2015.06.30 - 10Q

Table of Contents



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________
 Form 10-Q 
__________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015

Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of August 5, 2015 there were 82,755,657 outstanding Common Shares, $0.175 par value per share, of the registrant.
 


Table of Contents



INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2015 (unaudited) and December 31, 2014
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets


 


Fixed maturities, at fair value (amortized cost: 2015—$5,462,612; 2014—$5,534,494)
$
5,459,304

 
$
5,532,731

Short-term investments, at fair value (amortized cost: 2015—$1,337,914; 2014—$1,051,222)
1,338,051

 
1,051,074

Other investments, at fair value (cost: 2015—$901,581; 2014—$879,176)
893,707

 
813,011

Cash and cash equivalents
433,710

 
577,240

Restricted cash
140,019

 
173,003

Total investments and cash
8,264,791

 
8,147,059

Investments in affiliates
374,121

 
261,483

Premiums receivable
1,276,020

 
707,647

Deferred acquisition costs
253,225

 
161,295

Prepaid reinsurance premiums
161,516

 
81,983

Securities lending collateral
7,021

 
470

Loss reserves recoverable
376,665

 
377,466

Paid losses recoverable
40,198

 
38,078

Income taxes recoverable
13,787

 
—

Deferred tax asset
23,079

 
23,821

Receivable for investments sold
29,131

 
18,318

Intangible assets
124,092

 
126,924

Goodwill
196,758

 
195,897

Accrued investment income
23,894

 
24,865

Other assets
260,998

 
164,633

Total assets
$
11,425,296

 
$
10,329,939

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,187,177

 
$
3,234,394

Unearned premiums
1,519,491

 
990,564

Reinsurance balances payable
95,705

 
127,128

Securities lending payable
7,487

 
936

Deferred tax liability
8,063

 
5,541

Payable for investments purchased
105,871

 
68,574

Accounts payable and accrued expenses
167,776

 
318,245

Notes payable to operating affiliates
1,381,313

 
671,465

Senior notes payable
247,360

 
247,306

Debentures payable
538,032

 
539,277

Total liabilities
$
7,258,275

 
$
6,203,430

 
 
 
 
Commitments and contingent liabilities


 


Redeemable noncontrolling interest
—

 
79,956

 
 
 
 
Shareholders’ equity
 
 
 
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2015—158,379,505; 2014—155,554,224; Outstanding: 2015—83,295,795; 2014—83,869,845)
$
27,716

 
$
27,222

Treasury shares (2015—75,083,710; 2014—71,684,379)
(13,140
)
 
(12,545
)
Additional paid-in-capital
1,097,527

 
1,207,493

Accumulated other comprehensive loss
(9,066
)
 
(8,556
)
Retained earnings
2,553,894

 
2,374,344

Total shareholders’ equity available to Validus
3,656,931

 
3,587,958

Noncontrolling interest
510,090

 
458,595

Total shareholders’ equity
$
4,167,021

 
$
4,046,553

 
 
 
 
Total liabilities, noncontrolling interests and shareholders’ equity
$
11,425,296

 
$
10,329,939

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

2

Table of Contents



Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
726,968

 
$
655,674

 
$
1,846,466

 
$
1,667,665

Reinsurance premiums ceded
(54,896
)
 
(50,565
)
 
(245,736
)
 
(245,473
)
Net premiums written
672,072

 
605,109

 
1,600,730

 
1,422,192

Change in unearned premiums
(98,490
)
 
(139,106
)
 
(449,394
)
 
(473,232
)
Net premiums earned
573,582

 
466,003

 
1,151,336

 
948,960

Net investment income
33,608

 
21,286

 
64,629

 
44,648

Net realized gains on investments
2,244

 
7,858

 
6,413

 
11,598

Change in net unrealized (losses) gains on investments
(17,530
)
 
45,427

 
54,674

 
101,120

Income from investment affiliate
284

 
779

 
3,060

 
6,127

Other insurance related income and other income
2,540

 
5,235

 
7,372

 
19,065

Foreign exchange (losses) gains
(3,236
)
 
3,158

 
(6,787
)
 
(3,320
)
Total revenues
591,492

 
549,746

 
1,280,697

 
1,128,198

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
266,146

 
158,745

 
507,075

 
321,416

Policy acquisition costs
104,425

 
78,953

 
203,061

 
164,602

General and administrative expenses
82,963

 
73,842

 
167,991

 
148,287

Share compensation expenses
9,242

 
8,341

 
18,296

 
15,488

Finance expenses
17,735

 
16,126

 
37,587

 
32,026

Transaction expenses
—

 
3,252

 
—

 
3,252

Total expenses
480,511

 
339,259

 
934,010

 
685,071

 
 
 
 
 
 
 
 
Income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
110,981

 
210,487

 
346,687

 
443,127

Tax expense
(2,549
)
 
(1,391
)
 
(5,114
)
 
(1,351
)
Income from operating affiliates
4,104

 
4,892

 
6,557

 
9,819

(Income) attributable to operating affiliate investors
(30,879
)
 
(25,316
)
 
(54,085
)
 
(57,026
)
Net income
$
81,657

 
$
188,672

 
$
294,045

 
$
394,569

Net (income) attributable to noncontrolling interest
(17,644
)
 
(35,305
)
 
(56,621
)
 
(78,814
)
Net income available to Validus
$
64,013

 
$
153,367

 
$
237,424

 
$
315,755

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
2,763

 
2,615

 
(256
)
 
3,077

Change in minimum pension liability, net of tax
422

 
—

 
157

 
—

Change in fair value of cash flow hedge
390

 
—

 
(411
)
 
—

Other comprehensive income (loss)
$
3,575

 
$
2,615

 
$
(510
)
 
$
3,077

 
 
 
 
 
 
 
 
Comprehensive income available to Validus
$
67,588

 
$
155,982

 
$
236,914

 
$
318,832

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 

 
 

 
 
 
 
Basic
84,003,549

 
90,952,523

 
83,627,396

 
92,202,261

Diluted
87,313,154

 
95,276,836

 
87,448,142

 
96,538,178

 
 
 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.75

 
$
1.67

 
$
2.81

 
$
3.39

Earnings per diluted share available to common shareholders
$
0.73

 
$
1.61

 
$
2.72

 
$
3.27

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.32

 
$
0.30

 
$
0.64

 
$
0.60

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

3

Table of Contents



Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2015
 
June 30,
2014
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
27,222

 
$
27,036

Common shares issued, net
494

 
125

Balance - End of period
$
27,716

 
$
27,161

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(12,545
)
 
$
(10,228
)
Repurchase of common shares
(595
)
 
(939
)
Balance - End of period
$
(13,140
)
 
$
(11,167
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
1,207,493

 
$
1,677,894

Common shares issued, net
14,366

 
(4,510
)
Repurchase of common shares
(142,628
)
 
(196,400
)
Share compensation expenses
18,296

 
15,488

Balance - End of period
$
1,097,527

 
$
1,492,472

 
 
 
 
Accumulated other comprehensive (loss) income
 

 
 

Balance - Beginning of period
$
(8,556
)
 
$
(617
)
Other comprehensive (loss) income
(510
)
 
3,077

Balance - End of period
$
(9,066
)
 
$
2,460

 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
2,374,344

 
$
2,010,009

Dividends
(57,874
)
 
(59,584
)
Net income
294,045

 
394,569

Net (income) attributable to noncontrolling interest
(56,621
)
 
(78,814
)
Balance - End of period
$
2,553,894

 
$
2,266,180

 
 
 
 
Total shareholders’ equity available to Validus
$
3,656,931

 
$
3,777,106

 
 
 
 
Noncontrolling interest
$
510,090

 
$
575,347

 
 
 
 
Total shareholders’ equity
$
4,167,021

 
$
4,352,453

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

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30, 2015
 
June 30, 2014
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
294,045

 
$
394,569

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Share compensation expenses
18,296

 
15,488

Loss (gain) on deconsolidation/sale of subsidiary
1,777

 
(2,081
)
Amortization of discount on senior notes
54

 
54

Income from investment affiliate
(3,060
)
 
(6,127
)
Net realized gains on investments
(6,413
)
 
(11,598
)
Change in net unrealized gains on investments
(54,674
)
 
(101,120
)
Amortization of intangible assets
2,832

 
2,080

Income from operating affiliates
(6,557
)
 
(9,819
)
Foreign exchange losses (gains) included in net income
7,729

 
(11,629
)
Amortization of premium on fixed maturities
12,395

 
8,116

Change in:
 

 
 

Premiums receivable
(567,553
)
 
(514,339
)
Deferred acquisition costs
(91,930
)
 
(76,373
)
Prepaid reinsurance premiums
(79,533
)
 
(75,040
)
Loss reserves recoverable
644

 
32,983

Paid losses recoverable
(2,253
)
 
20,322

Income taxes recoverable
(13,931
)
 
—

Deferred tax asset
908

 
—

Accrued investment income
984

 
864

Other assets
(37,684
)
 
31,388

Reserve for losses and loss expenses
(46,973
)
 
(172,189
)
Unearned premiums
528,927

 
548,272

Reinsurance balances payable
(31,619
)
 
5,979

Deferred tax liability
2,329

 
1,539

Accounts payable and accrued expenses
(157,581
)
 
(63,896
)
Net cash (used in) provided by operating activities
(228,841
)
 
17,443

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
2,237,966

 
1,956,442

Proceeds on maturities of investments
186,594

 
384,259

Purchases of fixed maturities
(2,337,990
)
 
(1,906,212
)
Purchases of short-term investments, net
(375,299
)
 
(99,677
)
Purchases of other investments, net
(21,970
)
 
(54,716
)
(Increase) decrease in securities lending collateral
(6,551
)
 
2,071

Investment in operating affiliates
(10,400
)
 
—

Redemption from operating affiliates
27,264

 
57,025

Investment in investment affiliates
(23,115
)
 
—

Decrease in restricted cash
32,984

 
15,371

Proceeds on sale of subsidiary, net of cash
—

 
16,459

Net cash (used in) provided by investing activities
(290,517
)
 
371,022

 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Proceeds on issuance of notes payable to operating affiliates
1,155,284

 
320,454

Repayments on notes payable to operating affiliates
(621,444
)
 
(364,877
)
Issuance (redemption) of common shares, net
14,860

 
(4,385
)
Purchases of common shares under share repurchase program
(143,223
)
 
(197,339
)
Dividends paid
(58,740
)
 
(61,036
)
Increase (decrease) in securities lending payable
6,551

 
(2,071
)
Third party investment in redeemable noncontrolling interest
55,700

 
57,000

Third party redemption of redeemable noncontrolling interest
(19,395
)
 
(10,496
)
Net cash provided by (used in) financing activities
389,593

 
(262,750
)
 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(13,765
)
 
13,097

 
 
 
 
Net (decrease) increase in cash
(143,530
)
 
138,812

 
 
 
 
Cash and cash equivalents - beginning of period
$
577,240

 
$
734,148

 
 
 
 
Cash and cash equivalents - end of period
$
433,710

 
$
872,960

 
 
 
 
Taxes paid during the period
$
14,192

 
$
597

 
 
 
 
Interest paid during the period
$
27,248

 
$
27,224

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

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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 (the "Consolidated Financial Statements") include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the "SEC").
In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) 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. The Consolidated Statement of Cash Flows for the six months ended June 30, 2014 includes a revision to increase net cash provided by investing activities by $28,748. There are no changes to the sub-totals of net cash used in operating activities, financing activities or the effect of foreign currency rate changes on cash and cash equivalents. This revision resulted in an increase in net cash of $28,748 for the six months ended June 30, 2014.
The effect of this revision does not impact any per-share amounts or other components of equity or net assets in the statement of financial position in the prior period presented. The Company does not believe this revision is material to the prior period. The Company has revised these prior period amounts to provide comparability with current period cash flows. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ materially from those estimates. The Company’s principal estimates include:
•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 uncollectible amounts; and
•investment valuation of financial assets.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the U.S. Financial Accounting Standards Board (“FASB”).

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


2. Recent accounting pronouncements
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued Accounting Standard Update 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The original effective date for the amendments in this Update was for interim and annual reporting periods beginning after December 15, 2016; however, on July 9, 2015, the FASB delayed the effective date by one year. As such, the new effective date is for interim and annual reporting periods beginning after December 15, 2017. The FASB also decided to allow entities to choose to adopt the standard as of the original effective date. Earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” (ASU 2015-02). The amendments in this Update modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. The amendment also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The amendment also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance and it may have a material impact on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued Accounting Standard Update 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in this Update simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.
In May 2015, the FASB issued Accounting Standard Update 2015-07, "Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" (ASU 2015-07). The amendments in this Update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Earlier application is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.
In May 2015, the FASB issued Accounting Standard Update 2015-09, “Financial Services - Insurance (Topic 944) - Disclosures about Short-Duration Contracts” (ASU 2015-09). The amendments in this Update enhance annual disclosures relating to reserves for losses and loss expenses by requiring the following: (1) net incurred and paid claims development information by accident year; (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and loss expenses; (3) for each accident year presented, total IBNR plus expected development on case reserves included in the reserve for losses and loss expenses, accompanied by a description of reserving methodologies and any changes thereto; (4) for each accident year presented, quantitative information about claim frequency (unless impracticable) accompanied by a qualitative description of methodologies used for determining claim frequency information and any changes thereto; and (5) the average annual percentage payout of incurred claims by age for the same number of accident years presented. The amendments in this Update are effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early application is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.


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


3. Investments
(a)
Fixed maturity, short-term and other investments
The Company's investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related changes in net unrealized gains or losses included in earnings.
The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments as at June 30, 2015 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
817,410

 
$
2,473

 
$
(1,130
)
 
$
818,753

Non-U.S. government and government agency
221,592

 
1,542

 
(695
)
 
222,439

U.S. states, municipalities and political subdivisions
323,553

 
1,425

 
(1,118
)
 
323,860

Agency residential mortgage-backed securities
504,922

 
7,627

 
(2,012
)
 
510,537

Non-agency residential mortgage-backed securities
30,812

 
411

 
(499
)
 
30,724

U.S. corporate
1,463,488

 
2,965

 
(7,845
)
 
1,458,608

Non-U.S. corporate
495,182

 
2,430

 
(2,584
)
 
495,028

Bank loans
487,355

 
1,168

 
(5,230
)
 
483,293

Catastrophe bonds
153,769

 
182

 
(3,249
)
 
150,702

Asset-backed securities
643,864

 
2,469

 
(828
)
 
645,505

Commercial mortgage-backed securities
320,665

 
984

 
(1,794
)
 
319,855

Total fixed maturities
5,462,612

 
23,676

 
(26,984
)
 
5,459,304

Total short-term investments (a)
1,337,914

 
137

 
—

 
1,338,051

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
2,570

 
84

 
(921
)
 
1,733

Hedge funds (b)
599,709

 
108,870

 
(126,158
)
 
582,421

Private equity investments
49,309

 
7,576

 
(1,300
)
 
55,585

Investment funds
243,794

 
604

 
—

 
244,398

Mutual funds
6,199

 
3,371

 
—

 
9,570

Total other investments
901,581

 
120,505

 
(128,379
)
 
893,707

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
7,702,107

 
$
144,318

 
$
(155,363
)
 
$
7,691,062

Assets managed on behalf of operating affiliates (a)
(1,008,445
)
 
—

 
—

 
(1,008,445
)
Catastrophe bonds
(153,769
)
 
(182
)
 
3,249

 
(150,702
)
Noncontrolling interest (b)
(527,850
)
 
(91,716
)
 
113,542

 
(506,024
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,012,043

 
$
52,420

 
$
(38,572
)
 
$
6,025,891

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

8
Table of Contents

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 (or cost), gross unrealized gains and (losses) and estimated fair value of investments as at December 31, 2014 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
759,232

 
$
1,755

 
$
(901
)
 
$
760,086

Non-U.S. government and government agency
279,493

 
1,215

 
(1,980
)
 
278,728

U.S. states, municipalities and political subdivisions
448,668

 
1,780

 
(825
)
 
449,623

Agency residential mortgage-backed securities
520,685

 
9,697

 
(1,151
)
 
529,231

Non-agency residential mortgage-backed securities
37,954

 
369

 
(516
)
 
37,807

U.S. corporate
1,500,963

 
3,960

 
(5,217
)
 
1,499,706

Non-U.S. corporate
564,386

 
2,765

 
(3,989
)
 
563,162

Bank loans
457,537

 
200

 
(8,733
)
 
449,004

Catastrophe bonds
75,822

 
768

 
(926
)
 
75,664

Asset-backed securities
647,422

 
1,250

 
(1,190
)
 
647,482

Commercial mortgage-backed securities
242,332

 
598

 
(692
)
 
242,238

Total fixed maturities
5,534,494

 
24,357

 
(26,120
)
 
5,532,731

Total short-term investments (a)
1,051,222

 
13

 
(161
)
 
1,051,074

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
2,570

 
125

 
(920
)
 
1,775

Preferred stock
6,535

 
—

 
(201
)
 
6,334

Hedge funds (b)
570,371

 
60,792

 
(134,203
)
 
496,960

Private equity investments
48,995

 
4,987

 
(611
)
 
53,371

Investment funds
244,506

 
437

 
(111
)
 
244,832

Mutual funds
6,199

 
3,540

 
—

 
9,739

Total other investments
879,176

 
69,881

 
(136,046
)
 
813,011

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
7,464,892

 
$
94,251

 
$
(162,327
)
 
$
7,396,816

Assets managed on behalf of operating affiliates (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
(75,822
)
 
(768
)
 
926

 
(75,664
)
Noncontrolling interest (b)
(502,830
)
 
(48,446
)
 
120,782

 
(430,494
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,189,316

 
$
45,037

 
$
(40,619
)
 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

9
Table of Contents

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 June 30, 2015 and December 31, 2014.
 
June 30, 2015
 
December 31, 2014
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
2,420,994

 
44.3
 %
 
$
2,494,239

 
45.1
%
AA
541,469

 
9.9
 %
 
848,226

 
15.4
%
A
1,097,340

 
20.1
 %
 
1,086,091

 
19.6
%
BBB
663,198

 
12.1
 %
 
505,208

 
9.1
%
Total investment-grade fixed maturities
4,723,001

 
86.4
 %
 
4,933,764

 
89.2
%
 
 
 
 
 
 
 
 
BB
289,471

 
5.3
 %
 
362,972

 
6.6
%
B
247,369

 
4.6
 %
 
145,240

 
2.6
%
CCC
3,737

 
0.1
 %
 
12,733

 
0.2
%
CC
3,190

 
0.1
 %
 
3,926

 
0.1
%
C
—

 
0.0
 %
 
1,344

 
0.0
%
D/NR
192,536

 
3.5
 %
 
72,752

 
1.3
%
Total non-investment grade fixed maturities
736,303

 
13.6
 %
 
598,967

 
10.8
%
Total fixed maturities
$
5,459,304

 
100.0
 %
 
$
5,532,731

 
100.0
%
The amortized cost and estimated fair value amounts for fixed maturities held at June 30, 2015 and December 31, 2014 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
June 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
278,555

 
$
279,860

 
$
312,843

 
$
313,248

Due after one year through five years
2,980,225

 
2,978,036

 
3,163,225

 
3,159,200

Due after five years through ten years
541,425

 
535,074

 
497,175

 
491,870

Due after ten years
162,144

 
159,713

 
112,858

 
111,655

 
3,962,349

 
3,952,683

 
4,086,101

 
4,075,973

Asset-backed and mortgage-backed securities
1,500,263

 
1,506,621

 
1,448,393

 
1,456,758

Total fixed maturities
$
5,462,612

 
$
5,459,304

 
$
5,534,494

 
$
5,532,731

(b)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Fixed maturities and short-term investments
$
31,163

 
$
22,207

 
$
60,402

 
$
45,504

Other investments
4,014

 
—

 
7,202

 
—

Restricted cash and cash and cash equivalents
451

 
996

 
886

 
2,953

Securities lending income
6

 
2

 
9

 
4

Total gross investment income
35,634

 
23,205

 
68,499

 
48,461

Investment expenses
(2,026
)
 
(1,919
)
 
(3,870
)
 
(3,813
)
Total net investment income
$
33,608

 
$
21,286

 
$
64,629

 
$
44,648

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

10
Table of Contents

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


(c)
Net realized gains and change in net unrealized (losses) gains on investments
The following represents an analysis of net realized gains and the change in net unrealized (losses) gains on investments:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Fixed maturities, short-term and other investments
 

 
 

 
 
 
 
Gross realized gains
$
6,269

 
$
9,813

 
$
12,578

 
$
15,109

Gross realized (losses)
(4,025
)
 
(1,955
)
 
(6,165
)
 
(3,511
)
Net realized gains on investments
2,244

 
7,858

 
6,413

 
11,598

Change in net unrealized (losses) gains on investments (a)
(17,530
)
 
45,427

 
54,674

 
101,120

Total net realized and change in net unrealized (losses) gains on investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
(15,286
)
 
53,285

 
61,087

 
112,718

Assets managed on behalf of operating affiliates
—

 
—

 
—

 
—

Catastrophe bonds
573

 
1,184

 
2,909

 
1,988

Noncontrolling interest (a)
(15,431
)
 
(33,207
)
 
(50,511
)
 
(75,209
)
Total net realized and change in net unrealized (losses) gains on investments excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
(30,144
)
 
$
21,262

 
$
13,485

 
$
39,497

(a)
Includes the change in net unrealized (losses) gains on investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and is included in the Consolidated Statements of Comprehensive Income as net loss (income) attributable to noncontrolling interest.
(d)
Pledged investments
The following tables outline investments and cash pledged as collateral under the Company's credit facilities. For further details on the credit facilities, please refer to Note 12: “Debt and financing arrangements.”
 
 
June 30, 2015
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
260,137

 
391,146

$30,000 secured bi-lateral letter of credit facility
 
30,000

 
11,139

 
47,355

Talbot FAL facility
 
25,000

 
25,000

 
31,233

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,116

IPC bi-lateral facility
 
25,000

 
11,027

 
—

$230,000 Flagstone bi-lateral facility
 
230,000

 
204,833

 
377,215

Total
 
$
1,265,000

 
$
542,136

 
$
877,065


11
Table of Contents

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


 
 
December 31, 2014
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
276,455

 
395,750

$200,000 secured bi-lateral letter of credit facility
 
200,000

 
15,649

 
35,645

Talbot FAL facility
 
25,000

 
25,000

 
31,048

PaCRe senior secured letter of credit facility
 
10,000

 
294

 
—

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,078

IPC bi-lateral facility
 
40,000

 
15,897

 
99,437

$375,000 Flagstone bi-lateral facility
 
375,000

 
198,389

 
430,782

Total
 
$
1,605,000

 
$
561,684

 
$
1,022,740

In addition, $3,445,986 of cash and cash equivalents, restricted cash, short-term investments and fixed maturities were pledged during the normal course of business as at June 30, 2015 (December 31, 2014: $3,150,295). Of those, $3,398,876 were held in trust (December 31, 2014: $3,122,074). Pledged assets are generally for the benefit of the Company's cedants and policyholders, to support AlphaCat's fully collateralized reinsurance transactions and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators.
4. Fair value measurements
(a)
Classification within the fair value hierarchy
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.
There have been no material changes in the Company's valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

12
Table of Contents

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


At June 30, 2015, 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
$
—

 
$
818,753

 
$
—

 
$
818,753

Non-U.S. government and government agency
—

 
222,439

 
—

 
222,439

U.S. states, municipalities and political subdivisions
—

 
323,860

 
—

 
323,860

Agency residential mortgage-backed securities
—

 
510,537

 
—

 
510,537

Non-agency residential mortgage-backed securities
—

 
30,724

 
—

 
30,724

U.S. corporate
—

 
1,458,608

 
—

 
1,458,608

Non-U.S. corporate
—

 
495,028

 
—

 
495,028

Bank loans
—

 
361,858

 
121,435

 
483,293

Catastrophe bonds
—

 
149,702

 
1,000

 
150,702

Asset-backed securities
—

 
645,505

 
—

 
645,505

Commercial mortgage-backed securities
—

 
319,855

 
—

 
319,855

Total fixed maturities
—

 
5,336,869

 
122,435

 
5,459,304

Total short-term investments (a)
1,317,526

 
16,978

 
3,547

 
1,338,051

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,733

 
1,733

Hedge funds (b)
—

 
—

 
582,421

 
582,421

Private equity investments
—

 
—

 
55,585

 
55,585

Investment funds
—

 
78,470

 
165,928

 
244,398

Mutual funds
—

 
9,570

 
—

 
9,570

Total other investments
—

 
88,040

 
805,667

 
893,707

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
1,317,526

 
$
5,441,887

 
$
931,649

 
$
7,691,062

Assets managed on behalf of operating affiliates (a)
(1,008,445
)
 
—

 
—

 
(1,008,445
)
Catastrophe bonds
—

 
(149,702
)
 
(1,000
)
 
(150,702
)
Noncontrolling interest (b)
—

 
—

 
(506,024
)
 
(506,024
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
309,081

 
$
5,292,185

 
$
424,625

 
$
6,025,891

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.


13
Table of Contents

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, 2014, 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
$
—

 
$
760,086

 
$
—

 
$
760,086

Non-U.S. government and government agency
—

 
278,728

 
—

 
278,728

U.S. states, municipalities and political subdivisions
—

 
449,623

 
—

 
449,623

Agency residential mortgage-backed securities
—

 
529,231

 
—

 
529,231

Non-agency residential mortgage-backed securities
—

 
37,807

 
—

 
37,807

U.S. corporate
—

 
1,499,706

 
—

 
1,499,706

Non-U.S. corporate
—

 
563,162

 
—

 
563,162

Bank loans
—

 
416,256

 
32,748

 
449,004

Catastrophe bonds
—

 
70,664

 
5,000

 
75,664

Asset-backed securities
—

 
647,482

 
—

 
647,482

Commercial mortgage-backed securities
—

 
242,238

 
—

 
242,238

Total fixed maturities
—

 
5,494,983

 
37,748

 
5,532,731

Total short-term investments (a)
942,716

 
108,358

 
—

 
1,051,074

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,775

 
1,775

Preferred stock
—

 
6,334

 
—

 
6,334

Hedge funds (b)
—

 
—

 
496,960

 
496,960

Private equity investments
—

 
—

 
53,371

 
53,371

Investment fund
—

 
140,045

 
104,787

 
244,832

Mutual funds
—

 
9,739

 
—

 
9,739

Total other investments
—

 
156,118

 
656,893

 
813,011

Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
942,716

 
$
5,759,459

 
$
694,641

 
$
7,396,816

Assets managed on behalf of operating affiliates (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
—

 
(70,664
)
 
(5,000
)
 
(75,664
)
Noncontrolling interest (b)
—

 
—

 
(430,494
)
 
(430,494
)
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
245,792

 
$
5,688,795

 
$
259,147

 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.
At June 30, 2015, Level 3 investments excluding the catastrophe bonds and noncontrolling interests totaled $424,625 (December 31, 2014: $259,147), representing 7.0% (December 31, 2014: 4.2%) of total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interests, measured at fair value on a recurring basis.

14
Table of Contents

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


(b)
Level 1 assets measured at fair value
Short term investments
Short term investments categorized as Level 1 consist primarily of highly liquid securities, all with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value. The Company has determined that certain of its short-term investments, held in highly liquid money market-type funds, should be included in Level 1 as their fair values are based on quoted market prices in active markets.
(c)
Level 2 assets measured at fair value
Fixed maturity investments
Fixed maturity investments included in Level 2 include U.S. government and government agency, non-U.S. government and government agency, U.S. states, municipalities and political subdivisions, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, U.S. corporate, non-U.S. corporate, bank loans, catastrophe bonds, asset-backed securities and commercial mortgage-backed securities.
In general, valuation of the Company's fixed maturity investment portfolios is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company's fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
U.S. states, municipalities and political subdivisions
The Company's U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.

15
Table of Contents

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


Agency residential mortgage-backed securities
The Company's agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Non-agency residential mortgage-backed securities
The Company's non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.
U.S. corporate
Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company's corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company's non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Bank loans
The Company's bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company's bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Catastrophe bonds
Catastrophe bonds are based on broker or underwriter bid indications. To the extent that these indications are based on significant unobservable inputs, the relevant bonds will be classified as a Level 3 asset.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

16
Table of Contents

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


Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short term investments
Short term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments is generally determined using amortized cost which approximates fair value. The Company has determined that, other than highly liquid money market-type funds, the majority of the remaining securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value. To the extent that these valuations are based on significant unobservable inputs, the relevant short term investments will be classified as a Level 3 asset.
Preferred stock
The Company's preferred stock portfolio contains preferred term securities typically sold by non-public financial services companies, through a collateralized debt obligation product and are classified as Level 2 assets. The fair value of these investments is determined based on quoted market prices in active markets.
Investment funds
Investment funds classified as Level 2 assets includes one pooled investment which is invested in fixed income securities with high credit ratings. The investment fund is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the net asset value of the fund as reported by Lloyd’s Treasury & Investment Management.
Also included within investment funds is the Company's share of a portfolio of Lloyd's overseas deposits, which is also classified as a Level 2 asset. The underlying deposits are managed centrally by Lloyd's and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd's.
Mutual funds
Mutual funds consist of two investment funds which are invested in various quoted investments. The fair value of units in the mutual funds is based on the net asset value of the fund as reported by the fund manager.
(d)
Level 3 assets measured at fair value
Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. The Company's hedge funds, a fund of hedge funds, private equity investments, certain bank loans, an investment fund and certain catastrophe bonds are the only financial instruments in this category as at June 30, 2015. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).
Within the hedge fund industry, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager and regular evaluation of fund performance against applicable benchmarks.

17
Table of Contents

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


Bank loans
Included in the bank loans portfolio is a collection of loan participations held through an intermediary. These investments are classified as Level 3 assets. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary.
Fund of hedge funds
The fund of hedge funds includes a side pocket. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund's administrator provides a monthly reported NAV with a one month delay in its valuation which was used as a basis for fair value measurement in the Company's June 30, 2015 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at June 30, 2015 based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compares the one month delayed fund administrator's NAV to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.
Hedge funds
The hedge funds were valued at $582,421 at June 30, 2015 (December 31, 2014: $496,960). The hedge funds consist of investments in five Paulson & Co. managed funds (the "Paulson hedge funds") and one hedge fund assumed in the acquisition of Flagstone Reinsurance Holdings, S.A. (the "Flagstone Acquisition") (the "Flagstone hedge fund").
The Paulson hedge funds' administrator provides monthly reported NAVs with a one month delay in its valuation which was used as a partial basis for fair value measurement in the Company's June 30, 2015 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV as at June 30, 2015 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. Historically, the Company's valuation estimates have not materially differed from the subsequent NAVs.
The Flagstone hedge fund's administrator provides quarterly NAVs with a three-month delay in valuation which was used as a basis for fair value measurement in the Company's June 30, 2015 Consolidated Balance Sheet.
As these valuation techniques incorporate both observable and significant unobservable inputs, both the Paulson hedge funds and the Flagstone hedge fund are classified as Level 3 assets. The Paulson hedge funds are subject to quarterly liquidity.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation in the Company's June 30, 2015 Consolidated Balance Sheet. These private equity investments vary in investment strategies and are not actively traded in any open markets. As this valuation technique can incorporate significant unobservable inputs, the private equity investments are classified as Level 3 assets.
Investment funds
Investment funds classified as Level 3 assets consists of one structured securities fund that invests across asset backed securities, residential mortgage backed securities and commercial mortgage backed securities. The fair value of units in the investment fund is based on the NAV of the fund as reported by the independent fund administrator. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation which was used as a basis for fair value measurement in the Company's June 30, 2015 Consolidated Balance Sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the investment fund investment is classified as a Level 3 asset.

18
Table of Contents

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 presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Level 3 investments - Beginning of period
$
867,656

 
$
629,321

 
$
694,641

 
$
576,871

Purchases
53,810

 
100,000

 
199,599

 
100,000

Sales
(5,436
)
 
(21,744
)
 
(13,038
)
 
(25,333
)
Settlements
(4,203
)
 
(1,500
)
 
(8,198
)
 
(1,500
)
Net realized gains (losses)
—

 
5,634

 
(11
)
 
5,644

Change in net unrealized gains
19,822

 
34,685

 
58,656

 
84,011

Transfers into Level 3
—

 
—

 
—

 
6,703

Level 3 investments - End of period
$
931,649

 
$
746,396

 
$
931,649

 
$
746,396

Catastrophe Bonds
(1,000
)
 
—

 
(1,000
)
 
—

Noncontrolling interest (a)
(506,024
)
 
(546,790
)
 
(506,024
)
 
(546,790
)
Level 3 investments - End of period excluding catastrophe bonds and noncontrolling interest
$
424,625

 
$
199,606

 
$
424,625

 
$
199,606

(a)
Includes Level 3 investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.
There have not been any transfers into or out of Level 3 during the three months ended June 30, 2015 and 2014 or the six months ended June 30, 2015. During the six months ended June 30, 2014 there was a transfer of investments from Level 2 into Level 3 of the fair value hierarchy. This transfer was due to a reassessment of the extent of unobservable inputs used in establishing the fair value of certain catastrophe bonds.
5. Investments in affiliates
The following table presents the Company's investments in affiliates as at June 30, 2015 and December 31, 2014:
 
June 30, 2015
 
December 31, 2014
Investment affiliates
$
89,681

 
$
63,506

Operating affiliates
284,440

 
197,977

Investments in affiliates
$
374,121

 
$
261,483

(a)
Investment affiliate
Aquiline Financial Services Fund II L.P.    
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline II General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement of the Fund dated January 9, 2013 (the "Aquiline II Limited Partnership Agreement").
On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is also governed by the terms of the Aquiline II Limited Partnership Agreement.
The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.

19
Table of Contents

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


Aquiline Financial Services Fund III L.P.
On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of November 7, 2014 (the “Aquiline III Limited Partnership Agreement”).
The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.
The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliates balance for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Investment affiliates, beginning of period
$
85,982

 
$
39,848

 
$
63,506

 
$
34,500

Capital contributions
3,415

 
—

 
23,115

 
—

Income from investment affiliate
284

 
779

 
3,060

 
6,127

Investment affiliates, end of period
$
89,681

 
$
40,627

 
$
89,681

 
$
40,627

The following table presents the Company's investment in the Partnerships as at June 30, 2015:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
59,978

 
—
%
 
8.1
%
 
$
75,543

Aquiline Financial Services Fund III L.P.
$
14,138

 
—
%
 
13.7
%
 
$
14,138

Total
$
74,116

 
 
 
 
 
$
89,681

The following table presents the Company's investment in the Partnership as at December 31, 2014:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
51,001

 
—
%
 
8.1
%
 
$
63,506

(b)
Operating affiliates
AlphaCat Re 2011 Ltd.
On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011 Ltd. ("AlphaCat Re 2011"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. AlphaCat Re 2011 was a market facing entity and the Company's investment in AlphaCat Re 2011 has been treated as an equity method investment.
AlphaCat Re 2011 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2011.The Company's portion of the returns made during the three and six months ended June 30, 2015 and 2014 are included in the tables below.

20
Table of Contents

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


AlphaCat Re 2012 Ltd.
On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012 Ltd. ("AlphaCat Re 2012"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. AlphaCat Re 2012 was a market facing entity and the Company's investment in AlphaCat Re 2012 has been treated as an equity method investment.
AlphaCat Re 2012 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2012.The Company's portion of the returns made during the three and six months ended June 30, 2015 and 2014 are included in the tables below.
AlphaCat 2013, Ltd.
On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, Ltd. ("AlphaCat 2013"), an entity formed for the purpose of investing in collateralized reinsurance and retrocession on a worldwide basis. AlphaCat 2013 deployed its capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”) and the Company's investment in AlphaCat 2013 has been treated as an equity method investment.
AlphaCat 2013 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2013. The Company's portion of the returns made during the three and six months ended June 30, 2015 and 2014 are included in the tables below.
AlphaCat 2014, Ltd.
On December 20, 2013, the Company joined with other investors in capitalizing AlphaCat 2014, Ltd. (“AlphaCat 2014”), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2014 renewal season. AlphaCat 2014 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2014 has been treated as an equity method investment.
AlphaCat 2014 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2014. The Company's portion of the returns made during the three and six months ended June 30, 2015 and 2014 are included in the table below.
AlphaCat 2015, Ltd.
On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, Ltd. ("AlphaCat 2015"), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2015 renewal season. AlphaCat 2015 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2015 has been treated as an equity method investment.
AlphaCat ILS funds
The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and insurance linked securities ("ILS") contracts. AlphaCat ILS funds primarily deploy their capital through the AlphaCat Master Fund Ltd. (the "AlphaCat Master Fund") and AlphaCat Re. All of the funds are variable interest entities and are accounted for as equity method investments because the Company holds an equity interest of less than 50% and has significant influence. Two of these funds had been consolidated by the Company as the primary beneficiary from formation through to December 31, 2013 and May 31, 2015, respectively. However, on January 1, 2014 and June 1, 2015 the funds received $35,000 and $40,000 in additional third party subscriptions, respectively, resulting in a reduction of the Company’s equity interest below 50%. Therefore, these funds were deconsolidated and accounted for as an equity method investments from January 1, 2014 and June 1, 2015, respectively, since the Company retained significant influence. The fair value of the retained interest, based on the fair value of the underlying instruments in AlphaCat Master Fund and AlphaCat Re, amounted to $113,455 and $96,770 as at January 1, 2014 and June 1, 2015, respectively. The deconsolidations resulted in a gain of $1,372 and a loss of $1,777 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the six months ended June 30, 2014 and the three and six months ended June 30, 2015, respectively. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.

21
Table of Contents

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


AlphaCat Master Fund Ltd. and AlphaCat Reinsurance Ltd.
The Company utilizes AlphaCat Master Fund and AlphaCat Re for the purpose of investing in capital market products and writing collateralized reinsurance, respectively, on behalf of certain entities within the AlphaCat operating segment. AlphaCat Master Fund and AlphaCat Re are market facing entities which enter into transactions on behalf of AlphaCat 2015 and the AlphaCat ILS funds. The Company owns all of the voting equity interest in AlphaCat Master Fund and AlphaCat Re and, as a result, their financial statements are included in the Consolidated Financial Statements of the Company.
BetaCat ILS funds
The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk issued under Rule 144A of the Securities Act of 1933, following a passive buy-and-hold investment strategy. One of the funds is a variable interest entity and is consolidated by the Company as the primary beneficiary. The remaining fund is consolidated by the Company as it owns all of the voting equity interest. The Company's maximum exposure to either of the funds is the amount of capital invested at any given time. As at June 30, 2015, no third party subscriptions had been received.
The following tables present a reconciliation of the beginning and ending investment in operating affiliates for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30, 2015
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at March 31, 2015
$
4,596

 
$
710

 
$
1,054

 
$
3,835

 
$
26,916

 
$
140,239

 
$
177,350

Purchase of shares
—

 
—

 
—

 
—

 
2,400

 
6,930

 
9,330

Return of investment
—

 
—

 
—

 
(3,114
)
 
—

 
—

 
(3,114
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
—

 
96,770

 
96,770

Income (loss) from operating affiliates
5

 
(3
)
 
(11
)
 
2

 
1,282

 
2,829

 
4,104

As at June 30, 2015
$
4,601

 
$
707

 
$
1,043

 
$
723

 
$
30,598

 
$
246,768

 
$
284,440

 
Three Months Ended June 30, 2014
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
 AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at March 31, 2014
$
4,177

 
$
1,277

 
$
15,678

 
$
23,593

 
$
137,034

 
$
181,759

Return of investment
—

 
—

 
(13,659
)
 
—

 
—

 
(13,659
)
(Loss) income from operating affiliates
(5
)
 
927

 
561

 
1,421

 
1,988

 
4,892

As at June 30, 2014
$
4,172

 
$
2,204

 
$
2,580

 
$
25,014

 
$
139,022

 
$
172,992


22
Table of Contents

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


 
Six Months Ended June 30, 2015
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at December 31, 2014
$
4,606

 
$
735

 
$
1,068

 
$
28,085

 
$
25,600

 
$
137,883

 
$
197,977

Purchase of shares
—

 
—

 
—

 
—

 
2,400

 
8,000

 
10,400

Return of investment
—

 
—

 
—

 
(27,264
)
 
—

 
—

 
(27,264
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
—

 
96,770

 
96,770

(Loss) income from operating affiliates
(5
)
 
(28
)
 
(25
)
 
(98
)
 
2,598

 
4,115

 
6,557

As at June 30, 2015
$
4,601

 
$
707

 
$
1,043

 
$
723

 
$
30,598

 
$
246,768

 
$
284,440

 
Six Months Ended June 30, 2014
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
 AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at December 31, 2013
$
9,809

 
$
1,313

 
$
51,744

 
$
21,982

 
$
21,895

 
$
106,743

Return of investment
(5,825
)
 
—

 
(51,200
)
 
—

 
—

 
(57,025
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
113,455

 
113,455

Income from operating affiliates
188

 
891

 
2,036

 
3,032

 
3,672

 
9,819

As at June 30, 2014
$
4,172

 
$
2,204

 
$
2,580

 
$
25,014

 
$
139,022

 
$
172,992

The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at June 30, 2015:
 
Investment in operating affiliates
 
Cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
4,601

 
43.7
%
 
22.3
%
 
$
4,601

AlphaCat Re 2012
707

 
49.0
%
 
37.9
%
 
707

AlphaCat 2013
1,043

 
40.9
%
 
19.7
%
 
1,043

AlphaCat 2014
723

 
42.3
%
 
19.6
%
 
723

AlphaCat 2015
28,000

 
40.0
%
 
20.0
%
 
30,598

AlphaCat ILS funds
237,861

 
n/a

 
(a)

 
246,768

Total
$
272,935

 
 
 
 
 
$
284,440

(a)
Equity ownership in the funds was 7.6%, 20.2%, 9.1% and 44.6%, respectively as at June 30, 2015.

23
Table of Contents

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 presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at December 31, 2014:
 
Investment in operating affiliates
 
Cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
4,606

 
43.7
%
 
22.3
%
 
$
4,606

AlphaCat Re 2012
735

 
49.0
%
 
37.9
%
 
735

AlphaCat 2013
1,068

 
40.9
%
 
19.7
%
 
1,068

AlphaCat 2014
22,000

 
42.3
%
 
19.6
%
 
28,085

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
25,600

AlphaCat ILS funds
133,091

 
n/a

 
(a)

 
137,883

Total
$
187,100

 
 
 
 
 
$
197,977

(a)
Equity ownership in the funds was 7.9%, 39.7% and 9.1%, respectively as at December 31, 2014.
(c)
Notes payable and (income) attributable to operating affiliates
Notes are issued during the course of a year by AlphaCat Master Fund and AlphaCat Re to AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds (collectively the "feeder funds") in order to fund the purchase of capital market products and to write collateralized reinsurance on their behalf. The underlying capital market products and collateralized reinsurance typically have at least a twelve month duration; however, they do not have a stated maturity date. Since repayment is dependent on the settlement of the underlying transactions, the notes are subsequently redeemed as the underlying transactions are settled. The Company’s investments in the feeder funds, together with investments made by third parties, are provided as consideration for these notes to AlphaCat Master Fund and AlphaCat Re, which are consolidated in the Company’s Consolidated Financial Statements. The effective economic interest in AlphaCat Master Fund and AlphaCat Re that results from these transactions is represented on the Consolidated Balance Sheet as notes payable to operating affiliates. The subsequent income or loss generated by the relevant capital market products or collateralized reinsurance is transferred to the operating affiliates as (income) loss attributable to operating affiliate investors in the Company’s Consolidated Statements of Comprehensive Income. The notes do not have any principal amount, since the final amount payable is dependent on the income or loss. To the extent that the (income) loss attributable to operating affiliate investors has not been returned to investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
The following tables present a reconciliation of the beginning and ending notes payable to operating affiliates for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30, 2015
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at March 31, 2015
$
8,181

 
$
137,294

 
$
774,209

 
$
919,684

Notes payable to operating affiliates recognized on deconsolidation of AlphaCat ILS fund
—

 
—

 
179,316

 
179,316

Issuance of notes payable to operating affiliates
—

 
8,327

 
525,093

 
533,420

Redemption of notes payable to operating affiliates
(8,181
)
 
—

 
(247,380
)
 
(255,561
)
Foreign exchange loss
—

 
364

 
4,090

 
4,454

As at June 30, 2015
$
—

 
$
145,985

 
$
1,235,328

 
$
1,381,313


24
Table of Contents

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


 
Three Months Ended June 30, 2014
 
AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at March 31, 2014
$
48,163

 
$
149,816

 
$
363,394

 
$
561,373

Issuance of notes payable to operating affiliates
—

 
8,207

 
249,094

 
257,301

Redemption of notes payable to operating affiliates
(48,163
)
 
—

 
(148,800
)
 
(196,963
)
Foreign exchange (gain) loss
—

 
(31
)
 
1,270

 
1,239

As at June 30, 2014
$
—

 
$
157,992

 
$
464,958

 
$
622,950

 
Six Months Ended June 30, 2015
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at December 31, 2014
$
157,384

 
$
—

 
$
514,081

 
$
671,465

Notes payable to operating affiliates recognized on deconsolidation of AlphaCat ILS fund
—

 
—

 
179,316

 
179,316

Issuance of notes payable to operating affiliates
—

 
145,867

 
1,009,417

 
1,155,284

Redemption of notes payable to operating affiliates
(157,074
)
 
—

 
(464,370
)
 
(621,444
)
Foreign exchange (gain) loss
(310
)
 
118

 
(3,116
)
 
(3,308
)
As at June 30, 2015
$
—

 
$
145,985

 
$
1,235,328

 
$
1,381,313

 
Six Months Ended June 30, 2014
 
AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at December 31, 2013
$
223,809

 
$
—

 
$
215,463

 
$
439,272

Notes payable to operating affiliates recognized on deconsolidation of AlphaCat ILS fund
—

 
—

 
178,837

 
178,837

Issuance of notes payable to operating affiliates
—

 
157,914

 
433,831

 
591,745

Redemption of notes payable to operating affiliates
(223,512
)
 
—

 
(364,566
)
 
(588,078
)
Foreign exchange (gain) loss
(297
)
 
78

 
1,393

 
1,174

As at June 30, 2014
$
—

 
$
157,992

 
$
464,958

 
$
622,950

The portion of notes payable to operating affiliates that were due to the Company, as an investor in the affiliates, and third party investors as at June 30, 2015 amounted to $261,459 and $1,119,854, respectively (December 31, 2014: $148,264 and $523,201).
The following table presents the (income) attributable to operating affiliate investors for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015

June 30,
2014
AlphaCat 2013
$
(1
)
 
$
(3,644
)
 
$
—

 
$
(14,120
)
AlphaCat 2014
(99
)
 
(10,892
)
 
(255
)
 
(21,681
)
AlphaCat 2015
(9,811
)
 
—

 
(18,584
)
 
—

AlphaCat ILS funds
(20,968
)
 
(10,780
)
 
(35,246
)
 
(21,225
)
(Income) attributable to operating affiliate investors
$
(30,879
)
 
$
(25,316
)
 
$
(54,085
)
 
$
(57,026
)
The portion of income attributable to operating affiliate investors that was due to the Company, as an investor in the affiliates, and third party investors for the three months ended June 30, 2015 amounted to $4,964 and $25,915, respectively (2014: $5,087 and $20,229). The portion of income attributable to operating affiliate investors was due to the Company, as an investor in the affiliates, and third party investors for the six months ended June 30, 2015 amounted to $8,408 and $45,677, respectively (2014: $11,559 and $45,467).

25
Table of Contents

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


6. Noncontrolling interest
On April 2, 2012, the Company joined with other investors in capitalizing PaCRe Ltd. ("PaCRe"), a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. The Company has an equity interest of 10% and the remaining 90% interest is held by third party investors. The Company has a majority voting equity interest in PaCRe and as a result, the financial statements of PaCRe are included in the Consolidated Financial Statements of the Company. The portion of PaCRe’s earnings attributable to third party investors is recorded in the Consolidated Statements of Comprehensive Income as net (income) attributable to noncontrolling interest. PaCRe's shareholder rights do not include redemption features within the control of the third party shareholders. The third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interest.
The AlphaCat ILS funds have rights that enable shareholders, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interest. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability. On June 1, 2015, the one remaining consolidated AlphaCat ILS fund was deconsolidated and accounted for as an equity method investment. Therefore, the portion of earnings attributable to third party investors from that fund is recorded in the Consolidated Statements of Comprehensive Income as net (income) attributable to noncontrolling interest through May 31, 2015.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interest and noncontrolling interest for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at March 31, 2015
$
98,777

 
$
494,451

 
$
593,228

Issuance of shares
40,000

 
—

 
40,000

Income attributable to noncontrolling interest
2,005

 
15,639

 
17,644

Adjustment to noncontrolling interest as a result of deconsolidation
(121,387
)
 
—

 
(121,387
)
Redemption of shares
(19,395
)
 
—

 
(19,395
)
As at June 30, 2015
$
—

 
$
510,090

 
$
510,090

 
Three Months Ended June 30, 2014
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at March 31, 2014
$
8,390

 
$
540,934

 
$
549,324

Issuance of shares
57,000

 
—

 
57,000

Income attributable to noncontrolling interest
892

 
34,413

 
35,305

As at June 30, 2014
$
66,282

 
$
575,347

 
$
641,629

 
Six Months Ended June 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2014
$
79,956

 
$
458,595

 
$
538,551

Issuance of shares
55,700

 
—

 
55,700

Income attributable to noncontrolling interest
5,126

 
51,495

 
56,621

Adjustment to noncontrolling interest as a result of deconsolidation
(121,387
)
 
—

 
(121,387
)
Redemption of shares
(19,395
)
 
—

 
(19,395
)
As at June 30, 2015
$
—

 
$
510,090

 
$
510,090


26
Table of Contents

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


 
Six Months Ended June 30, 2014
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2013
$
86,512

 
$
497,657

 
$
584,169

Issuance of shares
57,000

 
—

 
57,000

Income attributable to noncontrolling interest
1,124

 
77,690

 
78,814

Adjustment to noncontrolling interest as a result of deconsolidation
(78,354
)
 
—

 
(78,354
)
As at June 30, 2014
$
66,282

 
$
575,347

 
$
641,629

7. Derivative instruments
The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures and interest rate exposures. As at June 30, 2015, the Company held foreign currency forward contracts to mitigate the risk of fluctuations in the U.S. dollar against a number of foreign currencies. As at June 30, 2015, the Company held two interest rate swaps to fix the payment of interest on the Company's 2006 and 2007 Junior Subordinated Deferrable Debentures, as well as three interest rate swaps and one cross-currency interest rate swap to fix the payment of interest and mitigate the foreign exchange rate impact on Flagstone's 2006 and 2007 Junior Subordinated Deferrable Debentures.
As at June 30, 2015, the Company held one foreign currency forward contract to mitigate the risk of fluctuations in the U.S. dollar against the Euro that was not designated as a hedging instrument.
The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments on the Consolidated Balance Sheets at June 30, 2015 and December 31, 2014:
 
 
As at June 30, 2015
 
As at December 31, 2014
Derivatives not designated as hedging instruments:
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
22,039

 
$
—

 
$
1,064

 
$
26,755

 
$
1,685

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses respectively on the Consolidated Balance Sheets. The net impact on earnings during the three and six months ended June 30, 2015, recognized in income within other income, relating to the foreign currency forward contract that was not designated as a hedging instrument was $(128) and $(127), respectively (2014: $nil and $nil).
The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments on the Consolidated Balance Sheets at June 30, 2015 and December 31, 2014:
 
 
As at June 30, 2015
 
As at December 31, 2014
Derivatives designated as hedging instruments:
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
198,775

 
$
1,966

 
$
9,550

 
$
189,026

 
$
401

 
$
3,136

Interest rate swap contracts
 
$
552,263

 
$
21

 
$
1,522

 
$
552,263

 
$
25

 
$
1,169

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively on the Consolidated Balance Sheets.
(a)
Classification within the fair value hierarchy
As described in Note 4: "Fair value measurements" under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The assumptions used within the valuation of the Company's derivative instruments are observable in the marketplace, can be derived from observable data or are supported by observable levels at which other similar transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.

27
Table of Contents

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


(b)
Derivative instruments designated as a fair value hedge
The Company designates its foreign currency derivative instruments as fair value hedges and formally and contemporaneously documents all relationships between the derivative instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items.
The following table provides the total impact on earnings, recognized in income within foreign exchange gains (losses), relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended
 
Six Months Ended
Foreign currency forward contracts
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Amount of (loss) gain recognized in income on derivative
 
$
(7,677
)
 
$
1,535

 
$
(17,790
)
 
$
4,838

Amount of gain (loss) on hedged item recognized in income attributable to risk being hedged
 
$
7,677

 
$
(1,535
)
 
$
17,790

 
$
(4,838
)
Amount of gain (loss) recognized in income on derivative (ineffective portion)
 
$
—

 
$
—

 


 
$
—

(c)
Derivative instruments designated as a cash flow hedge
The Company designates its interest rate derivative instruments as cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items. The Company currently applies the long haul method when assessing the hedge's effectiveness.
The following table provides the total impact on other comprehensive income (loss) and earnings relating to the derivative instruments formally designated as cash flow hedges along with the impact of the related hedged items for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended
 
Six Months Ended
Interest rate swap contracts
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Amount of effective portion recognized in other comprehensive income
 
$
2,846

 
$
3,252

 
$
6,886

 
$
6,460

Amount of effective portion subsequently reclassified to earnings
 
$
(3,236
)
 
$
(3,252
)
 
$
(6,475
)
 
$
(6,460
)
Amount of ineffective portion excluded from effectiveness testing
 
$
390

 
$
—

 
$
(411
)
 
$
—

The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Comprehensive Income.
(d)
Balance sheet offsetting
There was no balance sheet offsetting activity as at June 30, 2015 or December 31, 2014.
The Company currently provides cash collateral as security for interest rate swap contracts. The Company does not provide cash collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.
The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.
8. Reserve for losses and loss expenses
Reserves for losses and loss expenses are based in part upon the estimation of case reserves from broker, insured and ceding company reported data. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses, from which incurred but not reported losses can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to 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, 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 and adjusted 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 this estimate.
The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Reserve for losses and loss expenses, beginning of period
$
3,199,362

 
$
2,925,059

 
$
3,234,394

 
$
3,030,399

Losses and loss expenses recoverable
(375,882
)
 
(348,407
)
 
(377,466
)
 
(370,154
)
Net reserves for losses and loss expenses, beginning of period
2,823,480

 
2,576,652

 
2,856,928

 
2,660,245

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
336,864

 
231,401

 
661,352

 
433,487

Prior years
(70,718
)
 
(72,656
)
 
(154,277
)
 
(112,071
)
Total incurred losses and loss expenses
266,146

 
158,745

 
507,075

 
321,416

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
(28,965
)
 
(16,741
)
 
(42,065
)
 
(24,708
)
Prior years
(256,990
)
 
(199,236
)
 
(492,993
)
 
(449,351
)
Total net paid losses
(285,955
)
 
(215,977
)
 
(535,058
)
 
(474,059
)
Foreign exchange loss (gain)
6,841

 
9,153

 
(18,433
)
 
20,971

Net reserve for losses and loss expenses, end of period
2,810,512

 
2,528,573

 
2,810,512

 
2,528,573

Losses and loss expenses recoverable
376,665

 
338,734

 
376,665

 
338,734

Reserve for losses and loss expenses, end of period
$
3,187,177

 
$
2,867,307

 
$
3,187,177

 
$
2,867,307

During the three months ended June 30, 2015, the Company experienced $70,718 of prior period favorable development compared to $72,656 of prior period favorable development for the three months ended June 30, 2014. Prior period favorable development for the Validus Re segment was $30,879 for the three months ended June 30, 2015 compared to $26,668 for the three months ended June 30, 2014. The favorable development for the three months ended June 30, 2015 was primarily due to lower claims emergence on attritional losses. Prior period favorable development for the Talbot segment was $35,586 for the three months ended June 30, 2015 compared to $42,240 for the three months ended June 30, 2014. The favorable development for the three months ended June 30, 2015 was primarily due to favorable development on attritional losses.
During the six months ended June 30, 2015, the Company experienced $154,277 of prior period favorable development compared to $112,071 of prior period favorable development for the six months ended June 30, 2014. Prior period favorable development for the Validus Re segment was $55,575 for the six months ended June 30, 2015 compared to $36,696 for the six months ended June 30, 2014. The favorable development for the six months ended June 30, 2015 was primarily due to lower claims emergence on attritional losses. Prior period favorable development for the Talbot segment was $87,273 for the six months ended June 30, 2015 compared to $63,767 for the six months ended June 30, 2014. The favorable development for the six months ended June 30, 2015 was primarily due to favorable development on attritional losses.

Incurred losses and loss expenses comprise:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Gross losses and loss expenses
$
303,771

 
$
182,780

 
$
568,567

 
$
364,755

Reinsurance recoverable
(37,625
)
 
(24,035
)
 
(61,492
)
 
(43,339
)
Net incurred losses and loss expenses
$
266,146

 
$
158,745

 
$
507,075

 
$
321,416

9. 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.
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 as rated by Standard & Poor's or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At June 30, 2015, 98.5% (December 31, 2014: 98.0%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses and $244,756 of total IBNR recoverable (December 31, 2014: $231,129)) were fully collateralized or from reinsurers rated A- or better.
Reinsurance recoverables by reinsurer as at June 30, 2015 and December 31, 2014 are as follows:
 
June 30, 2015
 
December 31, 2014
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
340,154

 
81.6
%
 
$
312,205

 
75.1
%
Other reinsurers’ balances > $1 million
67,525

 
16.2
%
 
94,247

 
22.7
%
Other reinsurers’ balances < $1 million
9,184

 
2.2
%
 
9,092

 
2.2
%
Total
$
416,863

 
100.0
%
 
$
415,544

 
100.0
%
 
 
June 30, 2015
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
77,525

 
18.6
%
Lloyd's Syndicates
 
A+
 
76,778

 
18.4
%
Everest Re
 
A+
 
51,255

 
12.3
%
Hannover Re
 
AA-
 
43,188

 
10.4
%
Fully Collateralized
 
NR
 
31,328

 
7.5
%
Munich Re
 
AA-
 
20,463

 
4.9
%
Transatlantic Re
 
A+
 
13,117

 
3.1
%
Hamilton Re
 
A-
 
9,630

 
2.3
%
XL Re
 
A+
 
9,056

 
2.2
%
Helvetia
 
A
 
7,814

 
1.9
%
Total
 
 
 
$
340,154

 
81.6
%

28
Table of Contents

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


NR: Not rated
 
 
December 31, 2014
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
70,848

 
17.0
%
Lloyd's Syndicates
 
A+
 
62,318

 
15.0
%
Everest Re
 
A+
 
51,425

 
12.4
%
Hannover Re
 
AA-
 
40,927

 
9.8
%
Fully Collateralized
 
NR
 
23,315

 
5.6
%
Munich Re
 
AA-
 
19,384

 
4.7
%
Transatlantic Re
 
A+
 
12,418

 
3.0
%
XL Re
 
A+
 
11,114

 
2.7
%
Berkshire Hathaway Homestate
 
AA+
 
10,372

 
2.5
%
Merrimack Mutual Fire Insurance
 
A+
 
10,084

 
2.4
%
Total
 
 
 
$
312,205

 
75.1
%
NR: Not rated
At June 30, 2015 and December 31, 2014, the provision for uncollectible reinsurance relating to reinsurance recoverables was $4,840 and $4,755, respectively. To estimate the provision for uncollectible reinsurance, the reinsurance recoverable is first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied, especially in relation to ceded IBNR. The Company then uses default factors to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined in part using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
10. Share capital
(a)
Authorized and issued
The Company’s authorized share capital is 571,428,571 common shares with a par value of $0.175 per share. The holders of common shares are entitled to receive dividends. Holders of common shares are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company's common share purchase authorization to $750,000. This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company has repurchased 73,444,835 common shares for an aggregate purchase price of $2,374,524 from the inception of its share repurchase program to June 30, 2015. The Company had $649,877 remaining under its authorized share repurchase program as of June 30, 2015.
The Company expects the purchases under its share repurchase program 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.
The following table is a summary of the common shares issued and outstanding:
 
Common Shares
Common shares issued, December 31, 2014
155,554,224

Restricted share awards vested, net of shares withheld
609,654

Restricted share units vested, net of shares withheld
13,260

Options exercised
728,489

Warrants exercised
1,461,715

Direct issuance of common stock
639

Performance share awards vested, net of shares withheld
11,524

Common shares issued, June 30, 2015
158,379,505

Treasury shares, June 30, 2015
(75,083,710
)
Common shares outstanding, June 30, 2015
83,295,795

 
Common Shares
Common shares issued, December 31, 2013
154,488,497

Restricted share awards vested, net of shares withheld
585,535

Restricted share units vested, net of shares withheld
10,265

Options exercised
95,019

Direct issuance of common stock
713

Performance share awards vested, net of shares withheld
25,767

Common shares issued, June 30, 2014
155,205,796

Treasury shares, June 30, 2014
(63,810,857
)
Common shares outstanding, June 30, 2014
91,394,939

(b)
Warrants
During the six months ended June 30, 2015, 1,796,793 warrants were exercised, which resulted in the issuance of 1,461,715 common shares. During the six months ended June 30, 2014, no warrants were exercised. Holders of the outstanding warrants are entitled to exercise the warrants in whole or in part at any time until the expiration date. The total outstanding warrants at June 30, 2015 were 3,377,320 (December 31, 2014: 5,174,114). No further warrants are anticipated to be issued.
(c)
Dividends
On May 7, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on June 30, 2015 to holders of record on June 15, 2015.
On February 3, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on March 31, 2015 to holders of record on March 13, 2015.

11. Stock plans
(a)
Long Term Incentive Plan and Short Term Incentive Plan
The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. 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 14,976,896 shares of which 2,024,427 shares remain available for issuance at June 30, 2015. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs 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 pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.
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.
The Company has not granted any stock options since September 4, 2009.
There were no share compensation expenses in respect of options recognized for the three and six months ended June 30, 2015 and 2014.
Activity with respect to options for the six months ended June 30, 2015 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2014
1,160,057

 
$
7.12

 
$
17.74

Options exercised
(1,040,680
)
 
7.26

 
16.86

Options outstanding, June 30, 2015
119,377

 
$
5.94

 
$
25.46

Activity with respect to options for the six months ended June 30, 2014 was as follows: 
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2013
1,572,713

 
$
6.66

 
$
18.88

Options exercised
(95,019
)
 
4.41

 
24.99

Options outstanding, June 30, 2014
1,477,694

 
$
6.81

 
$
18.48

At June 30, 2015 and December 31, 2014, there were no unrecognized share compensation expenses in respect of options.
ii.
Restricted share awards
Restricted shares granted under the LTIP and STIP vest either pro rata or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three and six months ended June 30, 2015 of $8,653 (2014: $7,920) and $17,132 (2014: $14,921), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share awards for the six months ended June 30, 2015 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2014
2,858,711

 
$
35.81

Restricted share awards granted
670,432

 
43.55

Restricted share awards vested
(781,704
)
 
34.42

Restricted share awards forfeited
(51,818
)
 
38.04

Restricted share awards outstanding, June 30, 2015
2,695,621

 
$
38.09

Activity with respect to unvested restricted share awards for the six months ended June 30, 2014 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2013
2,684,745

 
$
33.74

Restricted share awards granted
920,496

 
37.32

Restricted share awards vested
(753,071
)
 
31.61

Restricted share awards forfeited
(24,632
)
 
34.53

Restricted share awards outstanding, June 30, 2014
2,827,538

 
$
35.46

At June 30, 2015, there were $84,397 (December 31, 2014: $74,670) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.8 years (December 31, 2014: 2.7 years).
iii.
Restricted share units
Restricted share units under the LTIP and STIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three and six months ended June 30, 2015 of $279 (2014: $167) and $541 (2014: $333), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share units for the six months ended June 30, 2015 was as follows:
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2014
103,484

 
$
36.54

Restricted share units granted
28,057

 
42.91

Restricted share units vested
(19,455
)
 
34.58

Restricted share units issued in lieu of cash dividends
1,517

 
36.53

Restricted share units forfeited
(892
)
 
35.42

Restricted share units outstanding, June 30, 2015
112,711

 
$
38.47

Activity with respect to unvested restricted share units for the six months ended June 30, 2014 was as follows:
 
Restricted
Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2013
66,518

 
$
33.74

Restricted share units granted
8,132

 
37.33

Restricted share units vested
(18,325
)
 
30.71

Restricted share units issued in lieu of cash dividends
1,029

 
33.74

Restricted share units outstanding, June 30, 2014
57,354

 
$
35.22

At June 30, 2015, there were $3,380 (December 31, 2014: $2,774) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 3.0 years (December 31, 2014: 3.1 years).
iv.
Performance share awards
The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share (“DBVPS”) over a three-year period relative to the Company's peer group. For performance share awards granted during the period, the grant date Diluted Book Value per Share is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the consolidated statements of comprehensive income in the period in which they are determined.
The Company recognized share compensation expenses during the three and six months ended June 30, 2015 of $310 (2014: $254) and $623 (2014: $234), respectively.
Activity with respect to unvested performance share awards for the six months ended June 30, 2015 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2014
106,369

 
$
36.03

Performance share awards granted
81,569

 
45.03

Performance share awards vested
(15,344
)
 
31.38

Performance share awards outstanding, June 30, 2015
172,594

 
$
40.70

Activity with respect to unvested performance share awards for the six months ended June 30, 2014 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2013
101,820

 
$
33.56

Performance share awards granted
52,639

 
37.33

Performance share awards vested
(32,746
)
 
32.62

Performance share awards conversion adjustment
(15,344
)
 
$
31.38

Performance share awards outstanding, June 30, 2014
106,369

 
$
36.03

At June 30, 2015, there were $5,108 (December 31, 2014: $2,232) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.5 years (December 31, 2014: 2.1 years).
(b)
 Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Restricted share awards
$
8,653

 
$
7,920

 
17,132

 
14,921

Restricted share units
279

 
167

 
541

 
333

Performance share awards
310

 
254

 
623

 
234

Total
$
9,242

 
$
8,341

 
$
18,296

 
$
15,488

 

29
Table of Contents

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


12. Debt and financing arrangements
(a)
Financing structure
The financing structure at June 30, 2015 was:
 
Commitment
 
Issued and outstanding (a)
 
Drawn
2006 Junior Subordinated Deferrable Debentures
$
150,000

 
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
200,000

 
139,800

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
134,482

 
134,482

 
134,482

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
598,232

 
538,032

 
538,032

2010 Senior Notes due 2040
250,000

 
250,000

 
247,360

Total debentures and senior notes payable
848,232

 
788,032

 
785,392

$400,000 syndicated unsecured letter of credit facility
400,000

 
—

 
—

$525,000 syndicated secured letter of credit facility
525,000

 
260,137

 
—

$30,000 secured bi-lateral letter of credit facility
30,000

 
11,139

 
—

Talbot FAL facility
25,000

 
25,000

 
—

AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

IPC bi-lateral facility
25,000

 
11,027

 
—

$230,000 Flagstone bi-lateral facility
230,000

 
204,833

 
—

Total credit and other facilities
1,265,000

 
542,136

 
—

Total debt and financing arrangements
$
2,113,232

 
$
1,330,168

 
$
785,392

The financing structure at December 31, 2014 was:
 
Commitment
 
Issued and outstanding (a)
 
Drawn
2006 Junior Subordinated Deferrable Debentures
$
150,000

 
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
200,000

 
139,800

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
135,727

 
135,727

 
135,727

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
599,477

 
539,277

 
539,277

2010 Senior Notes due 2040
250,000

 
250,000

 
247,306

Total debentures and senior notes payable
849,477

 
789,277

 
786,583

$400,000 syndicated unsecured letter of credit facility
400,000

 
—

 
—

$525,000 syndicated secured letter of credit facility
525,000

 
276,455

 
—

$200,000 secured bi-lateral letter of credit facility
200,000

 
15,649

 
—

Talbot FAL facility
25,000

 
25,000

 
—

PaCRe senior secured letter of credit facility
10,000

 
294

 
—

AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

IPC bi-lateral facility
40,000

 
15,897

 
—

$375,000 Flagstone bi-lateral facility
375,000

 
198,389

 
—

Total credit and other facilities
1,605,000

 
561,684

 
—

Total debt and financing arrangements
$
2,454,477

 
$
1,350,961

 
$
786,583

(a)
Indicates utilization of commitment amount, not necessarily drawn borrowings.

30
Table of Contents

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


(b)
Senior notes and junior subordinated deferrable debentures
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at the issuance date for each placement.
Description
Issuance date
Commitment
Maturity date
Fixed/Spread
 
Interest payments due
2006 Junior Subordinated Deferrable Debentures
June 15, 2006
$
150,000

June 15, 2036
9.069
%
(a)
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
August 23, 2006
$
134,482

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

June 15, 2037
8.480
%
(a)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
June 8, 2007
$
88,750

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

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

January 26, 2040
8.875
%
(a)
Semi-annually in arrears
(a)
Fixed interest rate.
(b)
Variable interest rate is the three-month LIBOR, reset quarterly, plus spread as noted in the table.
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at June 30, 2015:
Description
Issuance date
Commitment
Maturity date
Fixed/Spread
 
Interest payments due
2006 Junior Subordinated Deferrable Debentures
June 15, 2006
$
150,000

June 15, 2036
5.831
%
(b)
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
August 23, 2006
$
134,482

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

June 15, 2037
5.180
%
(b)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
June 8, 2007
$
88,750

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

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

January 26, 2040
8.875
%
(a)
Semi-annually in arrears
(a)
Fixed interest rate.
(b)
Interest rate has been fixed as a result of interest rate swap contracts entered into by the Company.

31
Table of Contents

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


Senior Notes
The Senior Notes due 2040 (the “2010 Senior Notes”) were part of a registered public offering. The 2010 Senior Notes mature on January 26, 2040.  The Company may redeem the notes, in whole at any time, or in part from time to time, at the Company's option on not less than 30 nor more than 60 days’ notice, at a make-whole redemption price as described in “Description of the Notes - Optional Redemption” in the 2010 Senior Notes prospectus supplement. In addition, the Company may redeem the notes, in whole, but not in part, at any time upon the occurrence of certain tax events as described in “Description of the Notes - Redemption for Tax Purposes” in the prospectus supplement.
Debt issuance costs were deferred as an asset and are amortized over the life of the 2010 Senior Notes. There were no redemptions made during the three and six months ended June 30, 2015 and 2014.
The 2010 Senior Notes are unsecured and unsubordinated obligations of the Company and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 2010 Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 2010 Senior Notes are structurally subordinated to all obligations of the Company’s subsidiaries.
Future payments of principal of $250,000 on the 2010 Senior Notes are all expected to be after 2020.
Junior subordinated deferrable debentures
The Company participated in private placements of junior subordinated deferrable interest debentures due 2036 and 2037 (respectively, the “2006 Junior Subordinated Deferrable Debentures” and “2007 Junior Subordinated Deferrable Debentures”).
Debt issuance costs for the 2006 and 2007 Junior Subordinated Deferrable Debentures were deferred as an asset and were amortized to income over the five year optional redemption periods. They are redeemable at the Company's option at par. There were no redemptions made during the three and six months ended June 30, 2015 and 2014.
As part of the acquisition of Flagstone, the Company assumed junior subordinated deferrable debentures due 2036 and 2037 (respectively, the “Flagstone 2006 Junior Subordinated Deferrable Debentures” and “Flagstone 2007 Junior Subordinated Deferrable Debentures”). These debentures are redeemable quarterly at par. There were no redemptions made during the three and six months ended June 30, 2015 and 2014.
Future payments of principal of $538,032 on the debentures discussed above are all expected to be after 2020.
(c)
Credit facilities
i.
$400,000 syndicated unsecured letter of credit facility and $525,000 syndicated secured letter of credit facility
On March 9, 2012, the Company entered into a $400,000 four-year unsecured credit facility with various counter parties as co-documentation agents and the lenders party thereto, which provides for letter of credit and revolving credit availability for the Company (the “Four Year Unsecured Facility”) (the full $400,000 of which is available for letters of credit and/or revolving loans). The Four Year Unsecured Facility was provided by a syndicate of commercial banks. Letters of credit under the Four Year Unsecured Facility are available to support obligations in connection with the insurance business of the Company and its subsidiaries. Loans under the Four Year Unsecured Facility are available for the general corporate and working capital purposes of the Company. The Company may request that existing lenders under the Four Year Unsecured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Unsecured Facility do not exceed $500,000.
Also on March 9, 2012, the Company entered into a $525,000 four-year secured credit facility, with the same parties, which provides for letter of credit availability for the Company (the “Four Year Secured Facility” and together with the Four Year Unsecured Facility, the “Credit Facilities”). The Four Year Secured Facility was also provided by a syndicate of commercial banks. Letters of credit under the Four Year Secured Facility will be available to support obligations in connection with the insurance business of the Company. The Company may request that existing lenders under the Four Year Secured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Secured Facility do not exceed $700,000. The obligations of the Company under the Four Year Secured Facility are secured by cash and securities deposited into cash collateral accounts from time to time with The Bank of New York Mellon.

32
Table of Contents

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


As of June 30, 2015, there were $260,137 in outstanding letters of credit under the Four Year Secured Facility (December 31, 2014: $276,455) and $nil (December 31, 2014: $nil) outstanding under the Four Year Unsecured Facility.
The Credit Facilities contain covenants that include, among other things (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $2,600,000 and, commencing with the end of the fiscal quarter ending March 31, 2012, to be increased quarterly by an amount equal to 50.0% of the Company’s consolidated net income (if positive) for such quarter plus 50.0% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Reinsurance, Ltd. and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair).  In addition, the Credit Facilities contain customary negative covenants applicable to the Company, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type. As of June 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
ii.
$25,000 Talbot FAL facility
On November 19, 2013, Validus Holdings, Ltd. (“Validus Holdings”), as Guarantor, and its wholly-owned subsidiary, Talbot Holdings Ltd. (“Talbot Holdings”), as Borrower, entered into an Amendment and Restatement Agreement relating to its $25,000 Funds-at-Lloyd’s Standby Letter of Credit Facility (the “Facility”) which amends the Facility to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2015 and prior underwriting years of account (the “Restated Facility”). The Restated Facility was provided and arranged by Lloyds Bank plc and ING Bank N.V., London Branch. The Restated Facility provides for the issuance of up to $25,000 (denominated in US Dollars or Pound Sterling) of secured letters of credit to be issued for the benefit of Lloyd’s of London. The existing $25,000 secured letter of credit will be extended to provide for an extended termination date covering the 2015, 2016 and prior underwriting years of account under the Restated Facility.
The Restated Facility contains affirmative covenants that include, among other things, (i) the requirement that Validus Holdings and its subsidiaries initially maintain a minimum level of consolidated net worth of at least $3,225,727, and commencing with the fiscal quarter ending September 30, 2013, to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of the aggregate increases in our consolidated shareholder’s equity interests by reason of issuance and sale of Validus Holdings’ common equity interests including upon any conversion of Validus Holdings’ debt securities into equity interests during such quarter and (ii) the requirement that Validus Holdings and its subsidiaries maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00. The Restated Facility defines net worth to include preferred and preference securities and “hybrid” securities (which includes Validus Holdings’ and its Flagstone subsidiaries’ Junior Subordinated Deferrable Debentures). The Restated Facility also requires that Talbot Holdings maintain at least $300,000 of its own Funds at Lloyd’s, and to obtain a letter of comfort from Lloyd’s of London confirming that Lloyd’s of London will take into account a requested order of drawdown to drawdown Talbot Holdings’ own Funds at Lloyd’s ahead of letters of credit issued under the Facility.
The Restated Facility also contains restrictions on Validus Holdings’ ability to pay dividends and other payments in respect of equity interests at any time that it is otherwise in default under the Facility (with certain exceptions for dividends in respect of preferred securities and hybrid securities, which are only limited during the continuance of certain specified defaults), incur debt at its subsidiaries level, transact with affiliates, incur liens, sell assets and merge or consolidate with others and other restrictions customary for transactions of this type, in each case subject to agreed exceptions.
Secured letter of credit availability under the Restated Facility is subject to a borrowing base limitation comprised of (a) the aggregate amount of cash and eligible securities owned by Validus Reinsurance, Ltd. and placed in a collateral account subject to a customary account control agreement in favor of the lenders and agents under the Restated Facility multiplied by (b) an agreed upon advance rate applicable for each category of cash and eligible securities. Obligations in respect of secured letters of credit under the Restated Facility are secured by a first-priority security interest on the cash and eligible securities comprising the borrowing base in favor of the trustee under the Restated Facility.

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


The Restated Facility contains representations and warranties customary for facilities of this type. The Restated Facility also contains customary events of default including without limitation, with agreed grace periods and thresholds, failure to make payments due under the Restated Facility, material inaccuracy of representations and warranties, breach of covenants, cross defaults to material indebtedness, bankruptcy defaults, judgments defaults, and failure to maintain certain material insurance licenses.
As of June 30, 2015, the Company had $25,000 (December 31, 2014: $25,000) in outstanding letters of credit under the Talbot FAL facility.
As of June 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL facility.
iii.
$25,000 IPC bi-lateral facility
The Company assumed an existing evergreen letter of credit facility through the acquisition of IPC Holdings, Ltd. (the "IPC bi-lateral facility"). As of June 30, 2015, there were $11,027 outstanding letters of credit issued under the IPC bi-lateral facility (December 31, 2014: $15,897). As of June 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.
iv.
$30,000 secured bi-lateral letter of credit facility
The Company is party to an evergreen secured bi-lateral letter of credit facility with Citibank Europe plc (the “Secured bi-lateral letter of credit facility”). As of June 30, 2015, $11,139 (December 31, 2014: $15,649) of letters of credit were outstanding under the Secured bi-lateral letter of credit facility. The Secured bi-lateral letter of credit facility has no fixed termination date and as of June 30, 2015, and throughout the reporting periods presented, the Company is in compliance with all terms and covenants thereof. During the period ended March 31, 2015 the size of the facility was decreased to $30,000 from $200,000.
v.
$10,000 PaCRe senior secured letter of credit facility
On May 11, 2012, PaCRe and its subsidiary, PaCRe Investments, Ltd. entered into a secured evergreen credit and letter of credit facility with JPMorgan Chase Bank, N.A. This facility provides for revolving borrowings by PaCRe and for letters of credit issued by PaCRe to be used to support its reinsurance obligations. This facility was terminated on May 29, 2015; therefore, as of June 30, 2015, $nil (December 31, 2014: $294) letters of credit were outstanding under this facility. As of the termination date, and throughout the reporting periods presented, PaCRe was in compliance with all covenants and restrictions thereof.
vi.
$30,000 AlphaCat Re secured letter of credit facility
In 2013, AlphaCat Re entered into a secured evergreen letter of credit facility with Comerica Bank. This facility provided for letters of credit issued by AlphaCat Re to be used to support its reinsurance obligations in the aggregate amount of $24,800. During the period ended March 31, 2014 the size of the facility was increased to $30,000 from $24,800. As of June 30, 2015, $30,000 (December 31, 2014: $30,000) of letters of credit were outstanding under this facility. As of June 30, 2015, and throughout the reporting periods presented, AlphaCat Re was in compliance with all covenants and restrictions thereof.
vii.
$230,000 Flagstone bi-lateral facility
As part of the Flagstone Acquisition, the Company assumed an evergreen Letters of Credit Master Agreement between Citibank Europe Plc and Flagstone Reassurance Suisse, S.A. (the “Flagstone Bi-Lateral Facility”). At June 30, 2015, the Flagstone Bi-Lateral Facility had $204,833 (December 31, 2014: $198,389) letters of credit issued and outstanding. As of June 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility. During the period ended March 31, 2015 the size of the facility was decreased to $230,000 from $375,000.

34
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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(d)
Finance expenses
Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facilities fees, bank charges, AlphaCat financing fees and Talbot FAL costs as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
2006 Junior Subordinated Deferrable Debentures
$
2,211

 
$
2,211

 
$
4,398

 
$
4,398

2007 Junior Subordinated Deferrable Debentures
1,835

 
1,835

 
3,644

 
3,644

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,243

 
2,244

 
4,461

 
4,467

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,770

 
1,778

 
3,528

 
3,528

2010 Senior Notes due 2040
5,597

 
5,597

 
11,194

 
11,194

Credit facilities
1,193

 
1,371

 
2,900

 
2,930

Bank charges
163

 
102

 
261

 
215

AlphaCat ILS fund fees (a)
2,680

 
969

 
7,108

 
1,646

Talbot FAL Facility
43

 
19

 
93

 
4

Total finance expenses
$
17,735

 
$
16,126

 
$
37,587

 
$
32,026

(a)
Includes finance expenses incurred by AlphaCat Managers, Ltd. in relation to fund raising for the AlphaCat ILS funds, AlphaCat 2015, AlphaCat 2014 and AlphaCat 2013.

35
Table of Contents

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


13. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three and six months ended June 30, 2015 and 2014 is as follows:
Three Months Ended June 30, 2015
Foreign currency items
 
Decrease in minimum pension liability
 
Losses on cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(11,137
)
 
$
(475
)
 
$
(1,029
)
 
$
(12,641
)
Net current period other comprehensive income, net of tax
2,763

 
422

 
390

 
3,575

Balance end of period, net of tax
$
(8,374
)
 
$
(53
)
 
$
(639
)
 
$
(9,066
)
Three Months Ended June 30, 2014
Foreign currency items
 
Total
Balance beginning of period, net of tax
$
(155
)
 
$
(155
)
Net current period other comprehensive income, net of tax
2,615

 
2,615

Balance end of period, net of tax
$
2,460

 
$
2,460

Six Months Ended June 30, 2015
Foreign currency items
 
Decrease in minimum pension liability
 
Losses on cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(8,118
)
 
$
(210
)
 
$
(228
)
 
$
(8,556
)
Net current period other comprehensive (loss) income, net of tax
(256
)
 
157

 
(411
)
 
(510
)
Balance end of period, net of tax
$
(8,374
)
 
$
(53
)
 
$
(639
)
 
$
(9,066
)
Six Months Ended June 30, 2014
Foreign currency items
 
Total
Balance beginning of period, net of tax
$
(617
)
 
$
(617
)
Net current period other comprehensive income, net of tax
3,077

 
3,077

Balance end of period, net of tax
$
2,460

 
$
2,460



36
Table of Contents

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


14. Commitments and contingencies
(a)
Concentrations of credit risk
The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets,” such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.5% or less of total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's non-investment grade bank loan portfolio, which represents 7.3% of total managed cash and investments as at June 30, 2015, and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. Managed cash and investments consist of total cash and investments less assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interests. In total, investments in below investment grade securities are limited to no more than 10% of the Company's managed cash and investment portfolio. As at June 30, 2015, 9.1% of the Company's total managed cash and investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.7% of managed cash and investments, other than with respect to government and agency securities as at June 30, 2015.
(b)
Funds at Lloyd's
The amounts provided under the Talbot FAL Facility would become a liability of the Company in the event of Syndicate 1183 declaring a loss at a level which would call on this arrangement.
Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.
The amounts of cash, investments and letters of credit provided for each year of account as follows:
 
2015 Underwriting Year
 
2014 Underwriting Year
Talbot FAL facility
$
25,000

 
$
25,000

Group funds
570,100

 
450,000

Total
$
595,100

 
$
475,000

The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends. See Note 3 (d) for investments pledged as collateral.
(c)
Lloyd's Central Fund
Whenever a member of Lloyd's is unable to pay its debts to policyholders, such debts may be payable by the Lloyd's Central Fund. If Lloyd's determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd's members up to 3% of a member's underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company's 2015 estimated premium income at Lloyd's of £625,000, at the June 30, 2015 exchange rate of £1 equals $1.57 and assuming the maximum 3% assessment, the Company would be assessed approximately $29,438.
(d)
Investment in affiliate commitments
As discussed in Note 5 "Investments in affiliates," on December 20, 2011 the Company entered into an Assignment and Assumption Agreement with Aquiline Capital Partners LLC, pursuant to which it assumed total capital commitments of $50,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company’s remaining commitment at June 30, 2015 was $142 (December 31, 2014: $7,500).

37
Table of Contents

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


On October 2, 2014, the Company assumed an additional investment in Aquiline Capital Partners II GP (Offshore) Ltd. as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company's remaining capital commitment at June 30, 2015 was $nil (December 31, 2014: $1,499).
On November 7, 2014, the Company entered into a Subscription Agreement with Aquiline Capital Partners III GP (Offshore) Ltd., pursuant to which it assumed total capital commitments of $100,000 in respect of Limited Partnership Interests in Aquiline Financial Services Fund III L.P. (the "Fund"). The Limited Partnership Interests are governed by the terms of the Aquiline III Limited Partnership Agreement dated November 7, 2014. The Company’s remaining commitment at June 30, 2015 was $85,862 (December 31, 2014: $100,000).
On December 29, 2014, the Company entered into an agreement with AlphaCat 2015 pursuant to which it assumed total capital commitments of $28,000. The Company’s remaining commitment at June 30, 2015 was $nil (December 31, 2014: $2,400).
On December 29, 2014, the Company entered into an agreement with an AlphaCat ILS fund pursuant to which it assumed total capital commitments of $20,000. The Company’s remaining commitment at June 30, 2015 was $nil (December 31, 2014: $8,000).
(e)
Fixed maturity commitment
As at June 30, 2015, the Company had an outstanding commitment to participate in certain revolving loan facilities through participation agreements with an established loan originator. The undrawn amount under the revolver facility participations as at June 30, 2015 was $20,272 (December 31, 2014: $7,539).
(f)
Other investment commitments
At June 30, 2015, the Company had capital commitments in other investments of $153,000 (December 31, 2014: $153,000). The Company's remaining commitment to these investments at June 30, 2015 was $78,732 (December 31, 2014: $83,712).
(g)
Multi-Beneficiary Reinsurance Trust ("MBRT")
In December 2014, the Company established an MBRT to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As at June 30, 2015, the Company was approved in a total of 41 jurisdictions. As a result, cedants domiciled in those jurisdictions will receive automatic credit in their regulatory filings for reinsurance provided by the Company.
(h)
Income tax examinations
The Company has open examinations by the U.K. HM Revenue and Customs for the tax years 2011 to 2013 and the Company believes that these examinations will be concluded within the next 12 months.

38
Table of Contents

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


15. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counter party are members of the Company's board of directors.
Aquiline Capital Partners, LLC and its related companies ("Aquiline"), which hold warrants to purchase 2,756,088 shares, and have two employees on the Company's Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. ("Group Ark"). Christopher E. Watson, a director of the Company, serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the three and six months ended June 30, 2015 of $526 (2014: $1,694) and $2,396 (2014: $3,067), respectively with $1,945 included in premiums receivable at June 30, 2015 (December 31, 2014: $335). The Company also recognized reinsurance premiums ceded during the three and six months ended June 30, 2015 of $(28) (2014: $nil) and $1 (2014: $nil) and had reinsurance balances payable of $4 at June 30, 2015 (December 31, 2014: $4). The Company recorded $1,089 of loss reserves recoverable at June 30, 2015 (December 31, 2014: $1,063). Earned premium adjustments of $534 (2014: $642) and $1,317 (2014: $2,083) were recorded during the three and six months ended June 30, 2015.
On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. ("Conning") to manage a portion of the Company's investment portfolio. Aquiline acquired Conning on June 16, 2009. Jeffrey W. Greenberg, a director of the Company, serves as a director of Conning Holdings Corp., the parent company of Conning. Investment management fees earned by Conning for the three and six months ended June 30, 2015 were $120 (2014: $170) and $405 (2014: $226) respectively, with $482 included in accounts payable and accrued expenses at June 30, 2015 (December 31, 2014: $515).
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. Messrs. Greenberg and Watson, directors of the Company, serve as managing principal and senior principal, respectively, of Aquiline Capital Partners LLC. For the three and six months ended June 30, 2015, the Company incurred $489 (2014: $nil) and $937 (2014: $nil) in partnership fees and made capital contributions of $3,415 (2014: $nil) and $8,977 (2014: $nil), with $nil included in accounts payable and accrued expenses at June 30, 2015 (December 31, 2014: $nil).
On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company is committing and agreeing to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline Financial Services III Partnership. For the three months ended June 30, 2015, the Company incurred no partnership fees and made no capital contributions. For the six months ended June 30, 2015, the Company incurred partnership fees of $nil and made capital contributions of $14,138, with $nil included in accounts payable and accrued expenses at June 30, 2015 (December 31, 2014: $nil).
Certain shareholders of the Company and their affiliates, as well as employers of entities associated with directors or officers have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company believes these transactions were settled for arm's length consideration.


39
Table of Contents

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


16. Earnings per share
The following table sets forth the computation of basic and earnings per diluted share for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
Basic earnings per share
 
 
 
 
 

 
 

Net income
$
81,657


$
188,672


$
294,045


$
394,569

Income attributable to noncontrolling interest
(17,644
)

(35,305
)

(56,621
)

(78,814
)
Net income available to Validus
64,013


153,367


237,424


315,755

Less: Dividends and distributions declared on outstanding warrants
(1,081
)
 
(1,552
)
 
(2,486
)
 
(3,104
)
Income available to common shareholders
$
62,932

 
$
151,815

 
$
234,938

 
$
312,651

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
84,003,549

 
90,952,523

 
83,627,396

 
92,202,261

 
 
 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.75

 
$
1.67

 
$
2.81

 
$
3.39

 
 
 
 
 
 
 
 
Earnings per diluted share
 
 
 
 
 

 
 

Net income
$
81,657

 
$
188,672

 
$
294,045

 
$
394,569

Income attributable to noncontrolling interest
(17,644
)
 
(35,305
)
 
(56,621
)
 
(78,814
)
Net income available to Validus
64,013

 
153,367

 
237,424

 
315,755

Less: Dividends and distributions declared on outstanding warrants
—

 
—

 
—

 
—

Income available to common shareholders
$
64,013

 
$
153,367

 
$
237,424

 
$
315,755

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
84,003,549

 
90,952,523

 
83,627,396

 
92,202,261

Share equivalents:
 
 
 
 
 
 
 
Warrants
2,073,231

 
2,729,226

 
2,409,149

 
2,722,618

Stock options
50,160

 
745,800

 
261,792

 
748,085

Unvested restricted shares
1,186,214

 
849,287

 
1,149,805

 
865,214

Weighted average number of diluted common shares outstanding
87,313,154

 
95,276,836

 
87,448,142

 
96,538,178

 
 
 
 
 
 
 
 
Earnings per diluted share available to common shareholders
$
0.73

 
$
1.61

 
$
2.72

 
$
3.27

Share equivalents that would result in the issuance of 630,174 common shares (2014: 689,169) were outstanding for the six months ended June 30, 2015, but were not included in the computation of earnings per diluted share because the effect would be antidilutive.

40
Table of Contents

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


17. Segment information
The Company conducts its operations worldwide through four operating segments, which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment requires different strategies.
Validus Re Segment
The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers’ compensation, crisis management, contingency, motor, technical lines, composite and trade credit.
AlphaCat Segment
The AlphaCat segment manages strategic relationships that leverage the Company’s underwriting and investment expertise and earns management, performance and underwriting fees primarily from the Company’s operating affiliates, AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014 and AlphaCat 2015, as well as PaCRe, the AlphaCat ILS funds and the BetaCat ILS funds.
Talbot Segment
The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial lines, contingency, accident & health and aviation classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Western World Segment
The Western World segment is focused on providing commercial insurance products on a surplus lines and specialty admitted basis. Western World specializes in underwriting classes of business that are not easily placed in the standard insurance market due to their complexity, high hazard, or unusual nature; including general liability, property and professional liability classes of business.
Corporate and eliminations
The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group. Corporate includes ‘non-core’ underwriting expenses, predominantly general and administrative and stock compensation expenses. Corporate also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, corporate is reflected separately, however corporate is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of inter segment revenues and expenses and unusual items that are not allocated to segments.

41
Table of Contents

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


The following tables summarize the results of our operating segments and "Corporate":
Three Months Ended June 30, 2015
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Corporate & Eliminations
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

 
 

Gross premiums written
 
$
296,895

 
$
64,117

 
$
293,046

 
$
79,554

 
$
(6,644
)
 
$
726,968

Reinsurance premiums ceded
 
(18,853
)
 
—

 
(37,246
)
 
(5,441
)
 
6,644

 
(54,896
)
Net premiums written
 
278,042

 
64,117

 
255,800

 
74,113

 
—

 
672,072

Change in unearned premiums
 
(13,492
)
 
(25,641
)
 
(50,362
)
 
(8,995
)
 
—

 
(98,490
)
Net premiums earned
 
264,550

 
38,476

 
205,438

 
65,118

 
—

 
573,582

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
123,405

 
—

 
95,970

 
46,771

 
—

 
266,146

Policy acquisition costs
 
43,826

 
3,844

 
47,659

 
9,617

 
(521
)
 
104,425

General and administrative expenses
 
18,781

 
3,526

 
35,555

 
8,923

 
16,178

 
82,963

Share compensation expenses
 
2,396

 
150

 
3,024

 
494

 
3,178

 
9,242

Total underwriting deductions
 
188,408

 
7,520

 
182,208

 
65,805

 
18,835

 
462,776

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
76,142

 
$
30,956

 
$
23,230

 
$
(687
)
 
$
(18,835
)
 
$
110,806

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
20,080

 
1,754

 
6,406

 
5,723

 
(355
)
 
33,608

Other insurance related income (loss)
 
434

 
3,755

 
40

 
276

 
(1,357
)
 
3,148

Finance expenses
 
(3,573
)
 
(2,591
)
 
(87
)
 
—

 
(11,484
)
 
(17,735
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
93,083

 
33,874

 
29,589

 
5,312

 
(32,031
)
 
129,827

Tax (expense) benefit
 
(2,745
)
 
—

 
(2,262
)
 
3,734

 
(1,276
)
 
(2,549
)
Income from operating affiliates
 
—

 
4,104

 
—

 
—

 
—

 
4,104

(Income) attributable to operating affiliate investors
 
—

 
(30,879
)
 
—

 
—

 
—

 
(30,879
)
Net operating income (loss)
 
$
90,338

 
$
7,099

 
$
27,327

 
$
9,046

 
$
(33,307
)
 
$
100,503

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
420

 
140

 
1,070

 
614

 
—

 
2,244

Change in net unrealized (losses) gains on investments
 
(13,360
)
 
16,396

 
(9,011
)
 
(11,204
)
 
(351
)
 
(17,530
)
Income (loss) from investment affiliate
 
429

 
—

 
—

 
(145
)
 
—

 
284

Foreign exchange (losses) gains
 
(1,106
)
 
1

 
(782
)
 
—

 
(1,349
)
 
(3,236
)
Other loss
 
(608
)
 
—

 
—

 
—

 
—

 
(608
)
Net income (loss)
 
$
76,113

 
$
23,636

 
$
18,604

 
$
(1,689
)
 
$
(35,007
)
 
$
81,657

 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(17,644
)
 
—

 
—

 
—

 
(17,644
)
Net income (loss) available (attributable) to Validus
 
$
76,113

 
$
5,992

 
$
18,604

 
$
(1,689
)
 
$
(35,007
)
 
$
64,013

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
93.6
%
 
100.0
%
 
87.3
%
 
93.2
%
 
 
 
92.4
%
Losses and loss expenses
 
46.6
%
 
0.0
%
 
46.7
%
 
71.8
%
 
 
 
46.4
%
Policy acquisition costs
 
16.6
%
 
10.0
%
 
23.2
%
 
14.8
%
 
 
 
18.2
%
General and administrative expenses (b)
 
8.0
%
 
9.5
%
 
18.8
%
 
14.5
%
 
 
 
16.1
%
Expense ratio
 
24.6
%
 
19.5
%
 
42.0
%
 
29.3
%
 
 
 
34.3
%
Combined ratio
 
71.2
%
 
19.5
%
 
88.7
%
 
101.1
%
 
 
 
80.7
%
Total assets
 
$
4,654,428

 
$
2,279,493

 
$
2,936,589

 
$
1,490,254

 
$
64,532

 
$
11,425,296

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expenses ratio includes share compensation expenses.

42
Table of Contents

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


Three Months Ended June 30, 2014
 
Validus Re Segment (c)
 
AlphaCat Segment
 
Talbot Segment
 
Corporate & Eliminations (c)
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

Gross premiums written
 
$
301,273

 
$
43,790

 
$
317,944

 
$
(7,333
)
 
$
655,674

Reinsurance premiums ceded
 
(21,522
)
 
—

 
(36,376
)
 
7,333

 
(50,565
)
Net premiums written
 
279,751

 
43,790

 
281,568

 
—

 
605,109

Change in unearned premiums
 
(58,023
)
 
(11,330
)
 
(69,753
)
 
—

 
(139,106
)
Net premiums earned
 
221,728

 
32,460

 
211,815

 
—

 
466,003

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
77,688

 
(3,033
)
 
84,090

 
—

 
158,745

Policy acquisition costs
 
31,125

 
3,056

 
45,593

 
(821
)
 
78,953

General and administrative expenses
 
17,040

 
3,780

 
34,173

 
18,849

 
73,842

Share compensation expenses
 
2,336

 
161

 
2,862

 
2,982

 
8,341

Total underwriting deductions
 
128,189

 
3,964

 
166,718

 
21,010

 
319,881

 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
93,539

 
$
28,496

 
$
45,097

 
$
(21,010
)
 
$
146,122

 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
16,265

 
829

 
4,671

 
(479
)
 
21,286

Other insurance related income (loss)
 
545

 
6,005

 
258

 
(1,997
)
 
4,811

Finance expenses
 
(3,670
)
 
(971
)
 
(68
)
 
(11,417
)
 
(16,126
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
106,679

 
34,359

 
49,958

 
(34,903
)
 
156,093

Tax (expense) benefit
 
(460
)
 
—

 
(1,364
)
 
433

 
(1,391
)
Income from operating affiliates
 
—

 
4,892

 
—

 
—

 
4,892

(Income) attributable to operating affiliate investors
 
—

 
(25,316
)
 
—

 
—

 
(25,316
)
Net operating income (loss)
 
$
106,219

 
$
13,935

 
$
48,594

 
$
(34,470
)
 
$
134,278

 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
1,324

 
6,442

 
92

 
—

 
7,858

Change in net unrealized gains on investments
 
12,661

 
30,087

 
2,679

 
—

 
45,427

Income from investment affiliate
 
779

 
—

 
—

 
—

 
779

Foreign exchange gains (losses)
 
2,848

 
(191
)
 
1,367

 
(866
)
 
3,158

Other income
 
424

 
—

 
—

 
—

 
424

Transaction expenses
 
—

 
—

 
—

 
(3,252
)
 
(3,252
)
Net income (loss)
 
$
124,255

 
$
50,273

 
$
52,732

 
$
(38,588
)
 
$
188,672

 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(35,305
)
 
—

 
—

 
(35,305
)
Net income (loss) available (attributable) to Validus
 
$
124,255

 
$
14,968

 
$
52,732

 
$
(38,588
)
 
$
153,367

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
92.9
%
 
100.0
 %
 
88.6
%
 
 
 
92.3
%
Losses and loss expenses
 
35.0
%
 
(9.3
)%
 
39.7
%
 
 
 
34.1
%
Policy acquisition costs
 
14.1
%
 
9.4
 %
 
21.5
%
 
 
 
16.9
%
General and administrative expenses (b)
 
8.7
%
 
12.1
 %
 
17.5
%
 
 
 
17.6
%
Expense ratio
 
22.8
%
 
21.5
 %
 
39.0
%
 
 
 
34.5
%
Combined ratio
 
57.8
%
 
12.2
 %
 
78.7
%
 
 
 
68.6
%
Total assets
 
$
5,674,201

 
$
1,651,256

 
$
3,004,163

 
$
156,690

 
$
10,486,310

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.
(c)
Beginning in the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written and reinsurance premiums ceded for the Validus Re segment and Corporate & Eliminations were reduced by $9,013 for the three months ended June 30, 2014 for comparative purposes. There was no impact to total gross premiums written and reinsurance premiums ceded on a consolidated basis.

43
Table of Contents

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


Six Months Ended June 30, 2015
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Corporate & Eliminations
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

 
 

Gross premiums written
 
$
1,008,107

 
$
166,681

 
$
563,123

 
$
136,501

 
$
(27,946
)
 
$
1,846,466

Reinsurance premiums ceded
 
(132,149
)
 
(4,538
)
 
(128,321
)
 
(8,674
)
 
27,946

 
(245,736
)
Net premiums written
 
875,958

 
162,143

 
434,802

 
127,827

 
—

 
1,600,730

Change in unearned premiums
 
(358,320
)
 
(89,472
)
 
(6,775
)
 
5,173

 
—

 
(449,394
)
Net premiums earned
 
517,638

 
72,671

 
428,027

 
133,000

 
—

 
1,151,336

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
236,533

 
(844
)
 
174,098

 
97,288

 
—

 
507,075

Policy acquisition costs
 
85,920

 
7,504

 
96,763

 
13,896

 
(1,022
)
 
203,061

General and administrative expenses
 
38,290

 
7,528

 
72,049

 
19,550

 
30,574

 
167,991

Share compensation expenses
 
4,974

 
299

 
5,981

 
971

 
6,071

 
18,296

Total underwriting deductions
 
365,717

 
14,487

 
348,891

 
131,705

 
35,623

 
896,423

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
151,921

 
$
58,184

 
$
79,136

 
$
1,295

 
$
(35,623
)
 
$
254,913

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
38,332

 
3,339

 
12,711

 
11,026

 
(779
)
 
64,629

Other insurance related income (loss)
 
749

 
9,526

 
94

 
539

 
(2,928
)
 
7,980

Finance expenses
 
(7,444
)
 
(7,107
)
 
(174
)
 
—

 
(22,862
)
 
(37,587
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
183,558

 
63,942

 
91,767

 
12,860

 
(62,192
)
 
289,935

Tax (expense) benefit
 
(865
)
 
—

 
(3,145
)
 
11

 
(1,115
)
 
(5,114
)
Income from operating affiliates
 
—

 
6,557

 
—

 
—

 
—

 
6,557

(Income) attributable to operating affiliate investors
 
—

 
(54,085
)
 
—

 
—

 
—

 
(54,085
)
Net operating income (loss)
 
$
182,693

 
$
16,414

 
$
88,622

 
$
12,871

 
$
(63,307
)
 
$
237,293

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
2,229

 
129

 
1,941

 
2,114

 
—

 
6,413

Change in net unrealized gains (losses) on investments
 
6,333

 
53,931

 
(1,100
)
 
(4,066
)
 
(424
)
 
54,674

Income from investment affiliate
 
2,362

 
—

 
—

 
698

 
—

 
3,060

Foreign exchange (losses) gains
 
(6,130
)
 
(94
)
 
(1,267
)
 
—

 
704

 
(6,787
)
Other loss
 
(608
)
 
—

 
—

 
—

 
—

 
(608
)
Net income (loss)
 
$
186,879

 
$
70,380

 
$
88,196

 
$
11,617

 
$
(63,027
)
 
$
294,045

 
 
 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(56,621
)
 
—

 
—

 
—

 
(56,621
)
Net income (loss) available (attributable) to Validus
 
$
186,879

 
$
13,759

 
$
88,196

 
$
11,617

 
$
(63,027
)
 
$
237,424

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
86.9
%
 
97.3
 %
 
77.2
%
 
93.6
%
 
 
 
86.7
%
Losses and loss expenses
 
45.7
%
 
(1.2
)%
 
40.7
%
 
73.1
%
 
 
 
44.0
%
Policy acquisition costs
 
16.6
%
 
10.3
 %
 
22.6
%
 
10.5
%
 
 
 
17.7
%
General and administrative expenses (b)
 
8.4
%
 
10.8
 %
 
18.2
%
 
15.4
%
 
 
 
16.2
%
Expense ratio
 
25.0
%
 
21.1
 %
 
40.8
%
 
25.9
%
 
 
 
33.9
%
Combined ratio
 
70.7
%
 
19.9
 %
 
81.5
%
 
99.0
%
 
 
 
77.9
%
Total assets
 
$
4,654,428

 
$
2,279,493

 
$
2,936,589

 
$
1,490,254

 
$
64,532

 
$
11,425,296

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expenses ratio includes share compensation expenses.

44
Table of Contents

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


Six Months Ended June 30, 2014
 
Validus Re Segment (c)
 
AlphaCat Segment
 
Talbot Segment
 
Corporate & Eliminations (c)
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

Gross premiums written
 
$
967,436

 
$
128,137

 
$
608,639

 
$
(36,547
)
 
$
1,667,665

Reinsurance premiums ceded
 
(151,339
)
 
(3,700
)
 
(126,981
)
 
36,547

 
(245,473
)
Net premiums written
 
816,097

 
124,437

 
481,658

 
—

 
1,422,192

Change in unearned premiums
 
(355,983
)
 
(61,294
)
 
(55,955
)
 
—

 
(473,232
)
Net premiums earned
 
460,114

 
63,143

 
425,703

 
—

 
948,960

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
145,843

 
(10,893
)
 
186,466

 
—

 
321,416

Policy acquisition costs
 
70,370

 
6,036

 
90,521

 
(2,325
)
 
164,602

General and administrative expenses
 
35,235

 
7,908

 
69,322

 
35,822

 
148,287

Share compensation expenses
 
4,544

 
151

 
5,444

 
5,349

 
15,488

Total underwriting deductions
 
255,992

 
3,202

 
351,753

 
38,846

 
649,793

 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
204,122

 
$
59,941

 
$
73,950

 
$
(38,846
)
 
$
299,167

 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
34,540

 
1,709

 
9,357

 
(958
)
 
44,648

Other insurance related income (loss)
 
1,522

 
15,502

 
275

 
(4,451
)
 
12,848

Finance expenses
 
(7,509
)
 
(1,654
)
 
(94
)
 
(22,769
)
 
(32,026
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors
 
232,675

 
75,498

 
83,488

 
(67,024
)
 
324,637

Tax benefit (expense)
 
118

 
—

 
(1,234
)
 
(235
)
 
(1,351
)
Income from operating affiliates
 
—

 
9,819

 
—

 
—

 
9,819

(Income) attributable to operating affiliate investors
 
—

 
(57,026
)
 
—

 
—

 
(57,026
)
Net operating income (loss)
 
$
232,793

 
$
28,291

 
$
82,254

 
$
(67,259
)
 
$
276,079

 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
3,770

 
7,667

 
161

 
—

 
11,598

Change in net unrealized gains on investments
 
19,905

 
75,959

 
5,256

 
—

 
101,120

Income from investment affiliate
 
6,127

 
—

 
—

 
—

 
6,127

Foreign exchange (losses) gains
 
(3,328
)
 
(153
)
 
1,217

 
(1,056
)
 
(3,320
)
Other income
 
6,217

 
—

 
—

 
—

 
6,217

Transaction expenses
 
—

 
—

 
—

 
(3,252
)
 
(3,252
)
Net income (loss)
 
$
265,484

 
$
111,764

 
$
88,888

 
$
(71,567
)
 
$
394,569

 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(78,814
)
 
—

 
—

 
(78,814
)
Net income (loss) available (attributable) to Validus
 
$
265,484

 
$
32,950

 
$
88,888

 
$
(71,567
)
 
$
315,755

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
84.4
%
 
97.1
 %
 
79.1
%
 
 
 
85.3
%
Losses and loss expenses
 
31.7
%
 
(17.3
)%
 
43.8
%
 
 
 
33.9
%
Policy acquisition costs
 
15.3
%
 
9.6
 %
 
21.2
%
 
 
 
17.3
%
General and administrative expenses (b)
 
8.6
%
 
12.8
 %
 
17.6
%
 
 
 
17.3
%
Expense ratio
 
23.9
%
 
22.4
 %
 
38.8
%
 
 
 
34.6
%
Combined ratio
 
55.6
%
 
5.1
 %
 
82.6
%
 
 
 
68.5
%
Total assets
 
$
5,674,201

 
$
1,651,256

 
$
3,004,163

 
$
156,690

 
$
10,486,310

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.
(c)
Beginning in the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written and reinsurance premiums ceded for the Validus Re segment and Corporate & Eliminations were reduced by $21,836 for the six months ended June 30, 2014 for comparative purposes. There was no impact to total gross premiums written and reinsurance premiums ceded on a consolidated basis.

45
Table of Contents

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 exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
 
Three Months Ended June 30, 2015
 
Gross Premiums Written
 
Validus Re
 
AlphaCat
 
Talbot
 
Western World
 
Eliminations
 
Total
 
%
United States
$
170,842

 
$
25,010

 
$
40,036

 
$
79,554

 
$
(627
)
 
$
314,815

 
43.3
%
Worldwide excluding
United States (a)
12,405

 
2,124

 
30,231

 
—

 
(15
)
 
44,745

 
6.2
%
Australia and New Zealand
1,654

 
624

 
1,173

 
—

 
14

 
3,465

 
0.5
%
Europe
16,370

 
1,073

 
10,584

 
—

 
(171
)
 
27,856

 
3.8
%
Latin America and Caribbean
6,437

 
—

 
28,693

 
—

 
(2,672
)
 
32,458

 
4.5
%
Japan
37,807

 
1,671

 
2,843

 
—

 
(52
)
 
42,269

 
5.8
%
Canada
611

 
294

 
2,299

 
—

 
(62
)
 
3,142

 
0.4
%
Rest of the world (b)
3,268

 
—

 
24,982

 
—

 
(537
)
 
27,713

 
3.8
%
Sub-total, non United States
78,552

 
5,786

 
100,805

 
—

 
(3,495
)
 
181,648

 
25.0
%
Worldwide including
United States (a)
38,292

 
32,571

 
32,704

 
—

 
(2,499
)
 
101,068

 
13.9
%
Other location non-specific (c)
9,209

 
750

 
119,501

 
—

 
(23
)
 
129,437

 
17.8
%
Total
$
296,895

 
$
64,117

 
$
293,046

 
$
79,554

 
$
(6,644
)
 
$
726,968

 
100.0
%
 
Three Months Ended June 30, 2014
 
Gross Premiums Written
 
Validus Re
(d)
 
AlphaCat
 
Talbot
 
Eliminations (d)
 
Total
 
%
United States
$
173,899

 
$
20,256

 
$
42,151

 
$
(597
)
 
$
235,709

 
36.0
%
Worldwide excluding
United States (a)
6,826

 
(266
)
 
38,434

 
(57
)
 
44,937

 
6.8
%
Australia and New Zealand
6,525

 
—

 
1,423

 
104

 
8,052

 
1.2
%
Europe
10,845

 
1,392

 
7,498

 
523

 
20,258

 
3.1
%
Latin America and Caribbean
6,234

 
—

 
30,132

 
(4,279
)
 
32,087

 
4.9
%
Japan
38,654

 
586

 
1,592

 
3

 
40,835

 
6.2
%
Canada
448

 
(1
)
 
2,750

 
(64
)
 
3,133

 
0.5
%
Rest of the world (b)
3,884

 
—

 
25,153

 
(503
)
 
28,534

 
4.4
%
Sub-total, non United States
73,416

 
1,711

 
106,982

 
(4,273
)
 
177,836

 
27.1
%
Worldwide including
United States (a)
36,435

 
21,823

 
28,883

 
1,484

 
88,625

 
13.5
%
Other location non-specific (c)
17,523

 
—

 
139,928

 
(3,947
)
 
153,504

 
23.4
%
Total
$
301,273

 
$
43,790

 
$
317,944

 
$
(7,333
)
 
$
655,674

 
100.0
%


46
Table of Contents

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


 
Six Months Ended June 30, 2015
 
Gross Premiums Written
 
Validus Re
 
AlphaCat
 
Talbot
 
Western World
 
Eliminations
 
Total
 
%
United States
$
509,661

 
$
38,585

 
$
68,094

 
$
136,501

 
$
(2,121
)
 
$
750,720

 
40.7
%
Worldwide excluding
United States (a)
47,399

 
7,957

 
65,173

 
—

 
(1,044
)
 
119,485

 
6.5
%
Australia and New Zealand
11,522

 
624

 
3,049

 
—

 
(141
)
 
15,054

 
0.8
%
Europe
40,876

 
2,841

 
23,798

 
—

 
(1,015
)
 
66,500

 
3.6
%
Latin America and Caribbean
15,315

 
—

 
51,385

 
—

 
(6,196
)
 
60,504

 
3.3
%
Japan
39,191

 
1,671

 
3,597

 
—

 
(65
)
 
44,394

 
2.4
%
Canada
2,798

 
488

 
3,997

 
—

 
(140
)
 
7,143

 
0.4
%
Rest of the world (b)
21,994

 
—

 
47,988

 
—

 
(2,856
)
 
67,126

 
3.6
%
Sub-total, non United States
179,095

 
13,581

 
198,987

 
—

 
(11,457
)
 
380,206

 
20.6
%
Worldwide including
United States (a)
123,348

 
110,465

 
54,498

 
—

 
(14,353
)
 
273,958

 
14.8
%
Other location non-specific (c)
196,003

 
4,050

 
241,544

 
—

 
(15
)
 
441,582

 
23.9
%
Total
$
1,008,107

 
$
166,681

 
$
563,123

 
$
136,501

 
$
(27,946
)
 
$
1,846,466

 
100.0
%
 
Six Months Ended June 30, 2014
 
Gross Premiums Written
 
Validus Re
(d)
 
AlphaCat
 
Talbot
 
Eliminations (d)
 
Total
 
%
United States
$
416,931

 
$
28,954

 
$
68,462

 
$
(2,917
)
 
$
511,430

 
30.8
%
Worldwide excluding
United States (a)
65,349

 
7,412

 
75,616

 
(1,084
)
 
147,293

 
8.7
%
Australia and New Zealand
19,385

 
1,019

 
4,303

 
(222
)
 
24,485

 
1.5
%
Europe
46,723

 
2,693

 
26,289

 
(1,244
)
 
74,461

 
4.5
%
Latin America and Caribbean
20,571

 
—

 
61,371

 
(14,948
)
 
66,994

 
4.0
%
Japan
38,821

 
586

 
2,130

 
(58
)
 
41,479

 
2.5
%
Canada
2,995

 
215

 
5,895

 
(236
)
 
8,869

 
0.5
%
Rest of the world (b)
22,679

 
—

 
43,557

 
(2,890
)
 
63,346

 
3.8
%
Sub-total, non United States
216,523

 
11,925

 
219,161

 
(20,682
)
 
426,927

 
25.5
%
Worldwide including
United States (a)
138,719

 
87,258

 
52,536

 
(9,934
)
 
268,579

 
16.1
%
Other location non-specific (c)
195,263

 
—

 
268,480

 
(3,014
)
 
460,729

 
27.6
%
Total
$
967,436

 
$
128,137

 
$
608,639

 
$
(36,547
)
 
$
1,667,665

 
100.0
%
(a)
Represents risks in two or more geographic zones.
(b)
Represents risks in one geographic zone.
(c)
The Other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable, such as marine and aerospace risks, since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.
(d)
During the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written for the Validus Re segment and Corporate & Eliminations were reduced by $9,013 and $21,836 for the three and six months ended June 30, 2014, respectively, for comparative purposes. There was no impact to total gross premiums written on a consolidated basis.


47
Table of Contents

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


18. Condensed consolidating financial information
The following tables present condensed consolidating balance sheets as at June 30, 2015 and December 31, 2014, condensed consolidating statements of comprehensive income for the three and six months ended June 30, 2015 and 2014, and condensed consolidating statements of cash flows for the six months ended June 30, 2015 and 2014, for Validus Holdings, Ltd. (the “Parent Guarantor”), Validus Holdings (UK) plc (the “Subsidiary Issuer”) and the non-guarantor subsidiaries of Validus Holdings, Ltd. The Subsidiary Issuer is a 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for under the equity method for purposes of the supplemental consolidating presentation and earnings of subsidiaries are reflected in the investment accounts and earnings. The Subsidiary Issuer is only allowed to issue senior notes that are fully and unconditionally guaranteed by the Parent Guarantor.

48
Table of Contents

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


Condensed Consolidating Balance Sheet As at June 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
28,436

 
$
—

 
$
5,491,068

 
$
(60,200
)
 
$
5,459,304

Short-term investments, at fair value
—

 
—

 
1,338,051

 
—

 
1,338,051

Other investments, at fair value
—

 
—

 
965,801

 
(72,094
)
 
893,707

Cash and cash equivalents
4,597

 
20

 
429,093

 
—

 
433,710

Restricted cash
5,599

 
—

 
134,420

 
—

 
140,019

Total investments and cash
38,632

 
20

 
8,358,433

 
(132,294
)
 
8,264,791

Investment in affiliates
—

 
—

 
374,121

 
—

 
374,121

Investment in subsidiaries on an equity basis
4,232,326

 
680,642

 
—

 
(4,912,968
)
 
—

Premiums receivable
—

 
—

 
1,276,020

 
—

 
1,276,020

Deferred acquisition costs
—

 
—

 
253,225

 
—

 
253,225

Prepaid reinsurance premiums
—

 
—

 
161,516

 
—

 
161,516

Securities lending collateral
—

 
—

 
7,021

 
—

 
7,021

Loss reserves recoverable
—

 
—

 
376,665

 
—

 
376,665

Paid losses recoverable
—

 
—

 
40,198

 
—

 
40,198

Income taxes recoverable
—

 
—

 
13,787

 
—

 
13,787

Deferred tax asset
—

 
—

 
23,079

 
—

 
23,079

Receivable for investments sold
—

 
—

 
29,131

 
—

 
29,131

Intangible assets
—

 
—

 
124,092

 
—

 
124,092

Goodwill
—

 
—

 
196,758

 
—

 
196,758

Accrued investment income
48

 
—

 
23,846

 
—

 
23,894

Intercompany receivable
2,159

 
—

 
—

 
(2,159
)
 
—

Other assets
2,512

 
—

 
258,486

 
—

 
260,998

Total assets
$
4,275,677

 
$
680,662

 
$
11,516,378

 
$
(5,047,421
)
 
$
11,425,296

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,187,177

 
$
—

 
$
3,187,177

Unearned premiums
—

 
—

 
1,519,491

 
—

 
1,519,491

Reinsurance balances payable
—

 
—

 
95,705

 
—

 
95,705

Securities lending payable
—

 
—

 
7,487

 
—

 
7,487

Deferred tax liability
—

 
—

 
8,063

 
—

 
8,063

Payable for investments purchased
—

 
—

 
105,871

 
—

 
105,871

Accounts payable and accrued expenses
21,386

 
—

 
146,390

 
—

 
167,776

Intercompany payable
—

 
59

 
2,100

 
(2,159
)
 
—

Notes payable to operating affiliates
—

 
—

 
1,381,313

 
—

 
1,381,313

Senior notes payable
247,360

 
—

 
—

 
—

 
247,360

Debentures payable
350,000

 
—

 
248,232

 
(60,200
)
 
538,032

Total liabilities
$
618,746

 
$
59

 
$
6,701,829

 
$
(62,359
)
 
$
7,258,275

Redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

Total shareholders' equity available to Validus
3,656,931

 
680,603

 
4,304,459

 
(4,985,062
)
 
3,656,931

Noncontrolling interest
—

 
—

 
510,090

 
—

 
510,090

Total liabilities, noncontrolling interests and shareholders' equity
$
4,275,677

 
$
680,662

 
$
11,516,378

 
$
(5,047,421
)
 
$
11,425,296

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

49
Table of Contents

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


Condensed Consolidating Balance Sheet As at December 31, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
—

 
$
—

 
$
5,592,931

 
$
(60,200
)
 
$
5,532,731

Short-term investments, at fair value
—

 
—

 
1,051,074

 
—

 
$
1,051,074

Other investments, at fair value
—

 
—

 
881,123

 
(68,112
)
 
$
813,011

Cash and cash equivalents
29,798

 
81

 
547,361

 
—

 
$
577,240

Restricted cash
—

 
—

 
173,003

 
—

 
173,003

Total investments and cash
29,798

 
81

 
8,245,492

 
(128,312
)
 
8,147,059

Investment in affiliates
—

 
—

 
261,483

 
—

 
261,483

Investment in subsidiaries on an equity basis
4,140,770

 
656,738

 
—

 
(4,797,508
)
 
—

Premiums receivable
—

 
—

 
707,647

 
—

 
707,647

Deferred acquisition costs
—

 
—

 
161,295

 
—

 
161,295

Prepaid reinsurance premiums
—

 
—

 
81,983

 
—

 
81,983

Securities lending collateral
—

 
—

 
470

 
—

 
470

Loss reserves recoverable
—

 
—

 
377,466

 
—

 
377,466

Paid losses recoverable
—

 
—

 
38,078

 
—

 
38,078

Deferred tax asset
—

 
—

 
23,821

 
—

 
23,821

Receivable for investments sold
—

 
—

 
18,318

 
—

 
18,318

Intangible assets
—

 
—

 
126,924

 
—

 
126,924

Goodwill
—

 
—

 
195,897

 
—

 
195,897

Accrued investment income
—

 
—

 
24,865

 
—

 
24,865

Intercompany receivable
41,078

 
—

 
20

 
(41,098
)
 
—

Other assets
3,239

 
—

 
161,394

 
—

 
164,633

Total assets
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,234,394

 
$
—

 
$
3,234,394

Unearned premiums
—

 
—

 
990,564

 
—

 
990,564

Reinsurance balances payable
—

 
—

 
127,128

 
—

 
127,128

Securities lending payable
—

 
—

 
936

 
—

 
936

Deferred tax liability
—

 
—

 
5,541

 
—

 
5,541

Payable for investments purchased
—

 
—

 
68,574

 
—

 
68,574

Accounts payable and accrued expenses
29,621

 
96

 
288,528

 
—

 
318,245

Intercompany payable
—

 
20

 
41,078

 
(41,098
)
 
—

Notes payable to operating affiliates
—

 
—

 
671,465

 
—

 
671,465

Senior notes payable
247,306

 
—

 
—

 
—

 
247,306

Debentures payable
350,000

 
—

 
249,477

 
(60,200
)
 
539,277

Total liabilities
$
626,927

 
$
116

 
$
5,677,685

 
$
(101,298
)
 
$
6,203,430

Redeemable noncontrolling interest
—

 
—

 
79,956

 
—

 
79,956

Total shareholders' equity available to Validus
3,587,958

 
656,703

 
4,208,917

 
(4,865,620
)
 
3,587,958

Noncontrolling interest
—

 
—

 
458,595

 
—

 
458,595

Total liabilities, noncontrolling interests and shareholders' equity
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

50
Table of Contents

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


Condensed Consolidating Statement of Comprehensive Income For the Three Months Ended June 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
573,582

 
$
—

 
$
573,582

Net investment income
87

 
—

 
34,536

 
(1,015
)
 
33,608

Net realized gains on investments
—

 
—

 
2,244

 
—

 
2,244

Change in net unrealized losses on investments
(351
)
 
—

 
(14,082
)
 
(3,097
)
 
(17,530
)
Income from investment affiliate
—

 
—

 
284

 
—

 
284

Other insurance related income and other income
—

 
—

 
19,486

 
(16,946
)
 
2,540

Foreign exchange losses
(747
)
 
(1
)
 
(2,488
)
 
—

 
(3,236
)
Total revenues
$
(1,011
)
 
$
(1
)
 
$
613,562

 
$
(21,058
)
 
$
591,492

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
266,146

 
—

 
266,146

Policy acquisition costs
—

 
—

 
104,425

 
—

 
104,425

General and administrative expenses
18,864

 
—

 
81,043

 
(16,944
)
 
82,963

Share compensation expenses
1,897

 
—

 
7,345

 
—

 
9,242

Finance expenses
11,914

 
—

 
6,311

 
(490
)
 
17,735

Total expenses
$
32,675

 
$
—

 
$
465,270

 
$
(17,434
)
 
$
480,511

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings of subsidiaries
(33,686
)
 
(1
)
 
148,292

 
(3,624
)
 
110,981

Tax expense
—

 
—

 
(2,549
)
 
—

 
(2,549
)
Income from operating affiliates
—

 
—

 
4,104

 
—

 
4,104

(Income) attributable to operating affiliate investors
—

 
—

 
(30,879
)
 
—

 
(30,879
)
Equity in net earnings of subsidiaries
97,699

 
1,914

 
—

 
(99,613
)
 
—

Net income
$
64,013

 
$
1,913

 
$
118,968

 
$
(103,237
)
 
$
81,657

Net (income) attributable to noncontrolling interest
—

 
—

 
(17,644
)
 
—

 
(17,644
)
Net income available to Validus
$
64,013

 
$
1,913

 
$
101,324

 
$
(103,237
)
 
$
64,013

Other comprehensive income
3,575

 
—

 
3,185

 
(3,185
)
 
3,575

Comprehensive income available to Validus
$
67,588

 
$
1,913

 
$
104,509

 
$
(106,422
)
 
$
67,588

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

51
Table of Contents

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


Condensed Consolidating Statement of Comprehensive Income For the Three Months Ended June 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
466,003

 
$
—

 
$
466,003

Net investment income
4

 
—

 
22,258

 
(976
)
 
21,286

Net realized gains on investments
—

 
—

 
7,858

 
—

 
7,858

Change in net unrealized gains on investments
—

 
—

 
46,295

 
(868
)
 
45,427

Income from investment affiliate
—

 
—

 
779

 
—

 
779

Other insurance related income and other income
—

 
—

 
21,677

 
(16,442
)
 
5,235

Foreign exchange (losses) gains
(545
)
 
—

 
3,703

 
—

 
3,158

Total revenues
$
(541
)
 
$
—

 
$
568,573

 
$
(18,286
)
 
$
549,746

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
158,745

 
—

 
158,745

Policy acquisition costs
—

 
—

 
78,953

 
—

 
78,953

General and administrative expenses
23,515

 
—

 
66,769

 
(16,442
)
 
73,842

Share compensation expenses
1,811

 
—

 
6,530

 
—

 
8,341

Finance expenses
11,895

 
—

 
4,716

 
(485
)
 
16,126

Transaction expenses
—

 
—

 
3,252

 
—

 
3,252

Total expenses
$
37,221

 
$
—

 
$
318,965

 
$
(16,927
)
 
$
339,259

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings (losses) of subsidiaries
(37,762
)
 
—

 
249,608

 
(1,359
)
 
210,487

Tax expense
—

 
—

 
(1,391
)
 
—

 
(1,391
)
Income from operating affiliates
—

 
—

 
4,892

 
—

 
4,892

(Income) attributable to operating affiliate investors
—

 
—

 
(25,316
)
 
—

 
(25,316
)
Equity in net earnings (losses) of subsidiaries
191,129

 
(918
)
 
—

 
(190,211
)
 
—

Net income (loss)
$
153,367

 
$
(918
)
 
$
227,793

 
$
(191,570
)
 
$
188,672

Net (income) attributable to noncontrolling interest
—

 
—

 
(35,305
)
 
—

 
(35,305
)
Net income (loss) available (attributable) to Validus
$
153,367

 
$
(918
)
 
$
192,488

 
$
(191,570
)
 
$
153,367

Other comprehensive income
2,615

 
—

 
2,615

 
(2,615
)
 
2,615

Comprehensive income (loss) available (attributable) to Validus
$
155,982

 
$
(918
)
 
$
195,103

 
$
(194,185
)
 
$
155,982

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

52
Table of Contents

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


Condensed Consolidating Statement of Comprehensive Income For the Six Months Ended June 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
1,151,336

 
$
—

 
$
1,151,336

Net investment income
144

 
—

 
66,505

 
(2,020
)
 
64,629

Net realized gains on investments
—

 
—

 
6,413

 
—

 
6,413

Change in net unrealized (losses) gains on investments
(424
)
 
—

 
59,080

 
(3,982
)
 
54,674

Income from investment affiliate
—

 
—

 
3,060

 
—

 
3,060

Other insurance related income and other income
—

 
—

 
39,109

 
(31,737
)
 
7,372

Foreign exchange losses
(237
)
 
(1
)
 
(6,549
)
 
—

 
(6,787
)
Total revenues
$
(517
)
 
$
(1
)
 
$
1,318,954

 
$
(37,739
)
 
$
1,280,697

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
507,075

 
—

 
507,075

Policy acquisition costs
—

 
—

 
203,061

 
—

 
203,061

General and administrative expenses
36,407

 
2

 
163,319

 
(31,737
)
 
167,991

Share compensation expenses
3,551

 
—

 
14,745

 
—

 
18,296

Finance expenses
23,772

 
—

 
14,786

 
(971
)
 
37,587

Total expenses
$
63,730

 
$
2

 
$
902,986

 
$
(32,708
)
 
$
934,010

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings of subsidiaries
(64,247
)
 
(3
)
 
415,968

 
(5,031
)
 
346,687

Tax expense
—

 
—

 
(5,114
)
 
—

 
(5,114
)
Income from operating affiliates
—

 
—

 
6,557

 
—

 
6,557

(Income) attributable to operating affiliate investors
—

 
—

 
(54,085
)
 
—

 
(54,085
)
Equity in net earnings of subsidiaries
301,671

 
22,109

 
—

 
(323,780
)
 
—

Net income
$
237,424

 
$
22,106

 
$
363,326

 
$
(328,811
)
 
$
294,045

Net (income) attributable to noncontrolling interest
—

 
—

 
(56,621
)
 
—

 
(56,621
)
Net income available to Validus
$
237,424

 
$
22,106

 
$
306,705

 
$
(328,811
)
 
$
237,424

Other comprehensive loss
(510
)
 
—

 
(99
)
 
99

 
(510
)
Comprehensive income available to Validus
$
236,914

 
$
22,106

 
$
306,606

 
$
(328,712
)
 
$
236,914

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

53
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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Comprehensive Income For the Six Months Ended June 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
948,960

 
$
—

 
$
948,960

Net investment income
7

 
—

 
46,589

 
(1,948
)
 
44,648

Net realized gains on investments
—

 
—

 
11,598

 
—

 
11,598

Change in net unrealized gains on investments
—

 
—

 
97,760

 
3,360

 
101,120

Income from investment affiliate
—

 
—

 
6,127

 
—

 
6,127

Other insurance related income and other income
—

 
—

 
53,469

 
(34,404
)
 
19,065

Foreign exchange losses
(713
)
 
—

 
(2,607
)
 
—

 
(3,320
)
Total revenues
$
(706
)
 
$
—

 
$
1,161,896

 
$
(32,992
)
 
$
1,128,198

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
321,416

 
—

 
321,416

Policy acquisition costs
—

 
—

 
164,602

 
—

 
164,602

General and administrative expenses
44,078

 
21

 
138,592

 
(34,404
)
 
148,287

Share compensation expenses
3,119

 
—

 
12,369

 
—

 
15,488

Finance expenses
23,718

 
—

 
9,273

 
(965
)
 
32,026

Transaction expenses
—

 
—

 
3,252

 
—

 
3,252

Total expenses
$
70,915

 
$
21

 
$
649,504

 
$
(35,369
)
 
$
685,071

(Loss) income before taxes, income from operating affiliates, (income) attributable to operating affiliate investors and equity in net earnings (losses) of subsidiaries
(71,621
)
 
(21
)
 
512,392

 
2,377

 
443,127

Tax expense
—

 
—

 
(1,351
)
 
—

 
(1,351
)
Income from operating affiliates
—

 
—

 
9,819

 
—

 
9,819

(Income) attributable to operating affiliate investors
—

 
—

 
(57,026
)
 
—

 
(57,026
)
Equity in net earnings (losses) of subsidiaries
387,376

 
(1,666
)
 
—

 
(385,710
)
 
—

Net income (loss)
$
315,755

 
$
(1,687
)
 
$
463,834

 
$
(383,333
)
 
$
394,569

Net (income) attributable to noncontrolling interest
—

 
—

 
(78,814
)
 
—

 
(78,814
)
Net income (loss) available (attributable) to Validus
$
315,755

 
$
(1,687
)
 
$
385,020

 
$
(383,333
)
 
$
315,755

Other comprehensive income
3,077

 
—

 
3,077

 
(3,077
)
 
3,077

Comprehensive income (loss) available (attributable) to Validus
$
318,832

 
$
(1,687
)
 
$
388,097

 
$
(386,410
)
 
$
318,832

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

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


Condensed Consolidating Statement of Cash Flows For The Six Months Ended June 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash provided by (used in) operating activities
$
55,556

 
$
(61
)
 
$
(199,336
)
 
$
(85,000
)
 
$
(228,841
)
Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
2,237,966

 
—

 
2,237,966

Proceeds on maturities of investments
—

 
—

 
186,594

 
—

 
186,594

Purchases of fixed maturities
(28,055
)
 
—

 
(2,309,935
)
 
—

 
(2,337,990
)
Purchases of short-term investments, net
—

 
—

 
(375,299
)
 
—

 
(375,299
)
Purchases of other investments, net
—

 
—

 
(21,970
)
 
—

 
(21,970
)
Increase in securities lending collateral
—

 
—

 
(6,551
)
 
—

 
(6,551
)
Investment in operating affiliates
—

 
—

 
(10,400
)
 
—

 
(10,400
)
Redemption from operating affiliates
—

 
—

 
27,264

 
—

 
27,264

Investment in investment affiliates
—

 
—

 
(23,115
)
 
—

 
(23,115
)
(Increase) decrease in restricted cash
(5,599
)
 
—

 
38,583

 
—

 
32,984

Return of capital from subsidiaries
140,000

 
—

 
—

 
(140,000
)
 
—

Net cash provided by (used in) investing activities
106,346

 
—

 
(256,863
)
 
(140,000
)
 
(290,517
)
Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to operating affiliates
—

 
—

 
1,155,284

 
—

 
1,155,284

Repayments on notes payable to operating affiliates
—

 
—

 
(621,444
)
 
—

 
(621,444
)
Issuance of common shares, net
14,860

 
—

 
—

 
—

 
14,860

Purchases of common shares under share repurchase program
(143,223
)
 
—

 
—

 
—

 
(143,223
)
Dividends paid
(58,740
)
 
—

 
(85,000
)
 
85,000

 
(58,740
)
Increase in securities lending payable
—

 
—

 
6,551

 
—

 
6,551

Third party investment in redeemable noncontrolling interest
—

 
—

 
55,700

 
—

 
55,700

Third party redemption in redeemable noncontrolling interest
—

 
—

 
(19,395
)
 
—

 
(19,395
)
Return of capital to parent
—

 
—

 
(140,000
)
 
140,000

 
—

Net cash (used in) provided by financing activities
(187,103
)
 
—

 
351,696

 
225,000

 
389,593

Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
(13,765
)
 
—

 
(13,765
)
Net decrease in cash
(25,201
)
 
(61
)
 
(118,268
)
 
—

 
(143,530
)
Cash and cash equivalents, beginning of period
29,798

 
81

 
547,361

 
—

 
577,240

Cash and cash equivalents, end of period
$
4,597

 
$
20

 
$
429,093

 
$
—

 
$
433,710

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

55
Table of Contents

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


Condensed Consolidating Statement of Cash Flows For The Six Months Ended June 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash provided by (used in) operating activities
$
365,372

 
$
—

 
$
(247,929
)
 
$
(100,000
)
 
$
17,443

Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
1,956,442

 
—

 
1,956,442

Proceeds on maturities of investments
—

 
—

 
384,259

 
—

 
384,259

Purchases of fixed maturities
—

 
—

 
(1,906,212
)
 
—

 
(1,906,212
)
Purchases of short-term investments, net
—

 
—

 
(99,677
)
 
—

 
(99,677
)
Purchases of other investments, net
—

 
—

 
(54,716
)
 
—

 
(54,716
)
Decrease in securities lending collateral
—

 
—

 
2,071

 
—

 
2,071

Redemption from operating affiliates
—

 
—

 
57,025

 
—

 
57,025

Investment in investment affiliates
—

 
—

 
—

 
—

 
—

Decrease in restricted cash
—

 
—

 
15,371

 
—

 
15,371

Proceeds on sale of subsidiary, net of cash
—

 
—

 
16,459

 
—

 
16,459

Net cash provided by investing activities
—

 
—

 
371,022

 
—

 
371,022

Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to operating affiliates
—

 
—

 
320,454

 
—

 
320,454

Repayments on notes payable to operating affiliates
—

 
—

 
(364,877
)
 
—

 
(364,877
)
Redemption of common shares, net
(4,385
)
 
—

 
—

 
—

 
(4,385
)
Purchases of common shares under share repurchase program
(197,339
)
 
—

 
—

 
—

 
(197,339
)
Dividends paid
(61,036
)
 
—

 
(100,000
)
 
100,000

 
(61,036
)
Decrease in securities lending payable
—

 
—

 
(2,071
)
 
—

 
(2,071
)
Third party investment in redeemable noncontrolling interest
—

 
—

 
57,000

 
—

 
57,000

Third party redemption in redeemable noncontrolling interest
—

 
—

 
(10,496
)
 


 
(10,496
)
Net cash (used in) provided by financing activities
(262,760
)
 
—

 
(99,990
)
 
100,000

 
(262,750
)
Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
13,097

 
—

 
13,097

Net increase in cash
102,612

 
—

 
36,200

 
—

 
138,812

Cash and cash equivalents, beginning of period
20,385

 
—

 
713,763

 
—

 
734,148

Cash and cash equivalents, end of period
$
122,997

 
$
—

 
$
749,963

 
$
—

 
$
872,960

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

19. Subsequent events
Quarterly Dividend
On August 5, 2015, the Company announced a quarterly cash dividend of $0.32 per each common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on September 30, 2015 to holders of record on September 15, 2015.

56

Table of Contents



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's consolidated results of operations for the three and six months ended June 30, 2015 and 2014 and the Company's consolidated financial condition, liquidity and capital resources as at June 30, 2015 and December 31, 2014. This discussion and analysis should be read in conjunction with the Company's unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company's audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2014, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
For a variety of reasons, the Company's historical financial results may not accurately indicate future performance. See "Cautionary Note Regarding Forward-Looking Statements." The Risk Factors set forth in Part I Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Executive Overview
The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. Validus Re is a Bermuda-based reinsurance segment focused on short-tail lines of reinsurance. AlphaCat is a Bermuda-based investment adviser, managing capital from third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. Talbot is a specialty insurance segment, primarily operating within the Lloyd's insurance market through Syndicate 1183. Western World is a U.S. based specialty excess and surplus lines insurance segment operating within the U.S. commercial market.
The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
On October 2, 2014, the Company acquired all of the outstanding shares of Western World. The acquisition provided the Company with enhanced access to the specialty U.S. commercial insurance market, the world's largest short-tail market, complementing the Company's existing market positions in both Bermuda reinsurance and the Lloyd's marketplace and increasing the Company's ability to leverage operational strengths in short-tail classes of business. In addition, the acquisition improves the Company's ability to manage (re)insurance cycles.
On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, a special purpose vehicle formed for the purpose of investing in collateralized reinsurance and retrocessional contracts. The Company has an equity interest and voting rights in AlphaCat 2015 which are below 50%, therefore the investment in AlphaCat 2015 is included as an equity method investment in the Consolidated Financial Statements of the Company.

57

Table of Contents



Business Outlook and Trends
We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. accounting principles do not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. At the same time, management believes that there is a heightened awareness of exposure to natural catastrophes on the part of cedants, rating agencies and catastrophe modeling firms, resulting in an increase in the demand for reinsurance protection. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates on most lines. During 2010 and 2011, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, Tohoku and New Zealand earthquake events, but the Company continues to see increased competition and decreased premium rates in most classes of business.
During the January 2014 renewal season, the Validus Re and AlphaCat segments underwrote $575.2 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 3.2% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. property catastrophe business, which experienced a reduction in rates of approximately 12.5%. During the mid-year 2014 renewal period, the Validus Re segment experienced rate softening across U.S. and international property lines. In particular, although limits placed from the Florida market increased, the availability of capacity resulted in overall pricing reductions for Florida property catastrophe business. The Talbot segment experienced a whole account rate decrease of 3.8% through December 31, 2014.
During the January 2015 renewal season, the Validus Re and AlphaCat segments underwrote $540.9 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 6.0% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. and European property catastrophe business, which experienced a reduction in rates of approximately 10-15%. During the mid-year 2015 renewal period, the Validus Re segment experienced a meaningful increase in the demand for U.S. wind capacity which resulted in the moderation of U.S. property market rate declines to mid-single digits. However, the rate environment in the international property market proved to be more challenging with rate declines closer to 10%. The Talbot segment experienced a whole account rate decrease of approximately 6.2% and the Western World segment experienced a whole account rate increase of approximately 3.3% through June 30, 2015.



58

Table of Contents



Financial Measures
The Company believes that the primary financial indicator for evaluating performance and measuring the overall growth in value generated for shareholders is book value per diluted common share. Book value per diluted common share plus accumulated dividends, together with other important financial indicators, is shown below:
 
As at, or for the
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Year Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
2014
Book value per diluted common share plus accumulated dividends
$50.95
 
$46.83
 
$50.95
 
$46.83
 
$48.54
Book value per diluted common share
41.43
 
38.55
 
41.43
 
38.55
 
39.66
Underwriting income
110,806
 
146,122
 
254,913
 
299,167
 
526,934
Net operating income attributable to Validus
98,347
 
132,184
 
231,183
 
272,481
 
486,464
Annualized return on average equity
7.0%
 
16.5%
 
13.0%
 
17.0%
 
13.1%
Book value per diluted common share plus accumulated dividends is considered by management to be the primary indicator of financial performance, as we believe growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends increased by $2.41, or 5.0%, from $48.54 at December 31, 2014 to $50.95 at June 30, 2015. Cash dividends per common share are an integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.32 per common share and common share equivalent during the three and six months ended June 30, 2015. On August 5, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on September 30, 2015 to holders of record on September 15, 2015. Book value per diluted common share plus accumulated dividends is calculated based on total shareholders’ equity available to Validus plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise), plus accumulated dividends. Book value per diluted common share plus accumulated dividends is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Book value per diluted common share is considered by management to be a measure of returns to common shareholders, as we believe growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid, increased by $1.77, or 4.5%, from $39.66 at December 31, 2014 to $41.43 at June 30, 2015. Growth in book value per diluted common share inclusive of dividends was 1.2% and 3.4% for the three months ended June 30, 2015 and 2014, respectively, and for the six months ended June 30, 2015 and 2014 was 6.1% and 8.1%, respectively. Book value per diluted common share is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other insurance related income, finance expenses, net realized and change in net unrealized gains (losses) on investments, foreign exchange gains (losses), other income (loss), non-recurring items and net (income) loss attributable to noncontrolling interest. The Company believes the reporting of underwriting income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the three months ended June 30, 2015 and 2014 was $110.8 million and $146.1 million, respectively, and for the six months ended June 30, 2015 and 2014 was $254.9 million and 299.2 million, respectively. Underwriting income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures."
Net operating income available to Validus is defined as net income excluding net realized and change in net unrealized gains (losses) on investments, income (loss) from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and net operating (income) loss attributable to noncontrolling interest. This measure focuses on the underlying fundamentals of the Company's operations without the influence of gains (losses) from the sale of investments, translation of non-U.S. dollar currencies and non-recurring items. Net operating income available to Validus for the three months ended June 30, 2015 and 2014 was $98.3 million and $132.2 million, respectively, and for the six months ended June 30, 2015 and 2014 was $231.2 million and $272.5 million, respectively. Net operating income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Annualized return on average equity represents the return generated on common shareholders’ capital during the period. Return on average equity is calculated by dividing the net income available to Validus for the period by the average shareholders’ equity available to Validus during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. The Company’s objective is to generate superior returns on capital that appropriately rewards shareholders for the risks assumed. The annualized return on average equity for the three months ended June 30, 2015 and 2014 was 7.0% and 16.5%, respectively, and for the six months ended June 30, 2015 and 2014 was 13.0% and 17.0%, respectively.

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Second Quarter 2015 Summarized Consolidated Results of Operations
•
Gross premiums written for the three months ended June 30, 2015 were $727.0 million compared to $655.7 million for the three months ended June 30, 2014, an increase of $71.3 million, or 10.9%.
•
Net premiums earned for the three months ended June 30, 2015 were $573.6 million compared to $466.0 million for the three months ended June 30, 2014, an increase of $107.6 million, or 23.1%.
•
Underwriting income for the three months ended June 30, 2015 was $110.8 million compared to $146.1 million for the three months ended June 30, 2014, a decrease of $35.3 million, or 24.2%.
•
Combined ratio for the three months ended June 30, 2015 of 80.7% which included $70.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 12.3 percentage points compared to a combined ratio for the three months ended June 30, 2014 of 68.6% which included $72.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 15.6 percentage points. The favorable loss reserve development was primarily due to lower than expected development on attritional losses.
•
Loss ratio for the three months ended June 30, 2015 of 46.4% compared to 34.1% for the three months ended June 30, 2014, an increase of 12.3 percentage points. Incurred losses for the three months ended June 30, 2015 were $266.1 million, which included losses and loss expenses of $48.1 million from a single notable loss event, Pemex, an offshore rig explosion.
•
Loss ratios by line of business are as follows:
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
 
Percentage Point Change
Property (a)
11.6
%
 
9.8
%
 
1.8
Marine
64.8
%
 
59.0
%
 
5.8
Specialty
67.1
%
 
46.1
%
 
21.0
Liability (a)
70.6
%
 
—
%
 
70.6
All lines
46.4
%
 
34.1
%
 
12.3
(a)    The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.
•
Losses and loss expenses from notable loss events, defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $30.0 million, for the three months ended June 30, 2015 were $48.1 million compared to $nil for the three months ended June 30, 2014.
•
Losses and loss expenses from non-notable loss events, defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million, for the three months ended June 30, 2015 were ($15.0) million compared to $21.9 million for the three months ended June 30, 2014.
•
Net investment income for the three months ended June 30, 2015 was $33.6 million compared to $21.3 million for the three months ended June 30, 2014, an increase of $12.3 million, or 57.9%.
•
Investment yield for the three months ended June 30, 2015 was 2.03% compared to 1.29% for the three months ended June 30, 2014.
•
Net operating income available to Validus for the three months ended June 30, 2015 was $98.3 million compared to $132.2 million for the three months ended June 30, 2014, a decrease of $33.8 million, or 25.6%.
•
Net income available to Validus for the three months ended June 30, 2015 was $64.0 million, or $0.73 per diluted common share compared to $153.4 million or $1.61 per diluted common share for the three months ended June 30, 2014.
•
Annualized return on average equity and annualized net operating return on average equity for the three months ended June 30, 2015 were 7.0% and 10.7%, respectively, compared to 16.5% and 14.2% for the three months ended June 30, 2014.

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Overview of the Results of Operations for the Three Months Ended June 30, 2015 compared to the Three Months Ended June 30, 2014.
The change in net operating income available to Validus for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the three months ended June 30
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
107,579

Notable loss events (a)
 
(48,074
)
Non-notable loss events (b)
 
36,946

Incurred current year losses, excluding notable and non-notable loss events
 
(94,335
)
Prior period loss development
 
(1,938
)
Other underwriting deductions (c)
 
(35,494
)
Underwriting income (d)
 
(35,316
)
(Income) attributable to operating affiliate investors
 
(5,563
)
Other operating expenses and income, net (e)
 
7,104

Net operating income (d)
 
(33,775
)
Net operating (income) attributable to noncontrolling interest
 
(62
)
Net operating income available to Validus (d)
 
$
(33,837
)
(a)
The notable loss event for the three months ended June 30, 2015 was Pemex. There were no notable loss events for the three months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were ($15.0) million compared to $21.9 million for the three months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(e)
Other operating expenses and income, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Net operating income available to Validus for the three months ended June 30, 2015 was $98.3 million compared to $132.2 million for the three months ended June 30, 2014, a decrease of $33.8 million or 25.6%. The primary factors driving the decrease in net operating income available to Validus were:
•
An increase in losses and loss expenses of $107.4 million primarily due to the acquisition of Western World, a current quarter notable loss event of $48.1 million and higher attritional losses in the current quarter, including $10.3 million of losses and loss expenses from flooding in Texas; offset by a decrease in non-notable loss events of $36.9 million; and,
•
An increase in other underwriting deductions of $35.5 million primarily due to the acquisition of Western World; offset by,
•
An increase in net premiums earned of $107.6 million primarily due to the acquisition of Western World and a significant new agriculture deal in the Validus Re segment.

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Segment Reporting
Management has determined that the Company operates in four reportable segments Validus Re, AlphaCat, Talbot and Western World.
Second Quarter 2015 Results of Operations - Validus Re Segment
The following table presents results of operations for the three months ended June 30, 2015 and 2014, respectively:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
296,895

 
$
301,273

Reinsurance premiums ceded
 
(18,853
)
 
(21,522
)
Net premiums written
 
278,042

 
279,751

Change in unearned premiums
 
(13,492
)
 
(58,023
)
Net premiums earned
 
264,550

 
221,728

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
123,405

 
77,688

Policy acquisition costs
 
43,826

 
31,125

General and administrative expenses
 
18,781

 
17,040

Share compensation expenses
 
2,396

 
2,336

Total underwriting deductions
 
188,408

 
128,189

 
 
 
 
 
Underwriting income (a)
 
76,142

 
93,539

 
 
 
 
 
Net investment income
 
20,080

 
16,265

Other insurance related income
 
434

 
545

Finance expenses
 
(3,573
)
 
(3,670
)
 
 
 
 
 
Operating income before taxes
 
93,083

 
106,679

Tax expense
 
(2,745
)
 
(460
)
Net operating income (a)
 
$
90,338

 
$
106,219

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
93.6
%
 
92.9
%
 
 
 
 
 
Losses and loss expenses
 
46.6
%
 
35.0
%
 
 
 
 
 
Policy acquisition costs
 
16.6
%
 
14.1
%
General and administrative expenses (b)
 
8.0
%
 
8.7
%
Expense ratio
 
24.6
%
 
22.8
%
Combined ratio
 
71.2
%
 
57.8
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income for the three months ended June 30, 2015 compared to the three months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
42,822

Notable loss events (a)
 
(35,189
)
Non-notable loss events (b)
 
32,161

Incurred current year losses, excluding notable and non-notable loss events
 
(46,900
)
Prior period loss development
 
4,211

Other underwriting deductions (c)
 
(14,502
)
Underwriting income (d)
 
(17,397
)
Other operating income and expenses, net (e)
 
1,516

Net operating income (d)
 
$
(15,881
)
(a)
The notable loss event for the three months ended June 30, 2015 was Pemex. There were no notable loss events for the three months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were ($15.0) million compared to $17.2 million for the three months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
246,100

 
$
266,813

 
$
(20,713
)
Marine
 
6,545

 
(216
)
 
6,761

Specialty
 
44,250

 
34,676

 
9,574

Total
 
$
296,895

 
$
301,273

 
$
(4,378
)
The decrease in gross premiums written in the property lines of $20.7 million was primarily due to a reduction in business written in the catastrophe excess of loss lines of $20.7 million. This decrease was driven by reductions in our participation on various programs due to the current market conditions and programs that were not available for renewal. The increase in gross premiums written in the marine lines of $6.8 million was primarily due to the reinstatement premium impact of the current quarter notable loss event, Pemex. The increase in gross premiums written in the specialty lines of $9.6 million was driven primarily by an increase in the agriculture lines of $21.5 million, due to final contract adjustments from business written during the first quarter of 2015. This increase was offset by a decrease in technical lines of $11.0 million, due to the non-renewal of a quota share arrangement after the program was restructured with less appealing economics.
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
246,100

 
82.9
%
 
$
266,813

 
88.6
 %
Marine
 
6,545

 
2.2
%
 
(216
)
 
(0.1
)%
Specialty
 
44,250

 
14.9
%
 
34,676

 
11.5
 %
Total
 
$
296,895

 
100.0
%
 
$
301,273

 
100.0
 %
The changes in mix of business are consistent with the changes in gross premiums written discussed above.

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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
17,097

 
$
19,508

 
$
(2,411
)
Marine
 
1,481

 
567

 
914

Specialty
 
275

 
1,447

 
(1,172
)
Total
 
$
18,853

 
$
21,522

 
$
(2,669
)
Reinsurance premiums ceded in the property lines decreased by $2.4 million in line with reduced gross premiums written. The decrease in reinsurance premiums ceded in the specialty lines of $1.2 million was due to adjustments on existing business.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
229,003

 
$
247,305

 
$
(18,302
)
Marine
 
5,064

 
(783
)
 
5,847

Specialty
 
43,975

 
33,229

 
10,746

Total
 
$
278,042

 
$
279,751

 
$
(1,709
)
The decrease in net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
229,003

 
93.1
%
 
$
247,305

 
92.7
%
Marine
 
5,064

 
77.4
%
 
(783
)
 
NM

Specialty
 
43,975

 
99.4
%
 
33,229

 
95.8
%
Total
 
$
278,042

 
93.6
%
 
$
279,751

 
92.9
%
The net retention ratios are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
107,193

 
$
115,985

 
$
(8,792
)
Marine
 
44,416

 
38,838

 
5,578

Specialty
 
112,941

 
66,905

 
46,036

Total
 
$
264,550

 
$
221,728

 
$
42,822

The decrease in property lines net premiums earned of $8.8 million was as a result of lower gross premiums written during the year. This was offset by the earned impact of the reduction in the reinsurance premiums ceded. The increase in marine lines net premiums earned of $5.6 million was due to the reinstatement premium impact of the current quarter notable loss event, Pemex, and adjustments to premiums on existing business; offset by the earned impact of lower gross premiums written during the current year. The increase in specialty lines net premiums earned of $46.0 million was primarily due to an increase in gross premiums written in the first quarter of 2015.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - All Lines
 
Three Months Ended June 30,
 
2015
 
2014
All lines—current period excluding items below
50.7
 %
 
39.3
 %
All lines—current period—notable loss events
13.3
 %
 
0.0
 %
All lines—current period—non-notable loss events
(5.7
)%
 
7.7
 %
All lines—change in prior accident years
(11.7
)%
 
(12.0
)%
All lines—loss ratio
46.6
 %
 
35.0
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
134,095

 
$
87,195

 
$
46,900

All lines—current period—notable loss events
 
35,189

 
—

 
35,189

All lines—current period—non-notable loss events
 
(15,000
)
 
17,161

 
(32,161
)
All lines—change in prior accident years
 
(30,879
)
 
(26,668
)
 
(4,211
)
All lines—losses and loss expenses
 
$
123,405

 
$
77,688

 
$
45,717

Notable Loss Events
Losses and loss expenses from a single notable loss event, Pemex, were $35.2 million for the three months ended June 30, 2015, which represented 13.3 percentage points of the loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $26.1 million. There were no notable loss events for the three months ended June 30, 2014.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were ($15.0) million, representing a reserve release on the first quarter 2015 non-notable loss event, Windstorm Niklas, compared to $17.2 million for the three months ended June 30, 2014.

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Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
28.6
 %
 
17.7
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
(14.0)
 %
 
14.8
 %
Property—change in prior accident years
(14.9)
 %
 
(27.7)
 %
Property—loss ratio
(0.3
)%
 
4.8
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
30,612

 
$
20,470

 
$
10,142

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
(15,000
)
 
17,161

 
(32,161
)
Property—change in prior accident years
 
(15,928
)
 
(32,103
)
 
16,175

Property—losses and loss expenses
 
$
(316
)
 
$
5,528

 
$
(5,844
)
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was higher by 10.9 percentage points, representing a higher level of attritional losses in the current quarter, including $10.0 million of losses and loss expenses from flooding in Texas. During the three months ended June 30, 2015, the property lines incurred ($15.0) million of losses and loss expenses from non-notable loss events, which represented (14.0) percentage points of the property lines loss ratio. During the three months ended June 30, 2014, the property lines incurred $17.2 million of losses and loss expenses from non-notable loss events, which represented 14.8 percentage points of the property lines loss ratio. The favorable development on prior accident years for the three months ended June 30, 2015 and 2014 of $15.9 million and $32.1 million, respectively, was primarily due to lower claims emergence on attritional losses.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Three Months Ended June 30,
 
2015
 
2014
Marine—current period excluding items below
42.7
 %
 
53.7
%
Marine—current period—notable loss events
75.5
 %
 
0.0
%
Marine—current period—non-notable loss events
0.0
 %
 
0.0
%
Marine—change in prior accident years
(25.0
)%
 
28.7
%
Marine—loss ratio
93.2
 %
 
82.4
%
 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
18,971

 
$
20,875

 
$
(1,904
)
Marine—current period—notable loss events
 
33,524

 
—

 
33,524

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(11,099
)
 
11,143

 
(22,242
)
Marine—losses and loss expenses
 
$
41,396

 
$
32,018

 
$
9,378


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The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 11.0 percentage points primarily due to the reinstatement premium impact of the current quarter notable loss event, Pemex. During the three months ended June 30, 2015 the marine lines incurred $33.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 75.5 percentage points of the marine lines loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $24.4 million. The favorable development of $11.1 million on prior accident years for the three months ended June 30, 2015 was primarily due to lower claims emergence on attritional losses; whereas, the unfavorable development of $11.1 million on prior accident years for the three months ended June 30, 2014 was primarily due to an increase in the ultimate loss estimate on Costa Concordia.
 
Losses and Loss Expenses Ratio - Specialty Lines
 
Three Months Ended June 30,
 
2015
 
2014
Specialty—current period excluding items below
74.8
 %
 
68.5
 %
Specialty—current period—notable loss events
1.5
 %
 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
Specialty—change in prior accident years
(3.4
)%
 
(8.5
)%
Specialty—loss ratio
72.9
 %
 
60.0
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
84,512

 
$
45,850

 
$
38,662

Specialty—current period—notable loss events
 
1,665

 
—

 
1,665

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(3,852
)
 
(5,708
)
 
1,856

Specialty—losses and loss expenses
 
$
82,325

 
$
40,142

 
$
42,183

The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was higher by 6.3 percentage points, primarily due to a change in business mix to include more agriculture business and higher attritional losses in the current quarter. During the three months ended June 30, 2015 the specialty lines incurred $1.7 million of losses and loss expenses from a single notable loss event, Pemex, which represented 1.5 percentage points of the specialty lines loss ratio. The favorable loss reserve development on prior accident years for the three months ended June 30, 2015 and 2014 of $3.9 million and $5.7 million, respectively, was due primarily to lower claims emergence on attritional losses.
Policy Acquisition Costs
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
18,441

 
17.2
%
 
$
17,863

 
15.4
%
Marine
 
7,778

 
17.5
%
 
6,295

 
16.2
%
Specialty
 
17,607

 
15.6
%
 
6,967

 
10.4
%
Total
 
$
43,826

 
16.6
%
 
$
31,125

 
14.1
%
The acquisition cost ratio for the property lines increased by 1.8 percentage points primarily due to the impact of adjustments to run-off business and a higher level of proportional business which carries higher acquisition costs than excess of loss business. The acquisition cost ratio for the marine lines increased by 1.3 percentage points due to the impact of adjustments to existing business. The acquisition cost ratio for the specialty lines increased by 5.2 percentage points primarily due to profit commissions and a large proportional contract that carries higher acquisition costs.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
18,781

 
7.1
%
 
$
17,040

 
7.7
%
Share compensation expenses
 
2,396

 
0.9
%
 
2,336

 
1.0
%
Total
 
$
21,177

 
8.0
%
 
$
19,376

 
8.7
%
General and administrative and share compensation expenses were comparable for the three months ended June 30, 2015 and 2014.
Selected Underwriting Ratios
The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expenses ratio and the expense ratio. The losses and loss expenses ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the three months ended June 30, 2015 and 2014.
 
Three Months Ended June 30,
 
2015
 
2014
Losses and loss expenses ratio
46.6
%
 
35.0
%
Policy acquisition cost ratio
16.6
%
 
14.1
%
General and administrative expenses ratio (a)
8.0
%
 
8.7
%
Expense ratio
24.6
%
 
22.8
%
Combined ratio
71.2
%
 
57.8
%
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2015 of 13.4 percentage points compared to the three months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
18,521

 
$
17,121

 
$
1,400

Other investments
 
2,720

 
—

 
2,720

Restricted cash and cash and cash equivalents
 
67

 
660

 
(593
)
Securities lending income
 
6

 
2

 
4

Total gross investment income
 
21,314

 
17,783

 
3,531

Investment expenses
 
(1,234
)
 
(1,518
)
 
284

Total net investment income
 
$
20,080

 
$
16,265

 
$
3,815

The increase in net investment income for the three months ended June 30, 2015 was $3.8 million or 23.5% primarily due to a change in asset allocation intended to improve yield. Net investment income from other investments includes distributed and undistributed net income from certain investments.

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Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
434

 
$
545

 
$
(111
)
Other insurance related income for the three months ended June 30, 2015 and 2014 was comparable.
Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
3,573

 
$
3,670

 
$
(97
)
Finance expenses for the three months ended June 30, 2015 and 2014 were comparable.

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Second Quarter 2015 Results of Operations - AlphaCat Segment
The following table presents results of operations for the three months ended June 30, 2015 and 2014, respectively:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
64,117

 
$
43,790

Reinsurance premiums ceded
 
—

 
—

Net premiums written
 
64,117

 
43,790

Change in unearned premiums
 
(25,641
)
 
(11,330
)
Net premiums earned
 
38,476

 
32,460

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
—

 
(3,033
)
Policy acquisition costs
 
3,844

 
3,056

General and administrative expenses
 
3,526

 
3,780

Share compensation expenses
 
150

 
161

Total underwriting deductions
 
7,520

 
3,964

 
 
 
 
 
Underwriting income (a)
 
30,956

 
28,496

 
 
 
 
 
Net investment income
 
1,754

 
829

Other insurance related income
 
3,755

 
6,005

Finance expenses
 
(2,591
)
 
(971
)
 
 
 
 
 
Operating income before income from operating affiliates and (income) attributable to operating affiliate investors
 
33,874

 
34,359

Income from operating affiliates
 
4,104

 
4,892

(Income) attributable to operating affiliate investors
 
(30,879
)
 
(25,316
)
Net operating income (a)
 
7,099

 
13,935

Net operating (income) attributable to noncontrolling interest
 
(2,156
)
 
(2,094
)
Net operating income available to Validus (a)
 
$
4,943

 
$
11,841

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
100.0
%
 
100.0
 %
 
 
 
 
 
Losses and loss expenses
 
0.0
%
 
(9.3
)%
 
 
 
 
 
Policy acquisition costs
 
10.0
%
 
9.4
 %
General and administrative expenses (b)
 
9.5
%
 
12.1
 %
Expense ratio
 
19.5
%
 
21.5
 %
Combined ratio
 
19.5
%
 
12.2
 %
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income available to Validus for the three months ended June 30, 2015 compared to the three months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the three months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
6,016

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
715

Prior period loss development
 
(3,748
)
Other underwriting deductions (b)
 
(523
)
Underwriting income (c)
 
2,460

(Income) attributable to operating affiliate investors
 
(5,563
)
Other operating income and expenses, net (d)
 
(3,733
)
Net operating income (c)
 
(6,836
)
Net operating (income) attributable to noncontrolling interest
 
(62
)
Net operating income available to Validus (c)
 
$
(6,898
)
(a)
There were no losses and loss expenses from notable or non-notable loss events for either of the three months ended June 30, 2015 and 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, taxes and income from operating affiliates.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
64,117

 
$
43,790

 
$
20,327

The increase in gross premiums written in the property lines was primarily due to an increase in the capital base of the AlphaCat ILS Funds.
Reinsurance Premiums Ceded
There were no reinsurance premiums ceded for either of the three months ended June 30, 2015 and 2014.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
64,117

 
$
43,790

 
$
20,327

The increase in AlphaCat net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 100.0% for both the three months ended June 30, 2015 and 2014.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
38,476

 
$
32,460

 
$
6,016

The increase in net premiums earned in the property lines was primarily due to the increase in gross premiums written.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
0.0
%
 
2.2
 %
Property—current period—notable loss events
0.0
%
 
0.0
 %
Property—current period—non-notable loss events
0.0
%
 
0.0
 %
Property—change in prior accident years
0.0
%
 
(11.5
)%
Property—loss ratio
0.0
%
 
(9.3
)%
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
—

 
$
715

 
$
(715
)
Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
—

 
(3,748
)
 
3,748

Property—losses and loss expenses
 
$
—

 
$
(3,033
)
 
$
3,033

The favorable development of $3.7 million, on prior accident years for the three months ended June 30, 2014, relates to the partial release of a 2013 aggregate excess of loss contract.
Notable Loss Events
There were no losses and loss expenses from notable loss events for the three months ended June 30, 2015. There were no notable loss events for the three months ended June 30, 2014.
Non-notable Loss Events
There were no losses and loss expenses from non-notable loss events for either of the three months ended June 30, 2015 and 2014.
Policy Acquisition Costs
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
3,844

 
10.0
%
 
$
3,056

 
9.4
%
The policy acquisition cost ratios for the three months ended June 30, 2015 and 2014 were comparable.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
3,526

 
9.1
%
 
$
3,780

 
11.6
%
Share compensation expenses
 
150

 
0.4
%
 
161

 
0.5
%
Total
 
$
3,676

 
9.5
%
 
$
3,941

 
12.1
%
The general and administrative and share compensation expenses for the three months ended June 30, 2015 and 2014 were comparable.
Selected Underwriting Ratios
The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2015 and 2014, respectively.
 
Three Months Ended June 30,
 
2015
 
2014
Losses and loss expenses ratio
0.0
%
 
(9.3
)%
Policy acquisition cost ratio
10.0
%
 
9.4
 %
General and administrative expenses ratio (a)
9.5
%
 
12.1
 %
Expense ratio
19.5
%
 
21.5
 %
Combined ratio
19.5
%
 
12.2
 %
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2015 of 7.3 percentage points compared to the three months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
1,730

 
$
810

 
$
920

Restricted cash and cash and cash equivalents
 
24

 
19

 
5

Total net investment income
 
$
1,754

 
$
829

 
$
925

The increase in net investment income of $0.9 million for the three months ended June 30, 2015 compared to 2014 was primarily due to an increase in the size of the catastrophe bond portfolio during the three months ended June 30, 2015.
Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
3,755

 
$
6,005

 
$
(2,250
)
The decrease in other insurance related income of $2.3 million, or 37.5%, was primarily due to a loss of $1.8 million on the deconsolidation of one of the AlphaCat ILS Funds in the current quarter.

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Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
2,591

 
$
971

 
$
1,620

The increase in finance expenses of $1.6 million was due to placement fees incurred in the current quarter for new capital to be deployed in 2015.
Income From Operating Affiliates
 
 
Income from Operating Affiliates
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
AlphaCat Re 2011
 
$
5

 
$
(5
)
 
$
10

AlphaCat Re 2012
 
(3
)
 
927

 
(930
)
AlphaCat 2013
 
(11
)
 
561

 
(572
)
AlphaCat 2014
 
2

 
1,421

 
(1,419
)
AlphaCat 2015
 
1,282

 
—

 
1,282

AlphaCat ILS funds
 
2,829

 
1,988

 
841

Total
 
$
4,104

 
$
4,892

 
$
(788
)
For details of voting and equity ownership interests of the above entities, refer to Note 5 to the Consolidated Financial Statements in Part I. The decrease in income from operating affiliates of $0.8 million for the three months ended June 30, 2015 was primarily due to the decrease in income from AlphaCat 2012 due to a reserve release in the prior year quarter and the decrease in the capital base of AlphaCat 2015 as compared to the capital base of AlphaCat 2014. This decrease was partially offset by an increase in income from the AlphaCat ILS funds due to the deconsolidation of one of the funds during the current quarter.
(Income) Attributable To Operating Affiliate Investors
 
 
(Income) Attributable to Operating Affiliate Investors
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
(Income) attributable to operating affiliate investors
 
$
(30,879
)
 
$
(25,316
)
 
$
(5,563
)
The increase in (income) attributable to operating affiliate investors of $5.6 million for the three months ended June 30, 2015, was due primarily to the increase in third party capital in the AlphaCat ILS Funds compared to the prior year quarter.
Net Operating Loss (Income) Attributable to Noncontrolling Interest
 
 
Net Operating (Income) Loss Attributable to Noncontrolling Interest
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net operating (income) attributable to noncontrolling interest
 
$
(2,156
)
 
$
(2,094
)
 
$
(62
)
For the three months ended June 30, 2015, net operating (income) attributable to noncontrolling interest was $2.2 million, which comprised $0.2 million relating to 90% of the net operating income in PaCRe for the quarter and $2.0 million of net operating income relating to the consolidated AlphaCat ILS funds.


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Second Quarter 2015 Results of Operations - Talbot Segment
The following table presents results of operations for the three months ended June 30, 2015 and 2014, respectively:
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
293,046

 
$
317,944

Reinsurance premiums ceded
 
(37,246
)
 
(36,376
)
Net premiums written
 
255,800

 
281,568

Change in unearned premiums
 
(50,362
)
 
(69,753
)
Net premiums earned
 
205,438

 
211,815

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
95,970

 
84,090

Policy acquisition costs
 
47,659

 
45,593

General and administrative expenses
 
35,555

 
34,173

Share compensation expenses
 
3,024

 
2,862

Total underwriting deductions
 
182,208

 
166,718

 
 
 
 
 
Underwriting income (a)
 
23,230

 
45,097

 
 
 
 
 
Net investment income
 
6,406

 
4,671

Other insurance related income
 
40

 
258

Finance expenses
 
(87
)
 
(68
)
 
 
 
 
 
Operating income before taxes
 
29,589

 
49,958

Tax expense
 
(2,262
)
 
(1,364
)
Net operating income (a)
 
$
27,327

 
$
48,594

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
87.3
%
 
88.6
%
 
 
 
 
 
Losses and loss expenses
 
46.7
%
 
39.7
%
 
 
 
 
 
Policy acquisition costs
 
23.2
%
 
21.5
%
General and administrative expenses (b)
 
18.8
%
 
17.5
%
Expense ratio
 
42.0
%
 
39.0
%
Combined ratio
 
88.7
%
 
78.7
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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The change in net operating income for the three months ended June 30, 2015 compared to the three months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
(6,377
)
Notable loss events (a)
 
(12,885
)
Non-notable loss events (b)
 
4,785

Incurred current year losses, excluding notable and non-notable loss events
 
2,874

Prior period loss development
 
(6,654
)
Other underwriting deductions (c)
 
(3,610
)
Underwriting income (d)
 
(21,867
)
Other operating income and expenses, net (e)
 
600

Net operating income (d)
 
$
(21,267
)
(a)
The notable loss event for the three months ended June 30, 2015 was Pemex. There were no notable loss events for the three months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were $nil compared to $4.8 million for the three months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
108,818

 
$
115,954

 
$
(7,136
)
Marine
 
89,709

 
109,440

 
(19,731
)
Specialty
 
94,519

 
92,550

 
1,969

Total
 
$
293,046

 
$
317,944

 
$
(24,898
)
Talbot gross premiums written for the three months ended June 30, 2015 translated at 2014 exchange rates would have been $298.1 million, a decrease of $19.8 million.
The decrease in gross premiums written in the property lines of $7.1 million was primarily due to a decrease in the property treaty lines of $6.6 million, of which $3.3 million related to the Latin American business now being written directly through Validus Reinsurance (Switzerland) Ltd ("Validus Re Swiss"), a Validus Re segment entity. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. In addition, renewed business in both the property treaty and downstream energy and power international lines have decreased due to unfavorable market conditions. The decrease in gross premiums written in the marine lines of $19.7 million was primarily driven by a decrease in the upstream energy and marine hull lines due to ongoing market conditions and economic factors which have reduced new business and renewals.


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Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
108,818

 
37.1
%
 
$
115,954

 
36.5
%
Marine
 
89,709

 
30.6
%
 
109,440

 
34.4
%
Specialty
 
94,519

 
32.3
%
 
92,550

 
29.1
%
Total
 
$
293,046

 
100.0
%
 
$
317,944

 
100.0
%
The changes in mix of business were consistent with the changes in gross premiums written discussed above.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
22,322

 
$
30,448

 
$
(8,126
)
Marine
 
10,849

 
3,503

 
7,346

Specialty
 
4,075

 
2,425

 
1,650

Total
 
$
37,246

 
$
36,376

 
$
870

The decrease in reinsurance premiums ceded in the property lines of $8.1 million was due primarily to a decrease in the property treaty lines of $7.0 million as a result of a reduction in reinstatement premiums and the timing of renewals in the current quarter. In addition, quota share premiums in the property treaty lines were lower by $1.7 million as a result of underlying Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. The increase in reinsurance premiums ceded in the marine lines of $7.3 million was due primarily to the reinstatement premium impact of the current quarter notable loss event, Pemex.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
86,496

 
$
85,506

 
$
990

Marine
 
78,860

 
105,937

 
(27,077
)
Specialty
 
90,444

 
90,125

 
319

Total
 
$
255,800

 
$
281,568

 
$
(25,768
)
The decrease in Talbot net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
86,496

 
79.5
%
 
$
85,506

 
73.7
%
Marine
 
78,860

 
87.9
%
 
105,937

 
96.8
%
Specialty
 
90,444

 
95.7
%
 
90,125

 
97.4
%
Total
 
$
255,800

 
87.3
%
 
$
281,568

 
88.6
%
The net retention ratios above are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
55,939

 
$
50,697

 
$
5,242

Marine
 
77,796

 
86,947

 
(9,151
)
Specialty
 
71,703

 
74,171

 
(2,468
)
Total
 
$
205,438

 
$
211,815

 
$
(6,377
)
The changes in net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - All Lines
 
Three Months Ended June 30,
 
2015
 
2014
All lines—current period excluding items below
57.7
 %
 
57.3
 %
All lines—current period—notable loss events
6.3
 %
 
0.0
 %
All lines—current period—non-notable loss events
0.0
 %
 
2.3
 %
All lines—change in prior accident years
(17.3)
 %
 
(19.9)
 %
All lines—loss ratio
46.7
 %
 
39.7
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
118,671

 
$
121,545

 
$
(2,874
)
All lines—current period—notable loss events
 
12,885

 
—

 
12,885

All lines—current period—non-notable loss events
 
—

 
4,785

 
(4,785
)
All lines—change in prior accident years
 
(35,586
)
 
(42,240
)
 
6,654

All lines - losses and loss expenses
 
$
95,970

 
$
84,090

 
$
11,880

Notable Loss Events
Losses and loss expenses from a single notable loss event, Pemex, were $12.9 million for the three months ended June 30, 2015, which represented 6.3 percentage points of the loss ratio. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $22.4 million. There were no notable loss events for the three months ended June 30, 2014.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended June 30, 2015 were $nil compared to $4.8 million for the three months ended June 30, 2014.

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Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Three Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
58.6
 %
 
57.5
 %
Property—current period—notable loss events
0.8
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
9.4
 %
Property—change in prior accident years
(29.8)
 %
 
(33.5)
 %
Property—loss ratio
29.6
 %
 
33.4
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
32,808

 
$
29,116

 
$
3,692

Property—current period—notable loss events
 
426

 
—

 
426

Property—current period—non-notable loss events
 
—

 
4,785

 
(4,785
)
Property—change in prior accident years
 
(16,683
)
 
(16,953
)
 
270

Property—losses and loss expenses
 
$
16,551

 
$
16,948

 
$
(397
)

The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 1.1 percentage points as a result of higher attritional losses in the current quarter. During the three months ended June 30, 2015, the property lines incurred $0.4 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.8 percentage points of the property lines loss ratio. Net of reinstatement premiums, the effect of this event on net operating income was a reduction of $0.3 million. During the three months ended June 30, 2014, the property lines incurred $4.8 million in losses and loss expenses from non-notable loss events which represented 9.4 percentage points of the property lines loss ratio. The favorable development of $16.7 million on prior accident years for the three months ended June 30, 2015 was primarily due to favorable development on attritional losses and certain events, including the Thailand floods which was a 2011 notable loss event, as well as lower emergence of new claims. The favorable development of $17.0 million on prior accident years for the three months ended June 30, 2014 was primarily due to favorable development on attritional losses.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Three Months Ended June 30,
 
2015
 
2014
Marine—current period excluding items below
50.3
 %
 
62.3
 %
Marine—current period—notable loss events
16.0
 %
 
0.0
 %
Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
Marine—change in prior accident years
(17.8
)%
 
(13.7
)%
Marine—loss ratio
48.5
 %
 
48.6
 %
 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
39,110

 
$
54,197

 
$
(15,087
)
Marine—current period—notable loss events
 
$
12,459

 
$
—

 
$
12,459

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(13,810
)
 
(11,949
)
 
(1,861
)
Marine—losses and loss expenses
 
$
37,759

 
$
42,248

 
$
(4,489
)

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The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 12.0 percentage points primarily due to a ferry loss in the prior year quarter. During the three months ended June 30, 2015 the marine lines incurred $12.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 16.0 percentage points of the marine lines loss ratio. Net of reinstatement premiums payable, the effect of this event on net operating income was a reduction of $22.0 million. The favorable development of $13.8 million on prior accident years for the three months ended June 30, 2015 was primarily due to favorable development on attritional losses and low emergence of new claims. The favorable development of $11.9 million on prior accident years for the three months ended June 30, 2014 was primarily due to favorable development on attritional claims as well as lower than expected emergence of other losses.
 
Losses and Loss Expenses Ratio - Specialty Lines
 
Three Months Ended June 30,
 
2015
 
2014
Specialty—current period excluding items below
65.2
 %
 
51.6
 %
Specialty—current period—notable loss events
0.0
 %
 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
Specialty—change in prior accident years
(7.1
)%
 
(18.0)
 %
Specialty—loss ratio
58.1
 %
 
33.6
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
46,753

 
$
38,232

 
$
8,521

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(5,093
)
 
(13,338
)
 
8,245

Specialty—losses and loss expenses
 
$
41,660

 
$
24,894

 
$
16,766

The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 13.6 percentage points primarily due to higher attritional losses in the current quarter. The favorable development of $5.1 million on prior accident years for the three months ended June 30, 2015 was primarily due to favorable development on attritional losses. The favorable development of $13.3 million on prior accident years for the three months ended June 30, 2014 was primarily due to favorable development on attritional losses and lower than expected emergence of other losses.
Policy Acquisition Costs
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
8,221

 
14.7
%
 
$
6,827

 
13.5
%
Marine
 
22,137

 
28.5
%
 
20,732

 
23.8
%
Specialty
 
17,301

 
24.1
%
 
18,034

 
24.3
%
Total
 
$
47,659

 
23.2
%
 
$
45,593

 
21.5
%
The property acquisition cost ratio increased by 1.2 percentage points due to lower ceded acquisition costs on quota share premiums as a result of the Latin American business being written directly through Validus Re Swiss. This business was previously written through Talbot and ceded to Validus Re through the second quarter of 2014. The marine acquisition cost ratio increased by 4.7 percentage points primarily due to the reinstatement premium impact of the current quarter notable loss event, Pemex, and profit commission adjustments to certain cargo and yachts policies in the current quarter.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
35,555

 
17.3
%
 
34,173

 
16.1
%
Share compensation expenses
 
3,024

 
1.5
%
 
2,862

 
1.4
%
Total
 
$
38,579

 
18.8
%
 
$
37,035

 
17.5
%
General and administrative expenses translated at 2014 exchange rates would have been $37.4 million, an increase of $3.2 million. This increase was primarily due to a greater retention of costs within the segment together with increased staff costs. Share compensation expense ratios were comparable for the three months ended June 30, 2015 and 2014.
Selected Underwriting Ratios
The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the three months ended June 30, 2015 and 2014, respectively.
 
Three Months Ended June 30,
 
2015
 
2014
Losses and loss expenses ratio
46.7
%
 
39.7
%
Policy acquisition cost ratio
23.2
%
 
21.5
%
General and administrative expenses ratio (a)
18.8
%
 
17.5
%
Expense ratio
42.0
%
 
39.0
%
Combined ratio
88.7
%
 
78.7
%
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the three months ended June 30, 2015 of 10.0 percentage points compared to the three months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Investment Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
6,467

 
$
4,755

 
$
1,712

Restricted cash and cash and cash equivalents
 
356

 
317

 
39

Total gross investment income
 
6,823

 
5,072

 
1,751

Investment expenses
 
(417
)
 
(401
)
 
(16
)
Total net investment income
 
$
6,406

 
$
4,671

 
$
1,735

The increase in net investment income of $1.7 million for the three months ended June 30, 2015 compared to 2014 was primarily due to a change in asset allocation intended to improve yield.

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Second Quarter 2015 Results of Operations - Western World Segment
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition and there are no comparatives for the second quarter of 2014.
The following table presents results of operations for the three months ended June 30, 2015:
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Underwriting income
 
 
Gross premiums written
 
$
79,554

Reinsurance premiums ceded
 
(5,441
)
Net premiums written
 
74,113

Change in unearned premiums
 
(8,995
)
Net premiums earned
 
65,118

 
 
 
Underwriting deductions
 
 
Losses and loss expenses
 
46,771

Policy acquisition costs
 
9,617

General and administrative expenses
 
8,923

Share compensation expenses
 
494

Total underwriting deductions
 
65,805

 
 
 
Underwriting income (a)
 
(687
)
 
 
 
Net investment income
 
5,723

Other insurance related income
 
276

Operating income before taxes
 
5,312

Tax expense
 
3,734

Net operating income (a)
 
$
9,046

 
 
 
Selected ratios:
 
 
Net premiums written / Gross premiums written
 
93.2
%
Losses and loss expenses
 
71.8
%
Policy acquisition costs
 
14.8
%
General and administrative expense (b)
 
14.5
%
Expense ratio
 
29.3
%
Combined ratio
 
101.1
%

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended June 30, 2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
15,886

 
20.0
%
Liability
 
63,668

 
80.0
%
Total
 
$
79,554

 
100.0
%
The liability lines consist largely of commercial package liability, program and other liability business and the property lines consist largely of commercial package property and program business. During the three months ended March 31, 2015, Western World began writing brokerage property business. Gross premiums written in the brokerage property class totaled $5.2 million for the three months ended June 30, 2015. During the three months ended December 31, 2014, Western World discontinued writing binding authority commercial auto business and a large bar and tavern program.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Property
 
$
1,371

Liability
 
4,070

Total
 
$
5,441

The Western World reinsurance program includes various treaties: a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended June 30, 2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
14,515

 
91.4
%
Liability
 
59,598

 
93.6
%
Total
 
$
74,113

 
93.2
%
Net premiums written and the net retention ratio were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Property
 
$
10,727

Liability
 
54,391

Total
 
$
65,118


Net premiums earned were driven by the earnings pattern of net premiums written.

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Table of Contents



Losses and Loss Expenses
 
 
Losses and Loss Expenses Ratio -
All Lines
 
 
Three Months Ended June 30, 2015
All lines—current period excluding items below
 
78.3
 %
All lines—current period—notable loss events
 
0.0
 %
All lines—current period—non-notable loss events
 
0.0
 %
All lines—change in prior accident years (a)
 
(6.5
)%
All lines—loss ratio (a)
 
71.8
 %
 
 
Losses and Loss Expenses - All Lines
(Dollars in thousands)
 
Three Months Ended June 30, 2015
All lines—current period excluding items below
 
$
51,024

All lines—current period—notable loss events
 
—

All lines—current period—non-notable loss events
 
—

All lines—change in prior accident years (a)
 
(4,253
)
All lines—losses and loss expenses (a)
 
$
46,771

(a)
Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,892 during the three months ended June 30, 2015, benefiting the loss ratio by 4.4 percentage points. The remaining fair value adjustment of $4,864 will be amortized during the remainder of 2015.
Notable Loss Events
There were no losses and loss expenses from notable loss events for the three months ended June 30, 2015.
Non-notable Loss Events
There were no losses and loss expenses from non-notable loss events for the three months ended June 30, 2015.

Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expenses Ratio - Property Lines
 
 
Three Months Ended June 30, 2015
Property—current period excluding items below
 
86.2
 %
Property—current period—notable loss events
 
0.0
 %
Property—current period—non-notable loss events
 
0.0
 %
Property—change in prior accident years (a)
 
(8.1
)%
Property—loss ratio (a)
 
78.1
 %

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Table of Contents



 
 
Losses and Loss Expenses - Property Lines
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Property—current period excluding items below
 
$
9,243

Property—current period—notable loss events
 
—

Property—current period—non-notable loss events
 
—

Property—change in prior accident years (a)
 
(866
)
Property—losses and loss expenses (a)
 
$
8,377

(a)
Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $76 during the three months ended June 30, 2015, increasing the loss ratio by 0.7 percentage points. The remaining fair value adjustment of $127 will be amortized during the remainder of 2015.
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was 86.2 percentage points, representing attritional claims experienced during the current quarter. The favorable development of $0.9 million on prior accident years for the three months ended June 30, 2015 primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expenses Ratio - Liability Lines
 
 
Three Months Ended June 30, 2015
Liability—current period excluding items below
 
76.8
 %
Liability—current period—notable loss events
 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
Liability—change in prior accident years (a)
 
(6.2
)%
Liability—loss ratio (a)
 
70.6
 %
 
 
Losses and Loss Expenses - Liability Lines
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Liability—current period excluding items below
 
$
41,781

Liability—current period—notable loss events
 
—

Liability—current period—non-notable loss events
 
—

Liability—change in prior accident years (a)
 
(3,387
)
Liability—losses and loss expenses (a)
 
$
38,394

(a)
Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,968 during the three months ended June 30, 2015, benefiting the loss ratio by 5.5 percentage points. The remaining fair value adjustment of $4,991 will be amortized during the remainder of 2015.
The liability lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, was 76.8 percentage points, representing attritional claims experienced during the quarter. The liability lines experienced favorable loss reserve development of $3.4 million during the three months ended June 30, 2015 primarily due to the amortization of the fair value adjustment noted above.

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Table of Contents



Policy Acquisition Costs
 
 
Three Months Ended June 30, 2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
725

 
6.8
%
Liability
 
8,892

 
16.3
%
Total (a)
 
$
9,617

 
14.8
%
(a)
Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $6,584 during the three months ended June 30, 2015, benefiting the policy acquisition cost ratio by 10.1 percentage points.
The property acquisition cost ratio for the three months ended June 30, 2015 was 6.8% and the liability acquisition cost ratio for the three months ended June 30, 2015 was 16.3%. The impact of the acquisition fair value adjustments on the policy acquisition cost ratio is noted above.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended June 30, 2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
8,923

 
13.7
%
Share compensation expenses
 
494

 
0.8
%
Total
 
$
9,417

 
14.5
%
Selected Underwriting Ratios
The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the three months ended June 30, 2015.
 
Three Months Ended June 30, 2015
Losses and loss expenses ratio
71.8
%
Policy acquisition cost ratio
14.8
%
General and administrative expenses ratio (a)
14.5
%
Expense ratio
29.3
%
Combined ratio
101.1
%
(a)
Includes general and administrative expenses and share compensation expenses.
The combined ratio for the three months ended June 30, 2015 reflects the underlying ratios highlighted above.
Net Investment Income
 
 
Investment Income
(Dollars in thousands)
 
Three Months Ended June 30, 2015
Fixed maturities and short-term investments
 
$
4,800

Other investments
 
1,294

Restricted cash and cash and cash equivalents
 
4

Total gross investment income
 
6,098

Investment expenses
 
(375
)
Total net investment income
 
$
5,723


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Table of Contents



Second Quarter 2015 Non-Segment Discussion
Corporate Expenses
Corporate general and administrative expenses for the three months ended June 30, 2015, net of eliminations related to the operating segments, were $16.2 million compared to $18.8 million for the three months ended June 30, 2014, a decrease of $2.7 million or 14.2%. This decrease was due primarily to the retention of certain costs within the operating segments and a decrease in professional fees compared to the prior year quarter. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.
Corporate share compensation expenses for the three months ended June 30, 2015 were $3.2 million compared to $3.0 million for the three months ended June 30, 2014, an increase of $0.2 million or 6.6%.
Corporate finance expenses for the three months ended June 30, 2015, net of eliminations related to the operating segments, were $11.5 million compared to $11.4 million for the three months ended June 30, 2014, an increase of $0.1 million or 0.6%.
Second Quarter 2015 Non-Operating Income and Expenses
The following non-operating income and expense items are discussed on a consolidated basis, since the Company does not include these items when assessing the results of its operating segments.
Net Realized and Change in Net Unrealized (Losses) Gains on Investments
 
 
Net Realized and Change in Net Unrealized (Losses) Gains on Investments
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net realized gains on investments
 
$
2,244

 
$
7,858

 
$
(5,614
)
Change in net unrealized (losses) gains on investments
 
(17,530
)
 
45,427

 
(62,957
)
Net realized and change in net unrealized (losses) gains on investments
 
$
(15,286
)
 
$
53,285

 
$
(68,571
)
The unfavorable movement in the net realized and change in net unrealized (losses) gains on investments of $68.6 million was due to an unfavorable movement in the net realized and unrealized (losses) gains on fixed maturity and short term investments of $46.0 million and an unfavorable movement in net realized and unrealized (losses) gains on other investments of $22.6 million.
The unfavorable movement on fixed maturity and short term investments was primarily as a result of a shift in the yield curve during the quarter. The unfavorable movement on other investments was primarily due to the movement in the net realized and unrealized gains of $19.8 million on the Paulson hedge funds held by PaCRe. This is offset by a 90% noncontrolling interest of $17.8 million.
Income From Investment Affiliate
 
 
Income From Investment Affiliate
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Income from investment affiliate
 
$
284

 
$
779

 
$
(495
)
The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the previous quarter.

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Table of Contents



Foreign Exchange (Losses) Gains
The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect period-to-period comparisons. The Company's largest foreign currency fluctuation exposures are to the following currencies, with the movement in the U.S. dollar against each currency shown in the table below:
U.S. dollar strengthened (weakened) against:
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
British Pound sterling
(5.3
)%
 
(2.6
)%
Euro
(3.2
)%
 
0.6
 %
Canadian dollar
(1.3
)%
 
(3.5
)%
Swiss franc
(3.6
)%
 
0.3
 %
Australian dollar
(0.9
)%
 
(1.7
)%
New Zealand dollar
10.3
 %
 
(1.1
)%
Singapore dollar
(1.6
)%
 
(1.0
)%
Japanese yen
2.5
 %
 
(1.7
)%
 
 
Foreign Exchange (Losses) Gains
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Foreign exchange (losses) gains
 
$
(3,236
)
 
$
3,158

 
$
(6,394
)
Foreign exchange (losses) for the three months ended June 30, 2015 were ($3.2) million compared to gains of $3.2 million for the three months ended June 30, 2014, an unfavorable movement of $6.4 million, or 202.5%, due primarily to the U.S. Dollar weakening against the British Pound sterling.
The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company attempts to limit its exposure to foreign exchange fluctuations.
Other (Loss) Income
 
 
Other (Loss) Income
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other (loss) income
 
$
(608
)
 
$
424

 
$
(1,032
)
Other (loss) income for the three months ended June 30, 2015 and 2014 is due primarily to adjustments related to assets acquired from the purchase of Flagstone.
Net (Income) Attributable to Noncontrolling Interest
 
 
Net (Income) Attributable to Noncontrolling Interest
 
 
Three Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net (income) attributable to noncontrolling interest
 
$
(17,644
)
 
$
(35,305
)
 
$
17,661

For the three months ended June 30, 2015, the net income attributable to noncontrolling interest was $17.6 million, which was comprised of operating income of $2.2 million, as discussed in the AlphaCat Segment Results of Operations, and non-operating income of $15.5 million, primarily on the investment portfolio within PaCRe.
For the three months ended June 30, 2014, net income attributable to noncontrolling interest was $35.3 million, which was comprised of operating income of $2.1 million, as discussed in the AlphaCat Segment Results of Operations, and non-operating income of $33.2 million, primarily on the investment portfolio within PaCRe.

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Year to Date 2015 Summarized Consolidated Results of Operations
•
Gross premiums written for the six months ended June 30, 2015 were $1,846.5 million compared to $1,667.7 million for the six months ended June 30, 2014, an increase of $178.8 million, or 10.7%.
•
Net premiums earned for the six months ended June 30, 2015 were $1,151.3 million compared to $949.0 million for the six months ended June 30, 2014, an increase of $202.4 million, or 21.3%.
•
Underwriting income for the six months ended June 30, 2015 was $254.9 million compared to $299.2 million for the six months ended June 30, 2014, a decrease of $44.3 million, or 14.8%.
•
Combined ratio for the six months ended June 30, 2015 of 77.9% which included $154.3 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 13.4 percentage points compared to a combined ratio for the six months ended June 30, 2014 of 68.5% which included $112.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.8 percentage points.
•
Loss ratio for the six months ended June 30, 2015 of 44.0% compared to 33.9% for the six months ended June 30, 2014, an increase of 10.1 percentage points. Incurred losses for the six months ended June 30, 2015 were $507.1 million, which included losses and loss expenses of $48.1 million from a single notable loss event, Pemex.
•
Loss ratios by line of business are as follows:
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
Percentage Point Change
Property (a)
15.6
%
 
12.1
%
 
3.5
Marine
50.4
%
 
49.3
%
 
1.1
Specialty
63.5
%
 
50.7
%
 
12.8
Liability (a)
74.0
%
 
—
%
 
74.0
All lines
44.0
%
 
33.9
%
 
10.1
(a)
The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.
•
Losses and loss expenses from notable loss events, defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $30.0 million, for the six months ended June 30, 2015 were $48.1 million compared to $nil for the six months ended June 30, 2014.
•
Losses and loss expenses from non-notable loss events, defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million, for the six months ended June 30, 2015 were $nil compared to $21.9 million for the six months ended June 30, 2014.
•
Net investment income for the six months ended June 30, 2015 was $64.6 million compared to $44.6 million for the six months ended June 30, 2014, an increase of $20.0 million, or 44.8%.
•
Investment yield for the six months ended June 30, 2015 was 1.93% compared to 1.35% for the six months ended June 30, 2014.
•
Net operating income available to Validus for the six months ended June 30, 2015 was $231.2 million compared to $272.5 million for the six months ended June 30, 2014, a decrease of $41.3 million, or 15.2%.
•
Net income available to Validus for the six months ended June 30, 2015 was $237.4 million, or $2.72 per diluted common share compared to $315.8 million or $3.27 per diluted common share for the six months ended June 30, 2014.
•
Annualized return on average equity and annualized net operating return on average equity for the six months ended June 30, 2015 were 13.0% and 12.7%, respectively, compared to 17.0% and 14.7% for the six months ended June 30, 2014.
•
Total investments and cash as at June 30, 2015 was $8.3 billion compared to $8.1 billion at December 31, 2014.
•
AlphaCat's assets under management as at July 1, 2015 was $2.1 billion compared to $1.9 billion as at January 1, 2015.


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Overview of the Results of Operations for the Six Months Ended June 30, 2015 compared to the Six Months Ended June 30, 2014.
The change in net operating income available to Validus for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the six months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
202,376

Notable loss events (a)
 
(48,074
)
Non-notable loss events (b)
 
21,946

Incurred current year losses, excluding notable and non-notable loss events
 
(201,737
)
Prior period loss development
 
42,206

Other underwriting deductions (c)
 
(60,971
)
Underwriting income (d)
 
(44,254
)
(Income) attributable to operating affiliate investors
 
2,941

Other operating expenses and income, net (e)
 
2,527

Net operating income (d)
 
(38,786
)
Net operating (income) loss attributable to noncontrolling interest
 
(2,512
)
Net operating income available to Validus (d)
 
$
(41,298
)
(a)
The notable loss event for the six months ended June 30, 2015 was Pemex. There were no notable loss events for the six months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2015 were $nil compared to $21.9 million for the six months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(e)
Other operating expenses and income, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Net operating income available to Validus for the six months ended June 30, 2015 was $231.2 million compared to $272.5 million for the six months ended June 30, 2014, a decrease of $41.3 million or 15.2%. The primary factors driving the decrease in net operating income were:
•
An increase in losses and loss expenses of $185.7 million primarily due to the acquisition of Western World, a current period notable loss event of $48.1 million and higher attritional losses in the current period, including $10.3 million of losses and loss expenses from flooding in Texas; offset by an increase in favorable prior period loss development and a decrease in non-notable loss events of $21.9 million;
•
An increase in policy acquisition costs of $38.5 million primarily due to the acquisition of Western World and a large proportional contract incepted in the current period that carries higher costs; and
•
An increase in general and administrative expenses of $19.7 million primarily due to the acquisition of Western World; offset by,
•
An increase in net premiums earned of $202.4 million, primarily due to the acquisition of Western World and a significant new agriculture deal in the Validus Re segment.


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Year to Date 2015 Results of Operations - Validus Re Segment
The following table presents results of operations for the six months ended June 30, 2015 and 2014, respectively:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
1,008,107

 
$
967,436

Reinsurance premiums ceded
 
(132,149
)
 
(151,339
)
Net premiums written
 
875,958

 
816,097

Change in unearned premiums
 
(358,320
)
 
(355,983
)
Net premiums earned
 
517,638

 
460,114

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
236,533

 
145,843

Policy acquisition costs
 
85,920

 
70,370

General and administrative expenses
 
38,290

 
35,235

Share compensation expenses
 
4,974

 
4,544

Total underwriting deductions
 
365,717

 
255,992

 
 
 
 
 
Underwriting income (a)
 
151,921

 
204,122

 
 
 
 
 
Net investment income
 
38,332

 
34,540

Other insurance related income
 
749

 
1,522

Finance expenses
 
(7,444
)
 
(7,509
)
 
 
 
 
 
Operating income before taxes
 
183,558

 
232,675

Tax (expense) benefit
 
(865
)
 
118

Net operating income (a)
 
$
182,693

 
$
232,793

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
86.9
%
 
84.4
%
 
 
 
 
 
Losses and loss expenses
 
45.7
%
 
31.7
%
 
 
 
 
 
Policy acquisition costs
 
16.6
%
 
15.3
%
General and administrative expenses (b)
 
8.4
%
 
8.6
%
Expense ratio
 
25.0
%
 
23.9
%
Combined ratio
 
70.7
%
 
55.6
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the six months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
57,524

Notable loss events (a)
 
(35,189
)
Non-notable loss events (b)
 
17,161

Incurred current year losses, excluding notable and non-notable loss events
 
(91,541
)
Prior period loss development
 
18,879

Other underwriting deductions (c)
 
(19,035
)
Underwriting income (d)
 
(52,201
)
Other operating income and expenses, net (e)
 
2,101

Net operating income (d)
 
$
(50,100
)
(a)
The notable loss event for the six months ended June 30, 2015 was Pemex. There were no notable loss events for the six months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2015 were $nil compared to $17.2 million for the six months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
465,446

 
$
528,492

 
$
(63,046
)
Marine
 
139,945

 
152,746

 
(12,801
)
Specialty
 
402,716

 
286,198

 
116,518

Total
 
$
1,008,107

 
$
967,436

 
$
40,671

The decrease in gross premiums written in the property lines of $63.0 million was primarily due to a reduction in business written in the catastrophe excess of loss lines of $68.2 million. This decrease was driven by reductions in our participation on various programs due to current market conditions. The decrease in gross premiums written in the marine lines of $12.8 million was due to non-renewals as a result of current market conditions and business historically written in marine lines being renewed in specialty lines. This decrease was offset by an increase in premiums from proportional treaties incepting in the current period and reinstatement premiums from the current period notable loss event, Pemex. The increase in gross premiums written in the specialty lines of $116.5 million was primarily due to a significant new agriculture deal as well as a significant increase in an existing agriculture deal, offset by various non-renewals.

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Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
465,446

 
46.2
%
 
$
528,492

 
54.6
%
Marine
 
139,945

 
13.9
%
 
152,746

 
15.8
%
Specialty
 
402,716

 
39.9
%
 
286,198

 
29.6
%
Total
 
$
1,008,107

 
100.0
%
 
$
967,436

 
100.0
%
The changes in mix of business were consistent with the changes in gross premiums written discussed above.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
114,093

 
$
132,455

 
$
(18,362
)
Marine
 
6,765

 
13,932

 
(7,167
)
Specialty
 
11,291

 
4,952

 
6,339

Total
 
$
132,149

 
$
151,339

 
$
(19,190
)
Reinsurance premiums ceded in the property lines decreased by $18.4 million primarily as a result of renewing our main retro program at reduced rates. The decrease in reinsurance premiums ceded in the marine lines of $7.2 million and the increase in the specialty lines of $6.3 million was primarily due to a composite marine program being renewed in the specialty lines.
Net Premiums Written
 
 
Net Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
351,353

 
$
396,037

 
$
(44,684
)
Marine
 
133,180

 
138,814

 
(5,634
)
Specialty
 
391,425

 
281,246

 
110,179

Total
 
$
875,958

 
$
816,097

 
$
59,861

The increase in net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
351,353

 
75.5
%
 
$
396,037

 
74.9
%
Marine
 
133,180

 
95.2
%
 
138,814

 
90.9
%
Specialty
 
391,425

 
97.2
%
 
281,246

 
98.3
%
Total
 
$
875,958

 
86.9
%
 
$
816,097

 
84.4
%
The net retention ratios are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
217,530

 
$
239,647

 
$
(22,117
)
Marine
 
82,647

 
81,695

 
952

Specialty
 
217,461

 
138,772

 
78,689

Total
 
$
517,638

 
$
460,114

 
$
57,524

The decrease in property lines net premiums earned of $22.1 million was as a result of lower gross premiums written during the six months ended June 30, 2015. This decrease was offset by the earned impact of the reduction in reinsurance premiums ceded. The increase in net premiums earned in the specialty lines of $78.7 million was primarily due to increase in gross premiums written for the six months ended June 30, 2015.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Six Months Ended June 30,
 
2015
 
2014
All lines—current period excluding items below
49.6
 %
 
36.0
 %
All lines—current period—notable loss events
6.8
 %
 
0.0
 %
All lines—current period—non-notable loss events
0.0
 %
 
3.7
 %
All lines—change in prior accident years
(10.7
)%
 
(8.0
)%
All lines—loss ratio
45.7
 %
 
31.7
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
256,919

 
$
165,378

 
$
91,541

All lines—current period—notable loss events
 
35,189

 
—

 
35,189

All lines—current period—non-notable loss events
 
—

 
17,161

 
(17,161
)
All lines—change in prior accident years
 
(55,575
)
 
(36,696
)
 
(18,879
)
All lines—losses and loss expenses
 
$
236,533

 
$
145,843

 
$
90,690

Notable Loss Events
Losses and loss expenses from a single notable loss event, Pemex, were $35.2 million for the six months ended June 30, 2015, which represented 6.8 percentage points of the loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $26.1 million. There were no notable loss events for the six months ended June 30, 2014.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2015 were $nil compared to $17.2 million for the six months ended June 30, 2014.

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Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Six Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
22.8
 %
 
15.5
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
7.2
 %
Property—change in prior accident years
(14.2
)%
 
(14.3
)%
Property—loss ratio
8.6
 %
 
8.4
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
49,528

 
$
37,166

 
$
12,362

Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
17,161

 
(17,161
)
Property—change in prior accident years
 
(30,824
)
 
(34,214
)
 
3,390

Property—losses and loss expenses
 
$
18,704

 
$
20,113

 
$
(1,409
)
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 7.3 percentage points as a result of higher attritional losses in the period, including $10.0 million of losses and loss expenses from flooding in Texas. During the six months ended June 30, 2014, the property lines incurred $17.2 million of losses and loss expenses from non-notable loss events, which represented 7.2 percentage points of the property lines loss ratio. The favorable development on prior accident years for the six months ended June 30, 2015 and 2014 of $30.8 million and $34.2 million, respectively, was primarily due to lower claims emergence on attritional losses.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Six Months Ended June 30,
 
2015
 
2014
Marine—current period excluding items below
56.0
 %
 
45.9
 %
Marine—current period—notable loss events
40.6
 %
 
0.0
 %
Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
Marine—change in prior accident years
(19.0
)%
 
(2.9
)%
Marine—loss ratio
77.6
 %
 
43.0
 %
 
 
Losses and Loss Expenses - Marine Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
46,272

 
$
37,494

 
$
8,778

Marine—current period—notable loss events
 
33,524

 
—

 
33,524

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(15,669
)
 
(2,370
)
 
(13,299
)
Marine—losses and loss expenses
 
$
64,127

 
$
35,124

 
$
29,003


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The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 10.1 percentage points as a result of higher attritional losses in the current period. During the six months ended June 30, 2015, the marine lines incurred $33.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 40.6 percentage points of the marine lines loss ratio. Net of $9.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $24.4 million. The favorable development of $15.7 million on prior accident years for the six months ended June 30, 2015 was primarily due to lower claims emergence on attritional losses; whereas, the lower favorable development of $2.4 million on prior accident years for the six months ended June 30, 2014 was primarily due to favorable development on the Gryphon Alpha mooring failure, partially offset by adverse development on Costa Concordia.
 
Losses and Loss Expenses Ratio - Specialty Lines
 
Six Months Ended June 30,
 
2015
 
2014
Specialty—current period excluding items below
74.1
 %
 
65.4
 %
Specialty—current period—notable loss events
0.8
 %
 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
Specialty—change in prior accident years
(4.2
)%
 
(0.1
)%
Specialty—loss ratio
70.7
 %
 
65.3
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
161,119

 
$
90,718

 
$
70,401

Specialty—current period—notable loss events
 
1,665

 
—

 
1,665

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(9,082
)
 
(112
)
 
(8,970
)
Specialty—losses and loss expenses
 
$
153,702

 
$
90,606

 
$
63,096

The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, was higher by 8.7 percentage points, primarily due to a change in business mix to include more agriculture business and higher attritional losses in the current period. During the six months ended June 30, 2015, the specialty lines incurred $1.7 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.8 percentage points of the specialty lines loss ratio. The favorable loss reserve development on prior accident years of $9.1 million during the six months ended June 30, 2015 was due primarily to lower claims emergence on attritional losses; whereas, the lower favorable development of $0.1 million on prior accident years in the six months ended June 30, 2014 was primarily due to an increase in the loss estimate on agriculture losses.
Policy Acquisition Costs
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
Property
 
$
36,676

 
16.9
%
 
$
39,797

 
16.6
%
Marine
 
15,606

 
18.9
%
 
13,859

 
17.0
%
Specialty
 
33,638

 
15.5
%
 
16,714

 
12.0
%
Total
 
$
85,920

 
16.6
%
 
$
70,370

 
15.3
%
The acquisition cost ratio for the marine lines increased by 1.9 percentage points primarily due to adjustments to existing business. The 3.5 percentage point increase in the acquisition cost ratio for the specialty lines was driven by profit commissions and a large proportional contract that carries higher acquisition costs.

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General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
38,290

 
7.4
%
 
$
35,235

 
7.6
%
Share compensation expenses
 
4,974

 
1.0
%
 
4,544

 
1.0
%
Total
 
$
43,264

 
8.4
%
 
$
39,779

 
8.6
%
The increase in general and administrative expenses of $3.1 million or 8.7% was due primarily to a greater retention of costs within the segment and an increase in staff costs related to overseas underwriting operations during the six months ended June 30, 2015. This increase was partially offset by a reduction in office and infrastructure costs in the current period related to entities that are no longer in use as a result of efficiencies achieved through rationalization of historical Flagstone entities. Share compensation expenses were comparable for the six months ended June 30, 2015 and 2014.
Selected Underwriting Ratios
The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expense ratio and the expense ratio. The losses and loss expense ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2015 and 2014.
 
Six Months Ended June 30,
 
2015
 
2014
Losses and loss expense ratio
45.7
%
 
31.7
%
Policy acquisition cost ratio
16.6
%
 
15.3
%
General and administrative expense ratio (a)
8.4
%
 
8.6
%
Expense ratio
25.0
%
 
23.9
%
Combined ratio
70.7
%
 
55.6
%
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the six months ended June 30, 2015 of 15.1 percentage points compared to the six months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
35,907

 
$
35,333

 
$
574

Other investments
 
4,586

 
—

 
4,586

Cash and cash equivalents
 
111

 
2,263

 
(2,152
)
Securities lending income
 
9

 
4

 
5

Total gross investment income
 
40,613

 
37,600

 
3,013

Investment expenses
 
(2,281
)
 
(3,060
)
 
779

Total
 
$
38,332

 
$
34,540

 
$
3,792

The increase in net investment income for the six months ended June 30, 2015 was $3.8 million or 11.0% primarily due to a change in asset allocation intended to improve yield. Net investment income from other investments includes distributed and undistributed net income from certain investments.

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Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
749

 
$
1,522

 
$
(773
)
Other income for the six months ended June 30, 2015 and 2014 was comparable.
Finance Expenses
 
 
Finance Expenses
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
7,444

 
$
7,509

 
$
(65
)
Finance expenses for the six months ended June 30, 2015 and 2014 were comparable.

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Year to Date 2015 Results of Operations - AlphaCat Segment
The following table presents results of operations for the six months ended June 30, 2015 and 2014, respectively:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
166,681

 
$
128,137

Reinsurance premiums ceded
 
(4,538
)
 
(3,700
)
Net premiums written
 
162,143

 
124,437

Change in unearned premiums
 
(89,472
)
 
(61,294
)
Net premiums earned
 
72,671

 
63,143

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
(844
)
 
(10,893
)
Policy acquisition costs
 
7,504

 
6,036

General and administrative expenses
 
7,528

 
7,908

Share compensation expenses
 
299

 
151

Total underwriting deductions
 
14,487

 
3,202

 
 
 
 
 
Underwriting income (a)
 
58,184

 
59,941

 
 
 
 
 
Net investment income
 
3,339

 
1,709

Other insurance related income
 
9,526

 
15,502

Finance expenses
 
(7,107
)
 
(1,654
)
 
 
 
 
 
Operating income before income from operating affiliates and (income) attributable to operating affiliate investors
 
63,942

 
75,498

Income from operating affiliates
 
6,557

 
9,819

(Income) attributable to operating affiliate investors
 
(54,085
)
 
(57,026
)
Net operating income (a)
 
16,414

 
28,291

Net operating (income) attributable to noncontrolling interest
 
(6,110
)
 
(3,598
)
Net operating income available to Validus (a)
 
$
10,304

 
$
24,693

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
97.3
 %
 
97.1
 %
 
 
 
 
 
Losses and loss expenses
 
(1.2
)%
 
(17.3
)%
 
 
 
 
 
Policy acquisition costs
 
10.3
 %
 
9.6
 %
General and administrative expenses (b)
 
10.8
 %
 
12.8
 %
Expense ratio
 
21.1
 %
 
22.4
 %
Combined ratio
 
19.9
 %
 
5.1
 %
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income available to Validus for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus over the six months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
9,528

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
715

Prior period loss development
 
(10,764
)
Other underwriting deductions (b)
 
(1,236
)
Underwriting income (c)
 
(1,757
)
(Income) attributable to operating affiliate investors
 
2,941

Other operating income and expenses, net (d)
 
(13,061
)
Net operating income (c)
 
(11,877
)
Net operating income attributable to noncontrolling interest
 
(2,512
)
Net operating income available to Validus (c)
 
$
(14,389
)
(a)
There were no losses and loss expenses from notable or non-notable loss events for either of the six months ended June 30, 2015 or 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
166,681

 
$
128,137

 
$
38,544

The increase in gross premiums written in the property lines was primarily due to an increase in the capital base of the AlphaCat ILS Funds. This increase was offset by a decrease in the capital base of AlphaCat 2015 as compared to the capital base of AlphaCat 2014.
Reinsurance Premiums Ceded
AlphaCat reinsurance premiums ceded for the six months ended June 30, 2015 were $4.5 million compared to $3.7 million for the six months ended June 30, 2014.
Net Premiums Written
 
 
Net Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
162,143

 
$
124,437

 
$
37,706

The increase in AlphaCat net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 97.3% and 97.1% for the six months ended June 30, 2015 and 2014, respectively.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
72,671

 
$
63,143

 
$
9,528

The increase in net premiums earned in the property lines was primarily due to the increase in gross premiums written.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - Property Lines
 
Six Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
0.0
 %
 
1.1
 %
Property—current period—notable loss events
0.0
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
0.0
 %
Property—change in prior accident years
(1.2
)%
 
(18.4
)%
Property—loss ratio
(1.2
)%
 
(17.3
)%
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
—

 
$
715

 
$
(715
)
Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
(844
)
 
(11,608
)
 
10,764

Property - losses and loss expenses
 
$
(844
)
 
$
(10,893
)
 
$
10,049

The favorable development of $11.6 million, on prior accident years for the six months ended June 30, 2014, relates to the partial release of a 2013 aggregate excess of loss contract.
Notable Loss Events
There were no losses and loss expenses from notable loss events for the six months ended June 30, 2015. There were no notable loss events for the six months ended June 30, 2014.
Non-notable Loss Events
There were no losses and loss expenses from non-notable loss events for either of the six months ended June 30, 2015 and 2014.
Policy Acquisition Costs
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
Property
 
$
7,504

 
10.3
%
 
$
6,036

 
9.6
%
The acquisition cost ratios for the six months ended June 30, 2015 and 2014 were comparable.

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General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
7,528

 
10.4
%
 
$
7,908

 
12.5
%
Share compensation expenses
 
299

 
0.4
%
 
151

 
0.3
%
Total
 
$
7,827

 
10.8
%
 
$
8,059

 
12.8
%
The general and administrative and share compensation expenses for the six months ended June 30, 2015 and 2014 were comparable.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2015 and 2014.
 
Six Months Ended June 30,
 
2015
 
2014
Losses and loss expense ratio
(1.2
)%
 
(17.3)
 %
Policy acquisition cost ratio
10.3
 %
 
9.6
 %
General and administrative expense ratio (a)
10.8
 %
 
12.8
 %
Expense ratio
21.1
 %
 
22.4
 %
Combined ratio
19.9
 %
 
5.1
 %
(a)
Includes general and administrative expenses and share compensation expenses.
The increase in the combined ratio for the six months ended June 30, 2015 of 14.8 percentage points compared to the six months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
3,296

 
$
1,675

 
$
1,621

Cash and cash equivalents
 
43

 
34

 
9

Total net investment income
 
$
3,339

 
$
1,709

 
$
1,630

The increase in net investment income for the six months ended June 30, 2015 was $1.6 million or 95.4% and was due to an increase in the size of the catastrophe bond portfolio during the six months ended June 30, 2015.
Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
9,526

 
$
15,502

 
$
(5,976
)
The decrease in other insurance related income of $6.0 million or 38.5% was primarily due to a reduction in performance fees and a loss of $1.8 million on the deconsolidation of one of the AlphaCat ILS Funds during the six months ended June 30, 2015 and a gain of $1.4 million on the deconsolidation of one of the AlphaCat ILS Funds during the six months ended June 30, 2014.

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Finance Expenses
 
 
Finance Expenses
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
7,107

 
$
1,654

 
$
5,453

The increase in finance expenses of $5.5 million was as a result of placement fees incurred during the six months ended June 30, 2015 for new capital to be deployed in 2015.
Income From Operating Affiliates
 
 
Income from Operating Affiliates
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
AlphaCat Re 2011
 
$
(5
)
 
$
188

 
$
(193
)
AlphaCat Re 2012
 
(28
)
 
891

 
(919
)
AlphaCat 2013
 
(25
)
 
2,036

 
(2,061
)
AlphaCat 2014
 
(98
)
 
3,032

 
(3,130
)
AlphaCat 2015
 
2,598

 
—

 
2,598

AlphaCat ILS funds
 
4,115

 
3,672

 
443

Total
 
$
6,557

 
$
9,819

 
$
(3,262
)
For details of voting and equity ownership interests of the above entities, refer to Note 5 to the Consolidated Financial Statements in Part I. The decrease in income from operating affiliates for the six months ended June 30, 2015 was primarily due to the timing of capital deployment. Capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013. Also contributing to the decrease was a decrease in income from AlphaCat 2012 due to a reserve release during the six months ended June 30, 2014 and a decrease in the capital base of AlphaCat 2015 as compared to the capital base of AlphaCat 2014. These decreases were partially offset by an increase in income from the AlphaCat ILS funds due to the deconsolidation of one of the funds during the six months ended June 30, 2015.
(Income) Attributable To Operating Affiliate Investors
 
 
(Income) Attributable to Operating Affiliate Investors
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
(Income) attributable to operating affiliate investors
 
$
(54,085
)
 
$
(57,026
)
 
$
2,941

The decrease in (income) attributable to operating affiliate investors of $2.9 million for the six months ended June 30, 2015 was primarily due to the timing of capital deployment. As noted above, capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013 and thus had a larger effect on the six months ended June 30, 2014.

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Net Operating (Income) Attributable to Noncontrolling Interest
 
 
Net Operating (Income) Loss Attributable to Noncontrolling Interest
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net operating (income) attributable to noncontrolling interest
 
$
(6,110
)
 
$
(3,598
)
 
$
(2,512
)
For the six months ended June 30, 2015, the net operating income attributable to noncontrolling interest was $6.1 million, which comprised $1.0 million relating to 90% of the net operating income in PaCRe for the period and $5.1 million of net operating income relating to the consolidated AlphaCat ILS funds.
Assets Under Management
 
 
Assets Under Management
(Dollars in thousands)
 
As at July 1, 2015
 
As at January 1, 2015
Related party
 
$
355,023

 
$
346,907

Third party
 
1,724,288

 
1,533,840

Total
 
$
2,079,311

 
$
1,880,747

Assets under management were $2.1 billion as July 1, 2015, compared to $1.9 billion as at January 1, 2015. During the six months ended July 1, 2015, a total of $343.3 million of capital was raised, of which $304.9 million was raised from third parties. During the six months ended July 1, 2015, $221.9 million was returned to investors, of which $164.7 million was returned to third party investors.


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Year to Date 2015 Results of Operations - Talbot Segment
The following table presents results of operations for the six months ended June 30, 2015 and 2014, respectively:
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
Underwriting income
 
 
 
 
Gross premiums written
 
$
563,123

 
$
608,639

Reinsurance premiums ceded
 
(128,321
)
 
(126,981
)
Net premiums written
 
434,802

 
481,658

Change in unearned premiums
 
(6,775
)
 
(55,955
)
Net premiums earned
 
428,027

 
425,703

 
 
 
 
 
Underwriting deductions
 
 
 
 
Losses and loss expenses
 
174,098

 
186,466

Policy acquisition costs
 
96,763

 
90,521

General and administrative expenses
 
72,049

 
69,322

Share compensation expenses
 
5,981

 
5,444

Total underwriting deductions
 
348,891

 
351,753

 
 
 
 
 
Underwriting income (a)
 
79,136

 
73,950

 
 
 
 
 
Net investment income
 
12,711

 
9,357

Other insurance related income
 
94

 
275

Finance expenses
 
(174
)
 
(94
)
 
 
 
 
 
Operating income before taxes
 
91,767

 
83,488

Tax expense
 
(3,145
)
 
(1,234
)
Net operating income (a)
 
$
88,622

 
$
82,254

 
 
 
 
 
Selected ratios:
 
 

 
 

Net premiums written / Gross premiums written
 
77.2
%
 
79.1
%
 
 
 
 
 
Losses and loss expenses
 
40.7
%
 
43.8
%
 
 
 
 
 
Policy acquisition costs
 
22.6
%
 
21.2
%
General and administrative expenses (b)
 
18.2
%
 
17.6
%
Expense ratio
 
40.8
%
 
38.8
%
Combined ratio
 
81.5
%
 
82.6
%
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively, is described in the following table:
 
 
Increase (decrease) to net operating income over the six months ended June 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
2,324

Notable loss events (a)
 
(12,885
)
Non-notable loss events (b)
 
4,785

Incurred current year losses, excluding notable and non-notable loss events
 
(3,038
)
Prior period loss development
 
23,506

Other underwriting deductions (c)
 
(9,506
)
Underwriting income (d)
 
5,186

Other operating income and expenses, net (e)
 
1,182

Net operating income (d)
 
$
6,368

(a)
The notable loss event for the six months ended June 30, 2015 was Pemex. There were no notable loss events for the six months ended June 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2015 were $nil compared to $4.8 million for the six months ended June 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
180,479

 
$
194,057

 
$
(13,578
)
Marine
 
200,078

 
229,011

 
(28,933
)
Specialty
 
182,566

 
185,571

 
(3,005
)
Total
 
$
563,123

 
$
608,639

 
$
(45,516
)
Talbot gross premiums written for the six months ended June 30, 2015 translated at 2014 exchange rates would have been $573.3 million, a decrease of $35.4 million on the prior year period.
The decrease in gross premiums written in the property lines of $13.6 million was primarily due to a decrease in the property treaty lines of $12.3 million, of which $7.7 million related to the Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. In addition, renewed business in both the property treaty and downstream energy and power international lines have decreased due to unfavorable market conditions. The decrease in gross premiums written in the marine lines of $28.9 million was primarily driven by a decrease in the upstream energy, marine hull and treaty lines due to ongoing market conditions and economic factors which have reduced new business and renewals.

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Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
180,479

 
32.1
%
 
$
194,057

 
31.9
%
Marine
 
200,078

 
35.5
%
 
229,011

 
37.6
%
Specialty
 
182,566

 
32.4
%
 
185,571

 
30.5
%
Total
 
$
563,123

 
100.0
%
 
$
608,639

 
100.0
%
The changes in mix of business were consistent with the changes in gross premiums written discussed above.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
62,577

 
$
74,097

 
$
(11,520
)
Marine
 
28,678

 
21,976

 
6,702

Specialty
 
37,066

 
30,908

 
6,158

Total
 
$
128,321

 
$
126,981

 
$
1,340

The decrease in reinsurance premiums ceded in the property lines of $11.5 million was due primarily to a decrease in the property treaty lines of $5.6 million due to lower quota share premiums as a result of underlying Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. Also contributing to the decrease was a reduction in reinstatement premiums and the timing of renewals in the current period. The increase in the marine lines of $6.7 million was primarily due to the reinstatement premium impact of the current period notable loss event, Pemex. The increase in the specialty lines of $6.2 million was primarily due to reinstatement premiums across a number of classes. Also contributing to the increase was the restructuring of an excess of loss contract.
Net Premiums Written
 
 
Net Premiums Written
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
117,902

 
$
119,960

 
$
(2,058
)
Marine
 
171,400

 
207,035

 
(35,635
)
Specialty
 
145,500

 
154,663

 
(9,163
)
Total
 
$
434,802

 
$
481,658

 
$
(46,856
)
The changes in net premiums written were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.

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Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
117,902

 
65.3
%
 
$
119,960

 
61.8
%
Marine
 
171,400

 
85.7
%
 
207,035

 
90.4
%
Specialty
 
145,500

 
79.7
%
 
154,663

 
83.3
%
Total
 
$
434,802

 
77.2
%
 
$
481,658

 
79.1
%
The net retention ratios above are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
111,143

 
$
101,636

 
$
9,507

Marine
 
170,053

 
176,019

 
(5,966
)
Specialty
 
146,831

 
148,048

 
(1,217
)
Total
 
$
428,027

 
$
425,703

 
$
2,324

The changes in the net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.
Losses and Loss Expenses
 
Losses and Loss Expenses Ratio - All Lines
 
Six Months Ended June 30,
 
2015
 
2014
All lines—current period excluding items below
58.1
 %
 
57.7
 %
All lines—current period—notable loss events
3.0
 %
 
0.0
 %
All lines—current period—non-notable loss events
0.0
 %
 
1.1
 %
All lines—change in prior accident years
(20.4
)%
 
(15.0
)%
All lines—loss ratio
40.7
 %
 
43.8
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
248,486

 
$
245,448

 
$
3,038

All lines—current period—notable loss events
 
12,885

 
—

 
12,885

All lines—current period—non-notable loss events
 
—

 
4,785

 
(4,785
)
All lines—change in prior accident years
 
(87,273
)
 
(63,767
)
 
(23,506
)
All lines - losses and loss expenses
 
$
174,098

 
$
186,466

 
$
(12,368
)

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Notable Loss Events
Losses and loss expenses from a single notable loss event, Pemex, were $12.9 million for the six months ended June 30, 2015, which represented 3.0 percentage points of the loss ratio. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $22.4 million. There were no notable loss events for the six months ended June 30, 2014.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the six months ended June 30, 2015 were $nil compared to $4.8 million for the six months ended June 30, 2014.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expenses Ratio - Property Lines
 
Six Months Ended June 30,
 
2015
 
2014
Property—current period excluding items below
63.1
 %
 
64.3
 %
Property—current period—notable loss events
0.4
 %
 
0.0
 %
Property—current period—non-notable loss events
0.0
 %
 
4.7
 %
Property—change in prior accident years
(33.7
)%
 
(30.1
)%
Property—loss ratio
29.8
 %
 
38.9
 %
 
 
Losses and Loss Expenses - Property Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
70,180

 
$
65,400

 
$
4,780

Property—current period—notable loss events
 
426

 
—

 
426

Property—current period—non-notable loss events
 
—

 
4,785

 
(4,785
)
Property—change in prior accident years
 
(37,435
)
 
(30,620
)
 
(6,815
)
Property - losses and loss expenses
 
$
33,171

 
$
39,565

 
$
(6,394
)
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, decreased by 1.2 percentage points as a result of lower attritional losses in the current period. During the six months ended June 30, 2015, the property lines incurred $0.4 million of losses and loss expenses from a single notable loss event, Pemex, which represented 0.4 percentage points of the property lines loss ratio. Including reinstatement premiums, the effect of this event on net operating income was a reduction of $0.3 million. During the six months ended June 30, 2014, the property lines incurred $4.8 million in losses and loss expenses from non-notable loss events which represented 4.7 percentage points of the property lines loss ratio. The favorable development of $37.4 million on prior accident years for the six months ended June 30, 2015 primarily relates to favorable development on attritional losses and certain events, including the Thailand floods which was a 2011 notable loss event, as well as lower emergence of new claims. The favorable development of $30.6 million on prior accident years for the six months ended June 30, 2014 primarily relates to a combination of favorable development on notable loss events, primarily the Tohoku earthquake, and lower than expected development on attritional losses.
 
Losses and Loss Expenses Ratio - Marine Lines
 
Six Months Ended June 30,
 
2015
 
2014
Marine—current period excluding items below
51.2
 %
 
55.8
 %
Marine—current period—notable loss events
7.3
 %
 
0.0
 %
Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
Marine—change in prior accident years
(21.4
)%
 
(3.5
)%
Marine—loss ratio
37.1
 %
 
52.3
 %

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Losses and Loss Expenses - Marine Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
86,987

 
$
98,261

 
$
(11,274
)
Marine—current period—notable loss events
 
12,459

 
—

 
12,459

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(36,324
)
 
(6,269
)
 
(30,055
)
Marine - losses and loss expenses
 
$
63,122

 
$
91,992

 
$
(28,870
)
The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, decreased by 4.6 percentage points primarily due to lower attritional losses in the current period. During the six months ended June 30, 2015, the marine lines incurred $12.5 million of losses and loss expenses from a single notable loss event, Pemex, which represented 7.3 percentage points of the marine lines loss ratio. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $22.0 million. The favorable development of $36.3 million on prior accident years for the six months ended June 30, 2015 was primarily due to favorable development on attritional losses and lower emergence of new claims. The favorable development of $6.3 million on prior accident years for the six months ended June 30, 2014 represents a lower level of favorable development on attritional claims experienced compared to the current period.
 
Losses and Loss Expenses Ratio - Specialty Lines
 
Six Months Ended June 30,
 
2015
 
2014
Specialty—current period excluding items below
62.2
 %
 
55.3
 %
Specialty—current period—notable loss events
0.0
 %
 
0.0
 %
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
Specialty—change in prior accident years
(9.2
)%
 
(18.2
)%
Specialty—loss ratio
53.0
 %
 
37.1
 %
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
91,319

 
$
81,787

 
$
9,532

Specialty—current period—notable loss events
 
—

 
—

 
—

Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(13,514
)
 
(26,878
)
 
13,364

Specialty - losses and loss expenses
 
$
77,805

 
$
54,909

 
$
22,896

The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 6.9 percentage points primarily due to higher attritional losses in the current period. The favorable development of $13.5 million and $26.9 million on prior accident years for the six months ended June 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.

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Policy Acquisition Costs
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
Property
 
$
16,089

 
14.5
%
 
$
13,098

 
12.9
%
Marine
 
45,489

 
26.7
%
 
42,722

 
24.3
%
Specialty
 
35,185

 
24.0
%
 
34,701

 
23.4
%
Total
 
$
96,763

 
22.6
%
 
$
90,521

 
21.2
%
The property acquisition cost ratio increased by 1.6 percentage points due to lower ceded acquisition costs on quota share premiums as a result of the Latin American business being written directly through Validus Re Swiss. This business was previously written through Talbot and ceded to Validus Re through the second quarter of 2014. The marine acquisition cost ratio increased by 2.4 percentage points primarily due to the reinstatement premium impact of the current quarter notable loss event, Pemex, and profit commission adjustments to certain cargo and yachts policies during the current period.
General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
72,049

 
16.8
%
 
$
69,322

 
16.3
%
Share compensation expenses
 
5,981

 
1.4
%
 
5,444

 
1.3
%
Total
 
$
78,030

 
18.2
%
 
$
74,766

 
17.6
%
General and administrative expenses translated at 2014 exchange rates would have been $76.3 million, an increase of $7.0 million. This increase was due to a greater retention of costs within the segment together with increased staff costs; partially offset by a decrease in Lloyd's expenses during the six months ended June 30, 2015. Share compensation expense ratios were comparable for the six months ended June 30, 2015 and 2014.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the six months ended June 30, 2015 and 2014.
 
Six Months Ended June 30,
 
2015
 
2014
Losses and loss expense ratio
40.7
%
 
43.8
%
Policy acquisition cost ratio
22.6
%
 
21.2
%
General and administrative expense ratio (a)
18.2
%
 
17.6
%
Expense ratio
40.8
%
 
38.8
%
Combined ratio
81.5
%
 
82.6
%
(a)
Includes general and administrative expenses and share compensation expenses.
The decrease in the combined ratio for the six months ended June 30, 2015 of 1.1 percentage points compared to the six months ended June 30, 2014 was due to the movement in the underlying ratios as discussed above.

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Net Investment Income
 
 
Investment Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
12,823

 
$
9,454

 
$
3,369

Cash and cash equivalents
 
727

 
656

 
71

Total gross investment income
 
13,550

 
10,110

 
3,440

Investment expenses
 
(839
)
 
(753
)
 
(86
)
Total
 
$
12,711

 
$
9,357

 
$
3,354

The increase in net investment income for the six months ended June 30, 2015 was $3.4 million or 35.8% primarily due to a change in asset allocation intended to improve yield.

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Year to Date 2015 Results of Operations - Western World Segment
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition and there are no comparatives for the six months ended June 30, 2014.
The following table presents results of operations for the six months ended June 30, 2015:
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Underwriting income
 
 
Gross premiums written
 
$
136,501

Reinsurance premiums ceded
 
(8,674
)
Net premiums written
 
127,827

Change in unearned premiums
 
5,173

Net premiums earned
 
133,000

 
 
 
Underwriting deductions
 
 
Losses and loss expenses
 
97,288

Policy acquisition costs
 
13,896

General and administrative expenses
 
19,550

Share compensation expenses
 
971

Total underwriting deductions
 
131,705

 
 
 
Underwriting income (a)
 
1,295

 
 
 
Net investment income
 
11,026

Other insurance related income
 
539

Operating income before taxes
 
12,860

Tax benefit
 
11

Net operating income (a)
 
$
12,871

 
 
 
Selected ratios:
 
 
Net premiums written / Gross premiums written
 
93.6
%
Losses and loss expenses
 
73.1
%
Policy acquisition costs
 
10.5
%
General and administrative expense (b)
 
15.4
%
Expense ratio
 
25.9
%
Combined ratio
 
99.0
%

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expenses ratio includes share compensation expenses.

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Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
 
Gross
Premiums
Written
 
Gross
Premiums
Written (%)
Property
 
$
25,272

 
18.5
%
Liability
 
111,229

 
81.5
%
Total
 
$
136,501

 
100.0
%
The liability lines consist largely of commercial package liability, program and other liability business and the property lines consist largely of commercial package property and program business. During the three months ended March 31, 2015, Western World began writing brokerage property business. During the three months ended December 31, 2014, Western World discontinued writing binding authority commercial auto business and a large bar and tavern program.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Property
 
$
1,937

Liability
 
6,737

Total
 
$
8,674

The Western World reinsurance program includes various treaties: a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
23,335

 
92.3
%
Liability
 
104,492

 
93.9
%
Total
 
$
127,827

 
93.6
%
Net premiums written and the net retention ratio were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Property
 
$
21,422

Liability
 
111,578

Total
 
$
133,000


Net premiums earned were driven by the earnings pattern of net premiums written. Net premiums earned in the liability lines exceeded net premiums written as Western World discontinued writing binding authority commercial auto business and a large bar and tavern program during the three months ended December 31, 2014.

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Losses and Loss Expenses
 
 
Losses and Loss Expenses Ratio -
All Lines
 
 
Six Months Ended June 30, 2015
All lines—current period excluding items below
 
81.1
 %
All lines—current period—notable loss events
 
0.0
 %
All lines—current period—non-notable loss events
 
0.0
 %
All lines—change in prior accident years (a)
 
(8.0
)%
All lines—loss ratio (a)
 
73.1
 %
 
 
Losses and Loss Expenses - All Lines
(Dollars in thousands)
 
Six Months Ended June 30, 2015
All lines—current period excluding items below
 
$
107,873

All lines—current period—notable loss events
 
—

All lines—current period—non-notable loss events
 
—

All lines—change in prior accident years (a)
 
(10,585
)
All lines—losses and loss expenses (a)
 
$
97,288

(a)
Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $6,115 during the six months ended June 30, 2015, benefiting the loss ratio by 4.6% percentage points. The remaining fair value adjustment of $4,864 will be amortized during the remainder of 2015.
Notable Loss Events
There were no loss and loss expenses from notable loss events for the six months ended June 30, 2015.
Non-notable Loss Events
There were no loss and loss expenses from non-notable loss events for the six months ended June 30, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expenses Ratio - Property Lines
 
 
Six Months Ended June 30, 2015
Property—current period excluding items below
 
85.5
 %
Property—current period—notable loss events
 
0.0
 %
Property—current period—non-notable loss events
 
0.0
 %
Property—change in prior accident years (a)
 
(16.8
)%
Property—loss ratio (a)
 
68.7
 %

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Losses and Loss Expenses - Property Lines
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Property—current period excluding items below
 
$
18,313

Property—current period—notable loss events
 
—

Property—current period—non-notable loss events
 
—

Property—change in prior accident years (a)
 
(3,594
)
Property—losses and loss expenses (a)
 
$
14,719

(a)
Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $161 during the six months ended June 30, 2015, increasing the loss ratio by 0.8% percentage points. The remaining fair value adjustment of $127 will be amortized during the remainder of 2015.
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, was 85.5% percentage points, representing attritional claims experienced during the period, which included losses of $2.8 million from winter weather related claims. The favorable development of $3.6 million on prior accident years for the six months ended June 30, 2015 primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expenses Ratio - Liability Lines
 
 
Six Months Ended June 30, 2015
Liability—current period excluding items below
 
80.3
 %
Liability—current period—notable loss events
 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
Liability—change in prior accident years (a)
 
(6.3
)%
Liability—loss ratio (a)
 
74.0
 %
 
 
Losses and Loss Expenses - Liability Lines
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Liability—current period excluding items below
 
$
89,560

Liability—current period—notable loss events
 
—

Liability—current period—non-notable loss events
 
—

Liability—change in prior accident years (a)
 
(6,991
)
Liability—losses and loss expenses (a)
 
$
82,569

(a)
Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $6,276 during the six months ended June 30, 2015, benefiting the loss ratio by 5.6% percentage points. The remaining fair value adjustment of $4,991 will be amortized during the remainder of 2015.
The liability lines current period loss ratio, excluding the impact of notable and non-notable loss events, was 80.3% percentage points, representing attritional claims experienced during the period. The liability lines experienced favorable loss reserve development of $7.0 million during the six months ended June 30, 2015 primarily due to the amortization of the fair value adjustment noted above.

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Policy Acquisition Costs
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
1,549

 
7.2
%
Liability
 
12,347

 
11.1
%
Total (a)
 
$
13,896

 
10.5
%
(a)
Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $16,992 during the six months ended June 30, 2015, benefiting the policy acquisition cost ratio by 12.8% percentage points.
The property acquisition cost ratio for the six months ended June 30, 2015 was 7.2% and the liability acquisition cost ratio for the six months ended June 30, 2015 was 11.1%. The impact of the acquisition fair value adjustments on the policy acquisition cost ratio is noted above.
General and Administrative and Share Compensation Expenses
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
19,550

 
14.7
%
Share compensation expenses
 
971

 
0.7
%
Total
 
$
20,521

 
15.4
%
Selected Underwriting Ratios
The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expenses ratio, expense ratio and combined ratio for the six months ended June 30, 2015.
 
Six Months Ended June 30, 2015
Losses and loss expenses ratio
73.1
%
Policy acquisition cost ratio
10.5
%
General and administrative expenses ratio (a)
15.4
%
Expense ratio
25.9
%
Combined ratio
99.0
%
(a)
Includes general and administrative expenses and share compensation expenses.
The combined ratio for the six months ended June 30, 2015 reflects the underlying ratios highlighted above.
Net Investment Income
 
 
Investment Income
(Dollars in thousands)
 
Six Months Ended June 30, 2015
Fixed maturities and short-term investments
 
$
9,155

Other investments
 
2,616

Restricted cash and cash and cash equivalents
 
5

Total gross investment income
 
11,776

Investment expenses
 
(750
)
Total net investment income
 
$
11,026



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Table of Contents



Year to Date 2015 Non-Segment Discussion
Corporate Expenses
Corporate general and administrative expenses for the six months ended June 30, 2015, net of eliminations related to the operating segments, were $30.6 million compared to $35.8 million for the six months ended June 30, 2014, a decrease of $5.2 million or 14.7%. This decrease was due primarily to the retention of certain costs within the operating segments. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.
Corporate share compensation expenses for the six months ended June 30, 2015 were $6.1 million compared to $5.3 million for the six months ended June 30, 2014, an increase of $0.7 million or 13.5%.
Corporate finance expenses for the six months ended June 30, 2015, net of eliminations related to the operating segments, were $22.9 million compared to $22.8 million for the six months ended June 30, 2014, an increase of $0.1 million or 0.4%.
Year to Date 2015 Non-Operating Income and Expenses
The following non-operating income and expense items are discussed on a consolidated basis, since the Company does not include these items when assessing the results of its operating segments.
Net Realized and Change in Net Unrealized Gains on Investments
 
 
Net Realized and Change in Net Unrealized Gains on Investments
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net realized gains on investments
 
$
6,413

 
$
11,598

 
$
(5,185
)
Change in net unrealized gains on investments
 
54,674

 
101,120

 
(46,446
)
Net realized and change in net unrealized gains on investments
 
$
61,087

 
$
112,718

 
$
(51,631
)
The unfavorable movement in the net realized and change in net unrealized gains on investments of $51.6 million was due to an unfavorable movement in the net realized and unrealized gains on fixed maturity and short term investments of $19.3 million and an unfavorable movement in net realized and unrealized gains on other investments of $32.3 million.
The unfavorable movement on fixed maturity and short term investments was primarily as a result of a shift in the yield curve during the current period. The unfavorable movement on other investments was primarily due to the movement in the net realized and unrealized gains of $27.4 million on the Paulson hedge funds held by PaCRe. This is offset by a 90% noncontrolling interest of $24.7 million.
Income From Investment Affiliate
 
 
Income From Investment Affiliate
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Income from investment affiliate
 
$
3,060

 
$
6,127

 
$
(3,067
)
The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the six months ended March 31, 2015 and 2014.

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Foreign Exchange Losses
The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect period-to-period comparisons. The Company's largest foreign currency fluctuation exposures are to the following currencies, with the movement in each currency against the U.S. dollar shown in the table below:
U.S. dollar strengthened (weakened) against:
 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
British Pound sterling
 
(0.8
)%
 
(3.2
)%
Euro
 
8.6
 %
 
0.4
 %
Canadian dollar
 
7.5
 %
 
0.4
 %
Swiss franc
 
(6.0
)%
 
(0.7
)%
Australian dollar
 
5.9
 %
 
(5.5
)%
New Zealand dollar
 
14.8
 %
 
(6.2
)%
Singapore dollar
 
1.6
 %
 
(1.3
)%
Japanese yen
 
2.4
 %
 
(3.6
)%
 
 
Foreign Exchange
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Foreign exchange losses
 
$
(6,787
)
 
$
(3,320
)
 
$
(3,467
)
Foreign exchange losses for the six months ended June 30, 2015 were $6.8 million compared to $3.3 million for the six months ended June 30, 2014, an unfavorable movement of $3.5 million, or 104.4%, due primarily to changes in liabilities held in Euro during the six months ended June 30, 2015 and the U.S. dollar strengthening against the Euro.
The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company attempts to limit its exposure to foreign exchange fluctuations.
Other (Loss) Income
 
 
Other (Loss) Income
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other (loss) income
 
$
(608
)
 
$
6,217

 
$
(6,825
)
Other (loss) income for the six months ended June 30, 2014 is due primarily to adjustments related to assets acquired from the purchase of Flagstone.

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Net (Income) Loss Attributable to Noncontrolling Interest
 
 
Net (Income) Loss Attributable to Noncontrolling Interest
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net (income) loss attributable to noncontrolling interest
 
$
(56,621
)
 
$
(78,814
)
 
$
22,193

For the six months ended June 30, 2015, net income attributable to noncontrolling interest was $56.6 million, which was comprised of operating income of $6.1 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating gain of $50.5 million, primarily on the investment portfolio within PaCRe.
For the six months ended June 30, 2014, net loss attributable to noncontrolling interest was $78.8 million, which was comprised of operating income of $3.6 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating gain of $75.2 million, primarily on the investment portfolio within PaCRe.
Other Non-GAAP Financial Measures
The operating results of an insurance or reinsurance company are also often measured by reference to its net operating income, which is a non-GAAP financial measure. Net operating income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income line items, as illustrated below.
(Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net operating income
 
100,503

 
134,278

 
237,293

 
276,079

Net realized gains on investments
 
2,244

 
7,858

 
6,413

 
11,598

Change in net unrealized (losses) gains on investments
 
(17,530
)
 
45,427

 
54,674

 
101,120

Income from investment affiliate
 
284

 
779

 
3,060

 
6,127

Foreign exchange (losses) gains
 
(3,236
)
 
3,158

 
(6,787
)
 
(3,320
)
Other (loss) income
 
(608
)
 
424

 
(608
)
 
6,217

Transaction expenses
 
—

 
(3,252
)
 
—

 
(3,252
)
Net income
 
$
81,657

 
$
188,672

 
$
294,045

 
$
394,569

Operating income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of operating income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.
The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of operating income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing operating income provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s underlying business performance.

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Operating income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of operating income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of operating income with other companies, particularly as operating income may be defined or calculated differently by other companies. Therefore, the Company provides prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of operating income to net income.
The Company also uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the total annual incentive compensation.
In presenting the Company's results, management has also included and discussed certain schedules containing book value per diluted common share and book value per diluted common share plus accumulated dividends that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP and may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
The following tables present reconciliations of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, at June 30, 2015 and December 31, 2014.
(Dollars in thousands, except share and per share amounts)
As at June 30, 2015
Equity Amount
 
Shares
 
Exercise Price
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
$
3,656,931

 
83,295,795

 
 
 
$
43.90

 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
3,656,931

 
83,295,795

 
 
 
 
Assumed exercise of outstanding warrants
59,506

 
3,377,320

 
$
17.62

 
 
Assumed exercise of outstanding stock options
3,040

 
119,377

 
$
25.46

 
 
Unvested restricted shares
—

 
2,980,925

 
 
 
 
Book value per diluted common share
$
3,719,477

 
89,773,417

 
 
 
$
41.43

Adjustment for accumulated dividends
 
 
 
 
 
 
$
9.52

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
$
50.95

(Dollars in thousands, except share and per share amounts)
As at December 31, 2014
Equity Amount
 
Shares
 
Exercise Price
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
$
3,587,958

 
83,869,845

 
 
 
$
42.78

 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
3,587,958

 
83,869,845

 
 
 
 
Assumed exercise of outstanding warrants
90,950

 
5,174,114

 
$
17.58

 
 
Assumed exercise of outstanding stock options
20,581

 
1,160,057

 
$
17.74

 
 
Unvested restricted shares
—

 
3,068,564

 
 
 
 
Book value per diluted common share
$
3,699,489

 
93,272,580

 
 
 
$
39.66

Adjustment for accumulated dividends
 
 
 
 
 
 
$
8.88

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
$
48.54


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Liquidity and Capital Resources
Investments
At June 30, 2015, the Company held investments totaling $7.7 billion, compared to $7.4 billion at December 31, 2014, an increase of $0.3 billion, or 4.0%, primarily as a result of an increase in short-term and other investments. A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s investment policies specifically require certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures to provide necessary liquidity in a wide range of reasonable scenarios. At June 30, 2015, the average duration of the Company’s fixed maturity and short term investment portfolio was 2.48 years (December 31, 2014: 2.16 years). This duration is reviewed regularly based on changes in the duration of the Company's liabilities and in general market conditions.
The Company’s investment portfolio is also structured to preserve capital. The Company’s investment policies require certain minimum credit quality standards, including a minimum weighted average portfolio rating of A+. Further limits on securities rated BBB and below are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall enterprise-risk framework. At June 30, 2015, the Company’s total investment portfolio had an average credit quality rating of AA- (December 31, 2014: AA-) and an effective yield of 1.93% for the six months then ended (2014: 1.35%). The estimated fair value of investment grade fixed maturities, as at June 30, 2015 was $4.7 billion, or 86.4% of the fixed maturity portfolio, compared to $4.9 billion as at December 31, 2014, or 89.2%, a decrease of $0.2 billion, or 4.3%. The estimated fair value of managed non-investment grade fixed maturities as at June 30, 2015 was $587.5 million or 9.1% of total managed cash and investments compared to $523.3 million or 7.7% of total managed cash and investments as at December 31, 2014, an increase of $64.2 million, or 12.3%. Managed non-investment grade securities consist primarily of bank loans and corporate bonds.
The Company also has an allocation to other investments, primarily hedge funds and investment funds. At June 30, 2015, these other investments, excluding noncontrolling interests, totaled $387.7 million, or 5.4%, of total investments, excluding noncontrolling interest (December 31, 2014: $382.5 million or 5.5%). For further details related to the investment portfolio, including the extent of investments with fair values measured using unobservable inputs, see Notes 3 and 4 to the Consolidated Financial Statements in Part I, Item 1.
The value of the Company’s fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, and prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans.

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The estimated fair value of investments at June 30, 2015 and December 31, 2014 was as follows:
 
June 30, 2015
 
December 31, 2014
(Dollars in thousands)
Estimated Fair Value
 
% of Total Investments
 
Estimated Fair Value
 
% of Total Investments
U.S. government and government agency
$
818,753

 
13.6
 %
 
$
760,086

 
12.3
 %
Non-U.S. government and government agency
222,439

 
3.7
 %
 
278,728

 
4.5
 %
U.S. states, municipalities and political subdivisions
323,860

 
5.4
 %
 
449,623

 
7.3
 %
Agency residential mortgage-backed securities
510,537

 
8.5
 %
 
529,231

 
8.5
 %
Non-agency residential mortgage-backed securities
30,724

 
0.5
 %
 
37,807

 
0.6
 %
U.S. corporate
1,458,608

 
24.2
 %
 
1,499,706

 
24.2
 %
Non-U.S. corporate
495,028

 
8.2
 %
 
563,162

 
9.1
 %
Bank loans
483,293

 
8.0
 %
 
449,004

 
7.2
 %
Catastrophe bonds
150,702

 
2.5
 %
 
75,664

 
1.2
 %
Asset-backed securities
645,505

 
10.7
 %
 
647,482

 
10.5
 %
Commercial mortgage-backed securities
319,855

 
5.3
 %
 
242,238

 
3.9
 %
Total fixed maturities
5,459,304

 
90.6
 %
 
5,532,731

 
89.3
 %
Total short-term investments (a)
1,338,051

 
22.2
 %
 
1,051,074

 
17.1
 %
Total other investments (b)
893,707

 
14.8
 %
 
813,011

 
13.1
 %
Total investments including assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
7,691,062

 
127.6
 %
 
7,396,816

 
119.5
 %
Assets managed on behalf of operating affiliates (a)
(1,008,445
)
 
(16.7
)%
 
(696,924
)
 
(11.3
)%
Catastrophe bonds
(150,702
)
 
(2.5
)%
 
(75,664
)
 
(1.2
)%
Noncontrolling interest (b)
(506,024
)
 
(8.4
)%
 
(430,494
)
 
(7.0
)%
Total investments, excluding assets managed on behalf of operating affiliates, catastrophe bonds and noncontrolling interest
$
6,025,891

 
100.0
 %
 
$
6,193,734

 
100.0
 %
(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the other investments balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

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As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s fixed maturity portfolio:
 
June 30, 2015
(Dollars in thousands)
Fair Value
 
% of Total
Supranational
$
43,167

 
6.0
%
Germany
37,803

 
5.4
%
United Kingdom
25,142

 
3.5
%
France
24,282

 
3.4
%
Norway
15,980

 
2.2
%
Province of Ontario
12,979

 
1.8
%
Jordan
10,100

 
1.4
%
Province of Manitoba
10,080

 
1.4
%
Denmark
10,038

 
1.4
%
Other (individual jurisdictions below $10,000)
32,868

 
4.5
%
Total Non-U.S. Government Securities
222,439

 
31.0
%
European Corporate Securities
203,833

 
28.4
%
United Kingdom Corporate Securities
157,757

 
22.0
%
Other Non-U.S. Corporate Securities
133,438

 
18.6
%
Total Non-U.S. Fixed Income Portfolio
$
717,467

 
100.0
%
The Company limits its exposure to any single issuer to 3.5% or less of total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. At June 30, 2015, the Company did not have an aggregate exposure to any single issuer of more than 0.7%, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at June 30, 2015 are as follows:
(Dollars in thousands)
 
June 30, 2015
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Total Cash and Investments
Morgan Stanley
 
$
58,020

 
 BBB+
 
0.7
%
JPMorgan Chase & Co
 
55,962

 
 A-
 
0.7
%
Citigroup Inc
 
53,529

 
 BBB+
 
0.6
%
Bank of America Corp
 
51,924

 
 BBB+
 
0.6
%
HSBC Holdings Plc
 
50,275

 
 A
 
0.6
%
Goldman Sachs Group
 
48,204

 
 BBB+
 
0.6
%
Wells Fargo & Company
 
41,357

 
 A-
 
0.5
%
Bank of New York Mellon Corp
 
37,601

 
 A
 
0.5
%
US Bancorp
 
34,305

 
 AA-
 
0.4
%
Apple Inc
 
31,754

 
 AA+
 
0.4
%
Total
 
$
462,931

 
 
 
5.6
%
(a)
Issuers exclude government-backed, government-sponsored enterprises and cash and cash equivalents.
(b)
Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.
(c)
Investment ratings are the median of Moody's, Standard & Poor's and Fitch, presented in Standard & Poor's equivalent rating. For investments where three ratings are unavailable, the lower of the ratings shall apply, presented in Standard & Poor's equivalent rating.

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The tables below show the Company’s investments in affiliates, accounted for under the equity method:
 
June 30, 2015
(Dollars in thousands)
Investment at cost
 
Voting ownership
 
Equity ownership
 
Carrying value
AlphaCat Re 2011
$
4,601

 
43.7
%
 
22.3
%
 
$
4,601

AlphaCat Re 2012
707

 
49.0
%
 
37.9
%
 
707

AlphaCat 2013
1,043

 
40.9
%
 
19.7
%
 
1,043

AlphaCat 2014
723

 
42.3
%
 
19.6
%
 
723

AlphaCat 2015
28,000

 
40.0
%
 
20.0
%
 
30,598

AlphaCat ILS funds
237,861

 
n/a

 
(a)

 
246,768

Aquiline Financial Services Fund II L.P.
59,978

 
n/a

 
8.1
%
 
75,543

Aquiline Financial Services Fund III L.P.
14,138

 
n/a

 
13.7
%
 
14,138

Total
$
347,051

 
 
 
 
 
$
374,121

(a)
Equity ownership in the AlphaCat ILS funds was 7.6%, 20.2%, 9.1% and 44.6%, respectively as at June 30, 2015.
 
December 31, 2014
(Dollars in thousands)
Investment at cost
 
Voting ownership
 
Equity ownership
 
Carrying value
AlphaCat Re 2011
$
4,606

 
43.7
%
 
22.3
%
 
$
4,606

AlphaCat Re 2012
735

 
49.0
%
 
37.9
%
 
735

AlphaCat 2013
1,068

 
40.9
%
 
19.7
%
 
1,068

AlphaCat 2014
22,000

 
42.3
%
 
19.6
%
 
28,085

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
25,600

AlphaCat ILS funds
133,091

 
n/a

 
(a)

 
137,883

Aquiline Financial Services Fund II L.P.
51,001

 
n/a

 
8.1
%
 
63,506

Total
$
238,101

 
 
 
 
 
$
261,483

(a)
Equity ownership in the AlphaCat ILS funds was 7.9%, 39.7% and 9.1%, respectively as at December 31, 2014.
During the six months ended June 30, 2015, the Company received partial returns of investment from AlphaCat 2014 of $27.3 million. The Company expects to receive further returns of investment during the year from AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013 and AlphaCat 2014.

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Reserves for Losses and Loss Expenses
At June 30, 2015, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section. The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
As at June 30, 2015
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for Losses and Loss Expenses
Property
 
$
496,924

 
$
404,270

 
$
901,194

Marine
 
376,018

 
478,212

 
854,230

Specialty
 
298,228

 
530,598

 
828,826

Liability
 
180,390

 
422,537

 
602,927

Total
 
$
1,351,560

 
$
1,835,617

 
$
3,187,177

 
 
As at June 30, 2015
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for Losses and Loss Expenses
Property
 
$
429,215

 
$
347,808

 
$
777,023

Marine
 
363,882

 
411,918

 
775,800

Specialty
 
257,393

 
484,068

 
741,461

Liability
 
169,161

 
347,067

 
516,228

Total
 
$
1,219,651

 
$
1,590,861

 
$
2,810,512


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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended June 30, 2015.
 
 
Three Months Ended June 30, 2015
(Dollars in thousands)
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,313,969

 
$
5,178

 
$
1,316,816

 
$
629,507

 
$
(66,108
)
 
$
3,199,362

Losses and loss expenses recoverable
 
(61,902
)
 
—

 
(284,572
)
 
(95,516
)
 
66,108

 
(375,882
)
Net reserves for losses and loss expenses, beginning of period
 
1,252,067

 
5,178

 
1,032,244

 
533,991

 
—

 
2,823,480

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
154,284

 
—

 
131,556

 
51,024

 
—

 
336,864

Prior years
 
(30,879
)
 
—

 
(35,586
)
 
(4,253
)
 
—

 
(70,718
)
Total incurred losses and loss expenses
 
123,405

 
—

 
95,970

 
46,771

 
—

 
266,146

 
 
 
 
 
 
 
 
 
 
 
 
 
Net paid losses
 
(134,925
)
 
(330
)
 
(101,437
)
 
(49,263
)
 
—

 
(285,955
)
Foreign exchange (gain) loss
 
(3,635
)
 
21

 
10,455

 
—

 
—

 
6,841

Net reserve for losses and loss expenses, end of period
 
1,236,912

 
4,869

 
1,037,232

 
531,499

 
—

 
2,810,512

Losses and loss expenses recoverable
 
58,904

 
—

 
293,578

 
89,609

 
(65,426
)
 
376,665

Reserve for losses and loss expenses, end of period
 
$
1,295,816

 
$
4,869

 
$
1,330,810

 
$
621,108

 
$
(65,426
)
 
$
3,187,177

The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the three months ended June 30, 2015, favorable loss reserve development on prior accident years was $70.7 million of which $30.9 million related to the Validus Re segment, $nil related to the AlphaCat segment, $35.6 million related to the Talbot segment and $4.3 million related to the Western World segment.

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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the six months ended June 30, 2015.
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,333,878

 
$
6,525

 
$
1,352,056

 
$
613,551

 
$
(71,616
)
 
$
3,234,394

Losses and loss expenses recoverable
 
(70,279
)
 
—

 
(290,581
)
 
(88,222
)
 
71,616

 
(377,466
)
Net reserves for losses and loss expenses, beginning of period
 
1,263,599

 
6,525

 
1,061,475

 
525,329

 
—

 
2,856,928

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
292,108

 
—

 
261,371

 
107,873

 
—

 
661,352

Prior years
 
(55,575
)
 
(844
)
 
(87,273
)
 
(10,585
)
 
—

 
(154,277
)
Total incurred losses and loss expenses
 
236,533

 
(844
)
 
174,098

 
97,288

 
—

 
507,075

 
 
 
 
 
 
 
 
 
 
 
 
 
Net paid losses
 
(244,899
)
 
(787
)
 
(198,254
)
 
(91,118
)
 
—

 
(535,058
)
Foreign exchange gain
 
(18,321
)
 
(25
)
 
(87
)
 
—

 
—

 
(18,433
)
Net reserve for losses and loss expenses, end of period
 
1,236,912

 
4,869

 
1,037,232

 
531,499

 
—

 
2,810,512

Losses and loss expenses recoverable
 
58,904

 
—

 
293,578

 
89,609

 
(65,426
)
 
376,665

Reserve for losses and loss expenses, end of period
 
$
1,295,816

 
$
4,869

 
$
1,330,810

 
$
621,108

 
$
(65,426
)
 
$
3,187,177

The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the six months ended June 30, 2015, favorable loss reserve development on prior accident years was $154.3 million of which $55.6 million related to the Validus Re segment, $0.8 million related to the AlphaCat segment, $87.3 million related to the Talbot segment and $10.6 million related to the Western World segment.
The management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company's actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events. Any reserve for potential development on notable loss events (or “RDE”) is included as part of the Company's overall reserve as defined and disclosed in the Critical Accounting Policies and Estimates section.
For disclosure purposes, only those notable loss events which have an ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year. The Company increased the threshold for disclosure for notable loss events effective January 1, 2011, from $5.0 million to $15.0 million and further increased the threshold effective January 1, 2013 from $15.0 million to $30.0 million. Non-notable loss events which aggregate to more than $15.0 million but less than $30.0 million on a consolidated basis have been disclosed from January 1, 2013.

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The reserves for notable loss events table below does not disclose 2010, 2011 or 2012 notable loss events. Deepwater Horizon, a 2010 event, had closing reserves of $61.4 million as at June 30, 2015. The New Zealand earthquakes of 2010 and 2011, had total closing reserves of $149.4 million as at June 30, 2015. Hurricane Sandy, a 2012 event, had total closing reserves of $90.7 million as at June 30, 2015 and Costa Concordia, also a 2012 event, had total closing reserves of $32.6 million as at June 30, 2015.
Reserves for Notable Loss Events (Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Notable Loss Event
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
Unfavorable (b)
 
of RDE
 
December 31, 2013
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
June 30, 2015
European Floods
 
$
77,587

 
$
(16,762
)
 
—

 
$
60,825

 
$
(25,938
)
 
—

 
$
34,887

 
(1,066
)
 
—

 
$
33,821

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
December 31, 2013
 
 
 
 
December 31, 2014
 
 
 
 
June 30, 2015
European Floods
 
 
 
 
 
$
8,006

 
$
52,819

 
 
 
$
11,864

 
$
15,017

 
 
 
$
3,092

 
$
10,859

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Notable Loss Event
 
 
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
June 30, 2015
Tripoli Airport (e)
 
$
28,134

 
 
 
 
 
 
 
$
6,810

 
—

 
$
34,944

 
$
2,050

 
—

 
$
36,994

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
June 30, 2015
Tripoli Airport (e)
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
34,944

 
 
 
$
18,793

 
$
18,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Notable Loss Event
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
June 30, 2015
Pemex
 
$
48,074

 
 
 
 
 
 
 
 
 
 
 
 
 
$
48,074

 
—

 
$
48,074

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
Pemex
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
44

 
$
48,030

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Development other than allocation of RDE.
(c)
Excludes impact of movements in foreign exchange rates.
(d)
Closing Reserve for the period equals Closing Estimate for the period less cumulative Paid Losses (Recovery).
(e)
As at September 30, 2014, the initial estimate for Tripoli Airport was below the $30.0 million notable loss event threshold; however, during the fourth quarter of 2014 adverse development caused this event to exceed the notable loss event threshold.

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Sources of Liquidity
Holding Company Liquidity
Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Validus Re, AlphaCat, Talbot and Western World segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis.
 
 
Capital at
(Dollars in thousands)
 
June 30, 2015
Western World Insurance Group, Inc. (consolidated)
 
$
685,134

Validus Reinsurance, Ltd.
 
2,971,363

Validus Reinsurance, Ltd. (consolidated)
 
3,656,497

Noncontrolling interest in PaCRe, Ltd.
 
510,090

Talbot Holdings, Ltd. (consolidated)
 
827,169

Other, net
 
(41,343
)
Total consolidated capitalization
 
4,952,413

Senior notes payable
 
(247,360
)
Debentures payable
 
(538,032
)
Total shareholders’ equity
 
$
4,167,021

Sources and Uses of Cash
The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.
In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

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There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the six months ended June 30, 2015 and 2014 is provided in the following table.
 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net cash (used in) provide by operating activities
 
$
(228,841
)
 
$
17,443

 
$
(246,284
)
Net cash (used in) provided by investing activities
 
(290,517
)
 
371,022

 
(661,539
)
Net cash provided by (used in) financing activities
 
389,593

 
(262,750
)
 
652,343

Effect of foreign currency rate changes on cash and cash equivalents
 
(13,765
)
 
13,097

 
(26,862
)
Net (decrease) increase in cash
 
$
(143,530
)
 
$
138,812

 
$
(282,342
)
Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash (used in) provided by operating activities during the six months ended June 30, 2015 was ($228.8) million compared to $17.4 million for six months ended June 30, 2014, an unfavorable movement of $246.3 million. This unfavorable movement reflects the returns on investments made to third party investors in operating affiliates as well as an increase in payments made in respect of certain retrocessional coverage.
We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.
Investing Activities
Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s investment portfolio. As at June 30, 2015, the Company’s portfolio was composed of fixed income investments, short-term and other investments amounting to $7.7 billion or 93.0% of total cash and investments. For further details related to investments pledged as collateral, see Note 3 (d) to the Consolidated Financial Statements in Part I, Item 1.
Net cash (used in) provided by investing activities during the six months ended June 30, 2015 was ($290.5) million compared to $371.0 million for the six months ended June 30, 2014, an unfavorable movement of $661.5 million. This unfavorable movement was due to an increase in the purchases of fixed maturity and short-term investments of $707.4 million as a result of a change in asset allocation intended to improve yield.
Financing Activities
Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, and the issuance and repayment of notes payable to operating affiliates.
Net cash provided by (used in) financing activities during the six months ended June 30, 2015 was $389.6 million compared to ($262.8) million during the six months ended June 30, 2014, a favorable movement of $652.3 million. This favorable movement was driven primarily by an increase in the issuance of notes payable to operating affiliates of $834.8 million due to increased investment in the AlphaCat Funds, a decrease of $54.1 million in the repurchase of common shares under the share repurchase program; offset by, an increase in the repayment of notes payable to operating affiliates of $256.6 million.

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Capital Resources
The following table details the Company's capital position as at June 30, 2015 and December 31, 2014.
Capitalization (Dollars in thousands)
June 30, 2015
 
December 31, 2014
Senior Notes (a)
$
247,360

 
$
247,306

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

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (c)
248,232

 
249,477

Total debt
785,392

 
786,583

 
 
 
 
Redeemable noncontrolling interest
—

 
79,956

 
 
 
 
Ordinary shares, capital and surplus available to Validus
3,665,997

 
3,596,514

Accumulated other comprehensive loss
(9,066
)
 
(8,556
)
Noncontrolling interest
510,090

 
458,595

Total shareholders' equity (d)
4,167,021

 
4,046,553

 
 
 
 
Total capitalization (d) (f)
4,952,413

 
4,913,092

Total capitalization available to Validus (e) (f)
$
4,442,323

 
$
4,374,541

 
 
 
 
Debt to total capitalization
15.9
%
 
16.0
%
Debt (excluding JSDs) to total capitalization
5.0
%
 
5.0
%
Notes
(a)
On January 21, 2010, the Company offered and sold $250.0 million of Senior Notes due 2040 (the “2010 Senior Notes”) in a registered public offering. The 2010 Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole any time or in part from time to time at a make-whole redemption price. The net proceeds of $244.0 million from the sale of the 2010 Senior Notes, after the deduction of commissions paid to the underwriters in the transaction and other expenses, was used by the Company for general corporate purposes, which included the repurchase of our outstanding capital stock and dividends to our shareholders.
(b)
$150.0 million of Junior Subordinated Deferrable Debentures (the "2006 Junior Subordinated Deferrable Debentures") were issued on June 15, 2006, mature on June 15, 2036 and have been redeemable at the Company's option at par since June 15, 2011. $200.0 million of Junior Subordinated Deferrable Debentures ("2007 Junior Subordinated Deferrable Debentures") were issued on June 21, 2007, mature on June 15, 2037 and have been redeemable at the Company's option at par since June 15, 2012. During 2008 and 2009, the Company repurchased $60.2 million principal amount of its 2007 Junior Subordinated Deferrable Debentures due 2037 from an unaffiliated financial institution.
(c)
As part of the acquisition of Flagstone Reinsurance Holdings, S.A., the Company assumed $137.2 million of junior subordinated deferrable interest debentures due 2036 (the “Flagstone 2006 Junior Subordinated Deferrable Debentures”). The Flagstone 2006 Junior Subordinated Deferrable Debentures mature on September 15, 2036 and have been redeemable at the Company's option at par since September 15, 2011. In addition, the Company assumed $113.7 million of junior subordinated deferrable interest debentures due 2037 (the “Flagstone 2007 Junior Subordinated Deferrable Debentures”). $88.8 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on July 30, 2037 and have been redeemable at the Company's option at par since July 30, 2012. $25.0 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on September 15, 2037 and have been redeemable at the Company's option at par since September 15, 2012.
(d)
Total capitalization equals total shareholders' equity plus redeemable noncontrolling interest, Senior Notes and Junior Subordinated Deferrable Debentures.
(e)
Total capitalization available to Validus equals total shareholder's equity less noncontrolling interest plus Senior Notes and Junior Subordinated Deferrable Debentures.
(f)
The Company does not include notes payable to operating affiliate investors within total capitalization, since these are issued to some of the Company's operating affiliates specifically for the purpose of purchasing capital market products and writing collateralized reinsurance.

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Shareholders' Equity
Shareholders' equity available to Validus at June 30, 2015 was $3.7 billion.
On August 5, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, which is payable on September 30, 2015 to shareholders and warrant holders of record on September 15, 2015. The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash flows, the Company's financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved a further increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company expects the purchases under its share repurchase program 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.
Debt and Financing Arrangements
The following table details the Company's borrowings and credit facilities as at June 30, 2015.
(Dollars in thousands)
Maturity Date /
Term (a)
Commitments
 
Issued and Outstanding (b)
2006 Junior Subordinated Deferrable Debentures
June 15, 2036
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
June 15, 2037
200,000

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
134,482

 
134,482

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
113,750

 
113,750

Total debentures payable
 
598,232

 
538,032

2010 Senior Notes due 2040
January 26, 2040
250,000

 
250,000

Total debentures and senior notes payable
 
848,232

 
788,032

$400,000 syndicated unsecured letter of credit facility
March 9, 2016
400,000

 
—

$525,000 syndicated secured letter of credit facility
March 9, 2016
525,000

 
260,137

$30,000 secured bi-lateral letter of credit facility
Evergreen
30,000

 
11,139

Talbot FAL facility
December 31, 2017
25,000

 
25,000

AlphaCat Re secured letter of credit facility
Evergreen
30,000

 
30,000

IPC bi-lateral facility
Evergreen
25,000

 
11,027

$230,000 Flagstone bi-lateral facility
Evergreen
230,000

 
204,833

Total credit and other facilities
 
1,265,000

 
542,136

Total debt and financing arrangements
 
$
2,113,232

 
$
1,330,168

(a)
The arrangement is indicated as evergreen if, unless written notice to the contrary is given, it automatically renews on a regular basis.
(b)
Indicates utilization of commitment amount, not necessarily drawn borrowings.
For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, please refer to Note 12 "Debt and financing arrangements" to the Consolidated Financial Statements in Part I, Item 1.

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Ratings
The following table summarizes the financial strength ratings of the Company and its principal reinsurance and insurance subsidiaries from internationally recognized rating agencies as of August 7, 2015:
 
A.M. Best (a)
 
S&P (b)
 
Moody’s (c)
 
Fitch (d)
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa2
 
A-
Senior debt
bbb
 
BBB+
 
Baa2
 
BBB+
Subordinated debt
bbb-
 
—
 
Baa3
 
BBB-
Preferred stock
bb+
 
BBB-
 
Ba1
 
—
Outlook on ratings
Stable
 
Stable
 
Positive
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A3
 
A
Outlook on ratings
Stable
 
Stable
 
Positive
 
Stable
 
 
 
 
 
 
 
 
Lloyd's of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd's syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Positive
 
Stable
 
—
 
Stable
 
 
 
 
 
 
 
 
Talbot Syndicate 1183
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Positive
 
—
 
—
 
—
 
 
 
 
 
 
 
 
Validus Reinsurance (Switzerland), Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A-
 
—
 
—
Outlook on ratings
Stable
 
Stable
 
—
 
—
 
 
 
 
 
 
 
 
Western World Insurance Company
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Stable
 
—
 
—
 
—
 
 
 
 
 
 
 
 
PaCRe, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A-
 
—
 
—
 
—
Outlook on ratings
(e)
 
—
 
—
 
—
(a)
The A.M. Best ratings were most recently affirmed on March 12, 2015 for Validus Holdings, Ltd, Validus Reinsurance, Ltd and Validus Reinsurance (Switzerland) Ltd. The A.M. Best rating for Lloyd's was most recently affirmed on July 24, 2014. The A.M. Best rating for Talbot Syndicate 1183 was assigned on June 12, 2015. The A.M. Best rating for Western World Insurance Company was downgraded from A+ to A on November 6, 2014.
(b)
The S&P ratings were most recently affirmed on November 3, 2014 for Validus Holdings, Ltd, Validus Reinsurance, Ltd. and Validus Reinsurance (Switzerland) Ltd. On October 13, 2014, the S&P rating for Lloyd's was affirmed and the outlook was revised from positive to stable.
(c)
The Moody’s ratings were most recently affirmed on June 25, 2014 for Validus Holdings, Ltd and Validus Reinsurance, Ltd.
(d)
The Fitch ratings were most recently affirmed on February 27, 2015 for Validus Holdings, Ltd. and Validus Reinsurance, Ltd. The Fitch rating for Lloyd's was most recently affirmed on June 30, 2015.
(e)
A.M. Best placed the A- rating of PaCRe, Ltd. “under review with negative implications” on January 20, 2015.

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Recent accounting pronouncements
Please refer to Note 2 to the Consolidated Financial Statements (Part I, Item 1) for discussion of relevant recent accounting pronouncements.
Critical Accounting Policies and Estimates
There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of the Company's Consolidated Financial Statements:
•
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 premiums ceded and reinsurance recoverable balances including the provision for uncollectible amounts; and
•
Investment valuation of financial assets.
Critical accounting policies and estimates are discussed further in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. Statements that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, “may”, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statement.
We believe that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the insurance and reinsurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;

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•
the Company’s ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements;
•
general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate;
•
the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures;
•
accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;
•
the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;
•
acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;
•
availability and cost of reinsurance and retrocession coverage;
•
the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;
•
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•
changes in domestic or foreign laws or regulations, or their interpretations;
•
changes in accounting principles or the application of such principles by regulators;
•
statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers; and
•
the other factors set forth under Part I Item 1A "Risk Factors" and under Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as well as the risk and other factors set forth in the Company's other filings with the SEC, as well as management's response to any of the aforementioned factors.
In addition, other general factors could affect our results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are principally exposed to five types of market risk:
•
interest rate risk;
•
foreign currency risk;
•
credit risk;
•
liquidity risk; and
•
inflation risk.
Interest Rate Risk:    The Company’s fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise and credit spreads widen, the market value of the Company’s fixed maturity portfolio falls and the Company has the risk that cash outflows will have to be funded by selling assets, which will be trading at depreciated values. As interest rates decline and credit spreads tighten, the market value of the Company’s fixed income portfolio increases and the Company has reinvestment risk, as funds reinvested may earn less than is necessary to match anticipated liabilities. We manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of the insurance and reinsurance liabilities the Company assumes.
As at June 30, 2015, the impact on the Company’s fixed maturity and short-term investments from an immediate 100 basis point increase in market interest rates (based on U.S. treasury yield) would have resulted in an estimated decrease in market value of 2.3%, or approximately $137.6 million. As at June 30, 2015, the impact on the Company’s fixed maturity portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 2.3% or approximately $136.5 million.
As at June 30, 2015, the Company held $1.5 billion (December 31, 2014: $1.5 billion), or 27.6% (December 31, 2014: 26.3%), of the Company's fixed maturity portfolio in asset-backed and mortgage-backed securities. Some of these assets are exposed to prepayment risk, which occurs when the frequency with which holders of the underlying loans prepay the outstanding principal before the maturity date changes. The adverse impact of prepayment is more evident in a declining interest rate environment. As a result, the Company will be exposed to reinvestment risk, as cash flows received by the Company will be accelerated and will be reinvested at the prevailing interest rates.
Foreign Currency Risk:    Certain of the Company’s reinsurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. Foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. Therefore, we manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash, receivables and investments that are denominated in such currencies. As at June 30, 2015, approximately $638.9 million, or 5.6% of our total assets and $685.4 million, or 9.4% of our total liabilities were held in foreign currencies. As at June 30, 2015, approximately $95.7 million, or 1.3% of our total liabilities held in foreign currencies were non-monetary items which do not require revaluation at each reporting date. As of December 31, 2014, $606.3 million, or 5.9% of our total assets and $738.5 million, or 11.9% of our total liabilities were held in foreign currencies. As of December 31, 2014, $92.4 million, or 1.3% of our total liabilities denominated in foreign currencies were non-monetary items which do not require revaluation at each reporting date. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts. For further information on the accounting treatment of our foreign currency derivatives, refer to Note 7 of Part I, Item 1 - Consolidated Financial Statements. To the extent foreign currency exposure is not hedged or otherwise matched, the Company may experience exchange losses, which in turn would adversely affect the results of operations and financial condition.

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Credit Risk: The Company is exposed to credit risk from the possibility that counterparties may default on their obligations. The Company’s primary credit risks reside in investment in U.S. and non-U.S. corporate bonds and amounts recoverable from reinsurers. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets”, such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.5% or less of its total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's bank loan portfolio and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. In total, investments in below investment grade securities are limited to no more than 10% of the Company’s managed cash and investment portfolio. As at June 30, 2015, 9.1% of the Company's total managed cash and investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.7% of total cash and investments, other than with respect to government and agency securities as at June 30, 2015.
The amount of the maximum exposure to credit risk is indicated by the carrying value of the Company's financial assets. 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 S & P or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At June 30, 2015, 98.5% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or above, (December 31, 2014: 98.0%, rated A-) or from reinsurers posting full collateral.
Liquidity risk: Certain of the Company's investments may become illiquid. Disruptions in the credit markets may materially affect the liquidity of the Company's investments, including non-agency residential mortgage-backed securities and bank loans which represent 6.2% (December 31, 2014: 6.0%) of total cash and investments at June 30, 2015. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include the payment of claims on a major catastrophic event) in a period of market illiquidity, the investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under other conditions. At June 30, 2015, the Company had $845.8 million (December 31, 2014: $999.8 million) of unrestricted, liquid assets, defined as unpledged cash and cash equivalents, short term investments and government and government agency securities. Details of the Company's debt and financing arrangements at June 30, 2015 are provided below.
(Dollars in thousands)
Maturity Date / Term
 
In Use / Outstanding
2006 Junior Subordinated Deferrable Debentures
June 15, 2036
 
$
150,000

2007 Junior Subordinated Deferrable Debentures
June 15, 2037
 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
 
134,482

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
 
113,750

Total debentures payable
 
 
538,032

2010 Senior Notes due 2040
January 26, 2040
 
250,000

Total debentures and senior notes payable
 
 
788,032

$400,000 syndicated unsecured letter of credit facility
March 9, 2016
 
—

$525,000 syndicated secured letter of credit facility
March 9, 2016
 
260,137

$30,000 secured bi-lateral letter of credit facility
Evergreen
 
11,139

Talbot FAL facility
December 31, 2017
 
25,000

AlphaCat Re secured letter of credit facility
Evergreen
 
30,000

IPC bi-lateral facility
Evergreen
 
11,027

$230,000 Flagstone bi-lateral facility
Evergreen
 
204,833

Total credit and other facilities
 
 
542,136

Total debt and financing arrangements
 
 
$
1,330,168

Inflation Risk: We do not believe that inflation has had or will have a material effect on the Company's combined results of operations, except insofar as (a) inflation may affect interest rates, and (b) losses and loss expenses may be affected by inflation.

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ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.
Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
As at June 30, 2015, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
ITEM 1A. RISK FACTORS
Please refer to the discussion of Risk Factors in Part 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has repurchased approximately 74.0 million common shares for an aggregate purchase price of $2.4 billion from the inception of the share repurchase program to August 5, 2015.
The Company expects the purchases under its share repurchase program 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.
On February 3, 2015, the Board of Directors of the Company approved a further increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The repurchase program may be modified, extended or terminated by the Board of Directors at any time. The remaining amount available under the current share repurchase authorization was $625.4 million as of August 5, 2015.
Share repurchases include repurchases by the Company of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. We repurchase these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested.
 
 
Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
 
 
As at March 31, 2015
 
 
 
 
 
 
 
Quarter ended
Effect of share repurchases:
 
(cumulative)
 
April
 
May
 
June
 
June 30, 2015
Aggregate purchase price (a)
 
$
2,289,409

 
$
—

 
$
37,296

 
$
47,819

 
$
85,115

Shares repurchased
 
71,475,993

 
$
—

 
$
873,120

 
$
1,095,722

 
$
1,968,842

Average price (a)
 
$
32.03

 
$
—

 
$
42.72

 
$
43.64

 
$
43.23

 
 
 
 
 
 
 
 
 
 
 
Estimated cumulative net accretive (dilutive) impact on:
 
 

 
 

 
 

 
 

 
 

Diluted BV per common share (b)
 
 

 
 

 
 

 
 

 
$
4.09

Diluted EPS - Quarter (c)
 
 

 
 

 
 

 
 

 
$
0.26

 
 
Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
Effect of share repurchases:
 
As at June 30, 2015 (cumulative)
 
July
 
August
 
As at August 5, 2015
 
Cumulative to Date Effect
Aggregate purchase price (a)
 
$
2,374,524

 
$
22,741

 
$
1,697

 
$
24,438

 
$
2,398,962

Shares repurchased
 
73,444,835

 
503,600

 
36,538

 
540,138

 
73,984,973

Average price (a)
 
$
32.33

 
$
45.16

 
$
46.44

 
$
45.24

 
$
32.42

(a)
Share transactions are on a trade date basis through August 5, 2015 and are inclusive of commissions.  Average share price is rounded to two decimal places.
(b)
As the average price per share repurchased during the periods from 2009 at the inception of the share repurchase program through to 2013 was lower than the book value per common share, the repurchase of shares increased the ending book value per share.
(c)
The estimated impact on earnings per diluted share was calculated by comparing reported results versus i) net income per share plus an estimate of lost net investment income on the cumulative share repurchases divided by ii) weighted average diluted shares outstanding excluding the weighted average impact of cumulative share repurchases. The impact of cumulative share repurchases was accretive to earnings per diluted share.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.


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ITEM 6. EXHIBITS
Exhibit
Description
 
 
Exhibit 31.1*
Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 31.2*
Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 32*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 101.1 INS*
XBRL Instance Document
 
 
Exhibit 101.SCH*
XBRL Taxonomy Extension Schema Document
 
 
Exhibit 101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
Exhibit 101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
 
 
Exhibit 101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
Exhibit 101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
*Filed herewith

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VALIDUS HOLDINGS, LTD.
 
 
(Registrant)
 
 
 
Date:
August 7, 2015
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
August 7, 2015
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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