Document
 
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, 2018

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of July 26, 2018, there were 79,329,027 outstanding common shares, $0.01 par value per share, of the registrant.

 



Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Table of Contents
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2018 (unaudited) and December 31, 2017
(Expressed in thousands of U.S. dollars, except share and per share information)
 
June 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2018—$5,651,953; 2017—$5,876,261)
$
5,559,953

 
$
5,858,348

Short-term investments trading, at fair value (amortized cost: 2018—$3,728,930; 2017—$3,381,714)
3,728,894

 
3,381,757

Other investments, at fair value (cost: 2018—$341,883; 2017—$330,416)
366,184

 
355,218

Investments in investment affiliates, equity method (cost: 2018—$72,135; 2017—$61,944)
127,247

 
100,137

Cash and cash equivalents
719,219

 
754,990

Restricted cash
286,279

 
394,663

Total investments and cash
10,787,776

 
10,845,113

Premiums receivable
1,947,462

 
939,487

Deferred acquisition costs
317,834

 
213,816

Prepaid reinsurance premiums
336,384

 
132,938

Securities lending collateral
2,117

 
2,717

Loss reserves recoverable
970,950

 
1,233,997

Paid losses recoverable
71,876

 
46,873

Income taxes recoverable
11,023

 
9,044

Deferred tax asset
60,438

 
52,467

Receivable for investments sold
15,662

 
12,182

Intangible assets
167,052

 
171,411

Goodwill
229,573

 
229,573

Accrued investment income
31,082

 
29,096

Other assets
549,841

 
508,165

Total assets
$
15,499,070

 
$
14,426,879

Liabilities
 

 
 

Reserve for losses and loss expenses
$
4,699,599

 
$
4,831,390

Unearned premiums
2,190,884

 
1,147,186

Reinsurance balances payable
406,081

 
331,645

Securities lending payable
2,117

 
2,717

Deferred tax liability
2,142

 
4,600

Payable for investments purchased
60,275

 
74,496

Accounts payable and accrued expenses
576,260

 
1,225,875

Notes payable to AlphaCat investors
1,206,671

 
1,108,364

Senior notes payable
245,664

 
245,564

Debentures payable
538,751

 
539,158

Total liabilities
9,928,444

 
9,510,995

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,390,233

 
1,004,094

Shareholders’ equity
 
 
 
Preferred shares (Issued and Outstanding: 2018—16,000; 2017—16,000)
400,000

 
400,000

Common shares (Issued: 2018—163,186,889; 2017—161,994,491; Outstanding: 2018—80,511,948; 2017—79,319,550)
28,558

 
28,349

Treasury shares (2018—82,674,941; 2017—82,674,941)
(14,468
)
 
(14,468
)
Additional paid-in capital
816,282

 
814,641

Accumulated other comprehensive income (loss)
9,859

 
(22,192
)
Retained earnings
2,568,905

 
2,688,742

Total shareholders’ equity available to Validus
3,809,136

 
3,895,072

Noncontrolling interests
371,257

 
16,718

Total shareholders’ equity
4,180,393

 
3,911,790

Total liabilities, noncontrolling interests and shareholders’ equity
$
15,499,070

 
$
14,426,879


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

3

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
For the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(unaudited)
Revenues
 
 
 
 
 
Gross premiums written
$
847,206

 
$
792,902

 
$
2,679,662

 
$
1,983,759

Reinsurance premiums ceded
(107,567
)
 
(56,222
)
 
(483,861
)
 
(256,328
)
Net premiums written
739,639

 
736,680

 
2,195,801

 
1,727,431

Change in unearned premiums
(3,032
)
 
(105,653
)
 
(840,252
)
 
(521,028
)
Net premiums earned
736,607

 
631,027

 
1,355,549

 
1,206,403

Net investment income
57,560

 
44,241

 
109,632

 
84,455

Net realized (losses) gains on investments
(7,394
)
 
2,274

 
(5,194
)
 
1,110

Change in net unrealized (losses) gains on investments
(10,730
)
 
16,321

 
(68,111
)
 
29,669

Income from investment affiliates
2,178

 
9,466

 
15,246

 
14,654

Other insurance related (loss) income and other (loss) income
(16,116
)
 
1,339

 
9,424

 
2,669

Foreign exchange losses
(526
)
 
(7,329
)
 
(1
)
 
(5,760
)
Total revenues
761,579

 
697,339

 
1,416,545

 
1,333,200

Expenses
 
 
 
 
 
 
 
Losses and loss expenses
476,610

 
296,149

 
798,155

 
565,734

Policy acquisition costs
118,781

 
117,268

 
235,237

 
228,896

General and administrative expenses
120,862

 
96,349

 
235,588

 
184,273

Share compensation expenses
16,040

 
11,146

 
25,769

 
20,637

Finance expenses
14,310

 
14,209

 
28,573

 
28,152

Transaction expenses
3,837

 
4,427

 
11,593

 
4,427

Total expenses
750,440

 
539,548

 
1,334,915

 
1,032,119

Income before taxes and (income) attributable to AlphaCat investors
11,139

 
157,791

 
81,630

 
301,081

Tax benefit
7,151

 
987

 
13,984

 
4,536

(Income) attributable to AlphaCat investors
(29,849
)
 
(11,830
)
 
(40,711
)
 
(19,333
)
Net (loss) income
(11,559
)
 
146,948

 
54,903

 
286,284

Net (income) attributable to noncontrolling interests
(35,511
)
 
(43,650
)
 
(100,223
)
 
(86,222
)
Net (loss) income (attributable) available to Validus
(47,070
)
 
103,298

 
(45,320
)
 
200,062

Dividends on preferred shares
(5,828
)
 
(2,203
)
 
(11,656
)
 
(4,406
)
Net (loss) income (attributable) available to Validus common shareholders
$
(52,898
)
 
$
101,095

 
$
(56,976
)
 
$
195,656

 
 
 
 
 
 
 
 
Comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(11,559
)
 
$
146,948

 
$
54,903

 
$
286,284

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustments
(2,737
)
 
1,489

 
(900
)
 
2,086

Change in minimum pension liability
342

 
1,184

 
304

 
1,252

Change in fair value of cash flow hedges
3,035

 
(144
)
 
31,798

 
(46
)
Other comprehensive income, net of tax
640

 
2,529

 
31,202

 
3,292

Comprehensive (income) attributable to noncontrolling interests
(35,511
)
 
(43,650
)
 
(100,223
)
 
(86,222
)
Comprehensive (loss) income (attributable) available to Validus
$
(46,430
)
 
$
105,827

 
$
(14,118
)
 
$
203,354

 
 
 
 
 
 
 
 
(Loss) earnings per common share
 
 
 
 
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.28

 
$
(0.72
)
 
$
2.47

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(0.66
)
 
$
1.25

 
$
(0.72
)
 
$
2.42

Cash dividends declared per common share
$
0.38

 
$
0.38

 
$
0.76

 
$
0.76

 
 
 
 
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 
Basic
79,650,474

 
79,270,561

 
79,488,081

 
79,202,116

Diluted
79,650,474

 
80,872,451

 
79,488,081

 
80,861,998

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

4

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2018
 
2017
 
(unaudited)
Preferred shares
 
 
 
Balance, beginning of period
$
400,000

 
$
150,000

Preferred shares issued

 
250,000

Balance, end of period
$
400,000

 
$
400,000

 
 
 
 
Common shares
 
 
 
Balance, beginning of period
$
28,349

 
$
28,224

Common shares issued, net
209

 
115

Balance, end of period
$
28,558

 
$
28,339

 
 
 
 
Treasury shares
 
 
 
Balance, beginning of period
$
(14,468
)
 
$
(14,376
)
Repurchase of common shares

 
(47
)
Balance, end of period
$
(14,468
)
 
$
(14,423
)
 
 
 
 
Additional paid-in capital
 
 
 
Balance, beginning of period
$
814,641

 
$
821,023

Offering expenses on preferred shares

 
(8,314
)
Common shares redeemed, net
(24,128
)
 
(12,076
)
Repurchase of common shares

 
(13,949
)
Share compensation expenses
25,769

 
20,637

Balance, end of period
$
816,282

 
$
807,321

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance, beginning of period
$
(22,192
)
 
$
(23,216
)
Other comprehensive income
31,202

 
3,292

Amounts reclassified from accumulated other comprehensive income (loss)
849

 

Balance, end of period
$
9,859

 
$
(19,924
)
 
 
 
 
Retained earnings
 
 
 
Balance, beginning of period
$
2,688,742

 
$
2,876,636

Net income
54,903

 
286,284

Net (income) attributable to noncontrolling interests
(100,223
)
 
(86,222
)
Dividends on common shares
(62,861
)
 
(62,174
)
Dividends on preferred shares
(11,656
)
 
(4,406
)
Balance, end of period
$
2,568,905

 
$
3,010,118

 
 
 
 
Total shareholders’ equity available to Validus
$
3,809,136

 
$
4,211,431

Noncontrolling interests
371,257

 
415,658

Total shareholders’ equity
$
4,180,393

 
$
4,627,089

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

5

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Six Months Ended June 30,
 
2018
 
2017
 
(unaudited)
Cash flows provided by (used in) operating activities
 
 
 
Net income
$
54,903

 
$
286,284

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share compensation expenses
25,769

 
20,637

Loss on redemption of AlphaCat ILS fund

 
402

Amortization of discount on Senior Notes
54

 
54

(Income) from investment and operating affiliates
(15,246
)
 
(14,654
)
Net realized and change in net unrealized losses (gains) on investments
73,305

 
(30,779
)
Amortization of intangible assets
4,359

 
3,995

Foreign exchange losses (gains) included in net income
8,837

 
(9,686
)
Amortization of premium on fixed maturity investments
6,853

 
7,012

Change in operational balance sheet items:
 
 
 
Premiums receivable
(1,010,121
)
 
(648,195
)
Deferred acquisition costs
(104,018
)
 
(97,746
)
Prepaid reinsurance premiums
(203,446
)
 
(30,684
)
Loss reserves recoverable
261,992

 
(113,508
)
Paid losses recoverable
(24,994
)
 
17,500

Reserve for losses and loss expenses
(125,377
)
 
199,985

Unearned premiums
1,043,698

 
488,198

Reinsurance balances payable
75,018

 
111,488

Other operational balance sheet items, net
91,562

 
(137,618
)
Net cash provided by operating activities
163,148

 
52,685

 
 
 
 
Cash flows provided by (used in) investing activities
 
 
 
Proceeds on sales of fixed maturity investments
1,739,391

 
1,632,371

Proceeds on maturities of fixed maturity investments
316,335

 
247,394

Purchases of fixed maturity investments
(1,867,720
)
 
(1,682,609
)
Purchases of short-term investments, net
(347,138
)
 
(88,623
)
Purchases of other investments, net
(12,487
)
 
(33,870
)
Decrease in securities lending collateral
600

 
7,265

(Investments in) distributions from investment affiliates, net
(11,864
)
 
11,708

Purchase of subsidiary, net of cash

 
(183,923
)
Net cash used in investing activities
(182,883
)
 
(90,287
)
 
 
 
 
Cash flows provided by (used in) financing activities
 
 
 
Net proceeds on issuance of notes payable to AlphaCat investors
98,720

 
269,645

Net proceeds on issuance of preferred shares

 
241,686

Redemption of common shares, net
(23,919
)
 
(11,961
)
Purchases of common shares under share repurchase program

 
(13,996
)
Dividends paid on preferred shares
(11,656
)
 
(4,406
)
Dividends paid on common shares
(68,518
)
 
(63,286
)
Decrease in securities lending payable
(600
)
 
(7,265
)
Third party investments in redeemable noncontrolling interests
466,550

 
210,200

Third party redemptions of redeemable noncontrolling interests
(233,478
)
 
(79,334
)
Third party investments in noncontrolling interests
321,900

 
258,300

Third party distributions of noncontrolling interests
(20,118
)
 
(96,125
)
Third party subscriptions deployed on funds and sidecars, net
(645,233
)
 
(171,952
)
Net cash (used in) provided by financing activities
(116,352
)
 
531,506

Effect of foreign currency rate changes on cash and cash equivalents and restricted cash
(8,068
)
 
10,608

Net (decrease) increase in cash and cash equivalents and restricted cash
(144,155
)
 
504,512

Cash and cash equivalents and restricted cash—beginning of period
1,149,653

 
490,932

Cash and cash equivalents and restricted cash—end of period
$
1,005,498

 
$
995,444

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the year
$
868

 
$
568

Interest paid during the year
$
25,090

 
$
27,186

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


6

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


1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
During the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” The change in reportable segments and primary lines of business had no impact on the Company’s historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of every voting interest entity (“VOE”) in which the Company has a controlling financial interest and variable interest entity (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the amounts included in the Consolidated Financial Statements reflect management’s best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
the reserve for losses and loss expenses;
the premium written on a line slip or proportional basis;
the valuation of goodwill and intangible assets;
the loss reserves recoverable, including the provision for uncollectible amounts; and
the valuation of invested assets and other financial instruments.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).
2. Recent accounting pronouncements
There have been no accounting pronouncements issued or adopted during the quarter ended June 30, 2018 that warrant disclosure in the Consolidated Financial Statements.

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

3. Business combinations
American International Group, Inc. (“AIG”)
On July 18, 2018, the Company completed its previously announced definitive agreement and plan of merger (the “Merger Agreement”) with American International Group, Inc. (“AIG”) in accordance with Section 105 of the Bermuda Companies Act 1981. Pursuant to the Merger Agreement the Company merged with an existing AIG subsidiary in accordance with the Bermuda Companies Act 1981 (the “Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of AIG.
Pursuant to the Merger Agreement, each issued and outstanding common share, par value $0.175 per common share, of the Company, other than shares that were owned by the Company as treasury shares, owned by a subsidiary of the Company, owned by AIG or any of its subsidiaries or that were subject to any Company Award (as defined in the Merger Agreement), were converted into the right to receive $68.00 in cash, without interest and subject to any applicable tax withholdings. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares remains issued and outstanding, and continues to be listed on the NYSE and registered under the Exchange Act.
Also on July 18, 2018, in connection with the consummation of the Merger, the Company notified the New York Stock Exchange (“NYSE”) of the completion of the Merger and requested that trading in the Common Shares be withdrawn from listing on the NYSE. The NYSE filed a notification of removal from listing on Form 25 with the Securities and Exchange Commission (“SEC”) with respect to the Common Shares to report the delisting of the Common Shares from the NYSE and to suspend trading of the Common Shares on the NYSE prior to the opening of trading on July 18, 2018.
On July 26, 2018 the Company filed with the SEC a certificate of notice of termination on Form 15 with respect to its Common Shares, requesting that the Common Shares be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the reporting obligations of the Company with respect to the Common Shares under Sections 13 and 15(d) of the Exchange Act be suspended.
Crop Risk Services (“CRS”)
On May 1, 2017, Western World, a wholly–owned subsidiary of the Company acquired all of the outstanding capital stock of CRS for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford, a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Insurance segment in the Consolidated Financial Statements from the date of acquisition.
For further information regarding the acquisition of CRS please refer to Note 5, “Business combinations,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

4. Investments
Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 6, “Variable interest entities,” for further details.
The amortized cost (or cost) and fair values of the Company’s investments as at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
December 31, 2017
 
Amortized 
Cost or Cost
 

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
613,130

 
$
604,392

 
$
733,510

 
$
727,397

Non-U.S. government and government agency
285,514

 
282,263

 
310,845

 
312,239

U.S. states, municipalities and political subdivisions
191,065

 
189,437

 
201,347

 
201,303

Agency residential mortgage-backed securities
956,254

 
929,859

 
984,387

 
978,049

Non-agency residential mortgage-backed securities
48,061

 
47,600

 
40,264

 
40,373

U.S. corporate
1,459,190

 
1,436,885

 
1,531,498

 
1,533,395

Non-U.S. corporate
410,287

 
403,385

 
420,522

 
422,249

Bank loans
480,593

 
471,212

 
450,320

 
442,951

Asset-backed securities
719,803

 
714,434

 
657,234

 
658,303

Commercial mortgage-backed securities
309,080

 
301,544

 
315,002

 
312,395

Total fixed maturities
5,472,977

 
5,381,011

 
5,644,929

 
5,628,654

Short-term investments
218,071

 
218,035

 
229,968

 
230,011

Other investments
 
 
 
 
 
 
 
Hedge funds
6,954

 
15,888

 
6,954

 
15,774

Private equity investments
64,921

 
79,185

 
63,684

 
78,407

Fixed income investment funds
208,400

 
209,503

 
203,167

 
204,426

Overseas deposits
61,608

 
61,608

 
56,611

 
56,611

Total other investments
341,883

 
366,184

 
330,416

 
355,218

Investments in investment affiliates (a)
72,135

 
127,247

 
61,944

 
100,137

Total managed investments
$
6,105,066

 
$
6,092,477

 
$
6,267,257

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
178,976

 
$
178,942

 
$
231,332

 
$
229,694

Short-term investments
3,510,859

 
3,510,859

 
3,151,746

 
3,151,746

Total non-managed investments
3,689,835

 
3,689,801

 
3,383,078

 
3,381,440

Total investments
$
9,794,901

 
$
9,782,278

 
$
9,650,335

 
$
9,695,460

(a)
The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in income as “Income from investment affiliates.”


9

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

(a)
Fixed maturity investments
The following table sets forth certain information regarding Standard & Poor’s credit quality ratings (or an equivalent rating with another recognized rating agency) of the Company’s fixed maturity investments as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,560,857

 
46.2
%
 
$
2,715,074

 
46.4
%
AA
417,814

 
7.5
%
 
442,397

 
7.6
%
A
1,102,419

 
19.8
%
 
1,137,795

 
19.4
%
BBB
797,698

 
14.3
%
 
828,392

 
14.1
%
Total investment grade managed fixed maturities
4,878,788

 
87.8
%
 
5,123,658

 
87.5
%
BB
157,241

 
2.8
%
 
168,967

 
2.9
%
B
227,954

 
4.1
%
 
237,131

 
4.0
%
CCC
20,219

 
0.4
%
 
18,217

 
0.3
%
CC
564

 
%
 

 
%
NR
96,245

 
1.7
%
 
80,681

 
1.4
%
Total non-investment grade managed fixed maturities
502,223

 
9.0
%
 
504,996

 
8.6
%
Total managed fixed maturities
$
5,381,011

 
96.8
%
 
$
5,628,654

 
96.1
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
AAA
$
250

 
%
 
$

 
%
Total investment grade non-managed catastrophe bonds
250

 
%
 

 
%
BB
$
6,632

 
0.2
%
 
$
22,110

 
0.3
%
B
2,626

 
%
 
3,265

 
0.1
%
NR
169,434

 
3.0
%
 
204,319

 
3.5
%
Total non-investment grade non-managed catastrophe bonds
178,692

 
3.2
%
 
229,694

 
3.9
%
Total non-managed catastrophe bonds
178,942

 
3.2
%
 
229,694

 
3.9
%
Total fixed maturities
$
5,559,953

 
100.0
%
 
$
5,858,348

 
100.0
%


10

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

The amortized cost and fair values for the Company’s fixed maturity investments held at June 30, 2018 and December 31, 2017 are shown below by contractual maturity. Actual maturity may differ from contractual maturity due to prepayment rights associated with certain investments.
 
June 30, 2018
 
December 31, 2017
 
Amortized Cost or Cost
 
Fair Value
 
Amortized Cost or Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
361,061

 
$
359,094

 
$
343,360

 
$
343,541

Due after one year through five years
2,333,731

 
2,295,728

 
2,527,018

 
2,513,620

Due after five years through ten years
556,784

 
547,685

 
577,347

 
577,109

Due after ten years
188,203

 
185,067

 
200,317

 
205,264

 
3,439,779

 
3,387,574

 
3,648,042

 
3,639,534

Asset-backed and mortgage-backed securities
2,033,198

 
1,993,437

 
1,996,887

 
1,989,120

Total managed fixed maturities
$
5,472,977

 
$
5,381,011

 
$
5,644,929

 
$
5,628,654

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
47,918

 
$
46,922

 
$
88,797

 
$
88,367

Due after one year through five years
130,433

 
131,395

 
140,035

 
138,844

Due after five years through ten years
625

 
625

 
2,500

 
2,483

Total non-managed catastrophe bonds
178,976

 
178,942

 
231,332

 
229,694

Total fixed maturities
$
5,651,953

 
$
5,559,953

 
$
5,876,261

 
$
5,858,348

(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
$
15,888

 
$
15,888

 
$

 
 
 
 
Private equity investments
 
79,185

 
79,185

 

 
 
 
 
Fixed income investment funds
 
209,503

 
209,503

 

 

 

Overseas deposits
 
61,608

 
61,608

 

 
 
 
 
Total other investments
 
$
366,184

 
$
366,184

 
$

 
 
 
 
 
 
December 31, 2017
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
15,774

 
15,774

 

 
 
 
 
Private equity investments
 
78,407

 
78,407

 

 
 
 
 
Fixed income investment funds
 
204,426

 
200,532

 
3,894

 
Daily
 
Daily to 2 days
Overseas deposits
 
56,611

 
56,611

 

 
 
 
 
Total other investments
 
$
355,218

 
$
351,324

 
$
3,894

 
 
 
 
(a)     The redemption frequency and notice periods only apply to investments without redemption restrictions.

11

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

Other investments include investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $196,379 (December 31, 2017: $186,734) are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $169,805 (December 31, 2017: $168,484) are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.
Certain securities included in other investments are subject to redemption restrictions. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known by the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments will liquidate over five to ten-year periods from inception of the funds. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by annual and quarterly funding and release processes for Lloyd’s market participants.
The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details. As at June 30, 2018, the Company does not have any plans to sell any of the other investments listed above.
(c)
Investments in investment affiliates
Included in the Company’s managed investment portfolio as at June 30, 2018 are investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”), Aquiline Technology Growth Fund L.P. (“Aquiline Tech”) and Aquiline Armour Co-Invest L.P. (“Aquiline Armour”) (collectively the “Aquiline partnerships”).
For further information regarding the Company’s Aquiline partnerships refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Investment affiliates, beginning of period
$
113,471

 
$
94,697

 
$
100,137

 
$
100,431

Net capital contributions (distributions)
11,598

 
(786
)
 
11,864

 
(11,708
)
Income from investment affiliates
2,178

 
9,466

 
15,246

 
14,654

Investment affiliates, end of period
$
127,247

 
$
103,377

 
$
127,247

 
$
103,377

As at June 30, 2018, the Company’s total unfunded investment commitment to the Aquiline partnerships was $95,788 (December 31, 2017: $125,996).


12

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

The following table presents the Company’s investments in the Aquiline partnerships as at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
28,529

 
%
 
8.1
%
 
$
49,248

Aquiline III
25,501

 
%
 
9.0
%
 
59,900

Aquiline Tech
4,406

 
%
 
10.6
%
 
4,400

Aquiline Armour
13,699

 
%
 
15.2
%
 
13,699

Total investments in investment affiliates
$
72,135

 
 
 
 
 
$
127,247

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,349

 
%
 
8.1
%
 
$
51,914

Aquiline III
24,737

 
%
 
9.0
%
 
44,733

Aquiline Tech
3,858

 
%
 
10.6
%
 
3,490

Total investments in investment affiliates
$
61,944

 
 
 
 
 
$
100,137

(d)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
39,224

 
$
31,212

 
$
76,993

 
$
62,883

Other investments
4,846

 
7,571

 
9,069

 
14,441

Cash and cash equivalents and restricted cash
1,744

 
716

 
2,883

 
1,326

Securities lending income
4

 
7

 
7

 
20

Total gross investment income
45,818

 
39,506

 
88,952

 
78,670

Investment expenses
(3,066
)
 
(1,443
)
 
(6,409
)
 
(4,415
)
Total managed net investment income
$
42,752

 
$
38,063

 
$
82,543

 
$
74,255

Non managed investments
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
5,842

 
$
4,500

 
$
9,990

 
$
7,560

Cash and cash equivalents and restricted cash
8,966

 
1,678

 
17,099

 
2,640

Total non-managed net investment income
14,808

 
6,178

 
27,089

 
10,200

Total net investment income
$
57,560

 
$
44,241

 
$
109,632

 
$
84,455

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

13

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

(e)
Net realized (losses) gains and change in net unrealized (losses) gains on investments
The following table sets forth an analysis of net realized (losses) gains and the change in net unrealized gains and losses on investments:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Managed investments
 
 
 
 
 
 
 
Gross realized gains
$
3,048

 
$
5,175

 
$
9,878

 
$
7,865

Gross realized (losses)
(10,480
)
 
(2,906
)
 
(16,168
)
 
(8,488
)
Net realized (losses) gains on investments
(7,432
)
 
2,269

 
(6,290
)
 
(623
)
Change in net unrealized (losses) gains on investments
(11,392
)
 
15,942

 
(68,169
)
 
30,291

Total net realized and change in net unrealized (losses) gains on managed investments
$
(18,824
)
 
$
18,211

 
$
(74,459
)
 
$
29,668

Non-managed investments
 
 
 
 
 
 
 
Gross realized gains
$
175

 
$
5

 
$
1,410

 
$
1,733

Gross realized (losses)
(137
)
 

 
(314
)
 

Net realized gains on investments
38

 
5

 
1,096

 
1,733

Change in net unrealized gains (losses) on investments
662

 
379

 
58

 
(622
)
Total net realized and change in net unrealized gains on non-managed investments
700

 
384

 
1,154

 
1,111

Total net realized and change in net unrealized (losses) gains on total investments
$
(18,124
)
 
$
18,595

 
$
(73,305
)
 
$
30,779

(f)
Pledged investments and cash
As at June 30, 2018, the Company had $6,310,851 (December 31, 2017: $5,853,744) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $6,282,368 were held in trust (December 31, 2017: $5,789,081). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions, as collateral for derivative instruments and to facilitate the accreditation of Validus Reinsurance, Ltd. (“Validus Re”), Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Lloyd’s Syndicate 1183 (the “Talbot Syndicate”) as alien (re)insurers by certain regulators.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $539,627 (December 31, 2017: $576,864). For further details on the credit facilities, refer to Note 13 “Debt and financing arrangements.”

14

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

5. Fair value measurements
(a)
Classification within the fair value hierarchy
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on unobservable inputs that reflect the Company’s own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of the valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.

15

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

At June 30, 2018, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$

 
$
604,392

 
$

 
$

 
$
604,392

Non-U.S. government and government agency

 
282,263

 

 

 
282,263

U.S. states, municipalities and political subdivisions

 
189,437

 

 

 
189,437

Agency residential mortgage-backed securities

 
929,859

 

 

 
929,859

Non-agency residential mortgage-backed securities

 
47,600

 

 

 
47,600

U.S. corporate

 
1,436,885

 

 

 
1,436,885

Non-U.S. corporate

 
403,385

 

 

 
403,385

Bank loans

 
245,476

 
225,736

 

 
471,212

Asset-backed securities

 
613,169

 
101,265

 

 
714,434

Commercial mortgage-backed securities

 
301,544

 

 

 
301,544

Total fixed maturities

 
5,054,010

 
327,001

 

 
5,381,011

Short-term investments
187,231

 
30,804

 

 

 
218,035

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
15,888

 
15,888

Private equity investments

 

 

 
79,185

 
79,185

Fixed income investment funds

 
9,576

 
18,807

 
181,120

 
209,503

Overseas deposits

 

 

 
61,608

 
61,608

Total other investments

 
9,576

 
18,807

 
337,801

 
366,184

Investments in investment affiliates (b)

 

 

 

 
127,247

Total managed investments
$
187,231

 
$
5,094,390

 
$
345,808

 
$
337,801

 
$
6,092,477

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$

 
$
127,380

 
$
51,562

 
$

 
$
178,942

Short-term investments
3,510,859

 

 

 

 
3,510,859

Total non-managed investments
3,510,859

 
127,380

 
51,562

 

 
3,689,801

Total investments
$
3,698,090

 
$
5,221,770

 
$
397,370

 
$
337,801

 
$
9,782,278

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.



16

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

At December 31, 2017, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$

 
$
727,397

 
$

 
$

 
$
727,397

Non-U.S. government and government agency

 
312,239

 

 

 
312,239

U.S. states, municipalities and political subdivisions

 
201,303

 

 

 
201,303

Agency residential mortgage-backed securities

 
978,049

 

 

 
978,049

Non-agency residential mortgage-backed securities

 
40,373

 

 

 
40,373

U.S. corporate

 
1,533,395

 

 

 
1,533,395

Non-U.S. corporate

 
422,249

 

 

 
422,249

Bank loans

 
232,886

 
210,065

 

 
442,951

Asset-backed securities

 
554,490

 
103,813

 

 
658,303

Commercial mortgage-backed securities

 
312,395

 

 

 
312,395

Total fixed maturities

 
5,314,776

 
313,878

 

 
5,628,654

Short-term investments
198,054

 
31,957

 

 

 
230,011

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
15,774

 
15,774

Private equity investments

 

 

 
78,407

 
78,407

Fixed income investment funds

 
13,351

 
17,404

 
173,671

 
204,426

Overseas deposits

 

 

 
56,611

 
56,611

Total other investments

 
13,351

 
17,404

 
324,463

 
355,218

Investments in investment affiliates (b)

 

 

 

 
100,137

Total managed investments
$
198,054

 
$
5,360,084

 
$
331,282

 
$
324,463

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$

 
$
152,233

 
$
77,461

 
$

 
$
229,694

Short-term investments
3,151,746

 

 

 

 
3,151,746

Total non-managed investments
3,151,746

 
152,233

 
77,461

 

 
3,381,440

Total investments
$
3,349,800

 
$
5,512,317

 
$
408,743

 
$
324,463

 
$
9,695,460

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At June 30, 2018, managed Level 3 investments totaled $345,808 (December 31, 2017: $331,282), representing 5.7% (December 31, 2017: 5.2%) of total managed investments.

17

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

(b)
Valuation techniques
There have been no material changes in the Company’s valuation techniques during the periods presented in these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.
Fixed maturity investments
In general, valuation of the Company’s fixed maturity investment portfolio is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Index providers generally utilize centralized trade reporting networks, available market makers and statistical techniques.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets. The Company considers these valuations to be Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services that employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
U.S. states, municipalities and political subdivisions
The Company’s U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Agency residential mortgage-backed securities
The Company’s agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.

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

Non-agency residential mortgage-backed securities
The Company’s non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company holds no sub-prime fixed maturity investments in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
U.S. corporate
U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company’s non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Bank loans
The Company’s bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company’s bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair values of these investments are classified as Level 3.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair values of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity

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

and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.
Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair values of these investments are classified as Level 2.
Catastrophe bonds
Catastrophe bonds are priced based on broker or underwriter bid indications. Level 2 catastrophe bonds are those traded over-the-counter; catastrophe bonds available only via private issuances are classified as Level 3.
Short-term investments
Short-term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair values of these investments are classified as Level 2.
Other investments
Hedge funds
The hedge fund’s administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
Fixed income investment funds
The Company’s investment funds classified as Level 2 consist of a pooled investment fund. The pooled investment is invested in fixed income securities with high credit ratings and is available only to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund, which is traded on a daily basis.
Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure. Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.
The fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation. The fair value of these investments is measured using the NAV practical expedient and therefore it has not been categorized within the fair value hierarchy.
None of these investments are probable of being sold at amounts different than their NAVs.

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

Overseas deposits
The Company’s share of a portfolio of Lloyd’s overseas deposits is managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair values of the deposits are based on the portfolio level reporting that is provided by Lloyd’s. The fair values of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
(c)
Level 3 investments
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six months ended June 30, 2018 and 2017: