealized (losses) gains on investments
 
(68,111
)
 
29,669

Income from investment affiliates
 
15,246

 
14,654

Other insurance related income and other income
 
9,424

 
2,669

Foreign exchange (losses)
 
(1
)
 
(5,760
)
Total revenues
 
1,416,545

 
1,333,200

Expenses
 
 
 
 
Losses and loss expenses
 
798,155

 
565,734

Policy acquisition costs
 
235,237

 
228,896

General and administrative expenses
 
235,588

 
184,273

Share compensation expenses
 
25,769

 
20,637

Finance expenses
 
28,573

 
28,152

Transaction expenses
 
11,593

 
4,427

Total expenses
 
1,334,915

 
1,032,119

Income before taxes and (income) attributable to AlphaCat investors
 
81,630

 
301,081

Tax benefit
 
13,984

 
4,536

(Income) attributable to AlphaCat investors
 
(40,711
)
 
(19,333
)
Net income
 
54,903

 
286,284

Net (income) attributable to noncontrolling interests
 
(100,223
)
 
(86,222
)
Net (loss) income (attributable) available to Validus
 
(45,320
)
 
200,062

Dividends on preferred shares
 
(11,656
)
 
(4,406
)
Net (loss) income (attributable) available to Validus common shareholders
 
$
(56,976
)
 
$
195,656

 
 
 
 
 
Supplemental information:
 
 
 
 
Losses and loss expenses:
 
 
 
 
Current period excluding items below
 
$
801,886

 
$
642,925

Current period—notable loss events
 
—

 
—

Current period—non-notable loss events
 
16,410

 
27,330

Change in prior accident years
 
(20,141
)
 
(104,521
)
Total losses and loss expenses
 
$
798,155

 
$
565,734

Selected ratios:
 
 
 
 
Ratio of net to gross premiums written
 
81.9
 %
 
87.1
 %
Losses and loss expense ratio:
 
 
 
 
Current period excluding items below
 
59.2
 %
 
53.3
 %
Current period—notable loss events
 
—
 %
 
—
 %
Current period—non-notable loss events
 
1.2
 %
 
2.3
 %
Change in prior accident years
 
(1.5
)%
 
(8.7
)%
Losses and loss expense ratio
 
58.9
 %
 
46.9
 %
Policy acquisition cost ratio
 
17.4
 %
 
19.0
 %
General and administrative expense ratio
 
19.3
 %
 
17.0
 %
Expense ratio
 
36.7
 %
 
36.0
 %
Combined ratio
 
95.6
 %
 
82.9
 %



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Table of Contents

Highlights for the six months ended June 30, 2018 were as follows:
•
Gross premiums written for the six months ended June 30, 2018 were $2,679.7 million compared to $1,983.8 million for the six months ended June 30, 2017, an increase of $695.9 million, or 35.1% driven by increases in all segments.
•
Reinsurance premiums ceded for the six months ended June 30, 2018 were $483.9 million compared to $256.3 million for the six months ended June 30, 2017, an increase of $227.5 million, or 88.8%. The increase was primarily driven by increases in the Insurance and Reinsurance segments.
•
Net premiums earned for the six months ended June 30, 2018 were $1,355.5 million compared to $1,206.4 million for the six months ended June 30, 2017, an increase of $149.1 million, or 12.4%. The increase was primarily driven by an increase in the Asset Management and Insurance segments, partially offset by a decrease in the Reinsurance segment.
•
Losses and loss expenses for the six months ended June 30, 2018 were $798.2 million compared to $565.7 million for the six months ended June 30, 2017, an increase of $232.4 million or 41.1% and included the following:
Notable Loss Events
•
There were no notable loss events occurring during the six months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the six months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $16.4 million, or 1.2 percentage points of the loss ratio.
•
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were $27.3 million, or 2.3 percentage points of the loss ratio. Net of reinstatement premiums of $0.6 million, the net loss attributable to Validus was $26.8 million.
Attritional losses
•
Attritional losses of $801.9 million, or 59.2 percentage points of the loss ratio during the six months ended June 30, 2018 compared to $642.9 million, or 53.3 percentage points of the loss ratio during the six months ended June 30, 2017. The increase in the attritional loss ratio was primarily driven by a higher frequency of low severity events which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the six months ended June 30, 2018 and 2017 was as follows:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Adverse (favorable) development on event losses
 
$
33,040

 
$
(15,403
)
(Favorable) development on attritional losses
 
(53,181
)
 
(89,118
)
Change in prior accident years
 
$
(20,141
)
 
$
(104,521
)
The adverse development on event losses during the six months ended June 30, 2018 was primarily driven by adverse development on the 2017 notable loss events, Hurricanes Irma and Maria, and was partially offset by favorable development on the 2017 Southern California Wildfires and Hurricane Harvey. Excluding the Asset Management segment, which includes losses attributable to AlphaCat’s third party investors and noncontrolling interests, favorable development during the six months ended June 30, 2018 was $43.2 million, which included adverse development of $4.5 million on event losses. The favorable development for the six months ended June 30, 2017 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the six months ended June 30, 2018 and 2017 was 58.9% and 46.9%, respectively, an increase of 12.0 percentage points.
◦
Loss ratios by line of business for the six months ended June 30, 2018 and 2017 were as follows:
 
Six Months Ended June 30,
 
2018
 
2017
Property
46.2
%
 
34.1
%
Specialty - Short-tail
65.0
%
 
50.5
%
Specialty - Other
69.9
%
 
63.9
%
All lines
58.9
%
 
46.9
%

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Table of Contents

•
Policy acquisition cost ratio for the six months ended June 30, 2018 was 17.4% compared to 19.0% for the six months ended June 30, 2017, a decrease of 1.6 percentage points.
•
General and administrative (“G&A”) expenses for the six months ended June 30, 2018 were $235.6 million compared to $184.3 million for the six months ended June 30, 2017, an increase of $51.3 million or 27.8%. General and administrative expenses for the six months ended June 30, 2018 included $30.4 million of CRS expenses. The remaining increase was primarily driven by higher staff costs, including an increase in the performance bonus accrual.
•
Share compensation expenses for the six months ended June 30, 2018 were $25.8 million compared to $20.6 million for the six months ended June 30, 2017, an increase of $5.1 million or 24.9%. The increase was driven by an increase in the performance share award conversion ratio.
•
Combined ratio for the six months ended June 30, 2018 and 2017 was 95.6% and 82.9%, respectively, an increase of 12.7 percentage points.


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Table of Contents

Year to Date Results of Operations - Reinsurance Segment
The following table presents underwriting results by line of business for the six months ended June 30, 2018 and 2017:
 
 
Six Months Ended June 30,
 
 
2018
 
2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
505,233

 
$
438,500

 
$
182,428

 
$
1,126,161

 
$
403,370

 
$
468,482

 
$
101,823

 
$
973,675

Reinsurance premiums ceded
 
(138,482
)
 
(37,332
)
 
(30,748
)
 
(206,562
)
 
(90,986
)
 
(32,012
)
 
(1,726
)
 
(124,724
)
Net premiums written
 
366,751

 
401,168

 
151,680

 
919,599

 
312,384

 
436,470

 
100,097

 
848,951

Change in unearned premiums
 
(189,058
)
 
(195,725
)
 
(72,541
)
 
(457,324
)
 
(105,971
)
 
(208,421
)
 
(44,596
)
 
(358,988
)
Net premiums earned
 
177,693

 
205,443

 
79,139

 
462,275

 
206,413

 
228,049

 
55,501

 
489,963

Other insurance related income
 
 
 
 
 
 
 
2

 
 
 
 
 
 
 
3

Total underwriting revenues
 
 
 
 
 
 
 
462,277

 
 
 
 
 
 
 
489,966

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
51,017

 
108,727

 
61,067

 
220,811

 
48,454

 
114,085

 
32,683

 
195,222

Policy acquisition costs
 
37,045

 
41,321

 
22,131

 
100,497

 
36,335

 
40,157

 
17,009

 
93,501

Total underwriting deductions before G&A
 
88,062

 
150,048

 
83,198

 
321,308

 
84,789

 
154,242

 
49,692

 
288,723

Underwriting income (loss) before G&A
 
$
89,631

 
$
55,395

 
$
(4,059
)
 
$
140,969

 
$
121,624

 
$
73,807

 
$
5,809

 
$
201,243

General and administrative expenses
 
 
 
 
 
 
 
55,437

 
 
 
 
 
 
 
42,173

Share compensation expenses
 
 
 
 
 
 
 
6,635

 
 
 
 
 
 
 
5,348

Total underwriting deductions
 
 
 
 
 
 
 
383,380

 
 
 
 
 
 
 
336,244

Underwriting income
 
 
 
 
 
 
 
$
78,897

 
 
 
 
 
 
 
$
153,722

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
62,973

 
$
129,951

 
$
55,535

 
$
248,459

 
$
49,584

 
$
147,952

 
$
33,664

 
$
231,200

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
2,500

 
2,500

 
—

 
5,000

 
3,629

 
7,225

 
—

 
10,854

Change in prior accident years
 
(14,456
)
 
(23,724
)
 
5,532

 
(32,648
)
 
(4,759
)
 
(41,092
)
 
(981
)
 
(46,832
)
Total losses and loss expenses
 
$
51,017

 
$
108,727

 
$
61,067

 
$
220,811

 
$
48,454

 
$
114,085

 
$
32,683

 
$
195,222

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
72.6
 %
 
91.5
 %
 
83.1
%
 
81.7
 %
 
77.4
 %
 
93.2
 %
 
98.3
 %
 
87.2
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
35.4
 %
 
63.3
 %
 
70.2
%
 
53.8
 %
 
24.0
 %
 
64.8
 %
 
60.7
 %
 
47.2
 %
Current period—notable loss events
 
—
 %
 
—
 %
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
1.4
 %
 
1.2
 %
 
—
%
 
1.1
 %
 
1.8
 %
 
3.2
 %
 
—
 %
 
2.2
 %
Change in prior accident years
 
(8.1
)%
 
(11.5
)%
 
7.0
%
 
(7.1
)%
 
(2.3
)%
 
(18.0
)%
 
(1.8
)%
 
(9.6
)%
Losses and loss expense ratio
 
28.7
 %
 
53.0
 %
 
77.2
%
 
47.8
 %
 
23.5
 %
 
50.0
 %
 
58.9
 %
 
39.8
 %
Policy acquisition cost ratio
 
20.8
 %
 
20.1
 %
 
28.0
%
 
21.7
 %
 
17.6
 %
 
17.6
 %
 
30.6
 %
 
19.1
 %
General and administrative expense ratio
 
 
 
 
 
 
 
13.4
 %
 
 
 
 
 
 
 
9.7
 %
Expense ratio
 
 
 
 
 
 
 
35.1
 %
 
 
 
 
 
 
 
28.8
 %
Combined ratio
 
 
 
 
 
 
 
82.9
 %
 
 
 
 
 
 
 
68.6
 %



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Highlights for the six months ended June 30, 2018 were as follows:
•
Gross premiums written for the six months ended June 30, 2018 were $1,126.2 million compared to $973.7 million for the six months ended June 30, 2017, an increase of $152.5 million, or 15.7% and included the following:
◦
Property premiums of $505.2 million during the six months ended June 30, 2018, compared to $403.4 million during the six months ended June 30, 2017, an increase of $101.9 million, or 25.3%, primarily driven by new business written and increased participation on a number of catastrophe excess of loss programs;
◦
Specialty - short-tail premiums of $438.5 million during the six months ended June 30, 2018, compared to $468.5 million during the six months ended June 30, 2017, a decrease of $30.0 million, or 6.4%. The decrease was primarily driven by the non-renewal of one significant agriculture contract and was partially offset by new composite business written; and
◦
Specialty - other premiums of $182.4 million during the six months ended June 30, 2018, compared to $101.8 million during the six months ended June 30, 2017, an increase of $80.6 million, or 79.2%, primarily driven by new casualty business written.
•
Reinsurance premiums ceded for the six months ended June 30, 2018 were $206.6 million compared to $124.7 million for the six months ended June 30, 2017, an increase of $81.8 million, or 65.6%. The increase was primarily driven by an increase in the property lines of $47.5 million as a result of new aggregate and proportional covers purchased and an increase in the specialty - other lines of $29.0 million as a result of a new casualty retrocession cover.
•
Net premiums earned for the six months ended June 30, 2018 were $462.3 million compared to $490.0 million for the six months ended June 30, 2017, a decrease of $27.7 million, or 5.7%. The decrease is primarily driven by the earning of new reinsurance covers purchased during the first quarter of 2018 noted above, and during the fourth quarter of 2017.
•
Losses and loss expenses for the six months ended June 30, 2018 were $220.8 million compared to $195.2 million for the six months ended June 30, 2017, an increase of $25.6 million or 13.1% and included the following:
Notable Loss Events
•
There were no notable loss events occurring during the six months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the six months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $5.0 million, or 1.1 percentage points of the loss ratio and related to the property and specialty - short-tail lines.
•
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were $10.9 million, or 2.2 percentage points of the loss ratio and related primarily to the specialty - short-tail lines.
Attritional losses
•
Attritional losses of $248.5 million, or 53.8 percentage points of the loss ratio during the six months ended June 30, 2018 compared to $231.2 million, or 47.2 percentage points of the loss ratio during the six months ended June 30, 2017. The increase in the attritional loss ratio was primarily due to $10.0 million of losses from Winter Storm Friederike which did not meet the non-notable loss threshold and the earned impact of higher retrocession purchases as noted above.

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Change in prior accident years
◦
Loss reserve development for the six months ended June 30, 2018 and 2017 was as follows:
 
 
Six Months Ended June 30, 2018
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) adverse development on event losses
 
$
(576
)
 
$
4,342

 
$
487

 
$
4,253

(Favorable) adverse development on attritional losses
 
(13,880
)
 
(28,066
)
 
5,045

 
(36,901
)
Change in prior accident years
 
$
(14,456
)
 
$
(23,724
)
 
$
5,532

 
$
(32,648
)
 
 
Six Months Ended June 30, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Adverse (favorable) development on event losses
 
$
1,743

 
$
(8,099
)
 
$
207

 
$
(6,149
)
(Favorable) development on attritional losses
 
(6,502
)
 
(32,993
)
 
(1,188
)
 
(40,683
)
Change in prior accident years
 
$
(4,759
)
 
$
(41,092
)
 
$
(981
)
 
$
(46,832
)
The net favorable development for the six months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the six months ended June 30, 2018 and 2017 was 47.8% and 39.8%, respectively, an increase of 8.0 percentage points, primarily driven by the adverse development and current quarter attritional losses within Specialty - Other noted above.
•
Policy acquisition cost ratio for the six months ended June 30, 2018 was 21.7% compared to 19.1% for the six months ended June 30, 2017, an increase of 2.6 percentage points. The increase was primarily driven by the earned impact of higher retrocession purchases as noted above and a change in business mix in the specialty classes.
•
General and administrative expenses for the six months ended June 30, 2018 were $55.4 million compared to $42.2 million for the six months ended June 30, 2017, an increase of $13.3 million or 31.5%. The increase was primarily driven by an increase in the performance bonus accrual and a higher allocation of costs to the segment.
•
Share compensation expenses for the six months ended June 30, 2018 were $6.6 million compared to $5.3 million for the six months ended June 30, 2017, an increase of $1.3 million or 24.1%. The increase was driven by an increase in the performance share award conversion ratio.
•
Combined ratio for the six months ended June 30, 2018 and 2017 was 82.9% and 68.6%, respectively, an increase of 14.3 percentage points.
•
Underwriting income for the six months ended June 30, 2018 was $78.9 million compared to $153.7 million for the six months ended June 30, 2017, a decrease of $74.8 million or 48.7%.


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Year to Date Results of Operations - Insurance Segment
On May 1, 2017, the Company completed its acquisition of CRS. The results of CRS have been presented within the specialty - short-tail line of business in the Insurance segment from the date of acquisition.
The following table presents underwriting results by line of business for the six months ended June 30, 2018 and 2017:
 
 
Six Months Ended June 30,
 
 
2018
 
2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
 Total
Underwriting revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
 
$
229,222

 
$
656,323

 
$
284,490

 
$
1,170,035

 
$
197,425

 
$
307,404

 
$
238,018

 
$
742,847

Reinsurance premiums ceded
 
(76,243
)
 
(142,577
)
 
(54,704
)
 
(273,524
)
 
(55,010
)
 
(49,213
)
 
(24,092
)
 
(128,315
)
Net premiums written
 
152,979

 
513,746

 
229,786

 
896,511

 
142,415

 
258,191

 
213,926

 
614,532

Change in unearned premiums
 
633

 
(182,602
)
 
(15,205
)
 
(197,174
)
 
(1,919
)
 
(11,917
)
 
(16,735
)
 
(30,571
)
Net premiums earned
 
153,612

 
331,144

 
214,581

 
699,337

 
140,496

 
246,274

 
197,191

 
583,961

Other insurance related income
 
 
 
 
 
 
 
2,205

 
 
 
 
 
 
 
1,724

Total underwriting revenues
 
 
 
 
 
 
 
701,542

 
 
 
 
 
 
 
585,685

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
147,476

 
234,440

 
144,327

 
526,243

 
112,296

 
126,344

 
128,711

 
367,351

Policy acquisition costs
 
33,444

 
40,568

 
43,695

 
117,707

 
29,551

 
50,562

 
41,216

 
121,329

Total underwriting deductions before G&A
 
180,920

 
275,008

 
188,022

 
643,950

 
141,847

 
176,906

 
169,927

 
488,680

Underwriting (loss) income before G&A
 
$
(27,308
)
 
$
56,136

 
$
26,559

 
$
57,592

 
$
(1,351
)
 
$
69,368

 
$
27,264

 
$
97,005

General and administrative expenses
 
 
 
 
 
 
 
143,160

 
 
 
 
 
 
 
98,872

Share compensation expenses
 
 
 
 
 
 
 
7,231

 
 
 
 
 
 
 
7,075

Total underwriting deductions
 
 
 
 
 
 
 
794,341

 
 
 
 
 
 
 
594,627

Underwriting (loss)
 
 
 
 
 
 
 
$
(92,799
)
 
 
 
 
 
 
 
$
(8,942
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
$
128,261

 
$
240,600

 
$
156,556

 
$
525,417

 
$
109,833

 
$
147,456

 
$
144,005

 
$
401,294

Current period—notable loss events
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Current period—non-notable loss events
 
10,355

 
1,055

 
—

 
11,410

 
16,476

 
—

 
—

 
16,476

Change in prior accident years
 
8,860

 
(7,215
)
 
(12,229
)
 
(10,584
)
 
(14,013
)
 
(21,112
)
 
(15,294
)
 
(50,419
)
Total losses and loss expenses
 
$
147,476

 
$
234,440

 
$
144,327

 
$
526,243

 
$
112,296

 
$
126,344

 
$
128,711

 
$
367,351

Selected ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of net to gross premiums written
 
66.7
%
 
78.3
 %
 
80.8
 %
 
76.6
 %
 
72.1
 %
 
84.0
 %
 
89.9
 %
 
82.7
 %
Losses and loss expense ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period excluding items below
 
83.5
%
 
72.7
 %
 
73.0
 %
 
75.1
 %
 
78.2
 %
 
59.9
 %
 
73.1
 %
 
68.7
 %
Current period—notable loss events
 
—
%
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
 
—
 %
Current period—non-notable loss events
 
6.7
%
 
0.3
 %
 
—
 %
 
1.6
 %
 
11.7
 %
 
—
 %
 
—
 %
 
2.8
 %
Change in prior accident years
 
5.8
%
 
(2.2
)%
 
(5.7
)%
 
(1.5
)%
 
(10.0
)%
 
(8.6
)%
 
(7.8
)%
 
(8.6
)%
Losses and loss expense ratio
 
96.0
%
 
70.8
 %
 
67.3
 %
 
75.2
 %
 
79.9
 %
 
51.3
 %
 
65.3
 %
 
62.9
 %
Policy acquisition cost ratio
 
21.8
%
 
12.3
 %
 
20.4
 %
 
16.8
 %
 
21.0
 %
 
20.5
 %
 
20.9
 %
 
20.8
 %
General and administrative expense ratio
 
 
 
 
 
 
 
21.5
 %
 
 
 
 
 
 
 
18.1
 %
Expense ratio
 
 
 
 
 
 
 
38.3
 %
 
 
 
 
 
 
 
38.9
 %
Combined ratio
 
 
 
 
 
 
 
113.5
 %
 
 
 
 
 
 
 
101.8
 %

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Table of Contents

Highlights for the six months ended June 30, 2018 were as follows:
•
Gross premiums written for the six months ended June 30, 2018 were $1,170.0 million compared to $742.8 million for the six months ended June 30, 2017, an increase of $427.2 million, or 57.5% and included the following:
◦
Property premiums of $229.2 million during the six months ended June 30, 2018, compared to $197.4 million during the six months ended June 30, 2017, an increase of $31.8 million, or 16.1%. The increase was primarily driven by rate improvements on existing business and the continued build out of product offerings in the U.S. short-tail property lines;
◦
Specialty - short-tail premiums of $656.3 million during the six months ended June 30, 2018, compared to $307.4 million during the six months ended June 30, 2017, an increase of $348.9 million, or 113.5%. The increase was primarily driven by new agriculture business written through CRS; and
◦
Specialty - other premiums of $284.5 million during the six months ended June 30, 2018, compared to $238.0 million during the six months ended June 30, 2017, an increase of $46.5 million, or 19.5%, primarily driven by increased participation on renewals and the build out of product offerings in U.S. liability lines.
•
Reinsurance premiums ceded for the six months ended June 30, 2018 were $273.5 million compared to $128.3 million for the six months ended June 30, 2017, an increase of $145.2 million, or 113.2%. The increase was primarily driven by an increase in the specialty - short-tail lines of $93.4 million driven by ceded agriculture premiums relating to new business written through CRS and an increase in the specialty - other lines of $30.6 million as a result of the continued build out of U.S. liability lines as noted above.
•
Net premiums earned for the six months ended June 30, 2018 were $699.3 million compared to $584.0 million for the six months ended June 30, 2017, an increase of $115.4 million, or 19.8%. The increase was primarily due to agriculture net premiums earned relating to new business written through CRS.
•
Losses and loss expenses for the six months ended June 30, 2018 were $526.2 million compared to $367.4 million for the six months ended June 30, 2017, an increase of $158.9 million or 43.3% and included the following:
Notable Loss Events
•
There were no notable loss events occurring during the six months ended June 30, 2018 or 2017.
Non-notable Loss Events
•
Losses and loss expenses incurred during the six months ended June 30, 2018 from the Papua New Guinea Earthquake non-notable loss event were $11.4 million, or 1.6 percentage points of the loss ratio and related to the property and specialty - short-tail lines.
•
Losses and loss expenses incurred from a single energy non-notable loss event during the six months ended June 30, 2017 were $16.5 million, or 2.8 percentage points of the loss ratio and related solely to the property lines.
Attritional losses
•
Attritional losses of $525.4 million, or 75.1 percentage points of the loss ratio during the six months ended June 30, 2018 compared to $401.3 million, or 68.7 percentage points of the loss ratio during the six months ended June 30, 2017. The increase in the attritional loss ratio was primarily driven by a higher frequency of low severity events which did not meet the non-notable loss threshold.
Change in prior accident years
◦
Loss reserve development for the six months ended June 30, 2018 and 2017 was as follows:
 
 
Six Months Ended June 30, 2018
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
Adverse (favorable) development on event losses
 
$
1,602

 
$
(1,032
)
 
$
(292
)
 
$
278

Adverse (favorable) development on attritional losses
 
7,258

 
(6,183
)
 
(11,937
)
 
(10,862
)
Change in prior accident years
 
$
8,860

 
$
(7,215
)
 
$
(12,229
)
 
$
(10,584
)

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Six Months Ended June 30, 2017
(Dollars in thousands)
 
Property
 
Specialty - Short-tail
 
Specialty - Other
 
Total
(Favorable) development on event losses
 
$
(1,031
)
 
$
(6,826
)
 
$
(1
)
 
$
(7,858
)
(Favorable) development on attritional losses
 
(12,982
)
 
(14,286
)
 
(15,293
)
 
(42,561
)
Change in prior accident years
 
$
(14,013
)
 
$
(21,112
)
 
$
(15,294
)
 
$
(50,419
)
The net favorable development for the six months ended June 30, 2018 and 2017 was primarily driven by favorable development on attritional losses.
•
Loss ratio for the six months ended June 30, 2018 and 2017 was 75.2% and 62.9%, respectively, an increase of 12.3 percentage points.
•
Policy acquisition cost ratio for the six months ended June 30, 2018 was 16.8% compared to 20.8% for the six months ended June 30, 2017, a decrease of 4.0 percentage points. The decrease was primarily driven by new agriculture business written which carries lower acquisition costs.
•
General and administrative expenses for the six months ended June 30, 2018 were $143.2 million compared to $98.9 million for the six months ended June 30, 2017, an increase of $44.3 million or 44.8%. The increase was driven by (i) CRS, which was acquired approximately midway through the second quarter of 2017, (ii) higher allocation of costs to the segment, and (iii) higher staff related expenses.
•
Combined ratio for the six months ended June 30, 2018 and 2017 was 113.5% and 101.8%, respectively, an increase of 11.7 percentage points.
•
Underwriting (loss) for the six months ended June 30, 2018 was $(92.8) million compared to $(8.9) million for the six months ended June 30, 2017, an increase of $83.9 million.


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Table of Contents

Year to Date Results of Operations - Asset Management Segment
The following table presents the Asset Management segment income on an asset manager basis for the six months ended June 30, 2018 and 2017:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Fee revenues
 
 
 
 
Third party
 
$
11,894

 
$
10,193

Related party
 
879

 
1,275

Total fee revenues
 
12,773

 
11,468

Expenses
 
 
 
 
General and administrative expenses
 
9,382

 
7,393

Share compensation expenses
 
71

 
165

Finance expenses
 
96

 
75

Tax (benefit) expense
 
(5
)
 
134

Foreign exchange losses
 
1

 
—

Total expenses
 
9,545

 
7,767

Income before investment income from funds and sidecars
 
3,228

 
3,701

Investment income (loss) from funds and sidecars (a)
 
 
 
 
AlphaCat Sidecars
 
134

 
(133
)
AlphaCat ILS Funds - Lower Risk (b)
 
3,007

 
3,490

AlphaCat ILS Funds - Higher Risk (b)
 
3,024

 
4,967

BetaCat ILS Funds
 
549

 
631

Validus' share of investment income from funds and sidecars
 
6,714

 
8,955

Asset Management segment income
 
$
9,942

 
$
12,656

 
 
 
 
 
Gross premiums written
 
 
 
 
AlphaCat Sidecars
 
$
(134
)
 
$
66

AlphaCat ILS Funds - Lower Risk (b)
 
172,527

 
106,540

AlphaCat ILS Funds - Higher Risk (b)
 
203,410

 
137,208

AlphaCat Direct (c)
 
13,200

 
26,794

Total
 
$
389,003

 
$
270,608

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

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Table of Contents

Highlights for the six months ended June 30, 2018 were as follows:
Fee revenues earned for the six months ended June 30, 2018 were $12.8 million compared to $11.5 million during the six months ended June 30, 2017, an increase of $1.3 million or 11.4%. Third party fee revenues earned during the six months ended June 30, 2018 were $11.9 million compared to $10.2 million during the six months ended June 30, 2017, an increase of $1.7 million or 16.7%. The increase in third party fee revenues was primarily driven by an increase in management fees as a result of an increase in assets under management over the last twelve months.
•
Total expenses for the six months ended June 30, 2018 were $9.5 million compared to $7.8 million during the six months ended June 30, 2017, an increase of $1.8 million, or 22.9%. The increase was driven by a higher allocation of costs to the segment.
•
Validus’ share of investment income from AlphaCat Funds and Sidecars for the six months ended June 30, 2018 was $6.7 million compared to $9.0 million during the six months ended June 30, 2017, a decrease of $2.2 million, or 25.0%. The decrease was due to losses recognized during the second quarter of 2018 in certain higher risk AlphaCat ILS funds.
•
Asset Management segment income for the six months ended June 30, 2018 was $9.9 million compared to $12.7 million during the six months ended June 30, 2017, a decrease of $2.7 million, or 21.4%.
Assets Under Management
 
 
Assets Under Management (a)
(Dollars in thousands)
 
July 1, 2018
 
January 1, 2018
Assets Under Management - Related Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
2,605

 
$
5,631

AlphaCat ILS Funds - Lower Risk (b)
 
68,348

 
75,898

AlphaCat ILS Funds - Higher Risk (b)
 
68,862

 
68,290

AlphaCat Direct (c)
 
—

 
—

BetaCat ILS Funds
 
25,470

 
24,914

Total
 
$
165,285

 
$
174,733

 
 
 
 
 
Assets Under Management - Third Party (a)
 
 
 
 
AlphaCat Sidecars
 
$
10,075

 
$
20,565

AlphaCat ILS Funds - Lower Risk (b)
 
1,732,177

 
1,663,606

AlphaCat ILS Funds - Higher Risk (b)
 
1,114,499

 
1,029,224

AlphaCat Direct (c)
 
405,613

 
443,730

BetaCat ILS Funds
 
63,482

 
67,046

Total
 
3,325,846

 
3,224,171

Total Assets Under Management (a)
 
$
3,491,131

 
$
3,398,904

(a)
The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
(b)
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
(c)
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
•
Assets under management were $3.5 billion as at July 1, 2018, compared to $3.4 billion as at January 1, 2018, of which third party assets under management were $3.3 billion as at July 1, 2018, compared to $3.2 billion as at January 1, 2018. During the six months ended July 1, 2018, the Asset Management segment raised a total of $304.8 million, of which $301.3 million was raised from third parties. During the six months ended July 1, 2018, $290.8 million was returned to investors, of which $274.0 million was returned to third party investors.

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Year to Date Results of Operations - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the six months ended June 30, 2018 and 2017:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Managed investments
 
 
 
 
Managed net investment income (a)
 
$
82,543

 
$
74,255

Net realized (losses) on managed investments (a)
 
(6,290
)
 
(623
)
Change in net unrealized (losses) gains on managed investments (a)
 
(68,169
)
 
30,291

Income from investment affiliates
 
15,246

 
14,654

Total managed investment return
 
23,330

 
118,577

Corporate expenses
 
 
 
 
General and administrative expenses
 
25,832

 
34,180

Share compensation expenses
 
11,832

 
8,049

Finance expenses (a)
 
28,339

 
28,013

Dividends on preferred shares
 
11,656

 
4,406

Tax (benefit) (a)
 
(13,979
)
 
(4,670
)
Total Corporate expenses
 
63,680

 
69,978

Other items
 
 
 
 
Foreign exchange (losses) (a)
 
(1,655
)
 
(6,220
)
Other income
 
582

 
268

Transaction expenses
 
(11,593
)
 
(4,427
)
Total other items
 
(12,666
)
 
(10,379
)
Total Corporate and Investments
 
$
(53,016
)
 
$
38,220

(a)
These items exclude the components which are included in the Asset Management segment income and amounts which are consolidated from VIEs.
Managed investments
Highlights for the six months ended June 30, 2018 were as follows:
•
Managed net investment income for the six months ended June 30, 2018 was $82.5 million compared to $74.3 million for the six months ended June 30, 2017, an increase of $8.3 million, or 11.2%.
•
Annualized effective yield on managed investments for the six months ended June 30, 2018 was 2.43%, compared to 2.31% for the six months ended June 30, 2017, an increase of 12 basis points.
•
Net realized (losses) on managed investments for the six months ended June 30, 2018 were $(6.3) million compared to $(0.6) million for the six months ended June 30, 2017.
•
Change in net unrealized (losses) on managed investments for the six months ended June 30, 2018 of $(68.2) million compared to gains of $30.3 million for the six months ended June 30, 2017. Changes in unrealized (losses) on managed investments during the six months ended June 30, 2018 were primarily driven by the impact of interest rate increases on the Company’s managed fixed maturity portfolio.
•
Income from investment affiliates for the six months ended June 30, 2018 was $15.2 million compared to $14.7 million for the six months ended June 30, 2017, an increase of $0.6 million, or 4.0%. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

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Corporate expenses and other items
Highlights for the six months ended June 30, 2018 as compared to 2017 were as follows:
•
General and administrative expenses for the six months ended June 30, 2018 were $25.8 million compared to $34.2 million for the six months ended June 30, 2017, a decrease of $8.3 million, or 24.4%. The decrease was primarily driven by a higher allocation of costs to reporting segments during the six months ended June 30, 2018.
•
Share compensation expenses for the six months ended June 30, 2018 were $11.8 million compared to $8.0 million for the six months ended June 30, 2017, an increase of $3.8 million, or 47.0%. The increase was driven by an increase in the performance share award conversion ratio.
•
Finance expenses for the six months ended June 30, 2018 were $28.3 million compared to $28.0 million for the six months ended June 30, 2017, an increase of $0.3 million, or 1.2%.
•
Dividends on preferred shares for the six months ended June 30, 2018 were $11.7 million compared to $4.4 million for the six months ended June 30, 2017, an increase of $7.3 million, or 164.5%. The increase was due to the issuance of $250.0 million of new Series B preferred shares during the second quarter of 2017.
•
Tax (benefit) for the six months ended June 30, 2018 was $(14.0) million compared to $(4.7) million for the six months ended June 30, 2017.
•
Foreign exchange (losses) for the six months ended June 30, 2018 were $(1.7) million compared to $(6.2) million for the six months ended June 30, 2017, a decrease of $4.6 million.
•
Transaction expenses for the six months ended June 30, 2018 were $11.6 million compared to $4.4 million for the six months ended June 30, 2017 and were composed of legal and financial advisory services in relation to the Company’s Merger with AIG and its acquisition of CRS during the second quarter of 2018 and 2017, respectively.
Liquidity and Capital Resources
Investments
Managed investments represent assets governed by the Company’s Investment Policy Statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” to the Consolidated Financial Statements in Part I, Item 1 for further details.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at June 30, 2018 and December 31, 2017 was as follows:

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Fair Value
 
June 30, 2018
 
December 31, 2017
Managed investments, cash and cash equivalents and restricted cash
 
 
 
Fixed maturities
 
 
 
U.S. government and government agency
$
604,392

 
$
727,397

Non-U.S. government and government agency
282,263

 
312,239

U.S. states, municipalities and political subdivisions
189,437

 
201,303

Agency residential mortgage-backed securities
929,859

 
978,049

Non-agency residential mortgage-backed securities
47,600

 
40,373

U.S. corporate
1,436,885

 
1,533,395

Non-U.S. corporate
403,385

 
422,249

Bank loans
471,212

 
442,951

Asset-backed securities
714,434

 
658,303

Commercial mortgage-backed securities
301,544

 
312,395

Total fixed maturities
5,381,011

 
5,628,654

Short-term investments
218,035

 
230,011

Other investments
 
 
 
Hedge funds
15,888

 
15,774

Private equity investments
79,185

 
78,407

Fixed income investment funds
209,503

 
204,426

Overseas deposits
61,608

 
56,611

Total other investments
366,184

 
355,218

Investments in investment affiliates (a)
127,247

 
100,137

Cash and cash equivalents
717,007

 
691,687

Restricted cash
88,755

 
62,848

Total managed investments, cash and cash equivalents and restricted cash
$
6,898,239

 
$
7,068,555

 
 
 
 
Non-managed investments, cash and cash equivalents and restricted cash
 
 
 
Catastrophe bonds
$
178,942

 
$
229,694

Short-term investments
3,510,859

 
3,151,746

Cash and cash equivalents
2,212

 
63,303

Restricted cash
197,524

 
331,815

Total non-managed investments, cash and cash equivalents and restricted cash
3,889,537

 
3,776,558

Total investments and cash
$
10,787,776

 
$
10,845,113

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in income as “Income from investment affiliates.”
As at June 30, 2018, the Company’s managed cash and investment portfolio totaled $6.9 billion (December 31, 2017: $7.1 billion). Refer to Note 4 to the Consolidated Financial Statements, “Investments,” in Part I, Item 1 for further details related to the Company’s managed investments.
A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s IPS specifically requires certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.25 years. At June 30, 2018, the average duration of the Company’s managed investment portfolio was 2.17 years (December 31, 2017: 2.17 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and general market conditions.
The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities with ratings. Further limits on asset classes and security types are

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also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At June 30, 2018, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of A+ (December 31, 2017: AA-). Refer to Note 4(a) to the Consolidated Financial Statements, “Investments,” in Part I, Item 1 for further details related to the investment ratings of the Company’s fixed maturity portfolio.
The value of the Company’s managed fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, fixed income investment funds and private equity investments. For further details on market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following tables provide a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s managed fixed maturity portfolio:
 
 
June 30, 2018
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
56,417

 
8.2
%
Supranational
 
49,910

 
7.3
%
Province of Ontario
 
30,661

 
4.5
%
Canada
 
29,129

 
4.2
%
France
 
20,285

 
3.0
%
Netherlands
 
16,005

 
2.3
%
Sweden
 
15,572

 
2.3
%
United Kingdom
 
14,850

 
2.2
%
Other (individual jurisdictions below $10,000)
 
49,434

 
7.2
%
Total Managed Non-U.S. Government Securities
 
282,263

 
41.2
%
European Corporate Securities
 
136,713

 
19.9
%
U.K. Corporate Securities
 
124,238

 
18.1
%
Other Non-U.S. Corporate Securities
 
142,434

 
20.8
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
685,648

 
100.0
%
 
 
December 31, 2017
(Dollars in thousands)
 
Fair Value
 
% of Total
Germany
 
$
71,287

 
9.7
%
Supranational
 
60,200

 
8.2
%
Canada
 
38,805

 
5.3
%
Province of Ontario
 
31,069

 
4.2
%
United Kingdom
 
19,886

 
2.7
%
France
 
14,066

 
1.9
%
Netherlands
 
10,348

 
1.4
%
Other (individual jurisdictions below $10,000)
 
66,578

 
9.1
%
Total Managed Non-U.S. Government Securities
 
312,239

 
42.5
%
European Corporate Securities
 
139,779

 
19.0
%
U.K. Corporate Securities
 
122,534

 
16.7
%
Other Non-U.S. Corporate Securities
 
159,936

 
21.8
%
Total Managed Non-U.S. Fixed Maturity Portfolio
 
$
734,488

 
100.0
%
At June 30, 2018, the Company did not have an aggregate exposure to any single issuer of more than 0.9% (December 31, 2017: 0.9%) of managed cash and investments, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at June 30, 2018 and December 31, 2017 were as follows:

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June 30, 2018
Issuer (a)
 
Fair Value (b)
 
Rating (c)
 
% of Managed Investments, Cash and Cash Equivalents and Restricted Cash
JPMorgan Chase & Co.
 
$
61,049

 
A-
 
0.9
%
Morgan Stanley
 
53,606

 
 BBB+
 
0.8
%
Citigroup Inc.
 
49,550

 
 BBB+
 
0.7
%
Bank of America Corp.
 
48,283

 
A-
 
0.7
%
Wells Fargo & Company
 
47,621

 
 A
 
0.7
%
Goldman Sachs Group
 
45,925

 
BBB+
 
0.7
%
HSBC Holdings plc
 
35,004

 
A
 
0.5
%
CVS Health Corp.
 
31,366

 
BBB
 
0.5
%
Toyota Motor Corp
 
27,628

 
A+
 
0.4
%
International Business Machines Corp.
 
26,535

 
A+
 
0.4
%
Total
 
$
426,567

 
 
 
6.3
%
 
 
December 31, 2017
Issuer (a)
 
Fair Value (b)
 
Rating (c)
 
% of Managed Investments, Cash and Cash Equivalents and Restricted Cash
JPMorgan Chase & Co.
 
$
67,079

 
 BBB+
 
0.9
%
Citigroup Inc.
 
59,438

 
 BBB+
 
0.8
%
Morgan Stanley
 
56,503

 
 BBB+
 
0.8
%
Bank of America Corp.
 
51,579

 
 A-
 
0.7
%
Goldman Sachs Group
 
49,679

 
 BBB+
 
0.7
%
Wells Fargo & Company
 
45,545

 
 A
 
0.6
%
AT&T Inc.
 
34,615

 
 BBB+
 
0.5
%
HSBC Holdings plc
 
33,972

 
 A
 
0.5
%
Bank of New York Mellon Corp.
 
32,592

 
 A
 
0.5
%
Capital One Financial Corporation
 
29,145

 
 BBB+
 
0.4
%
Total
 
$
460,147

 
 
 
6.4
%
(a)
Issuers exclude government-backed government-sponsored enterprises and cash and cash equivalents.
(b)
Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.
(c)
Investment ratings are the median of Moody’s, Standard & Poor’s and Fitch, presented in Standard & Poor’s equivalent rating. For investments where three ratings are unavailable, the lower of the ratings shall apply, presented as the Standard & Poor’s equivalent rating.
Reserve for Losses and Loss Expenses
At June 30, 2018 and December 31, 2017, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for
Losses and Loss Expenses
Property
 
$
974,369

 
$
1,119,127

 
$
2,093,496

 
$
893,180

 
$
1,398,563

 
$
2,291,743

Specialty - Short-tail
 
522,517

 
901,849

 
1,424,366

 
515,450

 
930,062

 
1,445,512

Specialty - Other
 
339,244

 
842,493

 
1,181,737

 
345,214

 
748,921

 
1,094,135

Total
 
$
1,836,130

 
$
2,863,469

 
$
4,699,599

 
$
1,753,844

 
$
3,077,546

 
$
4,831,390


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June 30, 2018
 
December 31, 2017
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for
Losses and Loss Expenses
Property
 
$
786,684

 
$
697,968

 
$
1,484,652

 
$
732,289

 
$
820,301

 
$
1,552,590

Specialty - Short-tail
 
457,550

 
749,698

 
1,207,248

 
435,201

 
653,693

 
1,088,894

Specialty - Other
 
304,755

 
731,994

 
1,036,749

 
310,904

 
645,005

 
955,909

Total
 
$
1,548,989

 
$
2,179,660

 
$
3,728,649

 
$
1,478,394

 
$
2,118,999

 
$
3,597,393

The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the three months ended June 30, 2018.
 
 
Three Months Ended June 30, 2018
(Dollars in thousands)
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,813,865

 
$
2,091,455

 
$
727,309

 
$
—

 
$
4,632,629

Loss reserves recoverable
 
(529,574
)
 
(450,370
)
 
—

 
—

 
(979,944
)
Net reserves for losses and loss expenses, beginning of period
 
1,284,291

 
1,641,085

 
727,309

 
—

 
3,652,685

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
Current year
 
132,148

 
337,890

 
19,143

 
—

 
489,181

Prior years
 
(14,810
)
 
4,964

 
(2,725
)
 
—

 
(12,571
)
Total net incurred losses and loss expenses
 
117,338

 
342,854

 
16,418

 
—

 
476,610

Foreign exchange loss
 
(17,765
)
 
(11,630
)
 
(953
)
 
—

 
(30,348
)
Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
Current year
 
(7,157
)
 
(44,974
)
 
(9,209
)
 
—

 
(61,340
)
Prior years
 
(112,300
)
 
(136,076
)
 
(60,582
)
 
—

 
(308,958
)
Total net paid losses
 
(119,457
)
 
(181,050
)
 
(69,791
)
 
—

 
(370,298
)
Net reserves for losses and loss expenses, end of period
 
1,264,407

 
1,791,259

 
672,983

 
—

 
3,728,649

Loss reserves recoverable
 
525,439

 
446,834

 
—

 
(1,323
)
 
970,950

Reserve for losses and loss expenses, end of period
 
$
1,789,846

 
$
2,238,093

 
$
672,983

 
$
(1,323
)
 
$
4,699,599

For the three months ended June 30, 2018, net favorable loss reserve development on prior accident years was $12.6 million, of which $14.8 million related to the Reinsurance segment and $2.7 million related to the Asset Management segment. The favorable development was partially offset by $5.0 million of adverse development related to the Insurance segment.

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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the six months ended June 30, 2018.
 
 
Six Months Ended June 30, 2018
(Dollars in thousands)
 
Reinsurance Segment
 
Insurance Segment
 
Asset Management Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,816,654

 
$
2,300,437

 
$
714,299

 
$
—

 
$
4,831,390

Loss reserves recoverable
 
(548,131
)
 
(640,866
)
 
(45,000
)
 
—

 
(1,233,997
)
Net reserves for losses and loss expenses, beginning of period
 
1,268,523

 
1,659,571

 
669,299

 
—

 
3,597,393

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
Current year
 
253,459

 
536,827

 
28,010

 
—

 
818,296

Prior years
 
(32,648
)
 
(10,584
)
 
23,091

 
—

 
(20,141
)
Total net incurred losses and loss expenses
 
220,811

 
526,243

 
51,101

 
—

 
798,155

Foreign exchange loss
 
(9,082
)
 
(4,827
)
 
(812
)
 
—

 
(14,721
)
Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
Current year
 
(10,238
)
 
(61,628
)
 
(9,209
)
 
—

 
(81,075
)
Prior years
 
(205,607
)
 
(328,100
)
 
(37,396
)
 
—

 
(571,103
)
Total net paid losses
 
(215,845
)
 
(389,728
)
 
(46,605
)
 
—

 
(652,178
)
Net reserves for losses and loss expenses, end of period
 
1,264,407

 
1,791,259

 
672,983

 
—

 
3,728,649

Loss reserves recoverable
 
525,439

 
446,834

 
—

 
(1,323
)
 
970,950

Reserve for losses and loss expenses, end of period
 
$
1,789,846

 
$
2,238,093

 
$
672,983

 
$
(1,323
)
 
$
4,699,599

For the six months ended June 30, 2018, net favorable loss reserve development on prior accident years was $20.1 million, of which $32.6 million related to the Reinsurance segment and $10.6 million related to the Insurance segment. The favorable development was partially offset by $23.1 million of adverse development related to the Asset Management segment.
For further information regarding the Company’s reserves for losses and loss expenses refer to Note 9 to the Consolidated Financial Statements, “Reserve for losses and loss expenses,” in Part I, Item 1. The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned.
The management of (re)insurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company’s actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events (“RDE”) and would be included as part of the Company’s overall reserves. As at June 30, 2018, the Company had no RDE.

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For disclosure purposes, only those notable loss events which have an ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, RDE may be established for a specific accident year.
 
 
 
 
Year Ended December 31, 2016
 
Year Ended December 31, 2017
 
Six Months Ended
June 30, 2018
2016 Notable Loss Events
 
Initial estimate (a)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
 
Development (Favorable) / Unfavorable
 
Closing
Estimate (b)
Canadian Wildfires
 
$
36,915

 
$
(17,265
)
 
$
19,650

 
$
(162
)
 
$
19,488

 
$
1

 
$
19,489

Hurricane Matthew
 
39,140

 
—

 
39,140

 
9,222

 
48,362

 
(2,119
)
 
46,243

2016 New Zealand Earthquake
 
31,421

 
—

 
31,421

 
—

 
31,421

 
(1,435
)
 
29,986

Total
 
$
107,476

 
$
(17,265
)
 
$
90,211

 
$
9,060

 
$
99,271

 
$
(3,553
)
 
$
95,718

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

 
$
13,974

 
$
4,074

 
$
9,738

 
$
553

 
$
9,186

Hurricane Matthew
 
 
 
6,712

 
32,428

 
25,090

 
16,560

 
3,004

 
11,437

2016 New Zealand Earthquake
 
 
 
—

 
31,421

 
817

 
30,604

 
17

 
29,152

Total
 
 
 
$
12,388

 
$
77,823

 
$
29,981

 
$
56,902

 
$
3,574

 
$
49,775

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

 
 
 
 
 
$
65,795

 
$
313,204

 
$
(20,568
)
 
$
292,636

Hurricane Irma
 
518,559

 
 
 
 
 
(60,414
)
 
458,145

 
40,406

 
498,551

Hurricane Maria
 
160,207

 
 
 
 
 
(10,856
)
 
149,351

 
34,471

 
183,822

Northern California Wildfires
 
87,754

 
 
 
 
 
—

 
87,754

 
121

 
87,875

Southern California Wildfires
 
38,495

 
 
 
 
 
—

 
38,495

 
(24,764
)
 
13,731

Total
 
$
1,052,424

 
 
 
 
 
$
(5,475
)
 
$
1,046,949

 
$
29,666

 
$
1,076,615

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss
 
Closing Reserve (c)
 
Paid Loss
 
Closing Reserve (c)
Hurricane Harvey
 
 
 
 
 
 
 
$
59,010

 
$
254,194

 
$
45,761

 
$
187,865

Hurricane Irma
 
 
 
 
 
 
 
119,045

 
339,100

 
90,368

 
289,138

Hurricane Maria
 
 
 
 
 
 
 
9,817

 
139,534

 
15,518

 
158,487

Northern California Wildfires
 
 
 
 
 
 
 
12,172

 
75,582

 
10,597

 
65,106

Southern California Wildfires
 
 
 
 
 
 
 
—

 
38,495

 
1,344

 
12,387

Total
 
 
 
 
 
 
 
$
200,044

 
$
846,905

 
$
163,588

 
$
712,983

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

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Sources of Liquidity
Holding Company Liquidity
Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Reinsurance, Insurance, and Asset Management segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet its short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:
(Dollars in thousands)
 
June 30, 2018
 
December 31, 2017
Validus Reinsurance, Ltd. (excluding capital supporting FAL) (a) (b)
 
$
3,870,628

 
$
3,898,905

Talbot Holdings, Ltd. (including capital supporting FAL) (b)
 
761,054

 
824,946

Other, net
 
(38,131
)
 
(44,057
)
Redeemable noncontrolling interests in AlphaCat
 
1,390,233

 
1,004,094

Noncontrolling interests in AlphaCat
 
371,257

 
16,718

Total consolidated capitalization
 
6,355,041

 
5,700,606

Senior notes payable
 
(245,664
)
 
(245,564
)
Debentures payable
 
(538,751
)
 
(539,158
)
Redeemable noncontrolling interests in AlphaCat
 
(1,390,233
)
 
(1,004,094
)
Total shareholders’ equity
 
4,180,393

 
3,911,790

Preferred shares (c)
 
(400,000
)
 
(400,000
)
Noncontrolling interests in AlphaCat
 
(371,257
)
 
(16,718
)
Total shareholders’ equity available to Validus common shareholders (c)
 
$
3,409,136

 
$
3,495,072

(a)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $680,266 (December 31, 2017: $702,932) relating to Western World Insurance Group, Inc.
(b)
Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $536,989 (December 31, 2017: $599,077) which supports Talbot’s FAL. This capital was included in Talbot Holdings, Ltd. (including capital supporting FAL).
(c)
Total shareholders’ equity available to Validus common shareholders excludes the liquidation value of the preferred shares.
Sources and Uses of Cash
The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.
In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

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There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents and restricted cash for the six months ended June 30, 2018 and 2017 is provided in the following table:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2018
 
2017
Net cash provided by operating activities
 
$
163,148

 
$
52,685

Net cash (used in) investing activities
 
(182,883
)
 
(90,287
)
Net cash (used in) provided by financing activities
 
(116,352
)
 
531,506

Effect of foreign currency rate changes on cash and cash equivalents and restricted cash
 
(8,068
)
 
10,608

Net (decrease) increase in cash and cash equivalents and restricted cash
 
$
(144,155
)
 
$
504,512

Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash provided by operating activities during six months ended June 30, 2018 and 2017 was $163.1 million and $52.7 million, respectively. The favorable movement of $110.5 million during the six months ended June 30, 2018 compared to 2017 was primarily due to the timing of cash receipts and payments, notably with regard to premiums receivable and losses payable, respectively.
We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.
Investing Activities
Cash flow used in investing activities is primarily from net (purchases) sales made in the Company’s investment portfolio. As at June 30, 2018, the Company’s portfolio was composed of fixed income, short-term and other investments and investments in investment affiliates amounting to $9.8 billion or 90.7% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 4 to the Consolidated Financial Statements, “Investments,” in Part I Item 1.
Net cash used in investing activities during the six months ended June 30, 2018 was $182.9 million compared to $90.3 million during the six months ended June 30, 2017. The increase in net cash used in investing activities of $92.6 million during the six months ended June 30, 2018 compared to 2017 was primarily driven by an increase in the purchases of both fixed maturity and short-term investments, partially offset by non-recurring expenditure in 2017 for the purchase of CRS.
Financing Activities
Cash flow (used in) provided by financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, including third party investments in the funds and sidecars, as well as the issuance of notes payable to AlphaCat investors, and is partially offset by repurchases of shares in the Company and the payment of dividends.
Net cash used in financing activities during the six months ended June 30, 2018 was $116.4 million compared to net cash provided by financing activities of $531.5 million during the six months ended June 30, 2017. The primary driver of this change was the deployment of $645.2 million of third party subscriptions into AlphaCat ILS Funds and Sidecars.

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Capital Resources
The following table details the Company’s capital position as at June 30, 2018 and December 31, 2017:
(Dollars in thousands)
 
June 30, 2018
 
December 31, 2017
Senior Notes (a)
 
$
245,664

 
$
245,564

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

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (a)
 
248,951

 
249,358

Total debt
 
784,415

 
784,722

 
 
 
 
 
Redeemable noncontrolling interests
 
1,390,233

 
1,004,094

 
 
 
 
 
Preferred shares, liquidation value (b)
 
400,000

 
400,000

Ordinary shares, capital and surplus available to Validus common shareholders
 
3,399,277

 
3,517,264

Accumulated other comprehensive income (loss)
 
9,859

 
(22,192
)
Noncontrolling interests
 
371,257

 
16,718

Total shareholders' equity
 
$
4,180,393

 
$
3,911,790

 
 
 
 
 
Total capitalization (c)
 
$
6,355,041

 
$
5,700,606

Total capitalization available to Validus (d)
 
$
4,593,551

 
$
4,679,794

 
 
 
 
 
Debt to total capitalization
 
12.3
%
 
13.8
%
Debt (excluding JSDs) to total capitalization
 
3.9
%
 
4.3
%
Debt and preferred shares to total capitalization
 
18.6
%
 
20.8
%
 
 
 
 
 
Debt to total capitalization available to Validus
 
17.1
%
 
16.8
%
Debt (excluding JSDs) to total capitalization available to Validus
 
5.3
%
 
5.2
%
Debt and preferred shares to total capitalization available to Validus
 
25.8
%
 
25.3
%
(a)
Refer to Part I, Item 1, Note 13 to the Consolidated Financial Statements, “Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.
(b)
Refer to Part I, Item 1, Note 11 to the Consolidated Financial Statements, “Share capital,” for further details and discussion on the Company’s preferred shares.
(c)
Total capitalization equals total shareholders’ equity plus redeemable noncontrolling interests and total debt.
(d)
Total capitalization available to Validus equals total capitalization (as per (c)) less redeemable noncontrolling interests and noncontrolling interests.
Shareholders’ Equity
Shareholders’ equity available to Validus common shareholders at June 30, 2018 was $3.4 billion, compared to $3.5 billion at December 31, 2017. Including the liquidation value of preferred shares, shareholders’ equity available to Validus at June 30, 2018 was $3.8 billion, compared to $3.9 billion at December 31, 2017.
On May 4, 2018, the Company announced a quarterly cash dividend of $0.38 per common share and cash dividends of $0.3671875 and $0.3625000 per depository share on the outstanding Series A and Series B Preferred Shares, respectively. The common share dividend was paid on May 30, 2018 to holders of record on May 15, 2018. The preferred share dividends were paid on June 15, 2018 to shareholders of record on June 1, 2018.
The Company has repurchased 81,035,969 common shares for an aggregate purchase price of $2.7 billion from the inception of the share repurchase program to July 26, 2018. The Company had $293.4 million remaining under its authorized share repurchase program as of July 26, 2018.
Debt and financing arrangements
For additional information about our debt, including the terms of our financing arrangements, basis for interest rates and debt covenants, refer to Part I, Item 1, Note 13 to the Consolidated Financial Statements, “Debt and financing arrangements,” and Part II, Item 8, Note 19 to the Consolidated Financial Statements, “Debt and financing arrangements,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. Such investments held by third parties are therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests, a mezzanine item between liabilities and shareholders’ equity. If and when a redemption notice is received, the fair value of the redemption is reclassified to accounts payable and accrued expenses. As at June 30, 2018 and December 31, 2017, the amount of the Company’s total capitalization owed to third parties as redeemable noncontrolling interests was $1.4 billion and $1.0 billion, respectively.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests. As at June 30, 2018 and December 31, 2017, the amount of the Company’s total capitalization owed to third parties as noncontrolling interests was $371.3 million and $16.7 million, respectively. Refer to Part I, Item 1, Notes 6 and 7 to the Consolidated Financial Statements, “Variable Interest Entities,” and “Noncontrolling interests,” respectively, for further details.
Ratings
The following table summarizes the financial strength ratings of the Company and its principal (re)insurance subsidiaries from internationally recognized rating agencies as of July 27, 2018:
 
A.M. Best
 
S&P
 
Moody’s
 
Fitch
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa1
 
A-
Senior debt
bbb
 
BBB+
 
Baa1
 
BBB+
Subordinated debt
bbb-
 
—
 
—
 
BBB
Preferred stock
bb+
 
BBB-
 
Baa3
 
BBB
Outlook on ratings
Developing (a)
 
Negative
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A2
 
A
Outlook on ratings
Developing (a)
 
Stable
 
Stable
 
Stable
 
 
 
 
 
 
 
 
Lloyd’s of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd’s syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Stable
 
Negative
 
—
 
Negative
 
 
 
 
 
 
 
 
Validus Reinsurance (Switzerland) Ltd
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
—
 
—
Outlook on ratings
Developing (a)
 
Stable
 
—
 
—
 
 
 
 
 
 
 
 
Western World Insurance Company
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Developing (a)
 
—
 
—
 
—
(a)
A.M. Best has placed all Validus Holdings, Ltd. ratings “under review with developing implications” following the announcement by the Company of the entry into a definitive agreement and plan of merger with AIG on January 22, 2018. Following the consummation of the merger on July 18, 2018, A.M. Best announced that the Company’s ratings will remain under review until the strategic initiatives, including the executed reinsurance agreements between Western World Insurance Group and AIG are finalized and the legal entity reorganization is completed.

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Recent Accounting Pronouncements
For information relating to relevant recent accounting pronouncements, refer to Part I, Item 1, Note 2 to the Consolidated Financial Statements, “Recent accounting pronouncements,” for further details.
Critical Accounting Policies and Estimates
There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of the Company’s Consolidated Financial Statements:
•the reserve for losses and loss expenses;
•the premium written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•the loss reserves recoverable, including the provision for uncollectible amounts; and
•the valuation of invested assets and other financial instruments.
Critical accounting policies and estimates are discussed further in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. These projections, goals, assumptions and statements are not historical facts but instead represent only the Company’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal,” or “estimate.” All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Company’s actual results and financial condition to differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements and, therefore, you should not place undue reliance on any such statement.
We believe that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the (re)insurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;

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•
the Company’s ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements;
•
general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the (re)insurance markets in which we operate;
•
the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures;
•
accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new (re)insurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;
•
the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;
•
acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;
•
availability and cost of reinsurance and retrocession coverage;
•
the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;
•
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•
changes in domestic or foreign laws or regulations, or their interpretations;
•
changes in accounting principles or the application of such principles by regulators;
•
statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda based insurers or reinsurers;
•
termination of or changes in the terms of the U.S. MPCI program and termination or changes to the U.S. Farm Bill, including modifications to the SRA put in place by the Risk Management Agency of the U.S. Department of Agriculture;
•
the effect of the announcement and completion of the acquisition by AIG (the “Acquisition”) on the Company’s relationships with its clients, operating results and business generally;
•
the outcome of any legal proceedings to the extent initiated against the Company or others following the Acquisition; and
•
the other factors set forth herein under Part I Item 1A “Risk Factors” and under Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other sections of this Annual Report on Form 10-K for the year ended December 31, 2017, as well as the risk and other factors set forth in the Company’s other filings with the SEC, as well as management’s response to any of the aforementioned factors.
In addition, other general factors could affect our results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The Company’s exposure to market risks has not changed materially since December 31, 2017.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined and in pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.
Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
As at June 30, 2018, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
ITEM 1A. RISK FACTORS
The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company, from time to time, repurchases its shares in the open market, or in privately negotiated transactions, under its share repurchase program. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. Share repurchases may also include repurchases by the Company of shares from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. The Company repurchases these shares at their fair market value, as determined by reference to the closing price of its common shares on the day the restricted shares vested. The Company’s share repurchase program may be modified, extended or terminated by its Board of Directors at any time.
The Company did not repurchase any common shares during the three months ended June 30, 2018. A summary of the common share repurchases made to date under the Company’s previously announced share repurchase programs is as follows:
 
 
Total shares repurchased under publicly announced repurchase program
(Dollars in thousands, except share and per share amounts)
 
Total number of shares repurchased
 
Aggregate Purchase
Price (a)
 
Average Price per Share (a)
 
Approximate dollar value of shares that may yet be purchased under the Program
Cumulative inception-to-date to July 26, 2018
 
81,035,969

 
$
2,730,975

 
$
33.70

 
$
293,426

(a)
Share transactions are on a trade date basis through July 26, 2018 and are inclusive of commissions. Average share price is rounded to two decimal places.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.
Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.
Certain of the Company’s non-U.S. subsidiaries provide global marine hull, war, cargo and liability policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that certain of its policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Since these policies insure multiple voyages and fleets containing multiple ships, the Company is unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.
Certain of the Company’s other non-U.S. subsidiaries have policies that provide excess of loss reinsurance coverage for various risks worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified by certain of its cedants that they either provide or intend to provide aviation spare parts coverage or marine and hull, war and related coverage for certain risks involving Iran. As the reinsurance coverage provided to these cedants covers multiple global risks and multiple insureds, the Company is unable to attribute gross revenues and net profits from such policy to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.

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

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VALIDUS HOLDINGS, LTD.
 
 
(Registrant)
 
 
 
Date:
July 27, 2018
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
July 27, 2018
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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