2012.06.30 - 10Q
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):
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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.
INDEX
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).
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
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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.
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
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:
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
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 |
|
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 |
|
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:
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:
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,
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.
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:
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 | |