UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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.)

19 Par-La-Ville Road, Hamilton, Bermuda HM 11
(Address of principal executive offices and zip code)

(441) 278-9000
(Registrant’s telephone number, including area code)

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

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

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

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

     As of November 13, 2008, there were 74,878,137 outstanding Common Shares, $0.175 par value per share, of the registrant.

 

 

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as at September 30, 2008 (unaudited) and December 31, 2007			2
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)			3
Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2008 and 2007 (unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3. Quantitative and Qualitative Disclosures About Market Risk			86
Item 4. Controls and Procedures			87
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			89
Item 1A. Risk Factors			89
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			89
Item 3. Defaults Upon Senior Securities			89
Item 4. Submission of Matters to a Vote of Security Holders			89
Item 5. Other Information			89
Item 6. Exhibits			89
Signatures			91
EX-10.12.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.13.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.14.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.15.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.16.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-10.18.1: AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at September 30, 2008 and December 31, 2007 (Expressed in thousands of U.S. dollars, except share and per share amounts)

		September 30,
		2008 (Unaudited)				December 31, 2007
Assets
Fixed maturities, at fair value (amortized cost: 2008 - $2,666,085; 2007 - $2,403,074)		$	2,595,476			$	2,411,398
Short-term investments, at fair value (amortized cost: 2008 - $327,048; 2007 - $251,150)			325,273				250,623
Cash and cash equivalents			335,367				444,698
Total cash and investments			3,256,116				3,106,719
Premiums receivable			529,039				401,241
Deferred acquisition costs			129,946				105,562
Prepaid reinsurance premiums			49,824				22,817
Securities lending collateral			158,411				164,324
Loss reserves recoverable			173,463				134,404
Paid losses recoverable			3,516				7,810
Net receivable for investments sold			11,820				—
Income taxes recoverable			2,331				3,325
Intangible assets			128,258				131,379
Goodwill			20,393				20,393
Accrued investment income			15,596				19,960
Other assets			30,883				26,290
Total assets		$	4,509,596			$	4,144,224
Liabilities
Reserve for losses and loss expenses		$	1,272,844			$	926,117
Unearned premiums			693,304				557,344
Reinsurance balances payable			53,253				36,848
Securities lending payable			161,727				164,324
Deferred income taxes			21,117				16,663
Net payable for investments purchased			—				31,426
Accounts payable and accrued expenses			86,440				126,702
Debentures payable			304,300				350,000
Total liabilities			2,592,985				2,209,424
Commitments and contingent liabilities (Note 8)
Shareholders’ equity
Ordinary shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (2008 - 74,878,137; 2007 - 74,199,836)			13,104				12,985
Additional paid-in capital			1,403,904				1,384,604
Accumulated other comprehensive loss			(1,528	)			(49	)
Retained earnings			501,131				537,260
Total shareholders’ equity			1,916,611				1,934,800
Total liabilities and shareholders’ equity		$	4,509,596			$	4,144,224

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

Consolidated Statements of Operations and Comprehensive (Loss) Income

For the Three and Nine Months Ended September 30, 2008 and 2007 (Expressed in thousands of U.S. dollars, except share and per share amounts)

		Three months ended				Three months ended				Nine months ended				Nine months ended
		September 30, 2008				September 30, 2007				September 30, 2008				September 30, 2007
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues
Gross premiums written		$	269,236			$	245,271			$	1,170,749			$	797,641
Reinsurance premiums ceded			(35,139	)			(7,906	)			(121,438	)			(65,644	)
Net premiums written			234,097				237,365				1,049,311				731,997
Change in unearned premiums			105,229				58,161				(108,823	)			(191,949	)
Net premiums earned			339,326				295,526				940,488				540,048
Net investment income			36,379				36,560				108,857				74,799
Realized gain on repurchase of debentures			—				—				8,752				—
Net realized (losses) gains on investments			(13,667	)			1,010				(8,348	)			823
Net unrealized (losses) gains on investments			(14,649	)			7,681				(72,608	)			3,136
Other income			1,269				1,330				3,666				1,330
Foreign exchange (losses) gains			(44,933	)			5,818				(35,843	)			9,210
Total revenues			303,725				347,925				944,964				629,346
Expenses
Losses and loss expense			318,464				87,263				580,578				176,426
Policy acquisition costs			60,425				50,945				173,545				81,000
General and administrative expenses			30,120				44,793				101,139				67,088
Share compensation expense			6,012				6,132				19,818				10,054
Finance expenses			14,517				17,886				48,796				26,331
Fair value of warrants issued			—				2,893				—				2,893
Total expenses			429,538				209,912				923,876				363,792
Net (loss) income before taxes			(125,813	)			138,013				21,088				265,554
Income tax expense			487				1,488				4,992				1,527
Net (loss) income		$	(126,300	)		$	136,525			$	16,096			$	264,027
Comprehensive (loss) income
Currency translation adjustments			(1,556	)			(640	)			(1,479	)			(640	)
Comprehensive (loss) income		$	(127,856	)		$	135,885			$	14,617			$	263,387
Earnings (loss) per share
Weighted average number of common shares and common share equivalents outstanding
Basic			74,864,724				69,107,336				74,435,840				62,024,179
Diluted			74,864,724				71,868,835				77,922,718				64,243,860
Basic (loss) earnings  per share		$	(1.71	)		$	1.98			$	0.15			$	4.26
Diluted (loss) earnings  per share		$	(1.71	)		$	1.90			$	0.14			$	4.11
Cash dividends declared per share		$	0.20				—			$	0.60				—

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

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Nine Months Ended September 30, 2008 and 2007 (Expressed in thousands of U.S. dollars, except share and per share amounts)

		Nine months ended
		September 30, 2008				September 30, 2007
		(Unaudited)				(Unaudited)
Common shares
Balance — Beginning of period		$	12,985			$	10,234
Issue of common shares			119				2,751
Balance — End of period		$	13,104			$	12,985
Additional paid-in capital
Balance — Beginning of period		$	1,384,604			$	1,048,025
Issue of common shares, net of expenses			(518	)			317,753
Stock option expense			3,171				2,930
Fair value of warrants qualifying as equity			—				2,893
Share compensation expense			16,647				7,123
Balance — End of period		$	1,403,904			$	1,378,724
Accumulated other comprehensive income (loss)
Balance — Beginning of period		$	(49	)		$	875
Currency translation adjustments			(1,479	)			(640	)
Cumulative effect of adoption of fair value option			—				(875	)
Balance — End of period		$	(1,528	)		$	(640	)
Retaining earnings
Balance — Beginning of period		$	537,260			$	133,389
Cumulative effect of adoption of fair value option			—				875
Dividends			(52,225	)			—
Net income			16,096				264,027
Balance — End of period		$	501,131			$	398,291
Total shareholders’ equity		$	1,916,611			$	1,789,360

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

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2008 and 2007 (Expressed in thousands of U.S. dollars, except share and per share amounts)

		Nine months ended				Nine months ended
		September 30, 2008				September 30, 2007
		(Unaudited)				(Unaudited)
Cash flows provided by operating activities
Net income for the period		$	16,096			$	264,027
Adjustments to reconcile net income to cash provided by operating activities:
Share compensation expense			19,818				10,053
Net realized (losses) gains on sales of investments			8,348				(823	)
Net unrealized (losses) gains on investments			72,608				(3,136	)
Fair value of Warrants expensed			—				2,893
Amortization of intangible assets			3,121				1,040
Foreign exchange on cash and cash equivalents included in net income			19,768				(7,714	)
Amortization of discounts on fixed maturities			2,226				(9,168	)
Realized gain on repurchase of debentures			(8,752	)			—
Changes in:
Premiums receivable			(134,822	)			(109,676	)
Deferred acquisition costs			(26,635	)			(27,559	)
Prepaid reinsurance premiums			(28,149	)			236
Losses recoverable			(41,145	)			2,319
Paid losses recoverable			4,279				16,480
Taxes recoverable			2,436				(525	)
Accrued investment income			(4,466	)			(1,305	)
Other assets			3,861				3,697
Reserve for losses and loss expense			369,962				88,283
Unearned premiums			147,461				191,703
Reinsurance balances payable			17,779				(18,110	)
Deferred taxation			6,083				2,096
Accounts payable and accrued expenses			(52,500	)			3,288
Net cash provided by operating activities			397,377				408,099
Cash flows used in investing activities
Proceeds on maturity of investments			264,103				891,202
Proceeds on sales of investments			1,770,892				—
Purchases of fixed maturities			(2,355,159	)			(1,338,169	)
(Purchases) sales of short-term investments, net			(74,290	)			115,365
Increase (decrease) in securities lending collateral			2,597				(47,692	)
Purchase of subsidiary, net of cash required			—				(18,809	)
Net cash used in investing activities			(391,857	)			(398,103	)
Cash flows provided by financing activities
(Redemption) net proceeds on issuance of debentures payable			(36,948	)			198,000
Issue of common shares, net of expenses			(398	)			320,504
Dividends paid			(50,570	)			—
Increase (decrease) in securities lending payable			(2,597	)			47,692
Net cash (used in) provided by financing activities			(90,513	)			566,196
Effect of exchange rate changes on cash and cash equivalents			(24,338	)			11,593
Net (decrease) increase in cash			(109,331	)			587,785
Cash and cash equivalents — Beginning of period			444,698				63,643
Cash and cash equivalents — End of period		$	335,367			$	651,428
Net taxes (recovered) paid during the period		$	(2,467	)		$	37
Interest paid during the period		$	20,802			$	15,131

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

Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (Unaudited)

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

     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly owned subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

     In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. During the third quarter of 2008, Hurricanes Ike and Gustav were significant loss events for the industry. The Company’s hurricane reserves estimates relating to these catastrophes are based on a ‘ground up’ estimate and analysis of contracts believed to be exposed to these events, together with internal data compiled from underwriters, actuaries and claims teams combined. Preliminary information from cedants, brokers and industry models has been considered in the process. Actual losses may vary from this estimate. The results of operations for any interim period are not necessarily indicative of the results for a full year. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board. The unaudited consolidated financial statements include the results of operations and cash flows of Talbot Holdings Ltd. (“Talbot”) since the date of acquisition of July 2, 2007 and not any prior periods (including for comparative purposes).

     In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement 133” (“FAS 161”). This statement expands the disclosure requirements of FAS 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair values and amounts of gains and losses on derivative contracts, and credit risk related contingent features in derivative agreements. The statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FAS 161 is not expected to have a material impact on the Company’s consolidated financial statements.

     In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This statement improves financial reporting by providing a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. This statement assigns a hierarchical rank to the various sources of accounting literature from Level A through Level D. FAS 162 will be effective 60 days after the SEC’s approval of the PCAOB’s amendments to AU Section 411. The adoption of FAS 162 is not expected to have a material impact on the Company’s consolidated financial statements.

     In May 2008, the FASB issued FAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60” (“FAS 163”). This statement decreases the inconsistencies in Statement No. 60 in the accounting for financial guarantee insurance contracts by insurance companies. FAS 163 addresses the differing views in Statement No. 60 regarding the recognition and measurement of premium revenues and claim liabilities and enhances the disclosure requirements for insurance contracts. FAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FAS 163 is not expected to have a material impact on the Company’s consolidated financial statements.

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

     In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (“EPS”) pursuant to the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, “Earnings per Share.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on the Company’s consolidated financial statements.

     In August 2008, the FASB issued proposed amendments to FAS 128, “Earnings per Share” (“proposed amendments to FAS 128”). The proposed amendments to FAS 128 reflect the FASB’s efforts to converge with International Accounting Standards and to improve the guidance on earnings per share (“EPS”). The proposed amendments to FAS 128 would be retrospectively applied to all prior-period EPS data. An effective date has not been established. The Company will continue to evaluate the potential impact of this guidance.

     In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 amends FAS 157 by incorporating an example to illustrate key considerations in determining the fair value of a financial asset in an inactive market. FSP FAS 157-3 is effective October 10, 2008 and should be applied to prior periods for which financial statements have not been issued. Pursuant to FSP FAS 157-3, the Company has elected to use fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable for certain investments in residential mortgage backed securities.

     During the first quarter of 2007, the Company adopted FAS 157 and FAS 159. Prior to January 1, 2007, the Company’s investments in fixed maturities were classified as available-for-sale and carried at fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. The Company believes that accounting for its investment portfolio as trading more closely reflects its investment guidelines. Beginning on January 1, 2007, the Company’s investments in fixed maturities were classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings.

     During the third quarter of 2008, the Company adopted FSP FAS 157-3. Consistent with this statement, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

     Under FAS 157, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy in FAS 157 prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.

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

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative approaches but for which the Company typically obtained independent external valuation information including, cash and certain cash instruments such as money market funds, overnight repos and commercial paper. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category include U.S. Treasuries, sovereign debt, corporate debt and U.S. agency and non-agency mortgage and asset-backed securities. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. Financial instruments in this category include certain residential mortgage-backed securities.

     At September 30, 2008, the Company’s investments are allocated between levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	737,667			$	—			$	737,667
Other Sovereign and Sovereign Agency			—				117,787				—				117,787
Agency Residential mortgage-backed securities			—				445,316				—				445,316
Corporate			—				449,991				—				449,991
Foreign Corporate			—				176,434				—				176,434
States, municipalities, political subdivision			—				15,030				—				15,030
Asset-backed securities			—				157,997				—				157,997
Non-Agency Residential mortgage-backed securities			—				148,574				130,028				278,602
Commercial mortgage-backed securities			—				216,652				—				216,652
Total fixed maturities							2,465,448				130,028				2,595,476
Total short-term investments			289,134				36,139				—				325,273
Total		$	289,134			$	2,501,587			$	130,028			$	2,920,749
At December 31, 2007, the Company’s investments are allocated between levels 1, 2 and 3 as follows:
		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	707,703			$	—			$	707,703
Other Sovereign and Sovereign Agency			—				141,493				—				141,493
Agency Residential mortgage-backed securities			—				421,665				—				421,665
Corporate			—				488,127				—				488,127
Asset-backed securities			—				191,455				—				191,455
Non-Agency Residential mortgage-backed securities			—				301,967				—				301,967
Commercial mortgage-backed securities			—				158,988				—				158,988
Total fixed maturities			—				2,411,398				—				2,411,398
Total short-term investments			215,052				35,571				—				250,623
Total		$	215,052			$	2,446,969			$	—			$	2,662,021

     The table in section (c) below shows the aggregate cost (or amortized cost) and fair value of the Company’s marketable securities, by investment type, as of the periods indicated.

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

     At September 30, 2008, Level 3 assets totaled $130,028, representing 4.5% of total assets measured at fair value on a recurring basis.

     The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2008:

		Residential mortgage-backed securities
		Three months ended				Nine months ended
		September 30, 2008				September 30, 2008
Level 3 investments — Beginning of period		$	—			$	—
Net payments, purchases and sales			—				—
Realized losses			—				—
Unrealized gains (losses)			—				—
Net transfers in (out)			130,028				130,028
Level 3 investments — End of period		$	130,028			$	130,028

     At September 30, 2008, $10,356 of unrealized losses was recorded in income attributable to the residential mortgage-backed securities measured at fair value on a recurring basis using Level 3 inputs.

     Net investment income is derived from the following sources:

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Fixed maturities and short-term investments		$	32,443			$	24,076			$	98,654			$	54,589
Securities lending income			261				59				1,150				66
Cash and cash equivalents			4,308				13,252				11,524				22,025
Total gross investment income			37,012				37,387				111,328				76,680
Investment expenses			(633	)			(827	)			(2,471	)			(1,881	)
Net investment income		$	36,379			$	36,560			$	108,857			$	74,799

     The following represents an analysis of net realized gains (losses) and the change in unrealized gains (losses) of investments:

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2008				2007				2008				2007
Fixed maturities, short-term investments and cash equivalents
Gross realized gains		$	3,653			$	1,517			$	14,965			$	1,761
Gross realized losses			(17,320	)			(507	)			(23,313	)			(938	)
Net realized (losses) gains on investments			(13,667	)			1,010				(8,348	)			823
Change in unrealized losses of securities lending			(2,422	)			—				(3,316	)			—
Change in unrealized (losses) gains of investments			(12,227	)			7,681				(69,292	)			3,136
Total net realized (losses) gains and change in unrealized gains (losses) of investments		$	(28,316	)		$	8,691			$	(80,956	)		$	3,959

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

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at September 30, 2008 are as follows:

						Gross				Gross unrealized				Estimated fair
		Amortized Cost				unrealized gains				losses				value
U.S. Government and Government Agency		$	730,913			$	8,242			$	(1,488	)		$	737,667
Other Sovereign and Sovereign Agency			126,070				497				(8,780	)			117,787
Agency Residential mortgage-backed securities			442,554				3,449				(687	)			445,316
Corporate			469,772				807				(20,588	)			449,991
Foreign Corporate			186,312				405				(10,283	)			176,434
States, municipalities, political subdivision			15,043				—				(13	)			15,030
Asset-backed securities			160,684				55				(2,742	)			157,997
Non-Agency Residential mortgage-backed securities			308,748				36,391				(66,537	)			278,602
Commercial mortgage-backed securities			225,989				21				(9,358	)			216,652
Total fixed maturities			2,666,085				49,867				(120,476	)			2,595,476
Total short-term investments			327,048				7				(1,782	)			325,273
Total		$	2,993,133			$	49,874			$	(122,258	)		$	2,920,749

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2007 are as follows:

						Gross				Gross unrealized				Estimated fair
		Amortized Cost				unrealized gains				losses				value
U.S. Government and Government Agency		$	700,697			$	7,163			$	(157	)		$	707,703
Other Sovereign and Sovereign Agency			143,744				1,003				(3,254	)			141,493
Agency Residential mortgage-backed securities			417,358				4,544				(237	)			421,665
Corporate			486,752				4,346				(2,971	)			488,127
Asset-backed securities			191,413				641				(599	)			191,455
Non-Agency Residential mortgage-backed securities			305,391				1,818				(5,242	)			301,967
Commercial mortgage-backed securities			157,719				1,317				(48	)			158,988
Total fixed maturities			2,403,074				20,832				(12,508	)			2,411,398
Total short-term investments			251,150				63				(590	)			250,623
Total		$	2,654,224			$	20,895			$	(13,098	)		$	2,662,021

     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at September 30, 2008 and December 31, 2007. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

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

		September 30, 2008								December 31, 2007
		Estimated fair								Estimated fair
		value				% of total				value				% of total
AAA		$	2,097,056				80.8	%		$	2,029,573				84.2	%
AA+			35,378				1.4	%			37,458				1.6	%
AA			53,716				2.1	%			51,091				2.1	%
AA-			124,677				4.8	%			96,578				4.0	%
A+			111,547				4.3	%			88,181				3.7	%
A			122,471				4.7	%			70,666				2.9	%
A-			41,427				1.6	%			29,948				1.2	%
BBB+			6,040				0.2	%			7,903				0.3	%
BBB			2,205				0.1	%			—				0.0	%
BB			959				0.0	%			—				0.0	%
Total		$	2,595,476				100.0	%		$	2,411,398				100.0	%

     The amortized cost and estimated fair value amounts for fixed maturity securities held at September 30, 2008 and December 31, 2007 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

		September 30, 2008								December 31, 2007
		Amortized				Estimated				Amortized				Estimated
		cost				fair value				cost				fair value
Due in one year or less		$	161,572			$	160,194			$	197,833			$	198,466
Due after one year through five years			1,259,911				1,233,096				1,083,470				1,087,758
Due after five years through ten years			78,434				76,720				29,509				30,427
Due after ten years			28,193				26,899				20,381				20,672
			1,528,110				1,496,909				1,331,193				1,337,323
Asset-backed and mortgage-backed securities			1,137,975				1,098,567				1,071,881				1,074,075
Total		$	2,666,085			$	2,595,476			$	2,403,074			$	2,411,398

     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At September 30, 2008 approximately $99,294 (December 31, 2007: $104,524) of letters of credit were issued and outstanding under this facility for which $99,525 of investments were pledged as collateral (December 31, 2007: $109,164). During the prior year the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s. At September 30, 2008, $100,000 (December 31, 2007: $100,000) of letters of credit were issued and outstanding under this facility for which $103,002 of investments were pledged as collateral (December 31, 2007: $118,121). In addition, $64,251 of investments are held in trust at September 30, 2008 (December 31, 2007: $nil).

     Cash and cash equivalents and investments in Talbot of $1,023,214 at September 30, 2008 were held in trust for the benefit of cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2007: $1,064,430).

     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at September 30, 2008, the Company had $157,085 (December 31, 2007: $161,579) in securities on loan. During the three months ended September 30, 2008, the Company had recorded a $3,316 unrealized loss on this collateral on its statements of operations (December 31, 2007: $nil).

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

     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 25.5 days (December 31, 2007: 42.9 days). As at September 30, 2008, the securities lending collateral reinvested by the Company in connection with its securities lending program is allocated between levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	59,364			$	—			$	59,364
Asset-backed securities			—				20,086				—				20,086
Short-term investments			56,221				20,726				—				76,947
Agency			—				2,014				—				2,014
		$	56,221			$	102,190			$	—			$	158,411
As at December 31, 2007, the securities lending collateral reinvested by the Company in connection with its securities lending program are allocated between levels 1, 2 and 3 as follows:
		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	49,055			$	—			$	49,055
Asset-backed securities			—				11,515				—				11,515
Short-term investments			97,797				5,957				—				103,754
		$	97,797			$	66,527			$	—			$	164,324

     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at September 30, 2008 and December 31, 2007. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

		September 30, 2008								December 31, 2007
		Estimated fair								Estimated fair
		value				% of total				value				% of total
AAA		$	51,625				32.6	%		$	18,611				11.3	%
AA+			4,960				3.1	%			2,999				1.8	%
AA			20,687				13.1	%			15,997				9.7	%
AA-			16,004				10.1	%			11,954				7.3	%
A+			4,996				3.1	%			9,010				5.5	%
A			3,793				2.4	%			7,956				4.9	%
NR			125				0.1	%			—				0.0	%
			102,190				64.5	%			66,527				40.5	%
NR (1)			56,221				35.5	%			97,797				59.5	%
Total		$	158,411				100.0	%		$	164,324				100.0	%

     The amortized cost and estimated fair value amounts for securities lending collateral reinvested held at September 30, 2008 and December 31, 2007 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

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

		September 30, 2008								December 31, 2007
		Amortized				Estimated				Amortized				Estimated fair
		cost				fair value				cost				value
Due in one year or less		$	80,234			$	78,961			$	103,793			$	104,151
Due after one year through five years			81,493				79,450				60,469				60,173
Total		$	161,727			$	158,411			$	164,262			$	164,324

     The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits, and increase aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.

     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. 100.0% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) at September 30, 2008 were from reinsurers rated A- or better, or from reinsurers posting full collateral, and included $32,529 of IBNR recoverable (December 31, 2007: $35,340). Reinsurance recoverables by reinsurer are as follows:

		September 30, 2008								December 31, 2007
		Reinsurance								Reinsurance
		recoverable				% of Total				recoverable				% of Total
Top 10 reinsurers		$	166,672				94.2	%		$	129,978				91.4	%
Other reinsurers balances > $1 million			7,673				4.3	%			8,700				6.1	%
Other reinsurers balances < $1 million			2,634				1.5	%			3,536				2.5	%
Total		$	176,979				100.0	%		$	142,214				100.0	%

				September 30, 2008
				Reinsurance
Top 10 Reinsurers		Rating		recoverable				% of Total
Fully collateralized reinsurers		NR		$	53,591				32.2	%
Hannover Re		AA-			30,627				18.4	%
Lloyd’s syndicates		A+			28,073				16.8	%
Allianz		AA			13,927				8.4	%
Munich Re		AA-			13,418				8.1	%
Swiss Re		AA-			12,392				7.4	%
Aspen Insurance UK Limited		A			5,557				3.3	%
Transatlantic Reinsurance Co.		AA-			3,553				2.1	%
Platinum Underwriters Bermuda Ltd.		A			3,006				1.8	%
Axa		AA			2,528				1.5	%
				$	166,672				100.0	%

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

				December 31, 2007
				Reinsurance
Top 10 Reinsurers		Rating		recoverable				% of Total
Hannover Re		AA-		$	31,630				24.4	%
Lloyd’s syndicates		A+			29,613				22.8	%
Swiss Re		AA-			18,758				14.4	%
Munich Re		AA-			14,322				11.0	%
Allianz		AA			13,461				10.4	%
Axa		AA			7,418				5.7	%
Aspen Insurance UK Limited		A			4,978				3.8	%
National Indemnity Company		AAA			4,738				3.6	%
Transatlantic Reinsurance Co.		AA-			2,970				2.3	%
Max Re Ltd.		A-			2,090				1.6	%
				$	129,978				100.0	%

     At September 30, 2008 and December 31, 2007, the provision for uncollectible reinsurance relating to losses recoverable was $2,957 and $3,106. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $176,979 reinsurance recoverable at September 30, 2008, $53,591 was collateralized (December 31, 2007: $nil).

     The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

     At September 30, 2008, the use of different assumptions within the model could have a material effect on the provision for uncollectible reinsurance reflected in the Company’s consolidated financial statements. To the extent the creditworthiness of the Company’s reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company’s provision.

     Between May 8, 2006 and July 28, 2006, Validus Re entered into retrocessional reinsurance agreements with Petrel Re Limited (“Petrel”), a Bermuda reinsurance company. These agreements include quota share reinsurance agreements (“Petrel Collateralized Quota Shares”) whereby Petrel assumes a quota share of certain lines of marine & energy and other lines of business assumed by Validus Re for unaffiliated third parties for the 2006 and 2007 underwriting years. Under the terms of the reinsurance agreements, the Company has determined it is not required to consolidate the assets, liabilities and results of operations of Petrel under the terms of FIN 46(R). Petrel is a separate legal entity in which the Company has no equity investment, management or board interests or related party relationships. The collateralized quota share retrocessional reinsurance agreement with Petrel was not extended beyond the 2007 underwriting year.

     Petrel is required to contribute funds into a trust (the “Petrel Trust”) for the benefit of Validus Re. Under the Petrel Collateralized Quota Shares, the amount required to be on deposit in the Petrel Trust is the sum of (i) full aggregate outstanding limits in excess of unpaid premium and related ceding commission on all in force covered policies plus (ii) an amount determined by Validus Re in its discretion to support known losses under covered policies (the “Required Amount of Available Assets”). If the actual amounts on deposit in the Petrel Trust, together with certain other amounts (the “Available Assets”), do not at least equal the Required Amount of Available Assets, Validus Re will, among other things, cease ceding business on a prospective basis.

     Validus Re pays a reinsurance premium to Petrel in the amount of the ceded percentage of the original gross premiums written on the business reinsured with Petrel less a ceding commission, which includes a reimbursement of direct acquisition expenses as well as a commission to Validus Re for generating the business. The Petrel

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

Collateralized Quota Shares also provides for a profit commission to Validus Re based on the underwriting results for the 2006 and 2007 underwriting years on a cumulative basis.

     For the three months ended September 30, 2008 and 2007 Validus Re ceded $(69) and $7,291 of premiums written through the Petrel Collateralized Quota Shares. The earned portion of premiums ceded to Petrel for the three months ended September 30, 2008 and 2007 was $(69) and $14,629. For the nine months ended September 30, 2008 and 2007 Validus Re ceded $(2,013) and $53,195 of premiums written through the Petrel Collateralized Quota Shares. The earned portion of premiums ceded to Petrel for the nine months ended September 30, 2008 and 2007 was $8,198 and $36,045.

     On December 22, 2007, Validus Re entered into a collateralized retrocessional reinsurance agreement with an unaffiliated third party whereby the Company cedes certain business underwritten in the marine offshore energy lines. For the three months ended September 30, 2008 and 2007 Validus Re ceded $3,994 and $nil of premiums written through this agreement. The earned portions of premiums ceded for the three months ended September 30, 2008 and 2007 were $7,744 and $nil. For the nine months ended September 30, 2008 and 2007 Validus Re ceded $18,554 and $nil of premiums written through this agreement. The earned portions of premiums ceded for the nine months ended September 30, 2008 and 2007 were $14,230 and $nil.

     A reverse stock split of the outstanding shares of the Company was approved by the shareholders effective immediately following the Company’s Annual General Meeting on March 1, 2007, whereby each 1.75 outstanding shares was consolidated into 1 share, and the par value of the Company’s shares was increased to $0.175 per share. This share consolidation has been reflected retroactively in these financial statements.

     The Company’s authorized share capital is 571,428,571 ordinary voting and non-voting ordinary shares with a par value of $0.175 each. The holders of ordinary voting shares are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.

     As of December 31, 2005, the Company had issued 58,423,173 common shares at a price of $17.50 in a private offering. Shares issued consisted of both voting common shares and non-voting common shares which are identical in all respects, other than with respect to voting and conversion of non-voting common shares. Of the shares issued at December 31, 2005, 14,057,138 were non-voting and an additional 5,714,285 shares converted to non-voting upon the filing of the Company’s registration statement for its initial public offering (“IPO”). Proceeds from this issuance, after offering expenses, were $999,997. These proceeds were used for general corporate purposes.

     The Company issued an additional 59,427 voting shares in a private offering in February 2006 at a price of $17.50 for net proceeds of $1,030.

     On July 2, 2007, the Company acquired Talbot and agreed to issue an additional 18,415 common shares to certain employees of Talbot. These employees had elected to receive common shares of the Company in lieu of a cash settlement for the purchase of their Talbot shares. The issued common shares of the Company were valued at $23.00 per share and were issued on July 2, 2007.

     On July 30, 2007, the Company completed its IPO, selling 15,244,888 common shares at a price of $22.00 per share. The net proceeds to the Company from the IPO were approximately $310,731, after deducting the underwriters’ discount and fees. On July 31, 2007, the Company used $188,971 of the net proceeds to fully repay borrowings and to pay accrued interest under its unsecured credit facility. The Company used the remaining $121,760 of net proceeds to make a capital contribution to Validus Reinsurance, Ltd. to support the future growth of

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

reinsurance operations and to pay certain expenses related to the Talbot acquisition and make a $3,000 payment to Aquiline in connection with the termination of the Advisory Agreement.

     On August 27, 2007, the Company issued an additional 453,933 common shares at a price of $22.00 per share pursuant to the underwriters’ option to purchase additional common shares. The net proceeds to the Company of $9,349 were contributed to Validus Reinsurance, Ltd. Inclusive of the net proceeds from the underwriters’ option to purchase additional common shares, total proceeds from the IPO were approximately $320,080 and capital contributed to Validus Reinsurance, Ltd. was approximately $127,312.

     During the three months ended September 30, 2008, no warrants or options were exercised. During the nine months ended September 30, 2008, 31,580 warrants were exercised, resulting in the net share issuance of 18,980 common shares. During the nine months ended September 30, 2008, 24,661 options were exercised resulting in the issuance of 24,661 common shares.

     During the three and nine months ended September 30, 2008, 498,024 Employee Seller Shares vested, resulting in the issuance of 498,024 common shares. During the three and nine months ended September 30, 2008, 181,053 Restricted Share Awards vested, resulting in the issuance of 136,636 common shares.

     The Company’s founder and sponsoring investors provided their insurance industry expertise, resources and relationships during the period ended December 31, 2005 to ensure that the Company would be fully operational with key management in place in time for the January 2006 renewal season. In return for these services the founder and sponsoring investors were issued warrants. Until July 30, 2007, the IPO date, agreements with the founder and sponsoring investors provided that the warrants represented, in the aggregate, 12.0% of the fully diluted shares of the Company (assuming exercise of all options, warrants and any other rights to purchase common shares) and were subject to adjustment such that the warrants would continue to represent, in the aggregate, 12.0% of the fully diluted shares of the Company until such time as the Company consummated an initial public offering, amalgamation, merger or another such similar corporate event. In consideration for the founder’s and sponsoring investors’ commitments, the Company had issued as at September 30, 2008 warrants to the founding shareholder and sponsoring investors to purchase, in the aggregate, up to 8,680,149 (December 31, 2007 — to 8,711,729) common shares. Of those issued 2,090,815 (December 31, 2007 — 2,090,185) of the warrants are to purchase non-voting common shares. The 12.0% agreement expired on the consummation of the IPO. No further warrants are anticipated to be issued.

     In February 2006 and July 2007 additional warrants were issued to the founding shareholder and sponsoring investors to maintain the allocation at 12.0% of the fully diluted shares of the Company pursuant to the anti-dilution provision of the warrants. 8,593 warrants were issued in February 2006 and 256,409 warrants were issued in July 2007.

     The warrants may be settled using either the physical settlement or net-share settlement methods. The warrants have been classified as equity instruments, in accordance with EITF 00-19: “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The warrants were initially measured at an aggregate fair value of $75,091 and recorded to additional paid-in capital. The founding shareholder’s warrants in the amount of $25,969 were accounted for as a deduction from additional paid-in capital and the balance of $49,122 was expensed. The additional warrants issued for the period ended December 31, 2006 increased the fair value to $75,168 with the increase of $77 expensed. The additional warrants issued for the period ended December 31, 2007 increased the fair value to $78,060 with the increase of $2,893 expensed.

     The fair value of each warrant issued was estimated on the date of grant using the Black-Scholes option-pricing model. The volatility assumption used, of approximately 30.0%, was derived from the historical volatility of the

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

share price of a range of publicly-traded Bermuda reinsurance companies of a similar business nature to the Company. No allowance was made for any potential illiquidity associated with the private trading of the Company’s shares. The other assumptions in the warrant-pricing model were as follows:

		December 15, 2005				February 3, 2006				July 24, 2007
		issuance				issuance				issuance
Warrants issued			8,446,727				8,593				256,409
Average strike price		$	17.50			$	17.50			$	20.00
Volatility			30.0	%			30.0	%			30.0	%
Risk-free rate			4.5	%			4.5	%			4.5	%
Expected dividend yield			0.0	%			0.0	%			0.0	%
Expected term (years)			10.0				10.0				8.0
Calculated fair-value per warrant		$	8.89			$	8.89			$	11.28

     During the three months ended September 30, 2008, no warrants were exercised. During the nine months ended September 30, 2008, 31,580 warrants were exercised, resulting in the net share issuance of 18,980 common shares.

     On February 20, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on March 17, 2008 to holders of record on March 3, 2008.

     On May 9, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on June 5, 2008 to holders of record on May 22, 2008.

     On August 7, 2008 the Company announced a quarterly cash dividend of $0.20 per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on September 4, 2008 to holders of record on August 21, 2008. The Company did not declare any dividends for the three and nine months ended September 30, 2007.

     The Company’s Long Term Incentive Plan (“LTIP”) provides for grants to employees of any option, stock appreciation right (“SAR”), restricted share, restricted share unit, performance share, performance unit, dividend equivalent or other share-based award. The total number of shares reserved for issuance under the LTIP is 13,126,896 shares. The LTIP is administered by the Compensation Committee of the Board of Directors. No SARs, performance shares, performance units or dividend equivalents have been granted to date. Grant prices are established at the estimated fair market value of the Company’s common shares at the date of grant.

     Options granted under the LTIP may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest ratably. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: risk free interest rate of 3.88%,(2007: 4.5%) expected life of 7 years, (2007: 7 years) expected volatility of 30% (2007: 30%) and a dividend yield of 3.20% (2007: nil). Expected volatility is based on stock price volatility of comparable publicly-traded companies. The company uses the simplified method outlined in the SEC Staff Accounting Bulletin 110 to estimate expected lives for options granted during the period as historical exercise data

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

is not available and the options meet the requirement as set out in the bulletin. Share expense of $1,080 was recorded for the three months ended September 30, 2008 (2007: $1,086) related to the options, with a corresponding increase to additional paid-in capital. Share expense of $3,171 was recorded for the nine months ended September 30, 2008 (2007: $2,930) related to the options, with a corresponding increase to additional paid-in capital. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to the options for the nine months ended September 30, 2008 is as follows:

						Weighted				Weighted average
						average grant				grant date
		Options				date fair value				exercise price
Options outstanding, December 31, 2007			2,761,176			$	7.61			$	17.82
Options granted			164,166				6.73				24.73
Options exercised			(24,661	)			7.35				17.50
Options forfeited			(11,099	)			8.33				18.46
Options outstanding, September 30, 2008			2,889,582			$	7.56			$	18.21
Options exercisable at September 30, 2008			1,032,392			$	7.49			$	17.67

     Activity with respect to options for the year ended December 31, 2007 is as follows:

						Weighted				Weighted average
						average grant				grant date
		Options				date fair value				exercise price
Options outstanding, December 31, 2006			2,568,894			$	7.35			$	17.50
Options granted			206,464				10.88				21.44
Options exercised			—				—				—
Options forfeited			(14,182	)			10.30				20.39
Options outstanding, December 31, 2007			2,761,176			$	7.61			$	17.82
Options exercisable at December 31, 2007			908,361			$	7.36			$	17.52

     At September 30, 2008 there was $10,219 (December 31, 2007: $12,340) of total unrecognized compensation expense related to the outstanding options that is expected to be recognized over a weighted-average period of 2.5 years (December 31, 2007: 3.1 years).

     Restricted shares granted under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share expense of $3,767 (2007: $1,629) was recorded for the three months ended September 30, 2008 related to the restricted shares. Share expense of $10,334 (2007: $3,707) was recorded for the nine months ended September 30, 2008 related to the restricted shares. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares for the nine months ended September 30, 2008 is as follows:

						Weighted average grant
		Restricted shares				date fair value
Restricted shares outstanding, December 31, 2007			2,158,220			$	20.44
Restricted shares granted			864,649				24.39
Restricted shares vested			(181,053	)			21.93
Restricted shares forfeited			(17,264	)			22.62
Restricted shares outstanding, September 30, 2008			2,824,552			$	21.57

     Activity with respect to unvested restricted shares for the period ended December 31, 2007 is as follows:

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

						Weighted average grant
		Restricted shares				date fair value
Restricted shares outstanding, December 31, 2006			733,964			$	17.52
Restricted shares granted			1,428,306				21.94
Restricted shares vested			—				—
Restricted shares forfeited			(4,050	)			20.39
Restricted shares outstanding, December 31, 2007			2,158,220			$	20.44

     At September 30, 2008 there was $33,085 (December 31, 2007: $25,116) of total unrecognized compensation expense related to the outstanding restricted shares that is expected to be recognized over a weighted-average period of 3.2 years (December 31, 2007: 3.4 years).

     Pursuant to the Share Sale Agreement for the purchase of Talbot, the Company issued 1,209,741 restricted shares to Talbot employees (the “Employee Seller Shares”). Upon consummation of the acquisition, the Employee Seller Shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s bye-laws. However, the Employee Seller Shares are subject to a restricted period during which the Employee Seller Shares are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of Employee Seller Shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period will end for 25% of the Employee Seller Shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that after four years forfeiture will be completely extinguished. Share expense of $1,153 and $3,417, respectively, was recorded for the three months ended September 30, 2008 and 2007. Share expense of $6,286 and $3,417, respectively, was recorded for the nine months ended September 30, 2008 and 2007. The expense represents the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares for the nine months ended September 30, 2008 is as follows:

						Weighted average grant
		Restricted shares				date fair value
Employee seller shares outstanding, December 31, 2007			1,209,741			$	22.01
Employee seller shares granted			—				—
Employee seller shares vested			(498,024	)			22.01
Employee seller shares forfeited			(17,079	)			22.01
Employee seller shares outstanding, September 30, 2008			694,638			$	22.01