UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-33606

 

VALIDUS HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

BERMUDA (State or other jurisdiction of incorporation or organization)		98-0501001 (I.R.S. Employer Identification No.)

29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes 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 May 7, 2010, there were 123,664,337 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 March 31, 2010 (unaudited) and December 31, 2009			2
Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (unaudited)			3
Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2010 and 2009 (unaudited)			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)			5
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			68
Item 4. Controls and Procedures			71
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			71
Item 1A. Risk Factors			71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			71
Item 3. Defaults Upon Senior Securities			72
Item 4. (Removed and Reserved)			72
Item 5. Other Information			73
Item 6. Exhibits			73
Signatures			74
EX-10.4
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

ITEM I.		FINANCIAL STATEMENTS

Validus Holdings, Ltd.

Consolidated Balance Sheets
As at March 31, 2010 (unaudited) and December 31, 2009
(Expressed in thousands of U.S. dollars, except share and per share information)

		March 31,				December 31,
		2010				2009
		(unaudited)
Assets
Fixed maturities, at fair value (amortized cost: 2010 - $5,173,255; 2009 - $4,870,395)		$	5,181,042			$	4,869,378
Short-term investments, at fair value (amortized cost: 2010 - $308,514; 2009 - $482,632)			308,502				481,766
Other investments, at fair value (amortized cost: 2010 - $31,717; 2009 - $35,941)			34,398				37,615
Cash and cash equivalents			478,476				387,585
Total investments and cash			6,002,418				5,776,344
Premiums receivable			803,921				551,616
Deferred acquisition costs			165,158				112,329
Prepaid reinsurance premiums			103,950				73,164
Securities lending collateral			99,230				90,350
Loss reserves recoverable			198,956				181,765
Paid losses recoverable			18,261				14,782
Net receivable for investments sold			13,879				—
Income taxes recoverable			2,261				2,043
Intangible assets			122,015				123,055
Goodwill			20,393				20,393
Accrued investment income			42,867				38,077
Other assets			39,267				35,222
Total assets		$	7,632,576			$	7,019,140
Liabilities
Reserve for losses and loss expenses		$	1,976,889			$	1,622,134
Unearned premiums			1,083,591				724,104
Reinsurance balances payable			44,715				65,414
Securities lending payable			100,000				90,106
Deferred income taxes			24,104				24,508
Net payable for investments purchased			—				44,145
Accounts payable and accrued expenses			107,119				127,809
Senior notes payable			246,793				—
Debentures payable			289,800				289,800
Total liabilities			3,873,011				2,988,020
Commitments and contingent liabilities
Shareholders’ equity
Common shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (2010 -123,910,430; 2009 - 128,459,478)			23,081				23,033
Treasury shares			(1,397	)			(553	)
Additional paid-in-capital			2,555,243				2,675,680
Accumulated other comprehensive (loss)			(6,658	)			(4,851	)
Retained earnings			1,189,296				1,337,811
Total shareholders’ equity			3,759,565				4,031,120
Total liabilities and shareholders’ equity		$	7,632,576			$	7,019,140

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

Validus Holdings, Ltd.

Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		Three Months Ended
		March 31, 2010				March 31, 2009
		(unaudited)				(unaudited)
Revenues
Gross premiums written		$	870,934			$	609,892
Reinsurance premiums ceded			(90,739	)			(72,512	)
Net premiums written			780,195				537,380
Change in unearned premiums			(322,501	)			(218,621	)
Net premiums earned			457,694				318,759
Net investment income			34,299				26,772
Net realized gains (losses) on investments			11,398				(23,421	)
Net unrealized gains on investments			15,413				22,153
Other income			888				757
Foreign exchange (losses)			(8,764	)			(4,200	)
Total revenues			510,928				340,820
Expenses
Losses and loss expenses			478,531				131,834
Policy acquisition costs			76,176				61,449
General and administrative expenses			53,569				38,079
Share compensation expenses			6,576				7,354
Finance expenses			15,151				7,723
Total expenses			630,003				246,439
Net (loss) income before taxes			(119,075	)			94,381
Tax benefit			697				526
Net (loss) income		$	(118,378	)		$	94,907
Comprehensive income
Foreign currency translation adjustments			(1,807	)			(196	)
Comprehensive (loss) income		$	(120,185	)		$	94,711
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic			126,633,277				75,744,577
Diluted			126,633,277				79,102,643
Basic (loss) earnings per share		$	(0.95	)		$	1.23
Diluted (loss) earnings per share		$	(0.95	)		$	1.20
Cash dividends declared per share		$	0.22			$	0.20

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

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		March 31, 2010				March 31, 2009
		(unaudited)				(unaudited)
Common shares
Balance — Beginning of period		$	23,033			$	13,235
Issue of common shares			48				36
Balance — End of period		$	23,081			$	13,271
Treasury shares
Balance — Beginning of period		$	(553	)		$	—
Repurchase of common shares			(844	)			—
Balance — End of period		$	(1,397	)		$	—
Additional paid-in capital
Balance — Beginning of period		$	2,675,680			$	1,412,635
Issue of common shares, net of expenses			300				(387	)
Repurchase of common shares			(127,313	)			—
Share compensation expenses			6,576				7,354
Balance — End of period		$	2,555,243			$	1,419,602
Accumulated other comprehensive (loss)
Balance — Beginning of period		$	(4,851	)		$	(7,858	)
Foreign currency translation adjustments			(1,807	)			(196	)
Balance — End of period		$	(6,658	)		$	(8,054	)
Retained earnings
Balance — Beginning of period		$	1,337,811			$	520,722
Dividends			(30,137	)			(17,462	)
Net (loss) income			(118,378	)			94,907
Balance — End of period		$	1,189,296			$	598,167
Total shareholders’ equity		$	3,759,565			$	2,022,986

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

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		March 31,				March 31,
		2010				2009
		(unaudited)				(unaudited)
Cash flows provided by (used in) operating activities
Net (loss) income		$	(118,378	)		$	94,907
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses			6,576				7,354
Net realized (gains) losses on investments			(11,398	)			23,421
Net unrealized (gains) on investments			(15,413	)			(22,153	)
Amortization of intangible assets			1,040				1,040
Foreign exchange losses on cash and cash equivalents included in net income			4,538				559
Amortization of premium on fixed maturities			3,713				1,702
Change in:
Premiums receivable			(255,394	)			(193,076	)
Deferred acquisition costs			(52,829	)			(35,344	)
Prepaid reinsurance premiums			(30,786	)			(37,160	)
Loss reserves recoverable			(18,871	)			4,413
Paid losses recoverable			(3,509	)			(3,051	)
Income taxes recoverable			(41	)			(653	)
Accrued investment income			(4,875	)			(86	)
Other assets			(6,557	)			3,083
Reserve for losses and loss expenses			366,176				15,064
Unearned premiums			359,487				255,782
Reinsurance balances payable			(19,203	)			33,260
Deferred income taxes			(624	)			93
Accounts payable and accrued expenses			(19,686	)			(1,288	)
Net cash provided by operating activities			183,966				147,867
Cash flows provided by (used in) investing activities
Proceeds on sales of investments			1,226,380				873,352
Proceeds on maturities of investments			113,341				222,402
Purchases of fixed maturities			(1,693,657	)			(1,232,740	)
Sales of short-term investments, net			173,233				94,644
Sales of other investments			4,383				—
(Increase) decrease in securities lending collateral			(9,894	)			319
Net cash (used in) investing activities			(186,214	)			(42,023	)
Cash flows provided by (used in) financing activities
Net proceeds on issuance of senior notes			246,793				—
Issue of common shares, net of expenses			348				(351	)
Purchases of common shares under share repurchase program			(128,157	)			—
Dividends paid			(29,944	)			(17,462	)
Increase (decrease) in securities lending payable			9,894				(319	)
Net cash provided by (used in) financing activities			98,934				(18,132	)
Effect of foreign currency rate changes on cash and cash equivalents			(5,795	)			(1,762	)
Net increase in cash			90,891				85,950
Cash and cash equivalents — beginning of period			387,585				449,848
Cash and cash equivalents — end of period		$	478,476			$	535,798
Taxes (recovered) paid during the period		$	(184	)		$	299
Interest paid during the period		$	6,365			$	6,672

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 and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 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, 2009, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

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

      The consolidated financial statements include the results and operations and cash flows of IPC Holdings Ltd. (“IPC”), since the date of acquisition, September 4, 2009 and not any prior periods (including for comparative purposes) except where indicated as ‘Pro Forma’ financial information.

2. Recent accounting pronouncements

     In June 2009, the FASB issued authoritative guidance on accounting for “Transfers and Servicing” (ASC 860). 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 January 1, 2010. The adoption of this guidance has not had 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”) (ASC 810). 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 January 1, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In January 2010, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” (ASC 820). This update requires additional disclosures regarding (1) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made; (2) inputs and valuation techniques used to measure fair value for financial assets and liabilities that fall in either Level 2 or Level 3; (3) the activity within Level 3 fair value measurements, including information on a gross basis for purchases, sales, issuances, and settlements; and (4) disaggregation of financial assets and liabilities measured at fair value into classes of financial assets and liabilities.

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

This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning January 1, 2011. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In February 2010, the FASB issued authoritative guidance which amends the “Subsequent Events” guidance (ASC 855). The guidance requires SEC filers to evaluate subsequent events through the date the financial statements are issued, and also exempts SEC filers from disclosing the date through which subsequent events have been evaluated. This update is effective immediately for financial statements that are (1) issued or available to be issued or (2) revised. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In March 2010, the FASB issued authoritative guidance which clarifies the “Embedded Derivatives” guidance in ASC 815. All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments. The amendments in this update are effective for interim periods beginning after June 15, 2010. The Company is currently evaluating the impact of this guidance, however it is not expected to have a material impact on the Company’s consolidated financial statements.

3. Investments

     The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

(a) Classification within the fair value hierarchy

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

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

     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including 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. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. Treasuries, sovereign debt, corporate debt, catastrophe bonds 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.

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

     The Company’s external investment advisors have noted illiquidity and dislocation in the non-Agency RMBS market during 2010 and 2009. During the period ended March 31, 2010 and 2009, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, management, with assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.

     Consistent with U.S. GAAP, market approach fair value measurements for securities trading in inactive markets are not determinative. In weighing the fair value measurements resulting from market approach and income approach valuation techniques, the Company has placed less reliance on the market approach fair value measurements. The income approach valuation technique determines the fair value of each security on the basis of contractual cash flows, discounted using a risk-adjusted discount rate. As the proposed valuation technique incorporates both observable and significant unobservable inputs, these securities are included as Level 3 assets with respect to the fair value hierarchy. The foundation for the income approach is the amount and timing of future cash flows.

     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust. During the fourth quarter of 2009, a majority of the fund of hedge funds was redeemed. The remaining portion is a side pocket valued at $21,919 at March 31, 2010. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. 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 February 28, 2010 NAV was used as a partial basis for fair value measurement in the Company’s March 31, 2010 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 utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund investment manager’s NAV. Immaterial variances are recorded in the following reporting period.

     At March 31, 2010, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	2,128,426			$	—			$	2,128,426
Non-U.S. Government and Government Agency			—				652,902				—				652,902
States, municipalities, political subdivision			—				27,013				—				27,013
Agency residential mortgage-backed securities			—				492,800				—				492,800
Non-Agency residential mortgage-backed securities			—				51,232				76,943				128,175
U.S. corporate			—				1,184,692				—				1,184,692
Non-U.S. corporate			—				449,645				—				449,645
Catastrophe bonds			—				51,771				—				51,771
Asset-backed securities			—				29,828				—				29,828
Commercial mortgage-backed securities			—				35,790				—				35,790
Total fixed maturities			—				5,104,099				76,943				5,181,042
Short-term investments			307,833				669				—				308,502
Other investments
Hedge fund			—				—				21,919				21,919
Mutual funds			—				12,479				—				12,479
Total		$	307,833			$	5,117,247			$	98,862			$	5,523,942

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

     At December 31, 2009, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	1,918,811			$	—			$	1,918,811
Non-U.S. Government and Government Agency			—				673,680				—				673,680
States, municipalities, political subdivision			—				19,359				—				19,359
Agency residential mortgage-backed securities			—				551,610				—				551,610
Non-Agency residential mortgage-backed securities			—				52,233				85,336				137,569
U.S. corporate			—				1,027,225				—				1,027,225
Non-U.S. corporate			—				409,398				—				409,398
Catastrophe bonds			—				52,351				—				52,351
Asset-backed securities			—				36,712				—				36,712
Commercial mortgage-backed securities			—				42,663				—				42,663
Total fixed maturities			—				4,784,042				85,336				4,869,378
Short-term investments			479,552				2,214				—				481,766
Other investments
Hedge fund			—				—				25,670				25,670
Mutual funds			—				11,945				—				11,945
Total		$	479,552			$	4,798,201			$	111,006			$	5,388,759

     At March 31, 2010, Level 3 investments totaled $98,862, representing 1.8% of total investments measured at fair value on a recurring basis. At December 31, 2009, Level 3 investments totaled $111,006, representing 2.1% 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 March 31, 2010 and December 31, 2009:

		Three Months Ended March 31, 2010
		Fixed Maturity								Total Fair Market
		Investments				Other Investments				Value
Level 3 investments - Beginning of period		$	85,336			$	25,670			$	111,006
Payments and purchases			—				—				—
Sales and maturities			—				(4,384	)			(4,384	)
Realized gains			—				174				174
Unrealized (losses) gains			(4,266	)			459				(3,807	)
Amortization			(4,127	)			—				(4,127	)
Transfers in			—				—				—
Level 3 investments — End of period		$	76,943			$	21,919			$	98,862

		Year Ended December 31, 2009
		Fixed Maturity								Total Fair Market
		Investments				Other Investments				Value
Level 3 investments - Beginning of period		$	111,318			$	—			$	111,318
Payments and purchases			—				115,351				115,351
Sales and maturities			(822	)			(92,004	)			(92,826	)
Realized (losses) gains			(1,284	)			1,609				325
Unrealized (losses) gains			(7,329	)			714				(6,615	)
Amortization			(16,547	)			—				(16,547	)
Transfers in			—				—				—
Level 3 investments — End of period		$	85,336			$	25,670			$	111,006

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

(b) Net investment income

     Net investment income was derived from the following sources:

		Three Months Ended
		March 31,				March 31,
		2010				2009
Fixed maturities and short-term investments		$	35,755			$	26,517
Cash and cash equivalents			586				761
Securities lending income			70				339
Total gross investment income			36,411				27,617
Investment expenses			(2,112	)			(845	)
Net investment income		$	34,299			$	26,772

(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
		March 31,				March 31,
		2010				2009
Fixed maturities, short-term and other investments and cash equivalents
Gross realized gains		$	12,765			$	9,453
Gross realized (losses)			(1,367	)			(32,874	)
Net realized gains (losses) on investments			11,398				(23,421	)
Net unrealized (losses) gains on securities lending			(1,014	)			1,092
Change in net unrealized gains on investments			16,427				21,061
Total net realized gains (losses) and change in unrealized gains (losses) of investments			26,811				(1,268	)

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

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at March 31, 2010 were as follows:

						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Estimated Fair Value
U.S. Government and Government Agency		$	2,116,773			$	14,946			$	(3,293	)		$	2,128,426
Non-U.S. Government and Government Agency			659,815				9,431				(16,344	)			652,902
States, municipalities, political subdivision			26,754				286				(27	)			27,013
Agency residential mortgage-backed securities			478,267				15,050				(517	)			492,800
Non-Agency residential mortgage-backed securities			169,515				405				(41,745	)			128,175
U.S. corporate			1,158,189				27,605				(1,102	)			1,184,692
Non-U.S. corporate			448,882				6,230				(5,467	)			449,645
Catastrophe bonds			50,132				1,936				(297	)			51,771
Asset-backed securities			30,024				270				(466	)			29,828
Commercial mortgage-backed securities			34,904				886				—				35,790
Total fixed maturities			5,173,255				77,045				(69,258	)			5,181,042
Total short-term investments			308,514				—				(12	)			308,502
Total other investments			31,717				2,681				—				34,398
Total		$	5,513,486			$	79,726			$	(69,270	)		$	5,523,942

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2009 were as follows:

						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Estimated Fair Value
U.S. Government and Government Agency		$	1,912,081			$	12,308			$	(5,578	)		$	1,918,811
Non-U.S. Government and Government Agency			678,555				7,552				(12,427	)			673,680
States, municipalities, political subdivision			19,310				105				(56	)			19,359
Agency residential mortgage-backed securities			537,876				14,643				(909	)			551,610
Non-Agency residential mortgage-backed securities			176,853				481				(39,765	)			137,569
U.S. corporate			1,004,464				23,895				(1,134	)			1,027,225
Non-U.S. corporate			411,499				4,781				(6,882	)			409,398
Catastrophe bonds			51,236				1,244				(129	)			52,351
Asset-backed securities			36,828				411				(527	)			36,712
Commercial mortgage-backed securities			41,693				971				(1	)			42,663
Total fixed maturities			4,870,395				66,391				(67,408	)			4,869,378
Total short-term investments			482,632				33				(899	)			481,766
Total other investments			35,941				1,674				—				37,615
Total		$	5,388,968			$	68,098			$	(68,307	)		$	5,388,759

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

     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at March 31, 2010 and December 31, 2009. 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.

		March 31, 2010								December 31, 2009
		Estimated Fair
		Value				% of Total				Estimated Fair Value				% of Total
AAA		$	3,436,170				66.3	%		$	3,287,879				67.5	%
AA			538,950				10.4	%			487,364				10.0	%
A			1,031,742				19.9	%			925,532				19.0	%
BBB			28,315				0.5	%			14,416				0.3	%
Investment grade			5,035,177				97.1	%			4,715,191				96.8	%
BB			37,230				0.7	%			45,191				0.9	%
B			50,147				1.0	%			59,116				1.2	%
CCC			53,590				1.1	%			45,194				1.0	%
D/NR			4,898				0.1	%			4,686				0.1	%
Non-Investment grade			145,865				2.9	%			154,187				3.2	%
Total fixed maturities		$	5,181,042				100.0	%		$	4,869,378				100.0	%

     The amortized cost and estimated fair value amounts for fixed maturity securities held at March 31, 2010 and December 31, 2009 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.

		March 31, 2010								December 31, 2009
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	324,276			$	323,807			$	269,889			$	270,688
Due after one year through five years			3,842,946				3,875,902				3,498,792				3,521,167
Due after five years through ten years			292,379				293,756				306,065				306,502
Due after ten years			944				984				2,399				2,467
			4,460,545				4,494,449				4,077,145				4,100,824
Asset-backed and mortgage-backed securities			712,710				686,593				793,250				768,554
Total		$	5,173,255			$	5,181,042			$	4,870,395			$	4,869,378

     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At March 31, 2010, approximately $246,793 (December 31, 2009: $225,823) of letters of credit were issued and outstanding under this facility for which $313,805 of investments were pledged as collateral (December 31, 2009: $314,857). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”). On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At March 31, 2010, $25,000 (December 31, 2009: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,426 of investments were pledged as collateral (December 31, 2009: $128,798). In addition, $1,568,760 of investments were held in trust at March 31, 2010, (December 31, 2009: $1,517,249). Of those, $1,433,130 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, 2009: $1,408,084).

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

     The Company assumed two letters of credit facilities as part of the acquisition of IPC (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 March 31, 2010, the IPC Syndicated Facility was closed. At March 31, 2010, the IPC Bi-Lateral Facility had $78,615 (December 31, 2009: $96,047) letters of credit issued and outstanding for which $219,091 (December 31, 2009: $219,004) 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 March 31, 2010, the Company had $97,967 (December 31, 2009: $88,146) in securities on loan. During the three months ended March 31, 2010, the Company recorded a $1,014 unrealized loss on this collateral on its Statements of Operations (March 31, 2009: unrealized gain $1,092).

     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 16.8 days (December 31, 2009: 26.1 days). As at March 31, 2010, 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		$	—			$	5,232			$	—			$	5,232
Agency			—				—				—				—
Asset-backed securities			—				998				—				998
Short-term investments			53,016				39,984				—				93,000
Total		$	53,016			$	46,214			$	—			$	99,230

     As at December 31, 2009, 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		$	—			$	14,123			$	—			$	14,123
Agency			—				9,363				—				9,363
Asset-backed securities			—				6,153				—				6,153
Short-term investments			730				59,981				—				60,711
Total		$	730			$	89,620			$	—			$	90,350

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

     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at March 31, 2010 and December 31, 2009. 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.

		March 31, 2010								December 31, 2009
		Estimated Fair Value				% of Total				Estimated Fair Value				% of Total
AAA		$	17,011				17.2	%		$	33,501				37.1	%
AA+			12,012				12.1	%			12,011				13.3	%
AA			—				0.0	%			4,998				5.5	%
AA-			10,969				11.1	%			19,910				22.0	%
A+			1,999				2.0	%			9,999				11.1	%
A			3,993				4.0	%			9,006				10.0	%
NR			230				0.2	%			195				0.2	%
			46,214				46.6	%			89,620				99.2	%
NR- Short-term investments(1)			53,016				53.4	%			730				0.8	%
Total		$	99,230				100.0	%		$	90,350				100.0	%

     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at March 31, 2010 and December 31, 2009 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.

		March 31, 2010								December 31, 2009
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	93,000			$	93,000			$	68,895			$	70,074
Due after one year through five years			7,000				6,230				21,211				20,276
Total		$	100,000			$	99,230			$	90,106			$	90,350

4. Reserve for losses and loss expenses

     Reserves for losses and loss expenses are based in part upon the estimation of case losses reported from brokers, insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed the total reserves.

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

     The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses as at March 31, 2010 and December 31, 2009:

		Three months ended				Year ended
		March 31,				December 31,
		2010				2009
Reserve for losses and loss expenses, beginning of period		$	1,622,134			$	1,305,303
Losses and loss expenses recoverable			(181,765	)			(208,796	)
Net reserves for losses and loss expenses, beginning of period			1,440,369				1,096,507
Net reserves acquired in purchase of IPC			—				304,957
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
Current year			505,260				625,810
Prior years			(26,729	)			(102,053	)
Total incurred losses and loss expenses			478,531				523,757
Total net paid losses			(127,652	)			(507,435	)
Foreign exchange			(13,315	)			22,583
Net reserve for losses and loss expenses, end of period			1,777,933				1,440,369
Losses and loss expenses recoverable			198,956				181,765
Reserve for losses and loss expenses, end of period		$	1,976,889			$	1,622,134

     The Company recorded losses of $323,874, net of reinsurance, from the Chile earthquake, windstorm Xynthia and the Melbourne hailstorm in the first quarter of 2010, offset by favorable prior year loss reserve development of $26,729. Favorable prior year loss reserve development of $11,478 and $15,251 was recorded by the Validus Re and Talbot segments respectively, which was attributable primarily to a reduction in ultimate losses on the Dublin floods, Hurricane Ivan and Hurricane Katrina and lower than expected attritional loss development.

5. 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.

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

a) Credit risk

     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At March 31, 2010, 98.9% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $98,893 of IBNR recoverable (December 31, 2009: $99,587). Reinsurance recoverables by reinsurer are as follows:

		March 31, 2010								December 31, 2009
		Reinsurance								Reinsurance
		Recoverable				% of Total				Recoverable				% of Total
Top 10 reinsurers		$	174,803				80.5	%			170,810				86.9	%
Other reinsurers’ balances > $1 million			37,247				17.1	%			19,818				10.1	%
Other reinsurers’ balances < $1 million			5,167				2.4	%			5,919				3.0	%
Total		$	217,217				100.0	%			196,547				100.0	%

		March 31, 2010
				Reinsurance
Top 10 Reinsurers		Rating		Recoverable				% of Total
Fully collateralized reinsurers		NR		$	42,785				24.5	%
Lloyd’s Syndicates		A+			39,146				22.4	%
Munich Re		AA-			16,558				9.5	%
Hannover Re		AA-			15,770				9.0	%
Aspen		A			12,963				7.4	%
Flagstone		A-			11,245				6.4	%
Brit Insurance Limited		A-			10,735				6.2	%
Transatlantic Re		A+			10,732				6.1	%
Swiss Re		A+			8,396				4.8	%
Everest Re		A-			6,473				3.7	%
Total					$174,803				100.0	%

		December 31, 2009
				Reinsurance
Top 10 Reinsurers		Rating		recoverable				% of Total
Fully collateralized reinsurers		NR		$	50,840				29.8	%
Lloyd’s Syndicates		A+			33,103				19.4	%
Munich Re		AA-			19,921				11.7	%
Hannover Re		AA-			13,427				7.8	%
Aspen		A			11,417				6.7	%
Allianz		AA			9,645				5.6	%
Swiss Re		A+			8,995				5.3	%
Transatlantic Re		A+			8,804				5.1	%
Brit Insurance Limited		A			8,159				4.8	%
Platinum Underwriters		A			6,499				3.8	%
Total					$170,810				100.0	%

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

     At March 31, 2010 and December 31, 2009, the provision for uncollectible reinsurance relating to losses recoverable was $4,050 and $3,477, respectively. 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 $217,217 reinsurance recoverable at March 31, 2010, $42,785 was fully collateralized (December 31, 2009: $50,840).

     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.

6. Share capital

a) Authorized and issued

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

     The Company may from time to time repurchase its securities, including common shares and Junior Subordinated Deferrable Debentures. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders. This amount is in addition to, and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010 under its previously authorized $400,000 share repurchase program.

     The Company expects the purchases to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.

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

     The following table is a summary of the common shares issued and outstanding:

		Common Shares
Common shares outstanding, December 31, 2009			128,459,478
Restricted share awards vested, net of shares withheld			174,582
Restricted share units vested, net of shares withheld			51,436
Employee seller shares vested, net of shares withheld			—
Options exercised			51,534
Warrants exercised			—
Shares repurchased			(4,826,600	)
Common shares outstanding, March 31, 2010			123,910,430

		Common Shares
Common shares outstanding, December 31, 2008			75,624,697
Restricted share awards vested, net of shares withheld			187,146
Restricted share units vested, net of shares withheld			—
Employee seller shares vested, net of shares withheld			17,079
Options exercised			—
Warrants exercised			—
Shares repurchased			—
Common shares outstanding, March 31, 2009			75,828,922

b) Warrants

     During the three months ended March 31, 2010 (2009: nil), no warrants were exercised.

c) Deferred share units

     Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. The total outstanding deferred share units at March 31, 2010 were 4,613 (December 31, 2009: 4,577).

d) Dividends

     On February 17, 2010, the Company announced a quarterly cash dividend of $0.22 (2009: $0.20) per common share and $0.22 per common share equivalent for which each outstanding warrant is then exercisable, payable on March 31, 2010 to holders of record on March 15, 2010.

7. Stock plans

a) Long Term Incentive Plan and Short Term Incentive Plan

     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. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Plan (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 13,126,896 shares. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs or performance shares have been granted to date. Grant prices are established at the fair market value of the Company’s common shares at the date of grant.

     i. Options

     Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either ratably or at the end of the required service period from the date of grant. All options granted in 2009 were as a result of the Amalgamation Agreement. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for all grants to date:

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

		Weighted average risk free		Weighted average
Year		interest rate		dividend yield		Expected life (years)		Expected volatility
2007 and prior years		4.5%		0.0%		7		30.0%
2008		3.5%		3.2%		7		30.0%
2009		3.9%		3.7%		2		34.6%

     Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.

     Share compensation expenses of $1,038 were recorded for the three months ended March 31, 2010 (2009: $1,057). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

     Activity with respect to the options for the three months ended March 31, 2010 was as follows:

						Weighted Average				Weighted Average
						Grant Date				Grant Date
		Options				Fair Value				Exercise Price
Options outstanding, December 31, 2009			3,278,015			$	6.83			$	19.88
Options granted			—				—				—
Options exercised			(51,534	)			5.72				22.34
Options forfeited			(3,207	)			10.30				20.39
Options outstanding, March 31, 2010			3,223,274			$	6.84			$	19.84
Options exercisable at March 31, 2010			2,514,697			$	6.00			$	20.08

     Activity with respect to options for the three months ended March 31, 2009 was as follows:

						Weighted Average				Weighted Average
						Grant Date				Grant Date
		Options				Fair Value				Exercise Price
Options outstanding, December 31, 2008			2,799,938			$	7.57			$	18.23
Options granted			—				—				—
Options exercised			—				—				—
Options forfeited			(4,070	)			10.30				20.39
Options outstanding, March 31, 2009			2,795,868			$	7.56			$	18.23
Options exercisable at March 31, 2009			1,494,872			$	7.45			$	17.84