2012.06.30 - 10Q

Table of Contents

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012

Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 
(441) 278-9000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
As of July 24, 2012 there were 93,985,765 outstanding Common Shares, $0.175 par value per share, of the registrant.
 



Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION 
ITEM I.
FINANCIAL STATEMENTS

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2012 (unaudited) and December 31, 2011
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2012 - $4,715,764; 2011 - $4,859,705)
$
4,772,899

 
$
4,894,145

Short-term investments, at fair value (amortized cost: 2012 - $310,715; 2011 - $280,299)
310,703

 
280,191

Other investments at fair value (amortized cost: 2012 - $510,900; 2011 - $15,002)
463,018

 
16,787

Cash and cash equivalents
903,310

 
832,844

Total investments and cash
6,449,930

 
6,023,967

Investments in affiliates
92,807

 
53,031

Premiums receivable
977,431

 
646,354

Deferred acquisition costs
176,172

 
121,505

Prepaid reinsurance premiums
176,387

 
91,381

Securities lending collateral
3,456

 
7,736

Loss reserves recoverable
371,484

 
372,485

Paid losses recoverable
32,395

 
90,495

Income taxes recoverable
2,651

 

Intangible assets
112,651

 
114,731

Goodwill
20,393

 
20,393

Accrued investment income
21,399

 
25,906

Other assets
62,412

 
50,487

Total assets
$
8,499,568

 
$
7,618,471

 
 
 
 
Liabilities
 

 
 

Reserve for losses and loss expenses
$
2,591,299

 
$
2,631,143

Unearned premiums
1,196,836

 
772,382

Reinsurance balances payable
185,456

 
119,899

Securities lending payable
4,145

 
8,462

Deferred income taxes
19,197

 
16,720

Net payable for investments purchased
6,451

 
1,256

Accounts payable and accrued expenses
76,774

 
83,402

Senior notes payable
247,036

 
246,982

Debentures payable
289,800

 
289,800

Total liabilities
$
4,616,994

 
$
4,170,046

 
 
 
 
Commitments and contingent liabilities


 


 
 
 
 
Shareholders’ equity
 

 
 

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2012 - 135,374,491; 2011 - 134,503,065; Outstanding: 2012 - 93,411,062; 2011 - 99,471,080)
$
23,691

 
$
23,538

Treasury shares (2012 - 41,963,429; 2011 - 35,031,985)
(7,343
)
 
(6,131
)
Additional paid-in-capital
1,684,781

 
1,893,890

Accumulated other comprehensive (loss)
(5,965
)
 
(6,601
)
Retained earnings
1,782,670

 
1,543,729

Total shareholders’ equity available to Validus
3,477,834

 
3,448,425

Noncontrolling interest
404,740

 

Total shareholders’ equity
$
3,882,574

 
$
3,448,425

 
 
 
 
Total liabilities and shareholders’ equity
$
8,499,568

 
$
7,618,471


The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information) 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
627,089

 
$
605,387

 
$
1,464,378

 
$
1,455,283

Reinsurance premiums ceded
(119,052
)
 
(132,346
)
 
(226,104
)
 
(242,166
)
Net premiums written
508,037

 
473,041

 
1,238,274

 
1,213,117

Change in unearned premiums
(60,410
)
 
(47,401
)
 
(339,448
)
 
(357,944
)
Net premiums earned
447,627

 
425,640

 
898,826

 
855,173

Net investment income
25,885

 
26,494

 
53,645

 
56,469

Net realized gains on investments
6,154

 
11,552

 
13,686

 
17,931

Net unrealized (losses) gains on investments
(53,574
)
 
18,526

 
(32,903
)
 
5,698

(Loss) from investment affiliate
(398
)
 

 
(398
)
 

Other income
5,994

 
595

 
14,885

 
2,201

Foreign exchange (losses) gains
(652
)
 
(1,991
)
 
2,514

 
(2,458
)
Total revenues
431,036

 
480,816

 
950,255

 
935,014

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
153,692

 
207,307

 
385,681

 
683,505

Policy acquisition costs
76,129

 
78,230

 
154,261

 
155,526

General and administrative expenses
61,635

 
60,841

 
128,010

 
109,318

Share compensation expenses
6,800

 
7,628

 
12,238

 
19,677

Finance expenses
13,706

 
16,361

 
29,985

 
30,362

Total expenses
311,962

 
370,367

 
710,175

 
998,388

 
 
 
 
 
 
 
 
Net income (loss) before taxes and income from operating affiliates
119,074

 
110,449

 
240,080

 
(63,374
)
Tax (expense) benefit
(404
)
 
29

 
(543
)
 
1,488

Income from operating affiliates
3,592

 

 
6,959

 

Net income (loss)
$
122,262

 
$
110,478

 
$
246,496

 
$
(61,886
)
Net loss (income) attributable to noncontrolling interest
45,360

 
(594
)
 
45,360

 
(594
)
Net income (loss) available (attributable) to Validus
$
167,622

 
$
109,884

 
$
291,856

 
$
(62,480
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 

 
 

 
 
 
 
Foreign currency translation adjustments
(757
)
 
(21
)
 
636

 
936

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
$
(757
)
 
$
(21
)
 
$
636

 
$
936

 
 
 
 
 
 
 
 
Comprehensive income (loss) available (attributable) to Validus
$
166,865

 
$
109,863

 
$
292,492

 
$
(61,544
)
 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 

 
 

 
 
 
 
Basic
98,254,186

 
98,385,924

 
98,839,663

 
98,165,132

Diluted
103,667,967

 
104,562,450

 
104,382,030

 
98,165,132

 
 
 
 
 
 
 
 
Basic earnings (loss) per share available (attributable) to common shareholders
$
1.69

 
$
1.10

 
$
2.92

 
$
(0.68
)
Diluted earnings (loss) per share available (attributable) to common shareholders
$
1.62

 
$
1.05

 
$
2.80

 
$
(0.68
)
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.25

 
$
0.25

 
$
0.50

 
$
0.50


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, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
 
June 30, 2012
 
June 30, 2011
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
23,538

 
$
23,247

Common shares issued, net
153

 
167

Balance - End of period
$
23,691

 
$
23,414

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(6,131
)
 
$
(6,096
)
Repurchase of common shares
(1,212
)
 
(35
)
Balance - End of period
$
(7,343
)
 
$
(6,131
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
1,893,890

 
$
1,860,960

Common shares (redeemed) issued, net
(1,307
)
 
6,071

Repurchase of common shares
(220,040
)
 
(5,960
)
Share compensation expenses
12,238

 
19,677

Balance - End of period
$
1,684,781

 
$
1,880,748

 
 
 
 
Accumulated other comprehensive (loss)
 

 
 

Balance - Beginning of period
$
(6,601
)
 
$
(5,455
)
Foreign currency translation adjustments
636

 
936

Balance - End of period
$
(5,965
)
 
$
(4,519
)
 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
1,543,729

 
$
1,632,175

Dividends
(52,915
)
 
(54,890
)
Net income (loss)
246,496

 
(61,886
)
Net loss (income) attributable to noncontrolling interest
45,360

 
(594
)
Balance - End of period
$
1,782,670

 
$
1,514,805

 
 
 
 
Total shareholders’ equity available to Validus
$
3,477,834

 
$
3,408,317

 
 
 
 
Noncontrolling interest
$
404,740

 
$
134,895

 
 
 
 
Total shareholders’ equity
$
3,882,574

 
$
3,543,212

 
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, 2012 and 2011 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2012
 
June 30,
2011
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income (loss)
$
246,496

 
$
(61,886
)
Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Share compensation expenses
12,238

 
19,677

Amortization of discount on senior notes
54

 
54

Loss from investment affiliate
398

 

Net realized (gains) on investments
(13,686
)
 
(17,931
)
Net unrealized losses (gains) on investments
32,903

 
(5,698
)
Amortization of intangible assets
2,080

 
2,080

Income from operating affiliates
(6,959
)
 

Foreign exchange (gains) included in net income
(5,844
)
 
(12,729
)
Amortization of premium on fixed maturities
12,253

 
16,247

Change in:
 

 
 

Premiums receivable
(330,214
)
 
(475,119
)
Deferred acquisition costs
(54,667
)
 
(52,827
)
Prepaid reinsurance premiums
(85,006
)
 
(106,312
)
Loss reserves recoverable
1,475

 
(155,002
)
Paid losses recoverable
58,149

 
(2,825
)
Income taxes recoverable
(2,720
)
 
(2,400
)
Accrued investment income
4,534

 
12,406

Other assets
(11,777
)
 
9,351

Reserve for losses and loss expenses
(43,198
)
 
575,832

Unearned premiums
424,454

 
464,256

Reinsurance balances payable
65,154

 
116,080

Deferred income taxes
2,565

 
(2,611
)
Accounts payable and accrued expenses
(3,518
)
 
(11,029
)
Net cash provided by operating activities
305,164

 
309,614

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
1,829,294

 
2,654,804

Proceeds on maturities of investments
295,192

 
195,055

Purchases of fixed maturities
(1,975,225
)
 
(2,613,981
)
Purchases of short-term investments, net
(31,629
)
 
(451,706
)
(Purchases) sales of other investments
(500,632
)
 
3,809

Decrease in securities lending collateral
4,317

 
960

Purchase of investment in operating affiliates
(26,500
)
 

Purchase of investment in investment affiliate
(3,368
)
 

Net cash (used in) investing activities
(408,551
)
 
(211,059
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

(Redemption) issuance of common shares, net
(1,154
)
 
6,238

Purchases of common shares under share repurchase program
(221,252
)
 
(5,995
)
Dividends paid
(56,260
)
 
(54,000
)
Decrease in securities lending payable
(4,317
)
 
(960
)
Third party investment in noncontrolling interest
450,100

 
134,301

Net cash provided by financing activities
167,117

 
79,584

 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
6,736

 
17,042

 
 
 
 
Net increase in cash
70,466

 
195,181

 
 
 
 
Cash and cash equivalents - beginning of period
$
832,844

 
$
620,740

 
 
 
 
Cash and cash equivalents - end of period
$
903,310

 
$
815,921

 
 
 
 
Taxes paid (recovered) during the period
$
3,764

 
$
(3,373
)
 
 
 
 
Interest paid during the period
$
20,117

 
$
23,823

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

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Table of Contents

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



1.
Basis of preparation and consolidation
 
These unaudited consolidated financial statements include Validus Holdings, Ltd. and its 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 financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, 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 significant 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 term "ASC" used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board ("FASB").

On April 2, 2012, the Company joined with other investors in capitalizing PaCRe, Ltd. (“PaCRe”) a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. Validus Reinsurance, Ltd. (“Validus Re”) has an equity interest in PaCRe and as Validus Re holds a majority of PaCRe's outstanding voting rights, the financial statements of PaCRe are included in the consolidated financial statements of the Company. The portion of PaCRe's earnings attributable to third party investors for the three and six months ended June 30, 2012 is recorded in the consolidated Statements of Comprehensive Income (loss) as net income attributable to noncontrolling interest. Refer to Note 5 "Noncontrolling interest" for further information.

On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012, Ltd. (“AlphaCat Re 2012”) a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. Validus Re has an equity interest and voting interest in AlphaCat Re 2012 which is below 50%, therefore the investment in AlphaCat Re 2012 is included as an equity method investment in the consolidated financial statements of the Company. Refer to Note 4 “Investments in affiliates” for further information.

2.
Recent accounting pronouncements
 
(a) Adoption of New Accounting Standards

Fair Value Measurement and Disclosures

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, "Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" ("ASU 2011-04"). The objective of ASU 2011-04 is to provide common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the amendments do not result in a change in the application of the requirements in ASC Topic 820 "Fair Value Measurements". ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. Effective January 1, 2012, the Company prospectively adopted this amended guidance. The adoption of this guidance did not impact our results of operations, financial condition or liquidity. The adoption of this guidance did not have a significant impact on the current disclosures included in Note 3 "Investments".
Presentation of Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income" ("ASU 2011-05"). The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05". ASU 2011-12 indefinitely defers certain reclassification adjustment provisions of ASU 2011-05. ASU 2011-12 is also effective for interim and annual periods beginning after December 15, 2011. Effective January 1, 2012, the Company retrospectively adopted this guidance. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

(b) Recently Issued Accounting Standards Not Yet Adopted

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have a material impact on the Company's consolidated financial statements. 

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). The objective of ASU 2012-02 is to simplify how entities test intangibles for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment described in ASC Topic 350 "Intangibles - Goodwill and Other - General Intangibles Other than Goodwill." The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued. The Company has evaluated the impact of this guidance and has concluded that it will not have a material impact on the Company's consolidated financial statements.

3.
Investments
 
The Company’s investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.
 
(a)
Classification within the fair value hierarchy
 
Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
 
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.
 
Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including 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

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


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, U.S. agency and non-agency mortgage and asset-backed securities and bank loans. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. An investment in four Paulson & Co. Inc. managed hedge funds and an investment in a fund of hedge funds are the only financial instruments in this category as at June 30, 2012. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).

Other investments consist of an investment in four Paulson & Co. Inc. managed hedge funds (the "hedge funds"), a fund of hedge funds and a deferred compensation trust held in mutual funds. The hedge funds were valued at $450,131 at June 30, 2012. The funds' administrator provides monthly reported NAVs with a one-month delay in its valuation. As a result, the funds' administrator's May 31, 2012 NAV was used as a partial basis for fair value measurement in the Company's June 30, 2012 balance sheet. The fund manager provides an estimate of the NAV at June 30, 2012 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Immaterial variances are recorded in the following reporting period. These managed hedge funds are subject to quarterly liquidity.

The fund of hedge funds is a side pocket valued at $4,662 at June 30, 2012. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund’s administrator provides a monthly reported NAV with a one-month delay in its valuation. As a result, the fund administrator’s May 31, 2012 NAV was used as a basis for fair value measurement in the Company’s June 30, 2012 balance sheet. The fund manager provides an estimate of the fund NAV at June 30, 2012 based on the estimated performance provided from the underlying third-party funds. To determine the reasonableness of the NAV, the Company compares the one-month delayed fund administrator's NAV to the fund manager’s estimated NAV that incorporates relevant valuation sources on a timely basis. Immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.
 
At June 30, 2012, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 

4

Table of Contents

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


 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. Government and Government Agency
$

 
$
1,139,424


$

 
$
1,139,424

Non-U.S. Government and Government Agency

 
331,601



 
331,601

States, municipalities, political subdivision

 
42,844



 
42,844

Agency residential mortgage-backed securities

 
449,464



 
449,464

Non-Agency residential mortgage-backed securities

 
23,069



 
23,069

U.S. corporate

 
1,271,768



 
1,271,768

Non-U.S. corporate

 
559,479



 
559,479

Bank loans

 
566,017

 

 
566,017

Catastrophe bonds

 
36,702



 
36,702

Asset-backed securities

 
352,531



 
352,531

Commercial mortgage-backed securities

 



 

Total fixed maturities

 
4,772,899

 

 
4,772,899

Short-term investments
282,061

 
28,642

 

 
310,703

Fund of hedge funds

 

 
4,662

 
4,662

Hedge funds (a)

 

 
450,131

 
450,131

Mutual funds

 
8,225

 

 
8,225

Total
$
282,061

 
$
4,809,766

 
$
454,793

 
$
5,546,620

Noncontrolling interest (a)
 
 
 
 
(405,118
)
 
(405,118
)
Total investments excluding noncontrolling interest
$
282,061

 
$
4,809,766

 
$
49,675

 
$
5,141,502


(a) The Company has an equity interest of 10% in PaCRe, the remaining 90% interest is held by third party investors.

At December 31, 2011, 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
$

 
$
1,182,393

 
$

 
$
1,182,393

Non-U.S. Government and Government Agency

 
449,358

 

 
449,358

States, municipalities, political subdivision

 
26,291

 

 
26,291

Agency residential mortgage-backed securities

 
468,054

 

 
468,054

Non-Agency residential mortgage-backed securities

 
32,706

 

 
32,706

U.S. corporate

 
1,329,758

 

 
1,329,758

Non-U.S. corporate

 
579,675

 

 
579,675

Bank loans

 
467,256

 

 
467,256

Catastrophe bonds

 
29,952

 

 
29,952

Asset-backed securities

 
328,299

 

 
328,299

Commercial mortgage-backed securities

 
403

 

 
403

Total fixed maturities

 
4,894,145

 

 
4,894,145

Short-term investments
257,854

 
22,337

 

 
280,191

Fund of hedge funds

 

 
5,627

 
5,627

Private equity investment

 

 
3,253

 
3,253

Mutual funds

 
7,907

 

 
7,907

Total
$
257,854

 
$
4,924,389

 
$
8,880

 
$
5,191,123

 
At June 30, 2012, Level 3 investments excluding the noncontrolling interest totaled $49,675, representing 1.0% of total

5

Table of Contents

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


investments, excluding noncontrolling interest, measured at fair value on a recurring basis. At December 31, 2011, Level 3 investments totaled $8,880 representing 0.2% of total investments measured at fair value on a recurring basis.
 
The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six month periods ending June 30, 2012 and 2011:
 
 
Three Months Ended June 30, 2012
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
8,325

 
$
8,325

Purchases

 
500,000

 
500,000

Sales

 
(277
)
 
(277
)
Issuances

 

 

Settlements

 

 

Realized gains

 
21

 
21

Unrealized (losses)

 
(48,494
)
 
(48,494
)
Amortization

 

 

Transfers

 
(4,782
)
 
(4,782
)
Level 3 investments - End of period
$

 
$
454,793

 
$
454,793

Noncontrolling interest (a)

 
(405,118
)
 
(405,118
)
Level 3 investments excluding noncontrolling interest
$

 
$
49,675

 
$
49,675

 
Three Months Ended June 30, 2011
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
10,713

 
$
10,713

Purchases

 

 

Sales

 
(1,247
)
 
(1,247
)
Issuances

 

 

Settlements

 

 

Realized gains

 
175

 
175

Unrealized gains

 
135

 
135

Amortization

 

 

Transfers

 

 

Level 3 investments - End of period
$

 
$
9,776

 
$
9,776

 

6

Table of Contents

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


 
Six Months Ended June 30, 2012
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
8,880

 
$
8,880

Purchases

 
500,000

 
500,000

Sales

 
(896
)
 
(896
)
Issuances

 

 

Settlements

 

 

Realized gains

 
48

 
48

Unrealized (losses)

 
(49,986
)
 
(49,986
)
Amortization

 

 

Transfers

 
(3,253
)
 
(3,253
)
Level 3 investments - End of period
$

 
$
454,793

 
$
454,793

Noncontrolling interest (a)

 
(405,118
)
 
(405,118
)
Level 3 investments excluding noncontrolling interest
$

 
$
49,675

 
$
49,675


 
Six Months Ended June 30, 2011
 
Fixed Maturity Investments
 
Other Investments
 
Total Fair Market Value
Level 3 investments - Beginning of period
$

 
$
12,892

 
$
12,892

Purchases

 

 

Sales

 
(3,809
)
 
(3,809
)
Issuances

 

 

Settlements

 

 

Realized gains

 
435

 
435

Unrealized gains

 
258

 
258

Amortization

 

 

Transfers

 

 

Level 3 investments - End of period
$

 
$
9,776

 
$
9,776


(a) The Company has an equity interest of 10% in PaCRe, the remaining 90% interest is held by third party investors.

There have not been any transfers between Levels 1 and 2 during the three or six months ended June 30, 2012. During the three months ended June 30, 2012, there was a transfer of the private equity investment out of Level 3 “Other investments” to “Investments in affiliates.” Refer to Note 4 “Investments in affiliates.

(b) Net investment income
 
Net investment income was derived from the following sources: 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012

June 30, 2011
 
June 30, 2012
 
June 30, 2011
Fixed maturities and short-term investments
$
26,471

 
$
27,535

 
$
53,747

 
$
56,470

Cash and cash equivalents
1,449

 
687

 
3,766

 
3,268

Securities lending income
1

 
8

 
6

 
24

Total gross investment income
27,921

 
28,230

 
57,519

 
59,762

Investment expenses
(2,036
)
 
(1,736
)
 
(3,874
)
 
(3,293
)
Net investment income
$
25,885

 
$
26,494

 
$
53,645

 
$
56,469


7

Table of Contents

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


 
(c)
Fixed maturity and short-term investments
 
The following represents an analysis of net realized gains and the change in net unrealized (losses) gains on investments:
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Fixed maturities, short-term and other investments and cash equivalents
 

 
 

 
 
 
 
Gross realized gains
$
9,415

 
$
13,032

 
$
19,423

 
$
28,797

Gross realized (losses)
(3,261
)
 
(1,480
)
 
(5,737
)
 
(10,866
)
Net realized gains on investments
6,154

 
11,552

 
13,686

 
17,931

Net unrealized gains on securities lending

 
11

 
37

 
41

Change in net unrealized (losses) gains on investments
(53,574
)
 
18,515

 
(32,940
)
 
5,657

Total net realized gains and change in net unrealized (losses) gains on investments
$
(47,420
)
 
$
30,078

 
$
(19,217
)
 
$
23,629

Noncontrolling interest (a)
44,882

 

 
44,882

 

Total net realized gains and change in net unrealized (losses) gains on investments excluding noncontrolling interest
$
(2,538
)
 
$
30,078

 
$
25,665

 
$
23,629


(a) The Company has an equity interest of 10% in PaCRe, the remaining 90% interest is held by third party investors.
 
The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at June 30, 2012 were as follows:

8

Table of Contents

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


 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. Government and Government Agency
$
1,131,386

 
$
8,154

 
$
(116
)
 
$
1,139,424

Non-U.S. Government and Government Agency
326,229

 
7,204

 
(1,832
)
 
331,601

States, municipalities, political subdivision
42,149

 
713

 
(18
)
 
42,844

Agency residential mortgage-backed securities
433,732

 
15,953

 
(221
)
 
449,464

Non-Agency residential mortgage-backed securities
26,119

 
250

 
(3,300
)
 
23,069

U.S. corporate
1,249,755

 
23,395

 
(1,382
)
 
1,271,768

Non-U.S. corporate
551,236

 
8,778

 
(535
)
 
559,479

Bank loans
567,779

 
3,346

 
(5,108
)
 
566,017

Catastrophe bonds
36,250

 
485

 
(33
)
 
36,702

Asset-backed securities
351,129

 
1,892

 
(490
)
 
352,531

Commercial mortgage-backed securities

 

 

 

 
 
 
 
 
 
 
 
Total fixed maturities
4,715,764

 
70,170

 
(13,035
)
 
4,772,899

Total short-term investments
310,715

 
8

 
(20
)
 
310,703

Mutual funds
6,504

 
1,721

 

 
8,225

Fund of hedge funds
4,396

 
266

 

 
4,662

Hedge funds (a)
500,000

 

 
(49,869
)
 
450,131

Total other investments
510,900

 
1,987

 
(49,869
)
 
463,018

 
 
 
 
 
 
 
 
Total
$
5,537,379

 
$
72,165

 
$
(62,924
)
 
$
5,546,620

Noncontrolling interest (a)
$
(450,000
)
 
$

 
$
44,882

 
$
(405,118
)
Total investments excluding noncontrolling interest
$
5,087,379

 
$
72,165

 
$
(18,042
)
 
$
5,141,502

 
(a) The Company has an equity interest of 10% in PaCRe, the remaining 90% interest is held by third party investors.

The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2011 were as follows:
 

9

Table of Contents

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


 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. Government and Government Agency
$
1,170,810

 
$
11,630

 
$
(47
)
 
$
1,182,393

Non-U.S. Government and Government Agency
446,258

 
9,173

 
(6,073
)
 
449,358

States, municipalities, political subdivision
25,715

 
586

 
(10
)
 
26,291

Agency residential mortgage-backed securities
451,751

 
16,622

 
(319
)
 
468,054

Non-Agency residential mortgage-backed securities
39,134

 
143

 
(6,571
)
 
32,706

U.S. corporate
1,314,375

 
24,932

 
(9,549
)
 
1,329,758

Non-U.S. corporate
577,743

 
6,320

 
(4,388
)
 
579,675

Bank loans
475,770

 
2,435

 
(10,949
)
 
467,256

Catastrophe bonds
29,250

 
702

 

 
29,952

Asset-backed securities
328,497

 
900

 
(1,098
)
 
328,299

Commercial mortgage-backed securities
402

 
1

 

 
403

 
 
 
 
 
 
 
 
Total fixed maturities
4,859,705

 
73,444

 
(39,004
)
 
4,894,145

Total short-term investments
280,299

 
1

 
(109
)
 
280,191

Fund of hedge funds
5,244

 
383

 

 
5,627

Private equity investment
3,253

 

 

 
3,253

Mutual funds
6,505

 
1,402

 

 
7,907

Total other investments
15,002

 
1,785

 

 
16,787

 
 
 
 
 
 
 
 
Total
$
5,155,006

 
$
75,230

 
$
(39,113
)
 
$
5,191,123

 
The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2012 and December 31, 2011. 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, 2012
 
December 31, 2011
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
745,676

 
15.6
%
 
$
882,912

 
18.0
%
AA
2,025,848

 
42.5
%
 
2,077,981

 
42.5
%
A
1,019,888

 
21.4
%
 
1,078,793

 
22.0
%
BBB
378,502

 
7.9
%
 
345,091

 
7.1
%
Investment grade
4,169,914

 
87.4
%
 
4,384,777

 
89.6
%
 
 
 
 
 
 
 
 
BB
315,768

 
6.6
%
 
254,409

 
5.2
%
B
263,900

 
5.5
%
 
231,420

 
4.7
%
CCC
8,885

 
0.2
%
 
12,578

 
0.3
%
CC
3,116

 
0.1
%
 
4,605

 
0.1
%
D/NR
11,316

 
0.2
%
 
6,356

 
0.1
%
Non-Investment grade
602,985

 
12.6
%
 
509,368

 
10.4
%
 
 
 
 
 
 
 
 
Total Fixed Maturities
$
4,772,899

 
100.0
%
 
$
4,894,145

 
100.0
%
 
The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2012 and December 31,

10

Table of Contents

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


2011 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
 
June 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
452,460

 
$
455,506

 
$
520,631

 
$
523,107

Due after one year through five years
3,049,223

 
3,088,234

 
3,160,647

 
3,186,711

Due after five years through ten years
398,769

 
398,975

 
350,459

 
346,654

Due after ten years
4,332

 
5,120

 
8,184

 
8,211

 
3,904,784

 
3,947,835

 
4,039,921

 
4,064,683

Asset-backed and mortgage-backed securities
810,980

 
825,064

 
819,784

 
829,462

Total
$
4,715,764

 
$
4,772,899

 
$
4,859,705

 
$
4,894,145

 
The Company has a four-year, $525,000 secured letter of credit facility provided by a syndicate of commercial banks (the “Four Year Facility”). At June 30, 2012, approximately $322,126 (December 31, 2011: $nil) of letters of credit were issued and outstanding under this facility for which $435,868 of investments were pledged as collateral (December 31, 2011: $nil). 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, 2012, $25,000 (December 31, 2011: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $43,835 of investments were pledged as collateral (December 31, 2011: $44,623). In addition, $2,100,431 of investments were held in trust at June 30, 2012 (December 31, 2011: $2,129,570). Of those, $1,778,366 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2011: $1,686,586). In 2009, the Company entered into a $500,000 secured letter of credit facility provided by Citibank Europe plc (the "Secured Bi-Lateral Letter of Credit Facility"). At June 30, 2012 approximately $80,134 (December 31, 2011: $nil) letters of credit were issued and outstanding under this facility for which $110,428 of investments were pledged as collateral (December 31, 2011: $nil).
 
The Company assumed two letters of credit facilities as part of the acquisition of IPC Holdings, Ltd. (the “IPC Acquisition”).  A Credit Facility between IPC, IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a 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, 2012, the IPC Bi-Lateral Facility had $51,479 (December 31, 2011: $57,146) letters of credit issued and outstanding for which $107,984 (December 31, 2011: $105,428) 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, 2012, the Company had $4,039 (December 31, 2011: $8,286) in securities on loan. During the three months ended June 30, 2012, the Company recorded a $nil unrealized gain on this collateral on its Statements of Comprehensive Income (Loss) (June 30, 2011: unrealized gain $11). During the six months ended June 30, 2012, the Company recorded a $37 unrealized gain on this collateral on its Statements of Comprehensive Income (Loss) (June 30, 2011: unrealized gain $41).
 
Securities lending collateral reinvested includes corporate floating rate securities and overnight repos with an average reset period of 2.9 days (December 31, 2011: 3.9 days). As at June 30, 2012, 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:
 

11

Table of Contents

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


 
Level 1
 
Level 2
 
Level 3
 
Total
Corporate
$

 
$
148

 
$

 
$
148

Short-term investments
3,308

 

 

 
3,308

Total
$
3,308

 
$
148

 
$

 
$
3,456

 
As at December 31, 2011, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Corporate
$

 
$
255

 
$

 
$
255

Cash and cash equivalents
7,481

 

 

 
7,481

Total
$
7,481

 
$
255

 
$

 
$
7,736


The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at June 30, 2012 and December 31, 2011. 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, 2012
 
December 31, 2011
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
NR
148

 
4.3
%
 
255

 
3.3
%
 
148

 
4.3
%
 
255

 
3.3
%
NR- Short-term investments (a)
3,308

 
95.7
%
 
7,481

 
96.7
%
Total
$
3,456

 
100.0
%
 
$
7,736

 
100.0
%

(a)
This amount relates to certain short-term investments with short original maturities which are generally not rated.
 
The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at June 30, 2012 and December 31, 2011 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.
 
 
June 30, 2012
 
December 31, 2011
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
3,525

 
$
3,308

 
$
7,462

 
$
7,481

Due after one year through five years
620

 
148

 
1,000

 
255

Total
$
4,145

 
$
3,456

 
$
8,462

 
$
7,736

 
4.
Investments in affiliates

(a) Operating affiliates

AlphaCat Re 2011, Ltd.
 
On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, Ltd. ("AlphaCat Re 2011"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. At the time of formation, Validus Re had a majority voting equity interest in AlphaCat Re 2011 and as a result the financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company.

On December 23, 2011, AlphaCat Re 2011 completed a secondary offering of its common shares to third party investors, along with a partial sale of Validus Re's common shares to one of the third party investors.

As a result of these transactions, Validus Re maintained an equity interest in AlphaCat Re 2011, however its share of AlphaCat Re 2011's outstanding voting rights decreased to 43.7%. As a result of the Company's voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and the remaining investment in AlphaCat Re 2011 has been treated as an equity method investment as at June 30, 2012. The portion of AlphaCat Re 2011's earnings attributable to third party investors for the year ended December 31, 2011 was recorded in the Consolidated Statements of Comprehensive Income (loss) as net income attributable to noncontrolling interest.

AlphaCat Re 2012, Ltd.

On May 29, 2012, the Company joined with other investors in capitalizing ACRe 2012, Ltd. ("AlphaCat Re 2012"), a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. The Company holds an equity interest of 37.9% and a voting interest of 49.0% in AlphaCat Re 2012, therefore the investment has been treated as an equity method investment as at June 30, 2012.

The following table presents a reconciliation of the beginning and ending investment in operating affiliate balances for the three and six months ended June 30, 2012
 
Three Months Ended June 30, 2012
 
 
Investment in operating affiliate (AlphaCat Re 2011)
 
Investment in operating affiliate (AlphaCat Re 2012)
 
Total
As at March 31, 2012
 
$
56,398

 
$

 
$
56,398

Purchase of shares
 

 
26,500

 
26,500

Income from operating affiliates
 
2,840

 
752

 
3,592

As at June 30, 2012
 
$
59,238

 
$
27,252

 
$
86,490

 
 
Six Months Ended June 30, 2012
 
Investment in operating affiliate (AlphaCat Re 2011)
 
Investment in operating affiliate (AlphaCat Re 2012)
 
Total
As at December 31, 2011
$
53,031

 
$

 
$
53,031

Purchase of shares

 
26,500

 
26,500

Income from operating affiliates
6,207

 
752

 
6,959

As at June 30, 2012
$
59,238

 
$
27,252

 
$
86,490


The following table presents the Company's investments in AlphaCat Re 2011 and AlphaCat Re 2012, as at June 30, 2012:
 
Investment in non-consolidated affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
AlphaCat Re 2011
$
41,389

 
43.7
%
 
22.3
%
 
$
59,238

AlphaCat Re 2012
$
26,500

 
49.0
%
 
37.9
%
 
$
27,252


(b) Investment affiliate

Aquiline Financial Services Fund II L.P.

On December 20, 2011, Validus Re entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which Validus Re has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Partnership") representing a total capital commitment of $50,000 (the "Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of July 2, 2010 (the "Limited Partnership Agreement"). Pursuant to the terms of the Limited Partnership Agreement, the Commitment will expire on July 2, 2015.

The private equity limited partnership provides quarterly capital account statements with a three-month delay in its valuation. As a result, the limited partnership's March 31, 2012 capital account statement was used as a basis for calculation of the Company's share of partnership income for the period.

The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliate balances for the three and six months ended June 30, 2012:
 
Three Months Ended June 30, 2012
 
Investment in limited partnership (Aquiline Financial Services Fund II L.P)
As at March 31, 2012
$
3,347

Capital contributions
3,368

(Loss) from investment affiliate
(398
)
As at June 30, 2012
$
6,317

 
Six Months Ended June 30, 2012
 
Investment in limited partnership (Aquiline Financial Services Fund II L.P) (a)
As at December 31, 2011
$
3,253

Capital contributions
4,898

Net unrealized loss on investments (a)
(1,436
)
(Loss) from investment affiliate
(398
)
As at June 30, 2012
$
6,317


(a) As at December 31, 2011 and March 31, 2012, this investment was included in "Other investments" as a level 3 investment in the fair value hierarchy, hence the change in fair value was included in net unrealized (losses) gains on investments.

The following table presents the Company's investment in Aquiline as at June 30, 2012:
 
Investment in non-consolidated affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P
$
8,151

 
%
 
6.8
%
 
$
6,317


5.
Noncontrolling interest
     On April 2, 2012, the Company joined with other investors in capitalizing PaCRe a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. Validus Re has a majority voting equity interest in PaCRe and as a result, the financial statements of PaCRe are included in the consolidated financial statements of the Company. The portion of PaCRe's earnings attributable to third party investors for the three and six months ended June 30, 2012 is recorded in the consolidated Statements of Comprehensive Income (loss) as net income attributable to noncontrolling interest.





The following table presents a reconciliation of the beginning and ending balances of noncontrolling interest for the three months ended June 30, 2012:
 
Noncontrolling
 
interest
Balance - April 2, 2012
$

   Purchase of shares by noncontrolling interest
 
450,100

Net Income (loss):
 
 
   Net (loss) attributable to noncontrolling interest
 
(45,360
)
 
 
Balance - June 30, 2012
$
404,740


6.
Derivative instruments used in hedging activities
 
The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures. As at June 30, 2012 the Company held a foreign currency forward contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Chilean Pesos (CLP) as well as foreign currency forward contracts to mitigate the risk of fluctuations in the Euro to U.S. dollar exchange rates.

The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at June 30, 2012:
 
 
 
 
 
Asset derivatives
 
Liability derivatives
Derivatives designated as hedging instruments:
 
Notional amount
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Foreign exchange contracts
 
$
45,711