UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2009

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.)

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 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 o          No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (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 6, 2009, there were 131,134,398 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, 2009 (Unaudited) and December 31, 2008			3
Consolidated Statements of Operations and Comprehensive Income for the Three and Nine months ended September 30, 2009 and 2008 (Unaudited)			4
Consolidated Statements of Shareholders’ Equity for the Nine months ended September 30, 2009 and 2008 (Unaudited)			5
Consolidated Statements of Cash Flows for the Nine months ended September 30, 2009 and 2008 (Unaudited)			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			96
Item 4. Controls and Procedures			98
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			99
Item 1A. Risk Factors			99
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			99
Item 3. Defaults Upon Senior Securities			99
Item 4. Submission of Matters to a Vote of Security Holders			99
Item 5. Other Information			100
Item 6. Exhibits			100
Signatures			101

EXHIBIT 10.1	AMENDMENT TO STANDBY LETTER OF CREDIT FACILITY
EXHIBIT 10.2	SECOND AMENDMENT TO EACH OF THE THREE-YEAR AND FIVE YEAR UNSECURED LETTER OF CREDIT FACILITY AGREEMENTS
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

ITEM I.		FINANCIAL STATEMENTS

Consolidated Balance Sheets
As at September 30, 2009 (Unaudited) and December 31, 2008 (Expressed in thousands of U.S. dollars, except share and per share information)

		September 30,				December 31,
		2009				2008
		(Unaudited)
Assets
Fixed maturities, at fair value (amortized cost: 2009 - $4,566,801; 2008 - $2,553,018)		$	4,590,143			$	2,454,501
Short-term investments, at fair value (amortized cost: 2009 - $595,557; 2008 - $379,537)			594,581				377,036
Other investments, at fair value (amortized cost: 2009 - $126,301)			129,012				—
Cash and cash equivalents			393,788				449,848
Total investments and cash			5,707,524				3,281,385
Premiums receivable			723,029				408,259
Deferred acquisition costs			139,157				108,156
Prepaid reinsurance premiums			101,711				22,459
Securities lending collateral			100,053				98,954
Loss reserves recoverable			172,101				208,796
Paid losses recoverable			10,064				1,388
Net receivable for investments sold			—				490
Income taxes recoverable			3,027				1,365
Intangibles assets			124,096				127,217
Goodwill			20,393				20,393
Accrued investment income			43,190				20,433
Other assets			32,726				23,185
Total assets		$	7,177,071			$	4,322,480
Liabilities
Reserve for losses and loss expenses		$	1,624,743			$	1,305,303
Unearned premiums			955,049				539,450
Reinsurance balances payable			40,879				33,042
Securities lending payable			101,040				105,688
Deferred income taxes			26,110				21,779
Net payable for investments purchased			39,224				—
Accounts payable and accrued expenses			119,534				74,184
Debentures payable			304,300				304,300
Total liabilities			3,210,879				2,383,746
Shareholders’ equity
Common shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (2009 - 131,107,196; 2008 - 75,624,697)			22,944				13,235
Additional paid-in-capital			2,748,121				1,412,635
Accumulated other comprehensive (loss)			(4,976	)			(7,858	)
Retained earnings			1,200,103				520,722
Total shareholders’ equity			3,966,192				1,938,734
Total liabilities and shareholders’ equity		$	7,177,071			$	4,322,480

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

Consolidated Statements of Operations and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2009 and 2008 (Unaudited) (Expressed in thousands of U.S. dollars, except share and per share information)

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues
Gross premiums written		$	331,028			$	269,236			$	1,365,951			$	1,170,749
Reinsurance premiums ceded			(67,687	)			(35,139	)			(202,489	)			(121,438	)
Net premiums written			263,341				234,097				1,163,462				1,049,311
Change in unearned premiums			111,376				105,229				(141,786	)			(108,823	)
Net premiums earned			374,717				339,326				1,021,676				940,488
Gain on bargain purchase, net of expenses			302,950				—				287,099				—
Net investment income			29,532				36,379				83,267				108,857
Realized gain on repurchase of debentures			—				—				—				8,752
Net realized gains (losses) on investments			5,429				(13,667	)			(20,642	)			(8,348	)
Net unrealized gains (losses) on investments			50,437				(14,649	)			109,839				(72,608	)
Other income			1,101				1,269				2,875				3,666
Foreign exchange (losses)			(5,244	)			(44,933	)			(1,012	)			(35,843	)
Total revenues			758,922				303,725				1,483,102				944,964
Expenses
Losses and loss expenses			134,152				318,464				390,736				580,578
Policy acquisition costs			64,236				60,425				190,125				173,545
General and administrative expenses			46,036				30,120				125,315				101,139
Share compensation expenses			5,862				6,012				18,848				19,818
Finance expenses			11,257				14,517				29,732				48,796
Total expenses			261,543				429,538				754,756				923,876
Net income (loss) before taxes			497,379				(125,813	)			728,346				21,088
Income tax benefit (expenses)			1,799				(487	)			3,301				(4,992	)
Net income (loss)		$	499,178			$	(126,300	)		$	731,647			$	16,096
Comprehensive income
Foreign currency translation adjustments			(915	)			(1,556	)			2,882				(1,479	)
Comprehensive income (loss)		$	498,263			$	(127,856	)		$	734,529			$	14,617
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic			92,492,373				74,864,724				81,458,329				74,435,840
Diluted			95,834,809				74,864,724				84,626,505				77,922,718
Basic earnings (loss) per share		$	5.38			$	(1.71	)		$	8.92			$	0.15
Diluted earnings (loss) per share		$	5.21			$	(1.71	)		$	8.65			$	0.14
Cash dividends declared per share		$	0.20			$	0.20			$	0.60			$	0.60

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

Consolidated Statements of Shareholders’ Equity
For the nine months ended September 30, 2009 and 2008 (Unaudited) (Expressed in thousands of U.S. dollars, except share and per share information)

		September 30, 2009				September 30, 2008
		(Unaudited)				(Unaudited)
Common shares
Balance — Beginning of period		$	13,235			$	12,985
Issue of common shares			9,709				119
Balance — End of period		$	22,944			$	13,104
Additional paid-in capital
Balance — Beginning of period		$	1,412,635			$	1,384,604
Issue of common shares, net of expenses			1,311,207				(518	)
Share compensation expenses			24,279				19,818
Balance — End of period		$	2,748,121			$	1,403,904
Accumulated other comprehensive (loss)
Balance — Beginning of period		$	(7,858	)		$	(49	)
Currency translation adjustments			2,882				(1,479	)
Balance — End of period		$	(4,976	)		$	(1,528	)
Retained earnings
Balance — Beginning of period		$	520,722			$	537,260
Dividends			(52,266	)			(52,225	)
Net Income			731,647				16,096
Balance — End of period		$	1,200,103			$	501,131
Total shareholders’ equity		$	3,966,192			$	1,916,611

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

Consolidated Statements of Cash Flows
For the nine months ended September 30, 2009 and 2008 (Unaudited) (Expressed in thousands of U.S. dollars, except share and per share information)

		September 30,				September 30,
		2009				2008
		(Unaudited)				(Unaudited)
Cash flows provided by (used in) operating activities
Net income		$	731,647			$	16,096
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses			24,279				19,818
Realized gain on repurchase of debentures			—				(8,752	)
Bargain purchase gain			(352,349	)			—
Net realized losses on investments			20,642				8,348
Net unrealized (gains) losses on investments			(109,838	)			72,608
Amortization of intangible assets			24,792				3,121
Foreign exchange (gains) losses on cash and cash equivalents included in net income			(10,487	)			19,768
Amortization of premium on fixed maturities			8,969				2,226
Change in:
Premiums receivable			(134,007	)			(134,822	)
Deferred acquisition costs			(8,914	)			(26,635	)
Prepaid reinsurance premiums			(75,617	)			(28,149	)
Loss reserves recoverable			42,634				(41,145	)
Paid losses recoverable			(8,621	)			4,279
Income taxes recoverable			(1,486	)			2,436
Accrued investment income			66				(4,466	)
Other assets			(557	)			3,861
Reserve for losses and loss expenses			(8,900	)			369,962
Unearned premiums			210,099				147,461
Reinsurance balances payable			3,903				17,779
Deferred income taxes			4,731				6,083
Accounts payable and accrued expenses			(12,602	)			(52,500	)
Net cash provided by operating activities			348,384				397,377
Cash flows provided by (used in) investing activities
Proceeds on sales of investments			2,247,581				1,770,892
Proceeds on maturities of investments			466,065				264,103
Purchases of fixed maturities			(2,792,562	)			(2,355,159	)
Sales (purchases) of short-term investments, net			91,354				(74,290	)
Purchases of other investments			(2,047	)			—
Decrease in securities lending collateral			4,649				2,597
Purchase of subsidiary, net of cash acquired			(376,878	)			—
Net cash (used in) investing activities			(361,838	)			(391,857	)
Cash flows provided by (used in) financing activities
Repurchase of debentures			—				(36,948	)
Issue of common shares, net of expenses			(1,774	)			(398	)
Dividends paid			(50,938	)			(50,570	)
(Decrease) in securities lending payable			(4,649	)			(2,597	)
Net cash (used in) financing activities			(57,361	)			(90,513	)
Effect of foreign currency rate changes on cash and cash equivalents			14,755				(24,338	)
Net (decrease) in cash			(56,060	)			(109,331	)
Cash and cash equivalents — beginning of period			449,848				444,698
Cash and cash equivalents — end of period		$	393,788				335,367
Taxes paid (recovered) during the period		$	1,395				(2,467	)
Interest paid during the period		$	20,016				20,802

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

Validus Holdings, Ltd.

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

1. Basis of preparation and consolidation

     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly 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, 2008, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

     In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, the valuation of goodwill and intangible assets, reinsurance recoverable balances including the provision for unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year.

2. Significant accounting policies

     In addition to the policies set forth below, the significant accounting policies described in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 should be read and considered.

a) Business combinations

     On September 4, 2009, the Company acquired all of the outstanding shares of IPC Holdings, Ltd. (“IPC”). The transaction was accounted for as an acquisition method business combination. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair value at the acquisition date. The consideration for the net assets acquired was concluded upon prior to the assessment of the fair value of the net assets at the acquisition date. Therefore, the excess of the value of the net assets acquired over the purchase price was recorded as gain on bargain purchase and is shown as a separate component of revenues in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2009. Significant judgment is required to arrive at an estimate of fair value and changes to assumptions used could lead to a materially different result. Certain amounts in IPC’s financial statements have been reclassified to conform to the Company’s accounting policies.

b) Other investments

     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust. All investment transactions are recorded on a first-in-first-out basis and realized gains and losses on the sale of

Validus Holdings, Ltd.

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

investments are determined on the basis of amortized cost. Other investments are carried at fair value with interest and dividend income, income distributions and realized and unrealized gains and losses included in net investment income. The fair value of other investments is generally established on the basis of the net valuation criteria established by the managers of the investments. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. In addition, due to a lag in reporting, some of the Company’s fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company’s current reporting date. In these circumstances, the Company estimates the fair value of these funds by starting with the prior month’s fund valuation, adjusting these valuations for capital calls, redemptions or distributions and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, it uses all credible information available. This principally includes preliminary estimates reported by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which the Company has reported results, or other valuation methods, as necessary. Actual final fund valuations may differ, perhaps materially so, from the Company’s estimates and these differences are recorded in the period they become known as a change in estimate.

3. Recent accounting pronouncements

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on “Business Combinations” and “Consolidation” which are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In April 2009, the FASB issued further authoritative guidance on business combinations that amended previous guidance on the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies. Significant changes arising from this update, which impact current and future acquisitions include the determination of the purchase price and treatment of transaction expenses, restructuring charges and negative goodwill as follows;

•

Purchase Price — The purchase price is determined as of the acquisition date, which is the date that the acquirer obtains control. Under previous guidance, the date the business combination was announced was used as the effective date in determining the purchase price;

•

Transaction Expenses — All costs associated with purchase transactions must be expensed as incurred. Under previous guidance, all such costs could be capitalized and included as part of transaction purchase price, adding to the amount of goodwill recognized;

•

Restructuring Costs — Expected restructuring costs are not recorded at the closing date, but rather after the transaction. The only costs to be included as a liability at the closing date are those for which an acquirer is obligated at the time of the closing. Under previous guidance, restructuring costs that were planned to occur after the closing of the transaction were recognized and recorded at the closing date as a liability;

•

Negative Goodwill/Bargain Purchases — Where total fair value of net assets acquired exceeds consideration paid (creating “negative goodwill”), the acquirer will record a gain as a result of the bargain purchase, to be recognized through the income statement at the close of the transaction. Under previous guidance, negative goodwill was recognized as a pro rata reduction of the assets assumed to allow the net assets acquired to equal the consideration paid; and

Validus Holdings, Ltd.

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

•

Noncontrolling Interests — In a partial or step acquisition where control is obtained, 100% of goodwill and identifiable net assets are recognized at fair value and the noncontrolling (sometimes called minority interest) interest is also recorded at fair value. Under previous guidance, in a partial acquisition only the controlling interest’s share of goodwill was recognized, the controlling interest’s share of identifiable net assets was recognized at fair value and the noncontrolling interest’s share of identifiable net assets was recognized at carrying value. A noncontrolling interest is now recognized in the equity section, presented separately from the controlling interest’s equity. Under previous guidance, noncontrolling interest in general was recorded in the mezzanine section.

     As a result of the adoption of this update the Company has expensed as incurred the transaction costs related to the definitive Amalgamation Agreement dated July 9, 2009 among IPC, Validus Holdings, Ltd and Validus, Ltd (the “Amalgamation Agreement”) with IPC, as described in Note 4. The adoption of this update on business combinations and consolidation materially impacts the consolidated financial statement recognition and measurement of current and future acquisitions.

     In June 2008, the FASB issued authoritative guidance on the “Balance Sheet” presentation of instruments granted in Share-based Payment transactions. This update 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. This update is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In January 2009, the FASB issued authoritative guidance on “Investments—Other” and the beneficial interests in securitized financial assets that amends certain recognition aspects of other-than-temporary impairments (“OTTI”). This update is effective prospectively for interim and annual periods ending after December 15, 2008. Retrospective application of this update to a prior interim or annual period is prohibited. As the Company’s investment portfolio is classified as trading, the adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

     In April 2009, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” and the recognition and presentation of other-than-temporary impairments (“OTTI”). The fair value measurement update includes guidance on; (1) estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased; and (2) identifying transactions that are not orderly. The primary change to the OTTI model for debt securities is the change in focus from an entity’s intent and ability to hold a security until recovery. Instead, an OTTI is triggered if; (1) an entity has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery; or (3) it does not expect to recover the entire amortized cost basis of the security. Both updates are effective for interim and annual periods ending after June 15, 2009. The adoption of these updates has not had a material impact on the Company’s consolidated financial statements.

     In April 2009, the FASB issued authoritative guidance on interim disclosures about fair value of “Financial Instruments". This update expands the fair value disclosures required for specified financial instruments for interim periods of publicly traded entities. This update also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim basis and to highlight any changes of the methods and significant assumptions from prior periods. This update is effective for interim and annual periods ending after June 15, 2009. As this update only expands certain disclosures requirements it has not had 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 information)

     In May 2009, the FASB issued authoritative guidance on management’s assessment of “Subsequent Events”. This update clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. This update is effective prospectively for interim and annual periods ending after June 15, 2009. The adoption of this update has not had a material impact on management’s existing processes for assessing subsequent events, and consequently the Company’s consolidated financial statements.

     In June 2009, the FASB issued authoritative guidance on accounting for “Transfers and Servicing” of financial assets which amends previous derecognition guidance. This update addresses practices that have developed that are not consistent with the original intent and key requirements and concerns that derecognized financial assets and related obligations should continue to be reported in the transferors’ financial statements. This update is effective for financial asset transfers in the interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

     In June 2009, the FASB issued authoritative guidance which amends the “Consolidation” guidance that applies to Variable Interest Entities (“VIEs”). This update amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. This update is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

     In June 2009, the FASB issued authoritative guidance which prescribes the use of the FASB Accounting Standards Codification (the “Codification”) as the authoritative source of U.S. “Generally Accepted Accounting Principles” (“GAAP”). All of its content carries the same level of authority, effectively superseding previous guidance to include only two levels of U.S. GAAP: authoritative and nonauthoritative. This update is effective for interim and annual periods ending after September 15, 2009. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In August 2009, the FASB updated guidance on “Fair Value Measurements and Disclosures” of liabilities. This update clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more prescribed valuation techniques to estimate fair value. This update is effective for the first interim or annual reporting period beginning after August 28, 2009. The adoption of this update will not have a material impact on the Company’s consolidated financial statements and affected disclosures only.

     In August 2009, the FASB proposed updated guidance on improving “Fair Value Measurements and Disclosures”. The proposed updated would clarify existing requirements regarding disclosures of inputs and valuation techniques and levels of disaggregation. In addition, the proposed updated would require new disclosures on (1) sensitivity disclosures regarding the effect of changing Level 3 inputs if the change in the fair value measurement would change significantly, (2) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made, and (3) additional disclosure in the reconciliation of Level 3 activity, including information on a gross basis for purchases, sales, issuances, and settlements. An effective date has not been established. As this update only expands certain disclosure requirements it is not expected to have a material impact on the Company’s consolidated financial statements.

     In September 2009, the FASB updated guidance on accounting for uncertainty in “Income Taxes” and disclosure amendments for nonpublic entities. This update provides guidance on (1) what constitutes a tax position for a pass-through or not-for-profit entity, (2) determining when an income tax is attributed to the reporting entity or its

Validus Holdings, Ltd.

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

owners, and (3) application of accounting for uncertainty in income taxes to a group of related entities composed of both taxable and nontaxable entities. The guidance is effective for interim and annual periods ending after September 15, 2009. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In September 2009, the FASB updated guidance on “Fair Value Measurements and Disclosures” of certain alternative investments. This guidance offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share. This guidance is effective for interim and annual reporting periods ending after December 15, 2009. Early adoption is permitted. This update was not adopted for the Company’s interim period ended September 30, 2009. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

4. Business combination

     On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”). Pursuant to an Amalgamation Agreement, the Company acquired all of IPC’s outstanding common shares in exchange for 0.9727 Company common shares and $7.50 cash per IPC common share. IPC’s operations are focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The acquisition of IPC was undertaken to gain a strategic advantage in the current reinsurance market and increase the Company’s capital base.

     The aggregate purchase price paid by the Company was $1,746,224 for adjusted tangible net assets acquired of $2,076,902. The global financial crisis and related market illiquidity have led to several publicly traded companies trading at substantial discounts. This was the primary factor responsible for a purchase price less than the book value of IPC’s net assets, and the recognition of a bargain purchase gain on acquisition.

     The estimates of fair values for tangible assets acquired and liabilities assumed are determined by management based on various market and income analyses and recent asset appraisals. Significant judgment is required to arrive at these estimates of fair value and changes to assumptions used could lead to materially different results.

     An adjustment of $50,000 was made to IPC’s net assets acquired in respect of the termination fee (the “Max Termination Fee”) paid under the Agreement and Plan of Amalgamation among Max Capital Group Ltd. (“Max”), IPC and IPC Limited (the “Max Amalgamation Agreement”). This Max Termination Fee was advanced to IPC by Validus on July 9, 2009, but was repayable in certain circumstances.

     In addition, the Company at closing recorded a $21,671 intangible asset for the acquired IPC customer relationships. This intangible asset relates to the acquired broker distribution network and is fair valued using a variation of the income approach. Under this approach, the Company estimated the present value of expected future cash flows to an assumed hypothetical market participant resulting from the existing IPC customer relationships, considering attrition, and discounting at a weighted average cost of capital. The composition of purchase price and fair value of net assets acquired is summarized as follows:

Total allocable purchase price
IPC shares outstanding at September 4, 2009			56,110,096
Exchange ratio			0.9727
Validus common shares issued			54,578,268

Validus Holdings, Ltd.

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

Total allocable purchase price
Validus closing share price on September 4, 2009		$	24.10
Total value of Validus shares to be issued						$	1,315,337
Total cash consideration paid at $7.50 per IPC share							420,826
Share compensation awards issued to IPC employees pursuant to the Amalgamation Agreement and earned prior to the Amalgamation							10,061
Total allocable purchase price							1,746,224
Tangible Assets Acquired
Cash and investments		$	2,463,374
Receivables (a)			202,278
Tangible Assets Acquired							2,665,652
Liabilities Acquired
Net loss reserves and paid losses recoverable		$	304,957
Unearned premiums, net of expenses			180,370
Other liabilities			53,423
Liabilities acquired							538,750
Net tangible assets acquired, at fair value							2,126,902
Max Termination Fee							(50,000	)
Net tangible assets acquired, at fair value, adjusted							2,076,902
Bargain purchase gain before establishment of intangible assets							330,678
Intangible asset — customer relationships							21,671
Bargain purchase gain on acquisition of IPC						$	352,349

     The Company also incurred transaction and termination expenses related to the acquisition. Transaction expenses are primarily comprised of legal, corporate advisory, and audit related services. Termination expenses are primarily comprised of severance costs and accelerated share compensation costs in connection with certain IPC employment contracts that have been terminated. Finally, the customer relationships intangible asset has been fully amortized as it not expected to significantly contribute to the Company’s future cash flows beyond the balance sheet date. The gain on bargain purchase, net of expenses has been presented as a separate line item in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss), and is composed of the following:

		September 30, 2009
		Three months ended				Nine months ended
Bargain purchase gain on acquisition of IPC		$	352,349			$	352,349
Transaction expenses			(13,597	)			(29,448	)
Termination expenses			(14,131	)			(14,131	)
Amortization of intangible asset — customer relationships			(21,671	)			(21,671	)
Gain on bargain purchase, net of expenses		$	302,950			$	287,099

Validus Holdings, Ltd.

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

     The following selected unaudited information has been provided to present a summary of the results of IPC since the acquisition date, that have been included within the Validus Re segment in the consolidated financial statements.

		From Acquisition Date to
		September 30, 2009
Net premiums written		$	(658	)
Total revenue			57,434
Total expenses			13,550
Net income		$	43,884

Supplemental Pro Forma Information

          Operating results of IPC have been included in the consolidated financial statements from the September 4, 2009 acquisition date. The following selected unaudited pro forma information has been provided to present a summary of the combined results of the Company and IPC, assuming the transaction had been effected on January 1, 2008. The unaudited pro forma data is for informational purposes only and does not necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above.

		Three months ended
		September 30, 2009				September 30, 2008
Net premiums written		$	288,605			$	293,647
Total revenue			609,620				327,033
Total expenses			274,365				545,898
Net income			335,255				(218,865	)
Basic earnings per share		$	3.61			$	(2.95	)
Diluted earnings per share		$	3.50			$	(2.95	)

		Nine months ended
		September 30, 2009				September 30, 2008
Net premiums written		$	1,544,270			$	1,407,062
Total revenue			1,620,181				1,122,443
Total expenses			841,921				1,074,763
Net income			778,260				47,680
Basic earnings per share		$	9.49			$	0.57
Diluted earnings per share		$	9.20			$	0.54

5. Investments

     During the first quarter of 2007, the Company adopted authoritative guidance on fair value measurements and disclosures and financial instruments. 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. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

Validus Holdings, Ltd.

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

(a) Classification within the fair value hierarchy

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

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

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices but for which the Company typically obtained independent external valuation information including U.S. and U.K. Treasuries, overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Sustainably all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. 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.

     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s August 31, 2009 NAV was used as a partial basis for fair value measurement in the Company’s September 30, 2009 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions from the underlying third-party funds. The Company combines the fund investment manager’s primarily market approach NAV with relevant valuation sources obtained on a timelier basis. As this combined approach valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. The foundation for the income approach is the amount and timing of future cash flows. To determine the reasonableness of the combined approach NAV, the Company assesses the variance between the combined approach NAV and the one-month delayed fund investment manager’s NAV. These variances are recorded in the following reporting period.

     On August 28, 2009, the Company sold short equity index futures contracts with the goal of hedging until closing of the IPC acquisition and liquidation of IPC’s mutual fund equity portfolio exposure. The contracts were closed when the equity positions were fully redeemed on September 9, 2009. The Company experienced a $3.3 million realized investment loss as a result of the futures contracts.

     At September 30, 2009, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

Validus Holdings, Ltd.

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

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	1,182,985			$	—			$	1,182,985
Non-U.S. Government and Government Agency			—				464,940				—				464,940
States, municipalities, political subdivision			—				8,642				—				8,642
Agency residential mortgage-backed securities			—				645,849				—				645,849
Non-Agency residential mortgage-backed securities			—				66,400				96,527				162,927
U.S. corporate			—				1,170,782				—				1,170,782
Non-U.S. corporate			—				827,048				—				827,048
Catastrophe bonds			—				21,368				—				21,368
Asset-backed securities			—				52,381				—				52,381
Commercial mortgage-backed securities			—				53,221				—				53,221
Total fixed maturities			—				4,493,616				96,527				4,590,143
Total short-term investments			592,325				2,256				—				594,581
Total other investments			—				11,614				117,398				129,012
Total		$	592,325			$	4,507,486			$	213,925			$	5,313,736

     At December 31, 2008, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	768,344			$	—			$	768,344
Non-U.S. Government and Government Agency			—				96,073				—				96,073
States, municipalities, political subdivision			—				15,516				—				15,516
Agency residential mortgage-backed securities			—				433,736				—				433,736
Non-Agency residential mortgage-backed securities			—				119,813				111,318				231,131
U.S. corporate			—				443,847				—				443,847
Non-U.S. corporate			—				125,700				—				125,700
Catastrophe bonds			—				10,872				—				10,872
Asset-backed securities			—				137,023				—				137,023
Commercial mortgage-backed securities			—				192,259				—				192,259
Total fixed maturities			—				2,343,183				111,318				2,454,501
Total short-term investments			365,357				11,679				—				377,036
Total		$	365,357			$	2,354,862			$	111,318			$	2,831,537

     At September 30, 2009, Level 3 investments totaled $213,925, representing 4.0% of total investments measured at fair value on a recurring basis. At December 31, 2008, Level 3 investments totaled $111,318, representing 3.9% of total investments 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 as at September 30, 2009 and December 31, 2008:

Validus Holdings, Ltd.

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

		Nine months ended				Year ended
		September 30, 2009				December 31, 2008
Level 3 investments — Beginning of period		$	111,318			$	—
Payments and purchases			115,351				—
Sales and maturities			(822	)			(59	)
Realized losses			(1,284	)			—
Unrealized losses			1,133				(14,603	)
Amortization			(11,771	)			(4,048	)
Transfers in			—				130,028
Level 3 investments — End of period		$	213,925			$	111,318

(b) Net investment income

     Net investment income was derived from the following sources:

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
Fixed maturities and short-term investments		$	29,427			$	32,443			$	82,341			$	98,654
Cash and cash equivalents			742				4,308				2,623				11,524
Securities lending income			171				261				683				1,150
Gross investment income			30,340				37,012				85,647				111,328
Investment expenses			(808	)			(633	)			(2,380	)			(2,471	)
Net investment income		$	29,532			$	36,379			$	83,267			$	108,857

(c) Fixed maturity and short-term investments

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

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
Fixed maturities, short-term and other investments and cash equivalents
Gross realized gains		$	9,795			$	3,653			$	23,175			$	14,965
Gross realized losses			(4,366	)			(17,320	)			(43,817	)			(23,313	)
Net realized gains (losses) on investments			5,429				(13,667	)			(20,642	)			(8,348	)
Change in unrealized gains (losses) on securities lending			1,441				(2,422	)			5,747				(3,316	)
Change in unrealized gains (losses) on investments			48,996				(12,227	)			104,092				(69,292	)
Total net realized gains (losses) and change in unrealized gains (losses) on investments		$	55,866			$	(28,316	)		$	89,197			$	(80,956	)

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at September 30, 2009 were as follows:

Validus Holdings, Ltd.

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

						Gross unrealized				Gross unrealized				Estimated fair
		Amortized Cost				gains				losses				value
U.S. Government and Government Agency		$	1,165,337			$	17,707			$	(59	)		$	1,182,985
Non-U.S. Government and Government Agency			467,741				7,365				(10,166	)			464,940
States, municipalities, political subdivision			8,500				142				—				8,642
Agency residential mortgage-backed securities			629,725				16,431				(307	)			645,849
Non-Agency residential mortgage-backed securities			198,597				817				(36,487	)			162,927
U.S. corporate			1,146,483				25,432				(1,133	)			1,170,782
Non-U.S. corporate			825,255				8,731				(6,938	)			827,048
Catastrophe bonds			20,757				731				(120	)			21,368
Asset-backed securities			52,196				723				(538	)			52,381
Commercial mortgage-backed securities			52,210				1,015				(4	)			53,221
Total fixed maturities			4,566,801				79,094				(55,752	)			4,590,143
Total short-term investments			595,557				38				(1,014	)			594,581
Total other investments			126,301				2,711				—				129,012
Total		$	5,288,659			$	81,843			$	(56,766	)		$	5,313,736

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2008 were as follows:

						Gross unrealized				Gross unrealized				Estimated fair
		Amortized Cost				gains				losses				value
U.S. Government and Government Agency		$	732,155			$	36,189			$	—			$	768,344
Non-U.S. Government and Government Agency			115,389				4,403				(23,719	)			96,073
States, municipalities, political subdivision			14,954				562				—				15,516
Agency residential mortgage-backed securities			425,533				8,358				(155	)			433,736
Non-Agency residential mortgage-backed securities			299,346				6				(68,221	)			231,131
U.S. corporate			454,810				2,126				(13,089	)			443,847
Non-U.S. corporate			140,807				1,696				(16,803	)			125,700
Catastrophe bonds			11,012				2				(142	)			10,872
Asset-backed securities			141,209				—				(4,186	)			137,023
Commercial mortgage-backed securities			217,803				—				(25,544	)			192,259
Total fixed maturities			2,553,018				53,342				(151,859	)			2,454,501
Total short-term investments			379,537				55				(2,556	)			377,036
Total		$	2,932,555			$	53,397			$	(154,415	)		$	2,831,537

     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at September 30, 2009 and December 31, 2008. 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 information)

		September 30, 2009								December 31, 2008
		Estimated fair								Estimated fair
		value				% of total				value				% of total
AAA		$	2,831,934				61.7	%		$	1,941,349				79.1	%
AA			578,547				12.6	%			146,923				6.0	%
A			978,886				21.3	%			338,966				13.8	%
BBB			71,914				1.6	%			12,427				0.5	%
Investment grade			4,461,281				97.2	%			2,439,665				99.4	%
BB			33,907				0.7	%			7,416				0.3	%
B			42,358				1.0	%			7,420				0.3	%
CCC			51,045				1.1	%			—				0.0	%
NR			1,552				0.0	%			—				0.0	%
Non-Investment grade			128,862				2.8	%			14,836				0.6	%
Total fixed maturities		$	4,590,143				100.0	%		$	2,454,501				100.0	%

     The amortized cost and estimated fair value amounts for fixed maturity securities held at September 30, 2009 and December 31, 2008 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, 2009								December 31, 2008
						Estimated fair								Estimated fair
		Amortized cost				value				Amortized cost				value
Due in one year or less		$	322,574			$	323,395			$	277,137			$	279,727
Due after one year through five years			2,896,645				2,932,941				1,143,494				1,134,275
Due after five years through ten years			412,464				416,835				17,451				17,493
Due after ten years			2,391				2,595				31,045				28,858
			3,634,074				3,675,766				1,469,127				1,460,353
Asset-backed and mortgage-backed securities			932,727				914,377				1,083,891				994,148
Total		$	4,566,801			$	4,590,143			$	2,553,018			$	2,454,501

     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At September 30, 2009, approximately $269,231 (December 31, 2008: $199,186) of letters of credit were issued and outstanding under this facility for which $365,238 of investments were pledged as collateral (December 31, 2008: $258,573). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s. At September 30, 2009, $100,000 (December 31, 2008: $100,000) of letters of credit were issued and outstanding under this facility for which $129,041 of investments were pledged as collateral (December 31, 2008: $144,149). In addition, $1,297,788 of investments were held in trust at September 30, 2009, (December 31, 2008: $1,100,235). Of those, $1,188,295 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2008: $1,032,267).

     The Company assumed two letters of credit facilities as part of the IPC Acquisition. A $250,000 Credit Agreement between IPC Holdings, Ltd., IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a $350,000 Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At September 30, 2009, the IPC Syndicated Facility had $38,602 letters of credit issued and outstanding for which

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

$39,760 investments were pledged as collateral. At September 30, 2009, the IPC Bi-Lateral Facility had $91,071 letters of credit issued and outstanding for which $321,760 of investments were held in an associated collateral account.

(d) Securities lending

     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at September 30, 2009, the Company had $98,840 (December 31, 2008: $103,266) in securities on loan. During the nine months ended September 30, 2009, the Company recorded a $5,747 unrealized gain on this collateral on its Statements of Operations (September 30, 2008: unrealized loss $3,316).

     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 23.4 days (December 31, 2008: 26.7 days). As at September 30, 2009, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	14,140			$	—			$	14,140
Agency			—				14,879				—				14,879
Asset-backed securities			—				11,382				—				11,382
Cash equivalents and short-term investments			4,981				54,671				—				59,652
Total		$	4,981			$	95,072			$	—			$	100,053

     As at December 31, 2008, the securities lending collateral reinvested lending by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	57,574			$	—			$	57,574
Asset-backed securities			—				18,228				—				18,228
Cash equivalents and short-term investments			7,390				15,762				—				23,152
Total		$	7,390			$	91,564			$	—			$	98,954

     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at September 30, 2009 and December 31, 2008. 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 information)

		September 30, 2009								December 31, 2008
		Estimated fair								Estimated fair
		value				% of total				value				% of total
AAA		$	85,919				85.8	%		$	45,137				45.7	%
AA			8,985				9.0	%			37,608				37.9	%
A			—				0.0	%			8,729				8.8	%
NR			168				0.2	%			90				0.1	%
			95,072				95.0	%			91,564				92.5	%
NR- Cash (1)			4,981				5.0	%			7,390				7.5	%
Total		$	100,053				100.0	%		$	98,954				100.0	%

     The amortized cost and estimated fair value amounts for securities lending collateral reinvested held at September 30, 2009 and December 31, 2008 are shown by contractual maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

		September 30, 2009								December 31, 2008
						Estimated fair								Estimated fair
		Amortized cost				value				Amortized cost				value
Due in one year or less		$	74,587			$	74,530			$	24,390			$	23,152
Due after one year through five years			26,453				25,523				81,298				75,802
Total		$	101,040			$	100,053			$	105,688			$	98,954

6. Reinsurance

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

a) Credit risk

     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At September 30, 2009, 99.3% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $62,631 of IBNR recoverable (December 31, 2008: $71,580). Reinsurance recoverables by reinsurer are as follows:

		September 30, 2009								December 31, 2008
		Reinsurance								Reinsurance
		recoverable				% of Total				reoverable				% of Total
Top 10 reinsurers		$	167,265				91.8	%			198,403				94.4	%
Other reinsurers’ balances > $1 million			6,105				3.4	%			8,987				4.3	%
Other reinsurers’ balances < $1 million			8,795				4.8	%			2,794				1.3	%
Total		$	182,165				100.0	%			210,184				100.0	%

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

		September 30, 2009
				Reinsurance
Top 10 Reinsurers		Rating		recoverable				% of Total
Fully collateralized reinsurers		NR		$	55,601				33.1	%
Hannover Re		AA-			28,711				17.2	%
Lloyd’s Syndicates		A			25,977				15.5	%
Allianz		AA			14,035				8.4	%
Munich Re		AA-			11,742				7.0	%
Swiss Re		A+			11,003				6.6	%
Aspen		A			7,282				4.4	%
Transatlantic Re		A+			5,781				3.5	%
Platinum		A			3,941				2.4	%
Brit		A			3,192				1.9	%
Total				$	167,265				100.0	%