UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended June 30, 2010

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 þ     No o

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

Yes o     No o

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

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

     As of August 6, 2010, there were 111,527,254 outstanding Common Shares, $0.175 par value per share, of the registrant.

 

 

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as at June 30, 2010 (unaudited) and December 31, 2009			1
Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)			2
Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2010 and 2009 (unaudited)			3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)			4
Notes to Consolidated Financial Statements (unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			89
Item 4. Controls and Procedures			92
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			92
Item 1A. Risk Factors			92
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			92
Item 3. Defaults Upon Senior Securities			94
Item 4. (Removed and Reserved)			94
Item 5. Other Information			94
Item 6. Exhibits			94
Signatures			95
EXHIBIT 31.1 CERTIFICATION
EXHIBIT 31.2 CERTIFICATION
EXHIBIT 32 CERTIFICATION
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

Validus Holdings, Ltd.

Consolidated Balance Sheets
As at June 30, 2010 (unaudited) and December 31, 2009
(Expressed in thousands of U.S. dollars, except share and per share information)

		June 30,				December 31,
		2010				2009
		(unaudited)
Assets
Fixed maturities, at fair value (amortized cost: 2010 - $4,924,447; 2009 - $4,870,395)		$	4,975,019			$	4,869,378
Short-term investments, at fair value (amortized cost: 2010 - $269,782; 2009 - $482,632)			269,782				481,766
Other investments, at fair value (amortized cost: 2010 - $24,948; 2009 - $35,941)			26,068				37,615
Cash and cash equivalents			492,489				387,585
Total investments and cash			5,763,358				5,776,344
Premiums receivable			931,670				551,616
Deferred acquisition costs			165,957				112,329
Prepaid reinsurance premiums			185,771				73,164
Securities lending collateral			99,224				90,350
Loss reserves recoverable			193,604				181,765
Paid losses recoverable			24,133				14,782
Net receivable for investments sold			25,542				—
Income taxes recoverable			1,171				2,043
Intangible assets			120,975				123,055
Goodwill			20,393				20,393
Accrued investment income			38,643				38,077
Other assets			44,182				35,222
Total assets		$	7,614,623			$	7,019,140
Liabilities
Reserve for losses and loss expenses		$	1,978,130			$	1,622,134
Unearned premiums			1,176,603				724,104
Reinsurance balances payable			98,740				65,414
Securities lending payable			100,000				90,106
Deferred income taxes			26,200				24,508
Net payable for investments purchased			—				44,145
Accounts payable and accrued expenses			95,404				127,809
Senior notes payable			246,820				—
Debentures payable			289,800				289,800
Total liabilities			4,011,697				2,988,020
Commitments and contingent liabilities
Shareholders’ equity
Common shares, 571,428,571 authorized, par value $0.175 Issued and outstanding (including treasury shares) (2010 - 111,407,993; 2009 - 128,459,478)			23,101				23,033
Treasury shares (2010 - 20,598,594; 2009 - 3,156,871)			(3,605	)			(553	)
Additional paid-in-capital			2,247,995				2,675,680
Accumulated other comprehensive (loss)			(6,726	)			(4,851	)
Retained earnings			1,342,161				1,337,811
Total shareholders’ equity			3,602,926				4,031,120
Total liabilities and shareholders’ equity		$	7,614,623			$	7,019,140

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

Validus Holdings, Ltd.

Consolidated Statements of Operations and Comprehensive Income
For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		Three Months Ended								Six Months Ended
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues
Gross premiums written		$	516,861			$	425,032			$	1,387,795			$	1,034,924
Reinsurance premiums ceded			(67,726	)			(62,291	)			(158,465	)			(134,803	)
Net premiums written			449,135				362,741				1,229,330				900,121
Change in unearned premiums			(11,191	)			(34,541	)			(333,692	)			(253,162	)
Net premiums earned			437,944				328,200				895,638				646,959
Net investment income			34,809				26,963				69,108				53,735
Net realized gains (losses) on investments			12,441				(2,650	)			23,839				(26,071	)
Net unrealized gains on investments			41,640				37,249				57,053				59,402
Other income			2,697				1,017				3,585				1,774
Foreign exchanges (losses) gains			(4,099	)			8,432				(12,863	)			4,232
Total revenues			525,432				399,211				1,036,360				740,031
Expenses
Losses and loss expenses			194,894				124,751				673,425				256,585
Policy acquisition costs			74,126				64,438				150,302				125,887
General and administrative expenses			52,379				41,200				105,948				79,279
Share compensation expenses			6,846				5,632				13,422				12,986
Finance expenses			13,218				10,752				28,369				18,475
Transaction expenses			—				15,851				—				15,851
Total expenses			341,463				262,624				971,466				509,063
Net income before taxes			183,969				136,587				64,894				230,968
Tax (expense) benefit			(4,187	)			976				(3,490	)			1,502
Net income		$	179,782			$	137,563			$	61,404			$	232,470
Comprehensive income
Foreign currency translation adjustments			(68	)			3,993				(1,875	)			3,797
Comprehensive income		$	179,714			$	141,556			$	59,529			$	236,267
Earnings per share
Weighted average number of common shares and common share equivalents outstanding
Basic			121,009,553				76,138,038				123,821,415				75,941,308
Diluted			125,152,300				78,942,065				125,661,729				79,022,355
Basic earnings per share		$	1.47			$	1.79			$	0.47			$	3.02
Diluted earnings per share		$	1.44			$	1.74			$	0.46			$	2.94
Cash dividends declared per share		$	0.22			$	0.20			$	0.44			$	0.40

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

Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		June 30, 2010				June 30, 2009
		(unaudited)				(unaudited)
Common shares
Balance — Beginning of period		$	23,033			$	13,235
Issue of common shares			68				92
Balance — End of period		$	23,101			$	13,327
Treasury shares
Balance — Beginning of period		$	(553	)		$	—
Repurchase of common shares			(3,052	)			—
Balance — End of period		$	(3,605	)		$	—
Additional paid-in capital
Balance — Beginning of period		$	2,675,680			$	1,412,635
Issue of common shares, net of expenses			(80	)			(1,243	)
Repurchase of common shares			(441,027	)			—
Share compensation expenses			13,422				12,986
Balance — End of period		$	2,247,995			$	1,424,378
Accumulated other comprehensive (loss)
Balance — Beginning of period		$	(4,851	)		$	(7,858	)
Foreign currency translation adjustments			(1,875	)			3,797
Balance — End of period		$	(6,726	)		$	(4,061	)
Retained earnings
Balance — Beginning of period		$	1,337,811			$	520,722
Dividends			(57,054	)			(34,867	)
Net income			61,404				232,470
Balance — End of period		$	1,342,161			$	718,325
Total shareholders’ equity		$	3,602,926			$	2,151,969

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

Validus Holdings, Ltd.

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)

		June 30,				June 30,
		2010				2009
		(unaudited)				(unaudited)
Cash flows provided by (used in) operating activities
Net income		$	61,404			$	232,470
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses			13,422				12,986
Discount on senior notes			27				—
Net unrealized (gains) losses on investments			(23,839	)			26,071
Net unrealized (gains) on investments			(57,053	)			(59,402	)
Amortization of intangible assets			2,080				2,081
Foreign exchange losses (gains) on cash and cash equivalents included in net income			17,129				(9,593	)
Amortization of premium on fixed maturities			8,410				4,123
Change in:
Premiums receivable			(383,671	)			(264,194	)
Deferred acquisition costs			(53,628	)			(37,460	)
Prepaid reinsurance premiums			(112,607	)			(63,532	)
Loss reserves recoverable			(13,488	)			42,977
Paid losses recoverable			(9,364	)			(34,083	)
Income taxes recoverable			860				(522	)
Accrued investment income			(653	)			680
Other assets			(11,550	)			258
Reserve for losses and loss expenses			367,779				(18,001	)
Unearned premiums			452,499				316,689
Reinsurance balances payable			35,240				66,957
Deferred income taxes			1,452				(2,504	)
Accounts payable and accrued expenses			(30,867	)			(6,190	)
Net cash provided by operating activities			263,582				209,811
Cash flows provided by (used in) investing activities
Proceeds on sales of investments			2,933,352				1,509,773
Proceeds on maturities of investments			198,637				311,221
Purchases of fixed maturities			(3,244,072	)			(2,122,514	)
Sales of short-term investments, net			211,801				53,781
Sales of other investments			11,610				—
(Increase) in securities lending collateral			(9,894	)			(63,235	)
Net cash provided by (used in) investing activities			101,434				(310,974	)
Cash flows provided by (used in) financing activities
Net proceeds on issuance of senior notes			246,793				—
Issue of common shares, net of expenses			(12	)			(1,182	)
Purchases of common shares under share repurchase program			(444,079	)			—
Dividends paid			(55,994	)			(33,973	)
Increase in securities lending payable			9,894				63,235
Net cash (used in) provided by financing activities			(243,398	)			28,080
Effect of foreign currency rate changes on cash and cash equivalents			(16,714	)			13,325
Net increase (decrease) in cash			104,904				(59,758	)
Cash and cash equivalents — beginning of period			387,585				449,848
Cash and cash equivalents — end of period		$	492,489			$	390,090
Taxes paid during the period		$	1,335			$	1,199
Interest paid during the period		$	12,729			$	13,344

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

Validus Holdings, Ltd.

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

1. Basis of preparation and consolidation

     These unaudited consolidated financial statements include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 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 should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the U.S. Securities and Exchange Commission (the “SEC”).

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

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

2. Recent accounting pronouncements

     In June 2009, the FASB issued authoritative guidance on accounting for “Transfers and Servicing” (ASC 860). This update addresses practices that have developed that are not consistent with the original intent and key requirements and concerns that derecognized financial assets and related obligations should continue to be reported in the transferors’ financial statements. This update is effective for financial asset transfers in the interim and annual periods beginning January 1, 2010. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

     In June 2009, the FASB issued authoritative guidance which amends the “Consolidation” guidance that applies to Variable Interest Entities (“VIEs”) (ASC 810). This update amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. This update is effective for interim and annual periods beginning January 1, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In January 2010, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” (ASC 820). This update requires additional disclosures regarding (1) significant transfers in and out of Levels 1 and 2 and

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

the reasons that such transfers were made; (2) inputs and valuation techniques used to measure fair value for financial assets and liabilities that fall in either Level 2 or Level 3; (3) the activity within Level 3 fair value measurements, including information on a gross basis for purchases, sales, issuances, and settlements; and (4) disaggregation of financial assets and liabilities measured at fair value into classes of financial assets and liabilities. This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning January 1, 2011. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

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

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

     In April 2010, the FASB issued authoritative guidance which clarifies the “Stock Compensation” guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance is effective for accounting periods beginning on or after December 15, 2010, with earlier application permitted. The Company is currently evaluating the impact of this guidance, however it is not expected to have a material impact on the Company’s consolidated financial statements.

3. Investments

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

(a) Classification within the fair value hierarchy

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

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

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

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

     The Company’s external investment advisors have noted illiquidity and dislocation in the non-Agency RMBS market during 2010 and 2009. During the period ended June 30, 2010 and 2009, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, management, with assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.

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

     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust held in mutual funds. During the fourth quarter of 2009, a majority of the fund of hedge funds was redeemed. The remaining portion is a side pocket valued at $19,130 at June 30, 2010. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s May 31, 2010 NAV was used as a partial basis for fair value measurement in the Company’s June 30, 2010 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses

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

the variance between the estimated NAV and the one-month delayed fund investment manager’s NAV. Immaterial variances are recorded in the following reporting period.

     At June 30, 2010, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
U.S. Government and Government Agency		$	—			$	1,751,516			$	—			$	1,751,516
Non-U.S. Government and Government Agency			—				662,062				—				662,062
States, municipalities, political subdivision			—				27,210				—				27,210
Agency residential mortgage-backed securities			—				500,018				—				500,018
Non-Agency residential mortgage-backed securities			—				51,744				75,578				127,322
U.S. corporate			—				1,294,383				—				1,294,383
Non-U.S. corporate			—				432,711				—				432,711
Catastrophe bonds			—				63,164				—				63,164
Asset-backed securities			—				88,270				—				88,270
Commercial mortgage-backed securities			—				28,363				—				28,363
Total fixed maturities			—				4,899,441				75,578				4,975,019
Short-term investments			269,216				566				—				269,782
Hedge fund			—				—				19,130				19,130
Mutual funds			—				6,938				—				6,938
Total		$	269,216			$	4,906,945			$	94,708			$	5,270,869

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

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

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

     At June 30, 2010, Level 3 investments totaled $94,708, representing 1.8% of total investments measured at fair value on a recurring basis. At December 31, 2009, Level 3 investments totaled $111,006, representing 2.1% of total investments measured at fair value on a recurring basis.

     The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs as at June 30, 2010 and December 31, 2009:

		Six Months Ended June 30, 2010
		Fixed Maturity								Total Fair Market
		Investments				Other Investments				Value
Level 3 investments - Beginning of period		$	85,336			$	25,670			$	111,006
Payments and purchases			—				—				—
Sales and maturities			—				(7,094	)			(7,094	)
Realized gains			—				344				344
Unrealized (losses) gains			(1,634	)			210				(1,424	)
Amortization			(8,124	)			—				(8,124	)
Transfers in			—				—				—
Level 3 investments — End of period		$	75,578			$	19,130			$	94,708

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

(b) Net investment income

     Net investment income was derived from the following sources:

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Fixed maturities and short-term investments		$	36,346			$	26,396			$	72,101			$	52,914
Cash and cash equivalents			311				1,120				897				1,881
Securities lending income			49				173				119				512
Total gross investment income			36,706				27,689				73,117				55,307
Investment expenses			(1,897	)			(726	)			(4,009	)			(1,572	)
Net investment income		$	34,809			$	26,963			$	69,108			$	53,735

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

(c) Fixed maturity and short-term investments

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

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2010				2009				2010				2009
Fixed maturities, short-term and other investments and cash equivalents
Gross realized gains		$	15,120			$	3,928			$	27,885			$	13,381
Gross realized (losses)			(2,679	)			(6,578	)			(4,046	)			(39,452	)
Net realized gains (losses) on investments			12,441				(2,650	)			23,839				(26,071	)
Net unrealized (losses) gains on securities lending			(6	)			3,214				(1,020	)			4,306
Change in net unrealized gains on investments			41,646				34,035				58,073				55,096
Total net realized gains (losses) and change in net unrealized gains on investments		$	54,081			$	34,599			$	80,892			$	33,331

     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at June 30, 2010 were as follows:

						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Estimated Fair Value
U.S. Government and Government Agency		$	1,718,214			$	33,540			$	(238	)		$	1,751,516
Non-U.S. Government and Government Agency			664,666				13,054				(15,658	)			662,062
States, municipalities, political subdivision			26,745				538				(73	)			27,210
Agency residential mortgage-backed securities			481,308				18,779				(69	)			500,018
Non-Agency residential mortgage-backed securities			164,121				116				(36,915	)			127,322
U.S. corporate			1,258,345				37,164				(1,126	)			1,294,383
Non-U.S. corporate			431,586				8,175				(7,050	)			432,711
Catastrophe bonds			62,924				1,366				(1,126	)			63,164
Asset-backed securities			88,788				442				(960	)			88,270
Commercial mortgage-backed securities			27,750				617				(4	)			28,363
Total fixed maturities			4,924,447				113,791				(63,219	)			4,975,019
Total short-term investments			269,782				—				—				269,782
Total other investments			24,948				1,120				—				26,068
Total		$	5,219,177			$	114,911			$	(63,219	)		$	5,270,869

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

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

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

     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2010 and December 31, 2009. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

		June 30, 2010								December 31, 2009
		Estimated Fair
		Value				% of Total				Estimated Fair Value				% of Total
AAA		$	3,111,753				62.5	%		$	3,287,879				67.5	%
AA			490,443				9.9	%			487,364				10.0	%
A			1,158,636				23.3	%			925,532				19.0	%
BBB			49,042				1.0	%			14,416				0.3	%
Investment grade			4,809,874				96.7	%			4,715,191				96.8	%
BB			52,701				1.0	%			45,191				0.9	%
B			35,087				0.7	%			59,116				1.2	%
CCC			72,574				1.5	%			45,194				1.0	%
D/NR			4,783				0.1	%			4,686				0.1	%
Non-Investment grade			165,145				3.3	%			154,187				3.2	%
Total Fixed Maturities		$	4,975,019				100.0	%		$	4,869,378				100.0	%

     The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2010 and December 31, 2009 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

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

		June 30, 2010								December 31, 2009
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	453,392			$	453,706			$	269,889			$	270,688
Due after one year through five years			3,538,674				3,602,572				3,498,792				3,521,167
Due after five years through ten years			170,314				174,656				306,065				306,502
Due after ten years			100				112				2,399				2,467
			4,162,480				4,231,046				4,077,145				4,100,824
Asset-backed and mortgage-backed securities			761,967				743,973				793,250				768,554
Total		$	4,924,447			$	4,975,019			$	4,870,395			$	4,869,378

     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At June 30, 2010, approximately $239,056 (December 31, 2009: $225,823) of letters of credit were issued and outstanding under this facility for which $321,018 of investments were pledged as collateral (December 31, 2009: $314,857). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”). On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At June 30, 2010, $25,000 (December 31, 2009: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,682 of investments were pledged as collateral (December 31, 2009: $128,798). In addition, $1,575,617 of investments were held in trust at June 30, 2010 (December 31, 2009: $1,517,249). Of those, $1,421,260 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2009: $1,408,084).

     The Company assumed two letters of credit facilities as part of the acquisition of IPC. A $250,000 Credit Agreement between IPC Holdings, Ltd., IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a $350,000 Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At March 31, 2010, the IPC Syndicated Facility was closed. At June 30, 2010, the IPC Bi-Lateral Facility had $77,603 (December 31, 2009: $96,047) letters of credit issued and outstanding for which $103,526 (December 31, 2009: $219,004) of investments were held in an associated collateral account.

(d) Securities lending

     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at June 30, 2010, the Company had $97,550 (December 31, 2009: $88,146) in securities on loan. During the three months ended June 30, 2010, the Company recorded a $6 unrealized loss on this collateral on its Statements of Operations (June 30, 2009: unrealized gain $3,214). During the six months ended June 30, 2010, the Company recorded a $1,020 unrealized loss on this collateral on its Statements of Operations (June 30, 2009: unrealized gain $4,306).

     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities and overnight repo with an average reset period of 11.5 days (December 31, 2009: 26.1 days). As at June 30, 2010, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

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

		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	5,204			$	—			$	5,204
Agency			—				—				—				—
Short-term investments			61,217				32,803				—				94,020
Total		$	61,217			$	38,007			$	—			$	99,224

     As at December 31, 2009, the securities lending collateral reinvested lending by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:

		Level 1				Level 2				Level 3				Total
Corporate		$	—			$	14,123			$	—			$	14,123
Agency			—				9,363				—				9,363
Asset-backed securities			—				6,153				—				6,153
Short-term investments			730				59,981				—				60,711
Total		$	730			$	89,620			$	—			$	90,350

     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at June 30, 2010 and December 31, 2009. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.

		June 30, 2010								December 31, 2009
		Estimated Fair Value				% of Total				Estimated Fair Value				% of Total
AAA		$	14,009				14.1	%		$	33,501				37.1	%
AA+			13,012				13.1	%			12,011				13.3	%
AA			—				0.0	%			4,998				5.5	%
AA-			2,993				3.0	%			19,910				22.0	%
A+			—				0.0	%			9,999				11.1	%
A			7,798				7.9	%			9,006				10.0	%
NR			195				0.2	%			195				0.2	%
			38,007				38.3	%			89,620				99.2	%
NR- Short-term investments (1)			61,217				61.7	%			730				0.8	%
Total		$	99,224				100.0	%		$	90,350				100.0	%

     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at June 30, 2010 and December 31, 2009 are shown by contractual maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

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

		June 30, 2010								December 31, 2009
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Due in one year or less		$	97,000			$	97,029			$	68,895			$	70,074
Due after one year through five years			3,000				2,195				21,211				20,276
Total		$	100,000			$	99,224			$	90,106			$	90,350

4. Reserve for losses and loss expenses

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

     The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses as at June 30, 2010 and December 31, 2009:

		Six Months Ended				Year ended
		June 30,				December 31,
		2010				2009
Reserve for losses and loss expenses, beginning of period		$	1,622,134			$	1,305,303
Losses and loss expenses recoverable			(181,765	)			(208,796	)
Net reserves for losses and loss expenses, beginning of period			1,440,369				1,096,507
Net reserves acquired in purchase of IPC			—				304,957
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
Current year			749,717				625,810
Prior years			(76,292	)			(102,053	)
Total incurred losses and loss expenses			673,425				523,757
Total net paid losses			(306,084	)			(507,435	)
Foreign exchange			(23,184	)			22,583
Net reserve for losses and loss expenses, end of period			1,784,526				1,440,369
Losses and loss expenses recoverable			193,604				181,765
Reserve for losses and loss expenses, end of period		$	1,978,130			$	1,622,134

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

5. Reinsurance

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

a) Credit risk

     The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At June 30, 2010, 99.2% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $84,216 of IBNR recoverable (December 31, 2009: $99,587). Reinsurance recoverables by reinsurer are as follows:

		June 30, 2010								December 31, 2009
		Reinsurance								Reinsurance
		Recoverable				% of Total				Recoverable				% of Total
Top 10 reinsurers		$	169,005				77.6	%			170,810				86.9	%
Other reinsurers’ balances > $1 million			38,635				17.8	%			19,818				10.1	%
Other reinsurers’ balances < $1 million			10,097				4.6	%			5,919				3.0	%
Total		$	217,737				100.0	%			196,547				100.0	%

		June 30, 2010
				Reinsurance
Top 10 Reinsurers		Rating		Recoverable				% of Total
Fully collateralized reinsurers		NR		$	40,591				24.0	%
Lloyd’s Syndicates		A+			37,641				22.3	%
Hannover Re		AA-			14,973				8.9	%
Montpelier Re		A-			15,000				8.9	%
Munich Re		AA-			12,276				7.3	%
Tokio Millenium		AA			10,000				5.9	%
Flagstone		A-			9,745				5.8	%
Transatlantic Re		A+			9,711				5.7	%
Everest Re		A-			9,695				5.7	%
Aspen		A			9,373				5.5	%
Total				$	169,005				100.0	%

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

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

     At June 30, 2010 and December 31, 2009, the provision for uncollectible reinsurance relating to losses recoverable was $5,505 and $3,477, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $217,737 reinsurance recoverable at June 30, 2010, $40,591 was fully collateralized (December 31, 2009: $50,840).

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

6. Share capital

a) Authorized and issued

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

     The Company may from time to time repurchase its securities, including common shares and Junior Subordinated Deferrable Debentures. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders. This amount is in addition to, and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010 under its previously authorized $400,000 share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased $300,000 in common shares.

     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.

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

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

		Common Shares
Common shares outstanding, December 31, 2009			128,459,478
Restricted share awards vested, net of shares withheld			281,512
Restricted share units vested, net of shares withheld			57,192
Employee seller shares vested, net of shares withheld			—
Options exercised			51,534
Warrants exercised			—
Shares repurchased			(17,441,723	)
Common shares outstanding, June 30, 2010			111,407,993