Validus Announces Third Quarter and Nine Month 2014 Financial Results

2014 Year to Date Net Income of $355.4 Million and 12.8% Annualized Operating Return on Average Equity

Book Value Per Diluted Common Share of $38.70 at September 30, 2014

PEMBROKE, Bermuda--()--Validus Holdings, Ltd. (“Validus” or the “Company”) (NYSE:VR) today reported net income available to Validus of $39.7 million, or $0.41 per diluted common share, for the three months ended September 30, 2014, compared to $183.4 million, or $1.77 per diluted common share, for the three months ended September 30, 2013. Net income available to Validus was $355.4 million, or $3.70 per diluted common share, for the nine months ended September 30, 2014, compared to $437.3 million, or $3.99 per diluted common share, for the nine months ended September 30, 2013.

“Net Operating Income available to Validus, Net Operating Income per share available to Validus and Annualized Net Operating Return on Average Equity.”

Net operating income available to Validus was $77.3 million, or $0.82 per diluted common share, for the three months ended September 30, 2014, compared to $155.2 million, or $1.50 per diluted common share, for the three months ended September 30, 2013. Net operating income available to Validus was $356.0 million, or $3.71 per diluted common share, for the nine months ended September 30, 2014, compared to $482.3 million, or $4.41 per diluted common share, for the nine months ended September 30, 2013.

Book value per diluted common share stands at $38.70, reflecting quarterly growth of 1.2% inclusive of dividends.

Commenting on the financial results for the three months ended September 30, 2014, Validus' Chairman and CEO Ed Noonan stated:

“Validus’ results for the quarter were impacted by $61.4 million of losses concentrated in the classes of aviation war and energy. Despite these losses, the company still generated $92.1 million in underwriting income, $77.3 million in net operating income and an 8.3% annualized operating return on average equity. Validus takes on volatile business as we get paid more for assuming the risk. By definition this means that our results will sometimes be lumpy, but I’d rather have a lumpy high return on equity than a lower consistent one. Our thoughtful underwriting of these classes of business is what has allowed Validus to create strong growth in book value since the company’s formation.”

Western World results have not been included in the Company's consolidated results for the three and nine months ended September 30, 2014.

Net income and net operating income available to Validus, earnings and operating earnings per diluted share available to Validus, by segment for the three months ended September 30, 2014 were as follows:

    Net Income Available to Validus       Net Operating Income Available to Validus
(Expressed in millions of U.S. dollars, except per share information)
Validus Re $ 56.0       $ 78.8
Talbot 21.7 31.5
PaCRe, Ltd. (5.9 )

-

Other AlphaCat Companies

5.7

5.0

AlphaCat subtotal (0.2 ) 5.0
Corporate & Eliminations (37.8 ) (38.0 )
Total $ 39.7   $ 77.3  
Earnings per diluted common share available to Validus $ 0.41
Operating earnings per diluted common share available to Validus $ 0.82

Net operating income (loss), a non-GAAP financial measure, is defined as net income (loss) excluding net realized and change in net unrealized gains (losses) on investments, income (loss) from investment affiliate, foreign exchange gains (losses) and non-recurring items. Net operating income (loss) available (attributable) to Validus is defined as above, but excludes income (loss) available (attributable) to noncontrolling interest. Reconciliations of these measures to net income (loss) and net income (loss) available (attributable) to Validus, the most directly comparable GAAP measures, are presented at the end of this release.

Third Quarter 2014 Results

Highlights for the third quarter include the following:

  • Gross premiums written for the three months ended September 30, 2014 were $359.0 million compared to $356.8 million for the three months ended September 30, 2013, an increase of $2.2 million, or 0.6%.
  • Net premiums earned for the three months ended September 30, 2014 were $494.7 million compared to $531.3 million for the three months ended September 30, 2013, a decrease of $36.6 million, or 6.9%.
  • Underwriting income for the three months ended September 30, 2014 was $92.1 million compared to $166.8 million for the three months ended September 30, 2013, a decrease of $74.7 million, or 44.8%.
  • Combined ratio for the three months ended September 30, 2014 was 81.4% which included $55.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.2 percentage points compared to a combined ratio for the three months ended September 30, 2013 of 68.6% which included $65.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 12.2 percentage points. The favorable loss reserve development was primarily due to lower than expected development on attritional losses. Included within the incurred losses for the three months ended September 30, 2014 of $224.1 million, was $61.4 million of non-notable loss events.
  • Net operating income available to Validus for the three months ended September 30, 2014 was $77.3 million compared to $155.2 million for the three months ended September 30, 2013, a decrease of $78.0 million, or 50.2%.
  • Net income available to Validus for the three months ended September 30, 2014 was $39.7 million compared to $183.4 million for the three months ended September 30, 2013, a decrease of $143.7 million, or 78.4%.
  • Annualized return on average equity of 4.2% and annualized net operating return on average equity of 8.3%.

Highlights for the year to date include the following:

  • Gross premiums written for the nine months ended September 30, 2014 were $2,026.6 million compared to $2,163.8 million for the nine months ended September 30, 2013, a decrease of $137.2 million, or 6.3%.
  • Net premiums earned for the nine months ended September 30, 2014 were $1,443.7 million compared to $1,609.8 million for the nine months ended September 30, 2013, a decrease of $166.2 million, or 10.3%.
  • Underwriting income for the nine months ended September 30, 2014 was $391.3 million compared to $494.5 million for the nine months ended September 30, 2013, a decrease of $103.3 million, or 20.9%.
  • Combined ratio for the nine months ended September 30, 2014 was 72.9% which included $167.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.6 percentage points compared to a combined ratio for the nine months ended September 30, 2013 of 69.3% which included $171.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.7 percentage points.
  • Net operating income available to Validus for the nine months ended September 30, 2014 was $356.0 million compared to $482.3 million for the nine months ended September 30, 2013, a decrease of $126.3 million, or 26.2%.
  • Net income available to Validus for the nine months ended September 30, 2014 was $355.4 million compared to $437.3 million for the nine months ended September 30, 2013, a decrease of $81.9 million, or 18.7%.
  • Annualized return on average equity of 12.8% and annualized net operating return on average equity of 12.8%.

Notable Loss Events

During the three months ended September 30, 2014 and 2013, the Company did not incur any notable losses, defined as consolidated losses which aggregate to a threshold greater than or equal to $30.0 million. The Company's loss ratio, excluding prior year development and notable loss events, for the three months ended September 30, 2014 and 2013 was 56.5% and 45.7%, respectively.

Validus Re Segment - Third Quarter 2014 Results

Highlights for the third quarter include the following:

  • Gross premiums written for the three months ended September 30, 2014 were $114.9 million compared to $130.9 million for the three months ended September 30, 2013, a decrease of $16.0 million, or 12.2%. Gross premiums written for the three months ended September 30, 2014 included $70.6 million of property premiums, $23.0 million of marine premiums and $21.3 million of specialty premiums, compared to $96.5 million of property premiums, $21.9 million of marine premiums and $12.6 million of specialty premiums for the three months ended September 30, 2013.
  • Net premiums earned for the three months ended September 30, 2014 were $226.7 million compared to $275.8 million for the three months ended September 30, 2013, a decrease of $49.1 million, or 17.8%.
  • The combined ratio for the three months ended September 30, 2014 was 70.3% compared to 48.0% for the three months ended September 30, 2013, an increase of 22.3 percentage points.
  • The loss ratio for the three months ended September 30, 2014 was 45.0% compared to 22.6% for the three months ended September 30, 2013, an increase of 22.4 percentage points. The loss ratio for the three months ended September 30, 2014 included favorable loss reserve development on prior accident years of $20.1 million, benefiting the loss ratio by 8.9 percentage points. The loss ratio for the three months ended September 30, 2013 included favorable loss reserve development on prior accident years of $30.9 million, benefiting the loss ratio by 11.2 percentage points. The favorable loss reserve development was primarily due to lower than expected development on attritional losses.
  • Net operating income available to Validus Re for the three months ended September 30, 2014 was $78.8 million compared to $153.9 million, for the three months ended September 30, 2013, a decrease of $75.1 million, or 48.8%.
  • General and administrative expenses for the three months ended September 30, 2014 were $18.5 million compared to $19.8 million for the three months ended September 30, 2013, a decrease of $1.3 million, or 6.4%.

Highlights for the year to date include the following:

  • Gross premiums written for the nine months ended September 30, 2014 were $1,104.2 million compared to $1,232.3 million for the nine months ended September 30, 2013, a decrease of $128.1 million, or 10.4%. Gross premiums written for the nine months ended September 30, 2014 included $617.0 million of property premiums, $175.7 million of marine premiums and $311.4 million of specialty premiums, compared to $727.4 million of property premiums, $194.0 million of marine premiums and $310.8 million of specialty premiums for the nine months ended September 30, 2013.
  • Net premiums earned for the nine months ended September 30, 2014 were $686.8 million compared to $883.7 million for the nine months ended September 30, 2013, a decrease of $196.9 million, or 22.3%.
  • The combined ratio for the nine months ended September 30, 2014 was 60.5% compared to 60.7% for the nine months ended September 30, 2013, a decrease of 0.2 percentage points.
  • The loss ratio for the nine months ended September 30, 2014 and the nine months ended September 30, 2013 was 36.1%. The loss ratio for the nine months ended September 30, 2014 included favorable loss reserve development on prior accident years of $56.8 million, benefiting the loss ratio by 8.3 percentage points. The loss ratio for the nine months ended September 30, 2013 included favorable loss reserve development on prior accident years of $62.7 million, benefiting the loss ratio by 7.1 percentage points.
  • Net operating income available to Validus Re for the nine months ended September 30, 2014 was $318.8 million compared to $409.7 million, for the nine months ended September 30, 2013, a decrease of $91.0 million, or 22.2%.
  • General and administrative expenses for the nine months ended September 30, 2014 were $53.8 million compared to $69.6 million for the nine months ended September 30, 2013, a decrease of $15.9 million, or 22.8%.

Talbot Segment - Third Quarter 2014 Results

Highlights for the third quarter include the following:

  • Gross premiums written for the three months ended September 30, 2014 were $245.7 million compared to $246.5 million for the three months ended September 30, 2013, a decrease of $0.8 million, or 0.3%. Gross premiums written for the three months ended September 30, 2014 included $67.0 million of property premiums, $90.8 million of marine premiums and $87.8 million of specialty premiums compared to $82.8 million of property premiums, $75.8 million of marine premiums and $87.8 million of specialty premiums for the three months ended September 30, 2013.
  • Net premiums earned for the three months ended September 30, 2014 were $232.8 million compared to $218.3 million for the three months ended September 30, 2013, an increase of $14.5 million, or 6.6%.
  • The combined ratio for the three months ended September 30, 2014 was 88.9% compared to 84.9% for the three months ended September 30, 2013, an increase of 4.0 percentage points.
  • The loss ratio for the three months ended September 30, 2014 was 50.8% compared to 45.8% for the three months ended September 30, 2013, an increase of 5.0 percentage points. The loss ratio for the three months ended September 30, 2014 included favorable loss reserve development on prior accident years of $35.4 million, benefiting the loss ratio by 15.2 percentage points. The loss ratio for the three months ended September 30, 2013 included favorable loss reserve development on prior accident years of $34.2 million, benefiting the loss ratio by 15.7 percentage points. The favorable loss reserve development was primarily due to lower than expected development on attritional losses.
  • Net operating income available to Talbot for the three months ended September 30, 2014 was $31.5 million compared to $36.8 million, for the three months ended September 30, 2013, a decrease of $5.3 million, or 14.4%.
  • General and administrative expenses for the three months ended September 30, 2014 were $37.7 million compared to $37.4 million for the three months ended September 30, 2013, an increase of $0.3 million, or 0.8%.

Highlights for the year to date include the following:

  • Gross premiums written for the nine months ended September 30, 2014 were $854.3 million compared to $855.5 million for the nine months ended September 30, 2013, a decrease of $1.2 million, or 0.1%. Gross premiums written for the nine months ended September 30, 2014 included $261.1 million of property premiums, $319.8 million of marine premiums and $273.4 million of specialty premiums compared to $285.0 million of property premiums, $306.1 million of marine premiums and $264.4 million of specialty premiums for the nine months ended September 30, 2013.
  • Net premiums earned for the nine months ended September 30, 2014 were $658.6 million compared to $626.4 million for the nine months ended September 30, 2013, an increase of $32.2 million, or 5.1%.
  • The combined ratio for the nine months ended September 30, 2014 was 84.8% compared to 77.6% for the nine months ended September 30, 2013, an increase of 7.2 percentage points.
  • The loss ratio for the nine months ended September 30, 2014 was 46.3% compared to 40.2% for the nine months ended September 30, 2013, an increase of 6.1 percentage points. The loss ratio for the nine months ended September 30, 2014 included favorable loss reserve development on prior accident years of $99.2 million, benefiting the loss ratio by 15.1 percentage points. The loss ratio for the nine months ended September 30, 2013 included favorable loss reserve development on prior accident years of $109.1 million, benefiting the loss ratio by 17.4 percentage points.
  • Net operating income available to Talbot for the nine months ended September 30, 2014 was $113.7 million compared to $153.1 million, for the nine months ended September 30, 2013, a decrease of $39.3 million, or 25.7%.
  • General and administrative expenses for the nine months ended September 30, 2014 were $107.0 million compared to $100.5 million for the nine months ended September 30, 2013, an increase of $6.5 million, or 6.5%.

AlphaCat Segment - Third Quarter 2014 Results

Highlights for the third quarter include the following:

  • Gross premiums written from our consolidated entities, including PaCRe, for the three months ended September 30, 2014 were $6.9 million compared to $3.5 million for the three months ended September 30, 2013, an increase of $3.5 million, or 99.3%.
  • Net premiums earned for the three months ended September 30, 2014 were $35.1 million compared to $37.2 million for the three months ended September 30, 2013, a decrease of $2.0 million, or 5.5%.
  • Other income for the three months ended September 30, 2014 was $6.0 million compared to $3.8 million for the three months ended September 30, 2013, an increase of $2.2 million, or 57.7%.
  • Income from operating affiliates for the three months ended September 30, 2014 was $3.8 million compared to $1.5 million for the three months ended September 30, 2013, an increase of $2.3 million, or 157.1%.
  • Income attributable to operating affiliate investors for the three months ended September 30, 2014 was $25.8 million compared to $11.8 million for the three months ended September 30, 2013, resulting in a decrease to net operating income of $14.0 million, or 118.4%.
  • The combined ratio for the three months ended September 30, 2014 was 42.7% compared to 68.0% for the three months ended September 30, 2013, a decrease of 25.3 percentage points.
  • The loss ratio for the three months ended September 30, 2014 was 10.6% compared to 42.0% for the three months ended September 30, 2013, a decrease of 31.4 percentage points. The loss ratios for the three months ended September 30, 2014 and 2013 did not include any loss reserve development on prior accident years.
  • Net operating income available to AlphaCat for the three months ended September 30, 2014 was $5.0 million compared to $3.1 million, for the three months ended September 30, 2013, an increase of $1.8 million, or 59.0%.

Highlights for the year to date include the following:

  • Gross premiums written from our consolidated entities, including PaCRe, for the nine months ended September 30, 2014 were $135.1 million compared to $146.8 million for the nine months ended September 30, 2013, a decrease of $11.7 million, or 8.0%.
  • Net premiums earned for the nine months ended September 30, 2014 were $98.3 million compared to $99.8 million for the nine months ended September 30, 2013, a decrease of $1.5 million, or 1.5%.
  • Other income for the nine months ended September 30, 2014 was $21.5 million compared to $17.4 million for the nine months ended September 30, 2013, an increase of $4.0 million, or 23.2%.
  • Income from operating affiliates for the nine months ended September 30, 2014 was $13.6 million compared to $8.8 million for the nine months ended September 30, 2013, an increase of $4.8 million, or 54.7%.
  • Income attributable to operating affiliate investors for the nine months ended September 30, 2014 was $82.8 million compared to $42.2 million for the nine months ended September 30, 2013, resulting in a decrease to net operating income of $40.7 million, or 96.5%.
  • The combined ratio for the nine months ended September 30, 2014 was 18.5% compared to 41.1% for the nine months ended September 30, 2013, a decrease of 22.6 percentage points.
  • The loss ratio for the nine months ended September 30, 2014 was (7.3)% compared to 17.0% for the nine months ended September 30, 2013, a decrease of 24.3 percentage points. The loss ratio for the nine months ended September 30, 2014 included favorable loss reserve development on prior accident years of $11.6 million, benefiting the loss ratio by 11.8 percentage points. Accounting for Validus' ownership interest in the various AlphaCat entities, the impact of the AlphaCat favorable loss reserve development on net operating income available to Validus was $0.3 million. The loss ratio for the nine months ended September 30, 2013 did not include any loss reserve development on prior accident years.
  • Net operating income available to AlphaCat for the nine months ended September 30, 2014 was $29.6 million compared to $33.4 million, for the nine months ended September 30, 2013, a decrease of $3.7 million, or 11.2%.

Corporate Results

Corporate results include executive and board expenses, internal and external audit expenses, interest and costs incurred in connection with the Company's senior notes and junior subordinated deferrable debentures and other costs relating to the Company as a whole.

General and administrative expenses for the three months ended September 30, 2014, net of eliminations related to the operating segments, were $19.4 million compared to $18.2 million for the three months ended September 30, 2013, an increase of $1.2 million or 6.6%. Share compensation expenses for the three months ended September 30, 2014, net of operating segment eliminations were $3.0 million compared to $4.9 million for the three months ended September 30, 2013, a decrease of $1.9 million or 38.6%. In addition to the general and administrative expenses noted above, there were $0.1 million of non-recurring costs relating to the acquisition of Western World Insurance Group, Inc. ("Western World") in the quarter.

General and administrative expenses for the nine months ended September 30, 2014, net of eliminations related to the operating segments, were $55.2 million compared to $48.4 million for the nine months ended September 30, 2013, an increase of $6.8 million, or 14.0%. Share compensation expenses for the nine months ended September 30, 2014 were $8.4 million compared to $7.0 million for the nine months ended September 30, 2013, an increase of $1.4 million, or 19.6%. In addition to the general and administrative expenses noted above, there were $3.4 million of non-recurring costs relating to the acquisition of Western World for the nine months ended September 30, 2014.

Investments

Net investment income for the three months ended September 30, 2014 was $25.3 million compared to $20.0 million for the three months ended September 30, 2013, an increase of $5.3 million, or 26.2%.

Net realized gains on investments for the three months ended September 30, 2014 were $4.6 million compared to net realized losses of ($6.3) million for the three months ended September 30, 2013, an increase of $10.9 million, or 172.7%.

The change in net unrealized losses on investments for the three months ended September 30, 2014 was $(85.0) million compared to the change in net unrealized gains of $70.0 million for the three months ended September 30, 2013, a decrease of $154.9 million, or 221.4%. Net unrealized losses on investments for the three months ended September 30, 2014 were driven by ($61.0) million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $54.9 million for the three months ended September 30, 2014, leaving a net impact to the Company of ($6.1) million.

The change in net unrealized gains on investments for the three months ended September 30, 2013 was driven by $43.3 million in unrealized gains relating to PaCRe. The amount of PaCRe's net unrealized gains attributable to noncontrolling interest was ($39.0) million for the three months ended September 30, 2013, leaving a net impact to the Company of $4.3 million.

Net investment income for the nine months ended September 30, 2014 was $69.9 million compared to $71.9 million for the nine months ended September 30, 2013, a decrease of $2.0 million, or 2.7%.

Net realized gains on investments for the nine months ended September 30, 2014 were $16.2 million compared to net realized losses of ($1.2) million for the nine months ended September 30, 2013, an increase of $17.4 million.

The change in net unrealized gains on investments for the nine months ended September 30, 2014 was $16.1 million compared to the change in net unrealized losses of ($78.6) million for the nine months ended September 30, 2013, an increase of $94.8 million, or 120.5%. Net unrealized gains on investments for the nine months ended September 30, 2014 were driven by $16.9 million in unrealized gains relating to PaCRe. The amount of PaCRe's net unrealized gains attributable to noncontrolling interest was ($15.2) million for the nine months ended September 30, 2014, leaving a net impact to the Company of $1.7 million.

The change in net unrealized losses on investments for the nine months ended September 30, 2013 was driven by ($32.7) million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $29.4 million for the nine months ended September 30, 2013, leaving a net impact to the Company of ($3.3) million.

Finance Expenses

Finance expenses for the three months ended September 30, 2014 were $15.4 million compared to $15.3 million for the three months ended September 30, 2013, an increase of 0.2%.

Finance expenses for the nine months ended September 30, 2014 were $47.4 million compared to $47.3 million for the nine months ended September 30, 2013, an increase of $0.1 million, or 0.3%.

Shareholders' Equity and Capitalization

As at September 30, 2014, total shareholders' equity was $4.2 billion including $522.3 million of noncontrolling interest. Shareholders' equity available to Validus was $3.7 billion as at September 30, 2014. Book value per diluted common share was $38.70 at September 30, 2014, compared to $38.55 at June 30, 2014. Book value per diluted common share is a non-GAAP financial measure. A reconciliation of this measure to book value per common share is presented at the end of this release.

Total capitalization at September 30, 2014 was $5.1 billion, including $540.0 million of junior subordinated deferrable debentures, $247.3 million of senior notes and $70.5 million of redeemable noncontrolling interest. Total capitalization available to Validus at September 30, 2014 was $4.5 billion, excluding $522.3 million of noncontrolling interest and $70.5 million of redeemable noncontrolling interest.

Share Repurchases

For the three months ended September 30, 2014, the number of shares repurchased was 2.3 million. A summary of the share repurchases made to date under the Company’s previously announced share repurchase program is as follows:

      Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
As at June 30, 2014
(cumulative)
        Quarter ended
September 30, 2014
Effect of share repurchases: July August September
Aggregate purchase price (a) $ 1,917,688 $ 6,887 $ 40,929 $ 41,371 $ 89,187
Shares repurchased 62,171,982 187,661 1,082,445 1,060,322 2,330,428
Average price (a) $ 30.84   $ 36.70   $ 37.81   $ 39.02   $ 38.27
 
Estimated cumulative net accretive (dilutive) impact on:
Book value per diluted common share (b) 3.00
Earnings per diluted share - Quarter (c) 0.12
      Share Repurchase Activity

(Expressed in thousands of U.S. dollars except for share and per share information)

Effect of share repurchases: As at September 30, 2014   October   As at October 28, 2014   Cumulative to Date Effect
Aggregate purchase price (a) $ 2,006,875 $ 65,633 $ 65,633 $ 2,072,508
Shares repurchased 64,502,410 1,663,577 1,663,577 66,165,987
Average price (a) $ 31.11   $ 39.45   $ 39.45   $ 31.32

(a) Share transactions are on a trade date basis through October 28, 2014 and are inclusive of commissions. Average share price is rounded to two decimal places.

(b) As the average price per share repurchased during certain periods between 2009 and 2014 was lower than the book value per common share, the repurchase of shares increased the Company's period 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.

Conference Call

The Company will host a conference call for analysts and investors on October 30, 2014 at 10:00 AM (Eastern) to discuss the third quarter 2014 financial results and related matters. The conference call may be accessed by dialing 1-888-771-4371 (toll-free U.S.) or 1-847-585-4405 (international) and entering the passcode 3791 8174. Those who intend to participate in the conference call should register at least ten minutes in advance to ensure access to the call. A telephone replay of the conference call will be available through November 13, 2014, by dialing 1-888-843-7419 (toll-free U.S.) or 1-630-652-3042 (international) and entering the passcode 3791 8174.

This conference call will also be available through a live audio webcast accessible through the Investor Relations section of the Company's website located at www.validusholdings.com. A replay of the webcast will be available at the Investor Relations section of the Company's website through November 13, 2014. In addition, a financial supplement relating to the Company's financial results for the three and nine months ended September 30, 2014 is available in the Investor Relations section of the Company's website.

About Validus Holdings, Ltd.

Validus Holdings, Ltd. is a holding company for reinsurance and insurance operating companies and investment advisors including Validus Reinsurance, Ltd. (“Validus Re”), Talbot Holdings Ltd. (“Talbot”), Western World Insurance Group, Inc. (“Western World”) and AlphaCat Managers, Ltd. (“AlphaCat”).

Western World results have not been included in the Company's consolidated results for the three and nine months ended September 30, 2014.

Validus Re is a Bermuda based reinsurer focused on short tail lines of reinsurance. Talbot is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd's insurance market through Syndicate 1183. AlphaCat is a Bermuda based investment adviser managing capital for third parties and the Group in insurance linked securities and other property catastrophe reinsurance investments.

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at September 30, 2014 and December 31, 2013

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

     
September 30, 2014 December 31, 2013
 
Assets
Fixed maturities, at fair value (amortized cost: 2014—$4,668,585; 2013—$5,522,853)

$

4,670,173

$

5,542,258

Short-term investments, at fair value (amortized cost: 2014—$1,684,997; 2013—$751,734) 1,684,982 751,778
Other investments, at fair value (cost: 2014—$714,508; 2013—$637,728) 718,633 618,316
Cash and cash equivalents   843,747     1,056,346  
Total investments and cash 7,917,535 7,968,698
Investments in affiliates 217,612 141,243
Premiums receivable 936,306 697,233
Deferred acquisition costs 186,277 134,269
Prepaid reinsurance premiums 129,809 103,251
Securities lending collateral 9,056 3,392
Loss reserves recoverable 298,502 370,154
Paid losses recoverable 62,991 80,080
Intangible assets 103,287 106,407
Goodwill 20,393 20,393
Accrued investment income 15,415 18,876
Other assets   155,867     202,436  
Total assets $ 10,053,050   $ 9,846,432  
 
Liabilities
Reserve for losses and loss expenses $ 2,752,168 $ 3,030,399
Unearned premiums 1,158,429 824,496
Reinsurance balances payable 141,482 154,874
Securities lending payable 9,522 3,858
Deferred income taxes 11,687 19,086
Net payable for investments purchased 54,735 19,383
Accounts payable and accrued expenses 186,649 278,187
Notes payable to operating affiliates 655,976 439,272
Senior notes payable 247,279 247,198
Debentures payable   539,953     541,416  
Total liabilities   5,757,880     5,558,169  
 
Commitments and contingent liabilities
Redeemable noncontrolling interest 70,473 86,512
 
Shareholders' equity
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2014—155,253,556; 2013—154,488,497; Outstanding: 2014—89,112,271; 2013—96,044,312) 27,169 27,036
Treasury shares (2014—66,141,285; 2013—58,444,185) (11,575 ) (10,228 )
Additional paid-in-capital 1,413,145 1,677,894
Accumulated other comprehensive (loss) (2,738 ) (617 )
Retained earnings   2,276,409     2,010,009  
Total shareholders' equity available to Validus   3,702,410     3,704,094  
 
Noncontrolling interest 522,287 497,657

 

 
Total shareholders' equity   4,224,697     4,201,751  
 
Total liabilities, noncontrolling interests and shareholders' equity $ 10,053,050   $ 9,846,432  
 
 

Validus Holdings, Ltd.

Consolidated Statements of Operations

For the three and nine months ended September 30, 2014 and 2013

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

     
Three Months Ended September 30, Nine Months Ended September 30,
2014   2013 2014   2013
Underwriting income
Gross premiums written $ 358,974 $ 356,760 $ 2,026,639 $ 2,163,833
Reinsurance premiums ceded   (30,137 )   (39,415 )   (275,610 )   (348,027 )
Net premiums written 328,837 317,345 1,751,029 1,815,806
Change in unearned premiums   165,859     213,943     (307,373 )   (205,999 )
Net premiums earned   494,696     531,288     1,443,656     1,609,807  
 
Underwriting deductions
Losses and loss expenses 224,125 177,965 545,541 587,780
Policy acquisition costs 86,404 94,900 251,006 275,663
General and administrative expenses 83,319 81,089 231,606 232,335
Share compensation expenses   8,764     10,527     24,252     19,483  
Total underwriting deductions   402,612     364,481     1,052,405     1,115,261  
 
Underwriting income $ 92,084 $ 166,807 $ 391,251 $ 494,546
 
Net investment income 25,261 20,009 69,909 71,868
Other (loss) income (4,080 ) (2,806 ) 14,985 4,297
Finance expenses   (15,354 )   (15,317 )   (47,380 )   (47,252 )
Operating income before taxes, income from operating affiliates and (income) attributable to operating affiliate investors $ 97,911 $ 168,693 $ 428,765 $ 523,459
Tax benefit (expense) 953 (5 ) (398 ) 220
Income from operating affiliates 3,761 1,463 13,580 8,779
(Income) attributable to operating affiliate investors   (25,807 )   (11,815 )   (82,833 )   (42,156 )
Net operating income $ 76,818 $ 158,336 $ 359,114 $ 490,302
 
Net realized gains (losses) on investments 4,595 (6,320 ) 16,193 (1,190 )
Change in net unrealized (losses) gains on investments (84,974 ) 69,967 16,146 (78,618 )
Income from investment affiliate 1,754 1,044 7,881 4,274
Foreign exchange (losses) gains (11,441 ) 6,036 (14,761 ) 4,735
Transaction expenses (a)   (149 )    

-

      (3,401 )    

-

 
Net (loss) income $ (13,397 ) $ 229,063 $ 381,172 $ 419,503
 
Net loss (income) attributable to noncontrolling interest 53,069 (45,694 ) (25,745 ) 17,831
                       
Net income available to Validus $ 39,672   $ 183,369   $ 355,427   $ 437,334  
 
Selected ratios:
Net premiums written / Gross premiums written 91.6 % 89.0 % 86.4 % 83.9 %
 
Losses and loss expenses 45.3 % 33.5 % 37.8 % 36.5 %
Policy acquisition costs 17.5 % 17.9 % 17.4 % 17.2 %
General and administrative expenses (b)   18.6 %   17.2 %   17.7 %   15.6 %
Expense ratio   36.1 %   35.1 %   35.1 %   32.8 %
 
Combined ratio   81.4 %   68.6 %   72.9 %   69.3 %

(a) The transaction expenses relate to costs incurred in connection with the acquisition of Western World Insurance Group, Inc. (“Western World”), which was completed on October 2, 2014. Western World results have not been included in the Company's consolidated results for the three and nine months ended September 30, 2014. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

(b) The general and administrative expense ratio includes share compensation expenses.

Validus Holdings, Ltd.

Consolidated Segment Operating Income (Loss)

For the three months ended September 30, 2014 and 2013

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

     
Three Months Ended September 30, 2014 Three Months Ended September 30, 2013
Validus Re   AlphaCat   Talbot   Corporate and Eliminations   Total Validus Re   AlphaCat   Talbot   Corporate and Eliminations   Total
Underwriting income
Gross premiums written 114,897 6,936 245,685 (8,544 ) 358,974 130,925 3,481 246,468 (24,114 ) 356,760
Reinsurance premiums ceded (10,899 ) (648 ) (27,134 ) 8,544   (30,137 ) (13,006 ) (525 ) (49,998 ) 24,114   (39,415 )
Net premiums written 103,998 6,288 218,551

-

328,837 117,919 2,956 196,470

-

317,345
Change in unearned premiums 122,712   28,850   14,297  

-

  165,859   157,873   34,210   21,860  

-

  213,943  
Net premiums earned 226,710   35,138   232,848  

-

  494,696   275,792   37,166   218,330  

-

  531,288  
 
Underwriting deductions
Losses and loss expenses 102,005 3,738 118,382

-

224,125 62,250 15,615 100,100

-

177,965
Policy acquisition costs 36,177 3,378 47,862 (1,013 ) 86,404 47,662 3,787 44,899 (1,448 ) 94,900
General and administrative expenses 18,522 7,719 37,709 19,369 83,319 19,785 5,728 37,402 18,174 81,089
Share compensation expenses 2,582   179   2,990   3,013   8,764   2,479   152   2,992   4,904   10,527  
Total underwriting deductions 159,286   15,014   206,943   21,369   402,612   132,176   25,282   185,393   21,630   364,481  
 
Underwriting income (loss) 67,424 20,124 25,905 (21,369 ) 92,084 143,616 11,884 32,937 (21,630 ) 166,807
 
Net investment income 20,762 837 4,965 (1,303 ) 25,261 15,628 967 4,395 (981 ) 20,009
Other (loss) income (6,827 ) 5,980 109 (3,342 ) (4,080 ) (1,892 ) 3,791 73 (4,778 ) (2,806 )
Finance expenses (3,622 ) (385 ) 162   (11,509 ) (15,354 ) (3,640 ) (80 ) (107 ) (11,490 ) (15,317 )
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors 77,737 26,556 31,141 (37,523 ) 97,911 153,712 16,562 37,298 (38,879 ) 168,693
Tax benefit (expense) 1,058

-

332 (437 ) 953 143

-

(513 ) 365 (5 )
Income from operating affiliates

-

3,761

-

-

3,761

-

1,463

-

-

1,463
(Income) attributable to operating affiliate investors

-

  (25,807 )

-

 

-

  (25,807 )

-

  (11,815 )

-

 

-

  (11,815 )
Net operating income (loss) (a) 78,795 4,510 31,473 (37,960 ) 76,818 153,855 6,210 36,785 (38,514 ) 158,336
Net operating loss (income) attributable to noncontrolling interest

-

  438  

-

 

-

  438  

-

  (3,099 )

-

 

-

  (3,099 )
Net operating income (loss) available (attributable) to Validus 78,795   4,948   31,473   (37,960 ) 77,256   153,855   3,111   36,785   (38,514 ) 155,237  

Notes:
(a) Net operating income (loss), a non-GAAP financial measure, is defined as net income (loss) excluding net realized and change in unrealized gains (losses) on investments, foreign exchange gains (losses), income (loss) from investment affiliate and non-recurring items. This measure focuses on the underlying fundamentals of our operations without the influence of gains (losses) from the sale of investments, translation of non-U.S.$ currencies and non-recurring items. Gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance. Gains (losses) arising from translation of non-U.S.$ denominated balances are unrelated to our underlying business. Net operating income (loss) available (attributable) to Validus is defined as above and includes income (loss) from noncontrolling interests.

Validus Holdings, Ltd.

Consolidated Segment Operating Income (Loss)

For the nine months ended September 30, 2014 and 2013

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

     
Nine Months Ended September 30, 2014 Nine Months Ended September 30, 2013
Validus Re   AlphaCat   Talbot   Corporate and Eliminations   Total Validus Re   AlphaCat   Talbot   Corporate and Eliminations   Total
Underwriting income
Gross premiums written 1,104,169 135,073 854,324 (66,927 ) 2,026,639 1,232,272 146,757 855,516 (70,712 ) 2,163,833
Reinsurance premiums ceded (184,074 ) (4,348 ) (154,115 ) 66,927   (275,610 ) (226,292 ) (525 ) (191,922 ) 70,712   (348,027 )
Net premiums written 920,095 130,725 700,209

-

1,751,029 1,005,980 146,232 663,594

-

1,815,806
Change in unearned premiums (233,271 ) (32,444 ) (41,658 )

-

  (307,373 ) (122,303 ) (46,459 ) (37,237 )

-

  (205,999 )
Net premiums earned 686,824   98,281   658,551  

-

  1,443,656   883,677   99,773   626,357  

-

  1,609,807  
 
Underwriting deductions
Losses and loss expenses 247,848 (7,155 ) 304,848

-

545,541 319,298 16,928 251,554

-

587,780
Policy acquisition costs 106,547 9,414 138,383 (3,338 ) 251,006 142,195 10,011 127,092 (3,635 ) 275,663
General and administrative expenses 53,757 15,627 107,031 55,191 231,606 69,649 13,757 100,506 48,423 232,335
Share compensation expenses 7,126   330   8,434   8,362   24,252   5,421   314   6,754   6,994   19,483  
Total underwriting deductions 415,278   18,216   558,696   60,215   1,052,405   536,563   41,010   485,906   51,782   1,115,261  
 
Underwriting income (loss) 271,546 80,065 99,855 (60,215 ) 391,251 347,114 58,763 140,451 (51,782 ) 494,546
 
Net investment income 56,285 2,546 14,322 (3,244 ) 69,909 61,770 2,821 13,496 (6,219 ) 71,868
Other income (loss) 912 21,482 384 (7,793 ) 14,985 11,237 17,439 564 (24,943 ) 4,297
Finance expenses (11,131 ) (2,039 ) 68   (34,278 ) (47,380 ) (12,133 ) (4,273 ) (256 ) (30,590 ) (47,252 )
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to operating affiliate investors 317,612 102,054 114,629 (105,530 ) 428,765 407,988 74,750 154,255 (113,534 ) 523,459
Tax benefit (expense) 1,176

-

(902 ) (672 ) (398 ) 1,755

-

(1,184 ) (351 ) 220
Income from operating affiliates

-

13,580

-

-

13,580

-

8,779

-

-

8,779
(Income) attributable to operating affiliate investors

-

  (82,833 )

-

 

-

  (82,833 )

-

  (42,156 )

-

 

-

  (42,156 )
Net operating income (loss) (a) 318,788 32,801 113,727 (106,202 ) 359,114 409,743 41,373 153,071 (113,885 ) 490,302
Net operating (income) attributable to noncontrolling interest

-

  (3,160 )

-

 

-

  (3,160 )

-

  (7,999 )

-

 

-

  (7,999 )
Net operating income (loss) available (attributable) to Validus 318,788   29,641   113,727   (106,202 ) 355,954   409,743   33,374   153,071   (113,885 ) 482,303  

Notes:
(a) Net operating income (loss), a non-GAAP financial measure, is defined as net income (loss) excluding net realized and change in unrealized gains (losses) on investments, foreign exchange gains (losses), income (loss) from investment affiliate and non-recurring items. This measure focuses on the underlying fundamentals of our operations without the influence of gains (losses) from the sale of investments, translation of non-U.S.$ currencies and non-recurring items. Gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance. Gains (losses) arising from translation of non-U.S.$ denominated balances are unrelated to our underlying business. Net operating income (loss) available (attributable) to Validus is defined as above and includes income (loss) from noncontrolling interests.

Validus Holdings, Ltd.

Non-GAAP Financial Measures Reconciliation

Net Operating Income available to Validus, Net Operating Income per share available to Validus and Annualized Net Operating Return on Average Equity

For the three and nine months ended September 30, 2014 and 2013

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

     
  Three Months Ended Nine Months Ended
September 30,   September 30, September 30,   September 30,
  2014   2013   2014   2013
 
Net income available to Validus $ 39,672 $ 183,369 $ 355,427 $ 437,334
Adjustments for:
Net realized (gains) losses on investments (4,595 ) 6,320 (16,193 ) 1,190
Change in net unrealized losses (gains) on investments 84,974 (69,967 ) (16,146 ) 78,618
(Income) from investment affiliate (1,754 ) (1,044 ) (7,881 ) (4,274 )
Foreign exchange losses (gains) 11,441 (6,036 ) 14,761 (4,735 )
Transaction expenses (a) 149

-

3,401

-

Net (loss) income attributable to noncontrolling interest (52,631 ) 42,595   22,585   (25,830 )
Net operating income available to Validus 77,256 155,237 355,954 482,303
Less: Dividends and distributions declared on outstanding warrants   (1,552 )   (1,552 )   (4,656 )   (17,662 )
Net operating income available to Validus, adjusted $ 75,704   $ 153,685   $ 351,298   $ 464,641  
 
Net income per share available to Validus - diluted $ 0.41 $ 1.77 $ 3.70 $ 3.99
Adjustments for:
Net realized (gains) losses on investments (0.04 ) 0.06 (0.17 ) 0.01
Change in net unrealized losses (gains) on investments 0.90 (0.67 ) (0.17 ) 0.75
(Income) from investment affiliate (0.02 ) (0.01 ) (0.08 ) (0.04 )
Foreign exchange losses (gains) 0.12 (0.06 ) 0.15 (0.04 )
Transaction expenses (a)

-

-

0.04

-

Net (loss) income attributable to noncontrolling interest   (0.55 )   0.41     0.24     (0.26 )
Net operating income per share available to Validus - diluted $ 0.82   $ 1.50   $ 3.71   $ 4.41  
 
Weighted average number of common shares and common share equivalents 94,736,572 103,613,766 95,937,641 105,264,913
 
Average shareholders' equity available to Validus $ 3,739,758 $ 3,701,009 $ 3,708,169 $ 3,831,684
 
Annualized net operating return on average equity   8.3 %   16.8 %   12.8 %   16.8 %

(a) The transaction expenses relate to costs incurred in connection with the acquisition of Western World Insurance Group, Inc. (“Western World”), which was completed on October 2, 2014. Western World results have not been included in the Company's consolidated results for the three and nine months ended September 30, 2014. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

Validus Holdings, Ltd.

Non-GAAP Financial Measures Reconciliation

Book Value per Common Share, Book Value per Diluted Common Share and Book Value per Diluted Common Share plus Accumulated Dividends

As at September 30, 2014 and December 31, 2013

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

   
As at September 30, 2014
Equity Amount   Shares   Exercise Price   Book Value Per Share
Book value per common share
Total shareholders' equity available to Validus $ 3,702,410 89,112,271 $ 41.55
 
Book value per diluted common share
Total shareholders' equity available to Validus 3,702,410 89,112,271
Assumed exercise of outstanding warrants 90,950 5,174,114 $ 17.58
Assumed exercise of outstanding stock options 26,340 1,439,328 $ 18.30
Unvested restricted shares  

-

2,980,333
Book value per diluted common share $ 3,819,700 98,706,046 $ 38.70
Adjustment for accumulated dividends   8.58
Book value per diluted common share plus accumulated dividends $ 47.28
 
As at December 31, 2013
Equity Amount Shares Exercise Price Book Value Per Share
Book value per common share
Total shareholders' equity available to Validus $ 3,704,094 96,044,312 $ 38.57
 
Book value per diluted common share
Total shareholders' equity available to Validus 3,704,094 96,044,312
Assumed exercise of outstanding warrants 98,513 5,296,056 $ 18.60
Assumed exercise of outstanding stock options 29,688 1,572,713 $ 18.88
Unvested restricted shares  

-

2,853,083
Book value per diluted common share $ 3,832,295 105,766,164 $ 36.23
Adjustment for accumulated dividends   7.68
Book value per diluted common share plus accumulated dividends $ 43.91

Cautionary Note Regarding Forward-Looking Statements

This press release may include forward-looking statements, both with respect to the Company and its industry, that reflect our current views with respect to future events and financial performance. 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. All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond the Company's control. 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 statements. We believe that these factors include, but are not limited to, the following: 1) unpredictability and severity of catastrophic events; 2) rating agency actions; 3) adequacy of Validus' risk management and loss limitation methods; 4) cyclicality of demand and pricing in the insurance and reinsurance markets; 5) statutory or regulatory developments including tax policy, reinsurance and other regulatory matters; 6) Validus' ability to implement its business strategy during "soft" as well as "hard" markets; 7) adequacy of Validus' loss reserves; 8) continued availability of capital and financing; 9) retention of key personnel; 10) competition; 11) potential loss of business from one or more major insurance or reinsurance brokers; 12) Validus' 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; 13) general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates); 14) the integration of businesses Validus may acquire or new business ventures Validus may start; 15) the effect on Validus' investment portfolios of changing financial market conditions including inflation, interest rates, liquidity and other factors; 16) acts of terrorism or outbreak of war; and 17) availability of reinsurance and retrocessional coverage, as well as management's response to any of the aforementioned factors.

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 and elsewhere, including the risk factors included in Validus' most recent reports on Form 10-K and Form 10-Q and other documents of the Company on file with or furnished to the U.S. Securities and Exchange Commission (“SEC”). Any forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Validus will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Validus or its business or operations. Except as required by law, the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Non-GAAP Financial Measures

In presenting the Company's results, management has included and discussed certain schedules containing net operating income (loss), net operating income (loss) available (attributable) to Validus, net operating income (loss) per share, underwriting income (loss), annualized net operating return on average equity, 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. 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. A reconciliation of net operating income (loss) to net income (loss), the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Net Operating Income available to Validus, Net Operating Income per share available to Validus and Annualized Net Operating Return on Average Equity”. A reconciliation of underwriting income and operating income to net income, the most comparable U.S. GAAP financial measure, is presented in the “Consolidated Statements of Operations” above.

Underwriting income indicates the performance of the Company's core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, gain on bargain purchase, net of expenses, net realized and change in unrealized gains (losses) on investments, foreign exchange gains (losses) and transaction expenses. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company's core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company's pricing and loss frequency and severity.

Underwriting profitability over time 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 believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.

Annualized net operating return on average equity is presented in the section above entitled “Net Operating Income available to Validus, Net Operating Income per share available to Validus and Annualized Net Operating Return on Average Equity.” A reconciliation of book value per diluted common share and book value per diluted common share plus accumulated dividends to book value per common share, the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Book Value per Common Share, Book Value per Diluted Common Share and Book Value per Diluted Common Share plus Accumulated Dividends.” Net operating income (loss) is calculated based on net income (loss) excluding net realized gains (losses) on investments, change in net unrealized gains (losses) on investments, foreign exchange gains (losses), income (loss) from investment affiliates and non-recurring items. Realized gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance. Gains (losses) arising from translation of non-US$ denominated balances are unrelated to our underlying business. Net operating income (loss) available (attributable) to Validus is defined as net operating income (loss) as defined above, but excluding income (loss) available (attributable) to noncontrolling interest.

Contacts

Investors:
Validus Holdings, Ltd.
Investor.Relations@validusholdings.com
+1-441-278-9000
or
Media:
Brunswick Group
Radina Russell / Josh Gerth
+1-212-333-3810

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