þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
BERMUDA | 98-0501001 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
Page | ||||||||
PART I. FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements: |
1 | |||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
36 | ||||||||
86 | ||||||||
86 | ||||||||
87 | ||||||||
87 | ||||||||
87 | ||||||||
88 | ||||||||
88 | ||||||||
88 | ||||||||
89 | ||||||||
EX-31.1: CERTIFICATION | ||||||||
EX-31.2: CERTIFICATION | ||||||||
EX-32: CERTIFICATION |
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Fixed maturities, at fair value (amortized cost: 2007 -
$1,767,870; 2006 - $843,982) |
$ | 1,772,121 | $ | 844,857 | ||||
Short-term investments, at fair value (amortized cost: 2007 -
$579,981; 2006 - $531,530) |
580,765 | 531,530 | ||||||
Cash and cash equivalents |
651,428 | 63,643 | ||||||
Total cash and investments |
3,004,314 | 1,440,030 | ||||||
Premiums receivable |
505,001 | 142,408 | ||||||
Deferred acquisition costs |
122,572 | 28,203 | ||||||
Prepaid reinsurance premiums |
59,623 | 8,245 | ||||||
Securities lending collateral |
60,018 | 12,327 | ||||||
Loss reserves recoverable |
165,115 | | ||||||
Paid losses recoverable |
8,174 | | ||||||
Taxes recoverable |
6,283 | | ||||||
Goodwill and other intangible assets |
152,812 | | ||||||
Accrued investment income |
15,476 | 6,456 | ||||||
Other assets |
27,214 | 8,754 | ||||||
Total assets |
$ | 4,126,602 | $ | 1,646,423 | ||||
Liabilities |
||||||||
Reserve for losses and loss expenses |
$ | 924,531 | $ | 77,363 | ||||
Unearned premiums |
727,293 | 178,824 | ||||||
Reinsurance balances payable |
56,553 | 7,438 | ||||||
Securities lending payable |
60,018 | 12,327 | ||||||
Deferred taxation |
20,260 | | ||||||
Net payable for investments purchased |
88,072 | 12,850 | ||||||
Accounts payable and accrued expenses |
110,515 | 15,098 | ||||||
Debentures payable |
350,000 | 150,000 | ||||||
Total liabilities |
2,337,242 | 453,900 | ||||||
Commitments and contingent liabilities |
||||||||
Shareholders equity |
||||||||
Ordinary shares, 571,428,571 authorized, par value $0.175
Issued and outstanding (2007 74,199,837; 2006 - 58,482,601) |
12,985 | 10,234 | ||||||
Additional paid-in capital |
1,378,724 | 1,048,025 | ||||||
Accumulated other comprehensive (loss) income |
(640 | ) | 875 | |||||
Retained earnings |
398,291 | 133,389 | ||||||
Total shareholders equity |
1,789,360 | 1,192,523 | ||||||
Total liabilities and shareholders equity |
$ | 4,126,602 | $ | 1,646,423 | ||||
2
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues |
||||||||||||||||
Gross premiums written |
$ | 245,271 | $ | 116,505 | $ | 797,641 | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(7,906 | ) | (38,892 | ) | (65,644 | ) | (64,051 | ) | ||||||||
Net premiums written |
237,365 | 77,613 | 731,997 | 411,233 | ||||||||||||
Change in unearned premiums |
58,161 | 14,885 | (191,949 | ) | (209,872 | ) | ||||||||||
Net premiums earned |
295,526 | 92,498 | 540,048 | 201,361 | ||||||||||||
Net investment income |
36,560 | 16,272 | 74,799 | 40,370 | ||||||||||||
Net realized gains (losses) on investments |
1,010 | (154 | ) | 823 | (894 | ) | ||||||||||
Net unrealized gains on investments |
7,681 | | 3,136 | | ||||||||||||
Other income |
1,330 | | 1,330 | | ||||||||||||
Foreign exchange gains |
5,818 | 369 | 9,210 | 1,061 | ||||||||||||
Total revenues |
347,925 | 108,985 | 629,346 | 241,898 | ||||||||||||
Expenses |
||||||||||||||||
Losses and loss expense |
87,263 | 11,577 | 176,426 | 67,058 | ||||||||||||
Policy acquisition costs |
50,945 | 10,638 | 81,000 | 24,575 | ||||||||||||
General and administrative expenses |
44,793 | 11,736 | 67,088 | 25,350 | ||||||||||||
Share compensation expense |
6,132 | 1,905 | 10,054 | 5,657 | ||||||||||||
Finance expenses |
17,886 | 3,453 | 26,331 | 5,136 | ||||||||||||
Fair value of Warrants issued |
2,893 | | 2,893 | 77 | ||||||||||||
Total expenses |
209,912 | 39,309 | 363,792 | 127,853 | ||||||||||||
Net income before taxes |
138,013 | 69,676 | 265,554 | 114,045 | ||||||||||||
Income taxes |
1,488 | | 1,527 | | ||||||||||||
Net income |
$ | 136,525 | $ | 69,676 | $ | 264,027 | $ | 114,045 | ||||||||
Comprehensive income |
||||||||||||||||
Unrealized gains arising during the period |
| 7,353 | | 190 | ||||||||||||
Unrealized losses on foreign exchange |
(640 | ) | | (640 | ) | | ||||||||||
Adjustment for reclassification of losses
realized in income |
| 154 | | 894 | ||||||||||||
Comprehensive income |
$ | 135,885 | $ | 77,183 | $ | 263,387 | $ | 115,129 | ||||||||
Earnings per share |
||||||||||||||||
Weighted average number of common shares
and common share equivalents outstanding
|
||||||||||||||||
Basic |
69,107,336 | 58,482,601 | 62,024,179 | 58,475,306 | ||||||||||||
Diluted |
71,868,835 | 58,651,163 | 64,243,860 | 58,584,161 | ||||||||||||
Basic earnings per share |
$ | 1.98 | $ | 1.19 | $ | 4.26 | $ | 1.95 | ||||||||
Diluted earnings per share |
$ | 1.90 | $ | 1.19 | $ | 4.11 | $ | 1.95 | ||||||||
3
Nine months ended | ||||||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Common shares |
||||||||
Balance Beginning of period |
$ | 10,234 | $ | 10,224 | ||||
Issue of common shares |
2,751 | 10 | ||||||
Balance End of period |
$ | 12,985 | $ | 10,234 | ||||
Additional paid-in capital |
||||||||
Balance Beginning of period |
$ | 1,048,025 | $ | 1,050,117 | ||||
Issue of common shares, net of expenses |
317,753 | 1,030 | ||||||
Stock option expense |
2,930 | 2,649 | ||||||
Fair value of Warrants qualifying as equity |
2,893 | 77 | ||||||
Equity reclassification impact of adopting FAS 123 R |
| (10,932 | ) | |||||
Stock compensation expense |
7,123 | 3,006 | ||||||
Balance End of period |
$ | 1,378,724 | $ | 1,045,947 | ||||
Accumulated other comprehensive income (loss) |
||||||||
Balance Beginning of period |
$ | 875 | $ | 105 | ||||
Net change in unrealized gain (loss) on investments |
| 1,084 | ||||||
Net change in unrealized gain (loss) on foreign exchange |
(640 | ) | | |||||
Cumulative effect of adoption of fair value option |
(875 | ) | | |||||
Balance End of period |
$ | (640 | ) | $ | 1,189 | |||
Deferred compensation |
||||||||
Balance Beginning of period |
$ | | $ | (10,932 | ) | |||
Equity reclassification impact of adopting FAS 123 R |
| 10,932 | ||||||
Balance End of period |
$ | | $ | | ||||
Retaining earnings (deficit) |
||||||||
Balance Beginning of period |
$ | 133,389 | $ | (49,708 | ) | |||
Cumulative effect of adoption of fair value option |
875 | | ||||||
Net income |
264,027 | 114,045 | ||||||
Balance End of period |
$ | 398,291 | $ | 64,337 | ||||
Total shareholders equity |
$ | 1,789,360 | $ | 1,121,707 | ||||
-4-
Nine months ended | ||||||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Cash flows provided by operating activities |
||||||||
Net income for the period |
$ | 264,027 | $ | 114,045 | ||||
Adjustments to reconcile net income to cash provided by
operating activities: |
||||||||
Stock compensation and stock option expense |
10,053 | 5,657 | ||||||
Net realized gains (losses)on sales of investments |
(823 | ) | 894 | |||||
Net unrealized gains on investments |
(3,136 | ) | | |||||
Fair value of Warrants expensed |
2,893 | 77 | ||||||
Amortization of intangibles |
1,040 | | ||||||
Foreign
exchange gains on cash and cash equivalents included in net income |
(7,714 | ) | (1,061 | ) | ||||
Amortization of discounts on fixed maturities |
(9,168 | ) | (7,568 | ) | ||||
Changes in: |
||||||||
Premiums receivable |
(109,676 | ) | (177,634 | ) | ||||
Deferred acquisition costs |
(27,559 | ) | (30,611 | ) | ||||
Prepaid reinsurance premiums |
236 | (34,300 | ) | |||||
Losses recoverable |
2,319 | (1,936 | ) | |||||
Paid losses recoverable |
16,480 | | ||||||
Taxes recoverable |
(525 | ) | | |||||
Accrued investment income |
(1,305 | ) | (2,338 | ) | ||||
Other assets |
3,697 | (2,085 | ) | |||||
Reserve for losses and loss expense |
88,283 | 63,211 | ||||||
Unearned premiums |
191,703 | 244,172 | ||||||
Reinsurance balances payable |
(18,110 | ) | 22,298 | |||||
Deferred taxation |
2,096 | | ||||||
Accounts payable and accrued expenses |
3,288 | (4,090 | ) | |||||
Net cash provided by operating activities |
408,099 | 188,731 | ||||||
Cash flows used in investing activities |
||||||||
Proceeds on sales of investments |
891,202 | 361,507 | ||||||
Purchases of fixed maturities |
(1,338,169 | ) | (910,714 | ) | ||||
Sales (purchases) of short-term investments, net |
115,365 | (98,906 | ) | |||||
Increase in securities lending collateral |
(47,692 | ) | | |||||
Purchase of subsidiary, net of cash acquired |
(18,809 | ) | | |||||
Net cash used in investing activities |
(398,103 | ) | (648,113 | ) | ||||
Cash flows provided by financing activities |
||||||||
Net proceeds on issuance of debentures payable |
198,000 | 146,250 | ||||||
Issue of common shares, net of expenses |
320,504 | 1,040 | ||||||
Increase in securities lending payable |
47,692 | | ||||||
Net cash provided by financing activities |
566,196 | 147,290 | ||||||
Effect of foreign currency rate changes on cash and cash equivalents |
11,593 | 1,061 | ||||||
Net increase (decrease) in cash |
587,785 | (311,031 | ) | |||||
Cash and cash equivalents Beginning of period |
63,643 | 398,488 | ||||||
Cash and cash equivalents End of period |
$ | 651,428 | $ | 87,457 | ||||
Net taxes paid during the period |
$ | 37 | $ | | ||||
Interest paid during the period |
$ | 15,131 | $ | 3,401 | ||||
5
1. | Nature of the business |
||
Validus Holdings, Ltd. (the Company or Validus) was incorporated under the laws of
Bermuda on October 19, 2005. The Company conducts its operations worldwide through two
wholly-owned subsidiaries, Validus Reinsurance, Ltd. (Validus Re) and Talbot Holdings Ltd.
(Talbot). Validus Re is registered as a Class 4 insurer under The Insurance Act 1978 of
Bermuda, amendments thereto and related regulations (The Act). On July 2, 2007, the Company
acquired all of the outstanding shares of Talbot from a group of institutional and other
investors, and Talbot employees, management, former employees and trusts on behalf of certain
employees and their families. Talbot is the Bermuda parent of a specialty insurance group
primarily operating within the Lloyds of London (Lloyds) insurance market through Syndicate
1183. The Company, through its subsidiaries, provides reinsurance coverage in the Property,
Marine and Specialty lines markets, effective January 1, 2006, and insurance coverage in the
same markets effective July 2, 2007. |
|||
On July 30, 2007, Validus completed its initial public offering (IPO), selling 15,244,888
common shares at a price of $22.00 per share. The net proceeds to the Company from the IPO were
approximately $310,731, after deducting the underwriters discount and fees. On August 27,
2007, the Company issued an additional 453,933 common shares at a price of $22.00 per share
pursuant to the underwriters option to purchase additional common shares; the net proceeds to
the Company were approximately $9,349 and total IPO proceeds inclusive of the underwriters
option to purchase additional common shares were $320,080. |
|||
2. | Basis of preparation and consolidation |
||
These unaudited consolidated financial statements include Validus and its wholly owned
subsidiaries (together, the Company) and have been prepared in accordance with U.S. Generally
Accepted Accounting Principles (U.S. GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of 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. 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 Companys 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. The
results of operations for any interim period are not necessarily indicative of the results for
a full year. All significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from these estimates. The major estimates reflected in the Companys consolidated
financial statements include the reserve for losses and loss expenses, premium estimates for
business written on a line slip or proportional basis, and reinsurance recoverable balances.
Actual results could differ from those estimates. The terms FAS and FASB used in these
notes refer to Statements of Financial Accounting Standards issued by the United States
Financial Accounting Standards Board. The unaudited consolidated financial statements include
the results of operations and cash flows of Talbot since the date of acquisition of July 2,
2007 and not any prior periods (including for comparative purposes), except with respect to
Supplemental Pro Forma Information included within Note 5(a). |
|||
This Quarterly Report should be read in conjunction with the Companys General Form for
Registration of Securities under the Securities Act of 1933 on Form 424(b)(4), which included
the results for the year ended December 31, 2006 and quarter ended March 31, 2007, and was
filed with the Securities and Exchange Commission (the SEC) on July 26, 2007. |
-6-
3. | Significant accounting policies |
||
The following is a summary of the significant accounting policies adopted by the Company: |
a) | Premiums
|
Insurance premiums written are recorded in accordance with the terms of underlying
policies. Reinsurance premiums written are recorded at the inception of the policy and are
estimated based on information received from brokers, ceding companies and reinsureds, and
any subsequent differences arising on such estimates will be recorded in the periods in
which they are determined. Premiums written are earned on a pro-rata basis over the term
of the period. For contracts and policies written on a losses occurring basis, the risk
period is generally the same as the contract or policy terms. For contracts written on a
policies attaching basis, the risk period is based on the terms of the underlying contracts
and policies and is generally assumed to be 24 months. The portion of the premiums written
applicable to the unexpired terms of the underlying contracts and policies in force are
recorded as unearned premiums. Reinstatement premiums are recorded at the time a loss
event occurs. |
|||
b) | Policy acquisition Costs |
||
Policy acquisition costs are costs that vary with, and are directly related to, the
production of new and renewal business, and consist principally of commissions and
brokerage expenses. Acquisition costs are shown net of commissions earned on reinsurance
ceded. These costs are deferred and amortized over the periods in which the related
premiums are earned. Deferred acquisition costs are limited to their estimated realizable
value based on the related unearned premiums, anticipated claims expenses and investment
income. Policy acquisition costs also include profit commission. |
|||
c) | Reserve for losses and loss expenses |
||
The reserve for losses and loss expenses includes reserves for unpaid reported losses
and for losses incurred but not reported (IBNR). The reserve for unpaid reported losses
and loss expenses is established by management based on reports from brokers, ceding
companies and insureds and represents the estimated ultimate cost of events or conditions
that have been reported to, or specifically identified by the Company. The reserve for
incurred but not reported losses and loss expenses is established by management based on
actuarially determined estimates of ultimate losses and loss expenses. Inherent in the
estimate of ultimate losses and loss expenses are expected trends in claim severity and
frequency and other factors which may vary significantly as claims are settled.
Accordingly, ultimate losses and loss expenses may differ materially from the amounts
recorded in the consolidated financial statements. These estimates are reviewed regularly
and, as experience develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, will be recorded in earnings in the period in which
they become known. |
|||
d) | Reinsurance Ceded |
||
In the normal course of business, the Company seeks to reduce the potential amount of
loss arising from claims events by reinsuring certain levels of risk assumed in various
areas of exposure with other insurers or reinsurers. The accounting for reinsurance ceded
depends on the method of reinsurance. If the policy is on a losses occurring during
basis, reinsurance premiums ceded are expensed (and any commissions thereon are earned) on
a pro-rata basis over the period the reinsurance coverage is provided. If the policy is a
risks attaching during policy, reinsurance premiums ceded are expensed (and any
commissions thereon are earned) in line with the gross premiums earned to which the risk
attaching relates. Prepaid reinsurance premiums represent the portion of premiums ceded
applicable to the unexpired term of policies in force. Reinstatement premiums ceded are
recorded at the time a loss event occurs. |
|||
Reinsurance recoverables are based on contracts in force. The method for determining
the reinsurance recoverable on unpaid loss and loss expenses involves actuarial estimates
of unpaid losses and loss expenses as well as a determination of the Companys ability to
cede unpaid losses and loss expenses under its reinsurance treaties. Amounts recoverable
from reinsurers are estimated in a manner consistent with the underlying liabilities.
Provisions are made for estimated unrecoverable reinsurance. |
7
e) | Investments |
||
The Company adopted Statement of Financial Accounting Standard (FAS) 157 entitled
Fair Value Measurements as of January 1, 2007. FAS 157 defines fair value as the price
received to transfer an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date reflecting the highest and best use
valuation concepts. FAS 157 establishes a framework for measuring fair value in GAAP by
creating a hierarchy of fair value measurements that distinguishes market data between
observable independent market inputs and unobservable market assumptions by the reporting
entity. FAS 157 further expands disclosures about such fair value measurements. FAS 157
applies broadly to most existing accounting pronouncements that require or permit fair
value measurements (including both financial and non-financial assets and liabilities) but
does not require any new fair value measurements. The Company elected to early adopt this
Statement effective January 1, 2007 under the provisions of FAS 159, The Fair Value Option
for Financial Assets and Liabilities Including amendment of FASB Statement No. 115. |
|||
Prior to January 1, 2007, the Companys investments in fixed maturities were
classified as available-for-sale and carried at fair value, with related net unrealized
gains or losses excluded from earnings and included in shareholders equity as a component
of accumulated other comprehensive income. As discussed in Note 6, beginning on January 1,
2007, the Companys investments in fixed maturities were classified as trading and carried
at fair value, with related net unrealized gains or losses included in earnings. The
Company believes that accounting for its investment portfolio as trading more closely
reflects its investment guidelines. The fair value of investments is based upon quoted
market values. |
|||
Short-term investments comprise investments with a remaining maturity of less than one
year at time of purchase. |
|||
All investment transactions are recorded on a first-in-first-out basis and realized
gains and losses on sale of investments are determined on the basis of amortized cost.
Interest on fixed maturity securities is recorded in net investment income when earned and
is adjusted for any amortization of premium or discount. |
|||
Prior to January 1, 2007, the Company reviewed the fair value of its investment
portfolio to identify declines in fair value below the amortized cost that were other than
temporary. This review involved consideration of several factors including (i) the time
period during which there had been a significant decline in fair value below amortized
cost, (ii) an analysis of the liquidity, business prospects and overall financial condition
of the issuer, (iii) the significance of the decline, (iv) an analysis of the collateral
structure and other credit support, as applicable, of the securities in question and (v)
the Companys intent and ability to hold the investment for a sufficient period of time for
the value to recover. If the Company concluded that a decline in fair values was other than
temporary, the cost of the security was written down to fair value below amortized cost and
the previously unrealized loss was therefore realized in the period such determination was
made. With respect to securities where the decline in value was determined to be temporary
and the securitys value was not written down, a subsequent decision could be made to sell
that security and realize the loss. Subsequent decisions on security sales were made within
the context of overall risk monitoring, changing information, market conditions generally
and assessing value relative to other comparable securities. |
|||
For mortgage-backed securities, and any other holdings for which there is a prepayment
risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments
required due to the resultant change in effective yields and maturities are recognized
retrospectively. Prepayment fees or call premiums that are only payable to the Company when
a security is called prior to its maturity, are earned when received and reflected in net
investment income. |
|||
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 |
8
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. |
|||
f) | Cash and cash equivalents |
||
The Company considers time deposits and money market funds with an original maturity
of 30 days or less as equivalent to cash. |
|||
g) | Foreign exchange |
||
Assets and liabilities of foreign operations whose functional currency is not the U.S.
dollar are translated at prevailing year end exchange rates. Revenue and expenses of such
foreign operations are translated at average exchange rates during the year. The net
effect of translation differences between functional and reporting currencies in foreign
operations, net of applicable deferred income taxes, are included in accumulated other
comprehensive income (loss). |
|||
Monetary assets and liabilities denominated in foreign currencies are revalued at the
exchange rates in effect at the balance sheet date and revenues and expenses denominated in
foreign currencies are translated at the prevailing exchange rate on the transaction date
with the resulting foreign exchange gains and losses included in earnings. |
|||
h) | Stock plans |
||
The Company accounts for its stock compensation plans in accordance with the fair
value recognition provisions of FAS No. 123 (revised) Share-Based Payments. Accordingly,
the Company recognizes the compensation expense for stock option grants and restricted
share grants based on the fair value of the award on the date of grant over the requisite
service period. |
|||
i) | Warrants |
||
The Company has accounted for certain warrant contracts issued to our sponsoring
investors in conjunction with the capitalization of the Company, and which may be settled
by the Company using either the physical settlement or net-share settlement methods, in
accordance with EITF 00-19: Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock. Accordingly, the fair value of these
Warrants has been recorded in equity as an addition to additional paid-in capital. The
associated cost of the fair value of these Warrants has been recorded in accordance with
3(j) below. |
|||
j) | Finance Expenses |
||
Finance expenses consist of interest on our junior subordinated deferrable debentures,
the amortization of debt offering costs, fees relating to our credit facilities and the
costs of funds at Lloyds. |
|||
k) | Offering and incorporation costs |
||
Offering costs incurred in connection with common share offerings, including
investment banking fees, legal fees, founders fees and the fair value of Warrants issued to
certain sponsors, are deducted from the proceeds of the offerings. Incorporation costs not
related to the raising of capital are expensed as incurred and are included in general and
administrative expenses. |
|||
The fair value of Warrants deducted from the proceeds of the offering are those issued
to our founding sponsor that was involved in raising capital. The fair value of the other
Warrants are recorded as an expense on the income statement in the period they are granted. |
9
l) | Earnings per share |
||
Basic earnings per common share is calculated by dividing net income available to
common shareholders by the weighted average number of common shares outstanding. Diluted
earnings per common share are based on the weighted average number of common shares and
share equivalents excluding any anti-dilutive effects of warrants and options. |
|||
m) | Income taxes and uncertain tax provisions |
||
Deferred tax assets and liabilities are recorded in accordance with the provisions of
FAS No. 109 Accounting for Income Taxes. Under FAS No. 109, the Company records deferred
income taxes which reflect the tax effect of the temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and their respective tax
bases. |
|||
The Company is not subject to any income, withholding or capital gains taxes under
current Bermuda law. The Company has operations in subsidiary form in various other
jurisdictions around the world, including but not limited to the U.K. and Canada, that are
subject to relevant taxes in those jurisdictions. |
|||
The Company adopted the provisions of FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes, on January 1, 2007 which requires the Company to recognize
the tax benefits of uncertain tax positions only where the position is more likely than
not to be sustained assuming examination by tax authorities. The Company did not recognise
any liabilities for unrecognized tax benefits as a result of the implementation of FIN 48. |
|||
n) | Business combinations |
||
On July 2, 2007, the Company acquired all of the outstanding shares of Talbot. The
transaction was accounted for as a purchase method business combination in accordance with
FAS No. 141, Business Combinations. Certain amounts in Talbots financial statements
have been reclassified to conform to the Companys accounting policies. |
|||
o) | Intangible assets and goodwill |
||
The Company accounts for intangible assets that arose from business combinations in
accordance with FAS No. 141 Business Combinations and FAS No. 142 Goodwill and Other
Intangible Assets. Goodwill and identifiable intangible assets with indefinite lives are
not amortized, but are tested for impairment at least annually. Intangible assets with
definite lives are amortized on a straight line basis over their estimated useful lives. |
4. | Recent accounting pronouncements |
||
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157) which
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. FAS 157 is
applicable in conjunction with other accounting pronouncements that require or permit fair value
measurements, where the FASB previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, FAS 157 does not require any new fair
value measurements. FAS No. 157 is effective for interim and annual financial statements issued
after January 1, 2008 and was early adopted. |
|||
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets
and Liabilities Including amendment of FASB Statement No. 115 (FAS 159), which permits entities
to choose to measure many financial instruments and certain other items at fair value. FAS 159
includes a provision whereby investments accounted for as available-for-sale or held-to-maturity
are eligible for the fair value option at the adoption date and will be accounted for as trading
securities subsequent to adoption. If FAS 157 is adopted simultaneously with FAS 159, any
change in an existing |
10
eligible items fair value shall be accounted for as a cumulative-effect adjustment. FAS
No. 159 is effective as of the beginning of the Companys fiscal year beginning after November
15, 2007 and may be early adopted. |
|||
The Company has early adopted FAS 157 and FAS 159 as of January 1, 2007 and elected the
fair value option on all securities previously accounted for as available-for-sale. The Company
believes that accounting for its investment portfolio as trading more closely reflects its
investment guidelines. Unrealized gains on available-for-sale investments at December 31, 2006
of $875, previously included in the accumulated other comprehensive income, were treated as a
cumulative-effect adjustment as of January 1, 2007. The cumulative-effect adjustment has
resulted in the transfer of the balance of unrealized gains and losses from accumulated other
comprehensive income to retained earnings and had no impact on the results of operations for the
period beginning January 1, 2007. The Companys investments are accounted for as trading for
period beginning January 1, 2007 and as such, all unrealized gains and losses are now included
in Net Income on the Statement of Operations. |
|||
In October 2006, the FASB issued proposed FASB Staff Position EITF 03-6-a, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment
transactions may be participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing basic earnings per share (EPS) pursuant to the
two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per
Share. The Company is evaluating the impact of EITF 03-6-a, but does not currently expect it
to have a material impact on the Companys financial statements. |
|||
In February 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140. This standard permits fair value
re-measurement of an entire hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation; narrows the scope exemption applicable to
interest-only strips and principal-only strips from FAS 133, clarifies that only the simplest
separations of interest payments and principal payments qualify as not being subject to the
requirements of FAS 133; establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation; clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives; and
amends FAS140 to eliminate the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. This statement is intended to require more consistent
accounting that eliminates exemptions and provides a means to simplify the accounting for hybrid
financial instruments. This statement was effective for all financial instruments acquired or
issued after January 1, 2007 and was adopted by the Company at that time. The application of
the standard does not have a material impact on the Companys financial condition and results of
operations. |
|||
5. | Business combination |
||
On July 2, 2007, the Company acquired all of the outstanding shares of Talbot from a group
of institutional and other investors, and Talbot employees, management, former employees and
trusts on behalf of certain employees and their families. Talbot underwrites in the marine and
energy, war, political violence, commercial property, financial institutions, contingency,
bloodstock & livestock, accident & health and treaty classes of business. Talbot will be the
Companys principal operation in the direct insurance market and primary point of access to the
London Market. The business will continue to trade in the Lloyds market through its
subsidiaries, Syndicate 1183 and Underwriting Risk Services Ltd (URSL). The acquisition of
Talbot was undertaken to provide product line and geographic diversification as well as offer
broader access to underwriting expertise. Additional factors that added to the value of Talbot
included its capital structure and workforce. These factors resulted in a market value greater
than the value of net assets. |
11
The purchase price, including expenses, paid by the Company was $389,204 and the fair value
of the tangible net assets acquired was $235,351, resulting in $153,853 assigned to intangible
assets and goodwill. Certain employees of Talbot elected to receive 18,415 shares of Validus
common stock valued at $424 in lieu of cash, which was included as a component of the purchase
price. |
|||
The fair value of net assets acquired and allocation of purchase price is summarized as
follows: |
Total Purchase Price |
$ | 389,204 | ||||||
Assets Acquired |
||||||||
Cash and investments |
$ | 924,985 | ||||||
Receivables |
252,351 | |||||||
Assets acquired |
$ | 1,177,336 | ||||||
Liabilities Acquired |
||||||||
Net loss reserves |
$ | (563,413 | ) | |||||
Unearned premiums, net of expenses |
(237,169 | ) | ||||||
Taxation |
(12,109 | ) | ||||||
Other net liabilities |
(129,294 | ) | ||||||
Liabilities acquired |
$ | (941,985 | ) | |||||
Net assets acquired |
$ | 235,351 | ||||||
Excess purchase price |
$ | 153,853 | ||||||
Goodwill and other intangible assets
acquired |
||||||||
Intangible asset Syndicate Capacity |
$ | 91,843 | ||||||
Intangible asset Trade name |
6,436 | |||||||
Intangible asset Distribution Network |
35,181 | |||||||
Total intangible assets |
133,460 | |||||||
Goodwill |
20,393 | |||||||
Total goodwill and other intangible assets |
$ | 153,853 | ||||||
2007 |
$ | 2,080 | ||
2008 |
4,160 | |||
2009 |
4,160 | |||
2010 |
4,160 | |||
2011 and per
annum thereafter until June 30, 2017 |
4,160 | |||
Total |
$ | 41,617 | ||
12
Supplemental Pro Forma Information |
|||
Operating results of Talbot have been included in the consolidated financial statements
from July 2, 2007, the date of acquisition. FAS 141 requires the following selected unaudited
pro forma information be provided to present a summary of the combined results of the Company
and Talbot assuming the transaction had been effected on January 1, 2006 and 2007. The unaudited
pro forma data is for informational purposes only and does not necessarily represent results
that would have occurred if the transaction had taken place on the basis assumed above. The
unaudited pro forma data assumes the acquisition of Talbot had been effected on January 1, 2006
and January 1, 2007 respectively. |
|||
Prior to the Companys acquisition of Talbot, the Company had a reinsurance agreement with
Talbot. Balances of $12,363 for the three and nine months ended September 30, 2007 and $8,675
for the year ended December 31, 2006 representing reinsurance ceded to Validus Re by Talbot was
eliminated from net premiums written. |
Three months ended | ||||||||
September 30, 2007 | September 30, 2006 | |||||||
Net premiums written |
$ | 237,365 | $ | 216,133 | ||||
Total revenue |
$ | 347,925 | $ | 249,930 | ||||
Total expenses |
$ | 209,912 | $ | 136,576 | ||||
Net income |
$ | 136,525 | $ | 113,693 | ||||
Basic earnings per share |
$ | 1.98 | $ | 1.94 | ||||
Diluted earnings per share |
$ | 1.90 | $ | 1.93 |
Nine months ended | ||||||||
September 30, 2007 | September 30, 2006 | |||||||
Net premiums written |
$ | 1,044,684 | $ | 772,565 | ||||
Total revenue |
$ | 936,482 | $ | 610,224 | ||||
Total expenses |
$ | 637,937 | $ | 431,703 | ||||
Net income |
$ | 298,842 | $ | 179,537 | ||||
Basic earnings per share |
$ | 4.82 | $ | 3.07 | ||||
Diluted earnings per share |
$ | 4.65 | $ | 3.05 |
6. | Investments |
||
During the first quarter of 2007, the Company adopted FAS 157 and FAS 159. Prior to January
1, 2007, the Companys investments in fixed maturities were classified as available-for-sale and
carried at fair value, with related net unrealized gains or losses excluded from earnings and
included in shareholders equity as a component of accumulated other comprehensive income.
Beginning on January 1, 2007, the Companys investments in fixed maturities were classified as
trading and carried at fair value, with related net unrealized gains or losses included in
earnings. |
|||
Validus uses established third party pricing services in valuing its portfolio of
marketable securities. Validus considers prices for exchange traded securities and actively
traded treasury securities to be derived based on quoted prices (unadjusted) in active markets
for identical assets (Level 1 inputs as defined in FAS 157). Validus considers securities
priced via vendors, indices, or broker dealers to be derived based on inputs that are observable
for the asset, either directly or indirectly (Level 2 inputs as defined in FAS 157). Validus
currently believes that none of its marketable securities are being valued based on unobservable
inputs (Level 3 inputs as defined in FAS 157). There have been no changes in the Companys use
of valuation techniques since its adoption of FAS 157. The Companys investments are allocated
between levels 1 and 2 as follows: |
September 30, 2007 | ||||
Level 1 |
$ | 745,493 | ||
Level 2 |
1,607,393 | |||
Level 3 |
| |||
Total |
$ | 2,352,886 | ||
13
a) | Net investment income |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Fixed maturities and short-term investments |
$ | 24,135 | $ | 8,885 | $ | 54,655 | $ | 27,173 | ||||||||
Cash and cash equivalents |
13,252 | 8,064 | 22,025 | 14,623 | ||||||||||||
Total gross investment income |
37,387 | 16,949 | 76,680 | 41,796 | ||||||||||||
Investment expenses |
(827 | ) | (677 | ) | (1,881 | ) | (1,426 | ) | ||||||||
Net investment income |
$ | 36,560 | $ | 16,272 | $ | 74,799 | $ | 40,370 | ||||||||
The following represents an analysis of net realized gains (losses) and the change in
unrealized gains (losses) of investments: |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Fixed maturities, short-term investments and
cash equivalents |
||||||||||||||||
Gross realized gains |
$ | 1,517 | $ | 1 | $ | 1,761 | $ | 31 | ||||||||
Gross realized losses |
(507 | ) | (155 | ) | (938 | ) | (925 | ) | ||||||||
Net realized gains (losses) on investments |
1,010 | (154 | ) | 823 | (894 | ) | ||||||||||
Change in unrealized gains (losses) of
investments |
7,681 | 7,507 | 3,136 | 1,084 | ||||||||||||
Total net realized (losses) gains and
change in
unrealized gains (losses) of investments |
$ | 8,691 | $ | 7,353 | $ | 3,959 | $ | 190 | ||||||||
b) | Fixed maturity and short-term investments |
||
The amortized cost, fair value and gross unrealized gains and losses and estimated
fair value of investments at September 30, 2007 are as follows: |
Gross | ||||||||||||||||||||
unrealized | ||||||||||||||||||||
Gross | Gross | foreign | ||||||||||||||||||
Amortized | unrealized | unrealized | exchange | Fair Market | ||||||||||||||||
Cost | gains | losses | gains | Value | ||||||||||||||||
U.S. Government and
Government Agency |
$ | 373,764 | $ | 1,938 | $ | (85 | ) | $ | | $ | 375,617 | |||||||||
Corporate |
494,997 | 1,636 | (1,208 | ) | 136 | 495,561 | ||||||||||||||
Non-U.S. Government and
Government Agency |
42,456 | 82 | (3 | ) | 583 | 43,118 | ||||||||||||||
Asset-backed and
mortgage-backed
securities |
856,653 | 3,111 | (1,939 | ) | | 857,825 | ||||||||||||||
Total fixed maturities |
1,767,870 | 6,767 | (3,235 | ) | 719 | 1,772,121 | ||||||||||||||
Total short-term
investments |
579,982 | 13 | | 770 | 580,765 | |||||||||||||||
Total |
$ | $2,347,852 | $ | 6,780 | $ | (3,235 | ) | $ | 1,489 | $ | 2,352,886 | |||||||||
14
Gross | Gross | |||||||||||||||
unrealized | unrealized | Estimated | ||||||||||||||
Amortized Cost | gains | gains | fair value | |||||||||||||
U.S. Government and Government Agency |
$ | 119,579 | $ | 304 | $ | (152 | ) | $ | 119,731 | |||||||
Corporate |
223,079 | 482 | (572 | ) | 222,989 | |||||||||||
Asset-backed and mortgage-backed
securities |
501,324 | 1,688 | (875 | ) | 502,137 | |||||||||||
Total fixed maturities |
843,982 | 2,474 | (1,599 | ) | 844,857 | |||||||||||
Total short-term investments |
531,530 | | | 531,530 | ||||||||||||
Total |
$ | 1,375,512 | $ | 2,474 | $ | (1,599 | ) | $ | 1,376,387 | |||||||
12 Months or Less | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | Losses | fair value | Losses | fair value | Losses | |||||||||||||||||||
U.S. Government and Government Agency |
$ | 56,385 | $ | (123 | ) | $ | | $ | | $ | 56,385 | $ | (123 | ) | ||||||||||
Corporate |
127,547 | (527 | ) | 9,111 | (45 | ) | 136,658 | (572 | ) | |||||||||||||||
Asset-backed and mortgage-backed
securities |
225,561 | (767 | ) | 22,832 | (137 | ) | 248,393 | (904 | ) | |||||||||||||||
Total |
$ | 409,493 | $ | (1,417 | ) | $ | 31,943 | $ | (182 | ) | $ | 441,436 | $ | (1,599 | ) | |||||||||
September 30, 2007 | December 31, 2006 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
fair value | % of total | fair value | % of total | |||||||||||||
AAA |
$ | 1,336,868 | 75.5 | % | $ | 644,106 | 76.2 | % | ||||||||
AA |
182,216 | 10.3 | % | 69,087 | 8.2 | % | ||||||||||
A+ |
98,226 | 5.5 | % | 58,285 | 6.9 | % | ||||||||||
A |
68,016 | 3.8 | % | 44,136 | 5.2 | % | ||||||||||
A- |
69,919 | 3.9 | % | 22,759 | 2.7 | % | ||||||||||
BBB |
16,876 | 1.0 | % | 6,484 | 0.8 | % | ||||||||||
Total |
$ | 1,772,121 | 100.0 | % | $ | 844,857 | 100.0 | % | ||||||||
15
September 30, 2007 | December 31, 2006 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
cost | fair value | cost | fair value | |||||||||||||
Due in one year or less |
$ | 388,537 | $ | 390,237 | $ | 67,984 | $ | 67,920 | ||||||||
Due after one year through five years |
505,745 | 506,700 | 255,808 | 255,739 | ||||||||||||
Due after five years through ten
years |
14,295 | 14,716 | 4,966 | 5,207 | ||||||||||||
Due after ten years |
2,640 | 2,644 | 13,900 | 13,854 | ||||||||||||
911,217 | 914,297 | 342,658 | 342,720 | |||||||||||||
Asset-backed
and mortgage-backed securities |
856,653 | 857,824 | 501,324 | 502,137 | ||||||||||||
Total |
$ | 1,767,870 | $ | 1,772,121 | $ | 843,982 | $ | 844,857 | ||||||||
During the nine months ended September 30, 2006, proceeds from sales of
available-for-sale securities were $361,507. For the three months ended September 30, 2006,
gross realized losses were $155 and realized gains were $1. For the nine months ended
September 30, 2006, gross realized losses were $925 and realized gains were $31. |
|||
The Company has a five year, $500,000 secured letter of credit facility provided by a
syndicate of commercial banks. At September 30, 2007 approximately $84,440 (December 31,
2006; $78,323) of letters of credit were issued and outstanding under this facility for
which $84,802 of investments were pledged as collateral (December 31, 2006; $87,718). |
|||
c) | Securities lending |
||
The Company participates in a securities lending program whereby certain securities
from its portfolio are loaned to third parties for short periods of time through a lending
agent. The Company retains all economic interest in the securities it lends and receives a
fee from the borrower for the temporary use of the securities. Collateral in the form of
cash, government securities and letters of credit is required at a rate of 102% of the
market value of the loaned securities and is held by a third party. As at September 30,
2007, the Company had $58,815 (December 31, 2006: $11,942) in securities on loan. |
7. | Reserves for losses and loss expenses |
||
Reserves for losses and loss expenses are based in part upon the estimation of case losses
reported from brokers, insureds and ceding companies. The Company also uses statistical and
actuarial methods to estimate ultimate expected losses and loss expenses. The period of time
from the occurrence of a loss, the reporting of a loss to the Company and the settlement of the
Companys liability may be several months or years. During this period, additional facts and
trends may be revealed. As these factors become apparent, case reserves will be adjusted,
sometimes requiring an increase or decrease in the overall reserves of the Company, and at
other times requiring a reallocation of incurred but not reported reserves to specific case
reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected
in earnings in the period in which they become known. While management believes that it has
made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses
and loss expense will not exceed the total reserves. |
|||
The following table represents an analysis of paid and unpaid losses and loss expenses
incurred and a reconciliation of the beginning and ending unpaid loss expense for the nine
months ended September 30, 2007 and year ended December 31, 2006: |
16
Nine months ended | Year ended | |||||||
September 30, 2007 | December 31, 2006 | |||||||
Reserves for losses and loss expenses, beginning of period |
$ | 77,363 | $ | | ||||
Net loss reserves acquired in purchase of Talbot |
588,068 | | ||||||
Increase (decrease) in net losses and loss expenses
incurred in
respect of losses occurring in |
||||||||
Current year |
208,083 | 91,323 | ||||||
Prior years |
(31,657 | ) | | |||||
Total incurred losses and loss expenses |
176,426 | 91,323 | ||||||
Less net losses and loss expenses paid in respect
of losses occurring in |
||||||||
Current year |
33,223 | 13,960 | ||||||
Prior years |
52,393 | | ||||||
Total net paid losses |
85,616 | 13,960 | ||||||
Foreign exchange |
3,175 | | ||||||
Net reserve for losses and loss expenses, end of period |
759,416 | 77,363 | ||||||
Losses and loss expenses recoverable |
165,115 | | ||||||
Reserve for losses and loss expenses, end of period |
$ | 924,531 | $ | 77,363 | ||||
8. | Reinsurance |
||
The Company enters into reinsurance and retrocession agreements in order to mitigate its
accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies
with higher limits, and increase aggregate capacity. The cession of insurance and reinsurance
does not legally discharge the Company from its primary liability for the full amount of the
policies, and the Company is required to pay the loss and bear collection risk if the reinsurer
fails to meet its obligations under the reinsurance agreement. Amounts recoverable from
reinsurers are estimated in a manner consistent with the underlying liabilities. |
a) | Effects of reinsurance on premiums written and earned |
The effects of reinsurance on premiums written and earned for the three and nine month
periods ended September 30, 2007 and 2006 are as follows: |
Three months ended September 30, 2007 | ||||||||||||||||||||||||
Validus Re | Talbot | Total | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct |
$ | | $ | | $ | 90,283 | $ | 90,533 | $ | 90,283 | $ | 90,533 | ||||||||||||
Assumed |
102,229 | 169,914 | 52,759 | 75,610 | 154,988 | 245,524 | ||||||||||||||||||
Ceded |
(7,291 | ) | (17,921 | ) | (615 | ) | (22,610 | ) | (7,906 | ) | (40,531 | ) | ||||||||||||
Total |
$ | 94,938 | $ | 151,993 | $ | 142,427 | $ | 143,533 | $ | 237,365 | $ | 295,526 | ||||||||||||
Three months ended September 30, 2006 | ||||||||||||||||||||||||
Validus Re | Talbot | Total | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Assumed |
116,505 | 116,930 | | | 116,505 | 116,930 |
17
Three months ended September 30, 2006 | ||||||||||||||||||||||||
Validus Re | Talbot | Total | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Ceded |
(38,892 | ) | (24,432 | ) | | | (38,892 | ) | (24,432 | ) | ||||||||||||||
Total |
$ | 77,613 | $ | 92,498 | $ | | $ | | $ | 77,613 | $ | 92,498 | ||||||||||||
Nine months ended September 30, 2007 | ||||||||||||||||||||||||
Validus Re | Talbot | Total | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct |
$ | | $ | | $ | 90,283 | $ | 90,533 | $ | 90,283 | $ | 90,533 | ||||||||||||
Assumed |
654,599 | 439,672 | 52,759 | 75,610 | 707,358 | 515,282 | ||||||||||||||||||
Ceded |
(65,029 | ) | (43,157 | ) | (615 | ) | (22,610 | ) | (65,644 | ) | (65,767 | ) | ||||||||||||
Total |
$ | 589,570 | $ | 396,515 | $ | 142,427 | $ | 143,533 | $ | 731,997 | $ | 540,048 | ||||||||||||
Nine months ended September 30, 2006 | ||||||||||||||||||||||||
Validus Re | Talbot | Total | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Assumed |
475,284 | 231,112 | | | 475,284 | 231,112 | ||||||||||||||||||
Ceded |
(64,051 | ) | (29,751 | ) | | | (64,051 | ) | (29,751 | ) | ||||||||||||||
Total |
$ | 411,233 | $ | 201,361 | $ | | $ | | $ | 411,233 | $ | 201,361 | ||||||||||||
b) | Credit risk |
The group evaluates the financial condition of its reinsurers and monitors concentration of
credit risk arising from its exposure to individual reinsurers. The reinsurance program is
generally placed with reinsurers whose rating, at the time of placement, was A- or better rated
by Standard & Poors or the equivalent with other rating agencies. Exposure to a single
reinsurer is also controlled with restrictions dependent on rating. 99.9% of reinsurance
recoverables (which includes loss reserves recoverable and recoverables on paid losses) at
September 30, 2007 were from reinsurers rated A- or better. Reinsurance recoverables by
reinsurer are as follows: |
September 30, 2007 | December 31, 2006 | |||||||||||||||
Reinsurance | % of | Reinsurance | % of | |||||||||||||
recoverable | Total | recoverable | Total | |||||||||||||
Top 10 reinsurers |
$ | 159,423 | 92.0 | % | $ | | 0.0 | % | ||||||||
Other reinsurers balances > $2 million |
5,321 | 3.1 | % | | 0.0 | % | ||||||||||
Other reinsurers balances < $2 million |
8,545 | 4.9 | % | | 0.0 | % | ||||||||||
Total |
$ | 173,289 | 100.0 | % | $ | | 0.0 | % | ||||||||
September 30, 2007 | December 31, 2006 | |||||||||||||||||||
Reinsurance | % of | Reinsurance | % of | |||||||||||||||||
Top 10 Reinsurers | Rating | recoverable | Total | recoverable | Total | |||||||||||||||
Hannover Ruck -AG |
AA- | $ | 35,514 | 20.5 | % | $ | | 0.0 | % | |||||||||||
Lloyds
Syndicates |
A+ | 33,194 | 19.2 | % | | 0.0 | % | |||||||||||||
Swiss Re |
AA- | 28,218 | 16.3 | % | | 0.0 | % | |||||||||||||
Allianz |
AA- | 15,812 | 9.1 | % | | 0.0 | % | |||||||||||||
Muenchener Ruckversicherungs |
AA- | 14,066 | 8.1 | % | | 0.0 | % | |||||||||||||
Axa Re |
AA | 12,087 | 7.0 | % | | 0.0 | % | |||||||||||||
National Indemnity Company |
AAA | 5,844 | 3.4 | % | | 0.0 | % | |||||||||||||
Max Re Ltd |
A- | 5,749 | 3.3 | % | | 0.0 | % |
18
September 30, 2007 | December 31, 2006 | |||||||||||||||||||
Reinsurance | % of | Reinsurance | % of | |||||||||||||||||
Top 10 Reinsurers | Rating | recoverable | Total | recoverable | Total | |||||||||||||||
Aspen Insurance UK Limited |
A | 5,276 | 3.0 | % | | 0.0 | % | |||||||||||||
Transatlantic Reinsurance |
AA- | 3,663 | 2.1 | % | | 0.0 | % | |||||||||||||
$ | 159,423 | 92.0 | % | $ | | 0.0 | % | |||||||||||||
c) | Collateralized quota share retrocession treaties |
19
9. | Share capital |
a) | Authorized and issued |
||
The Companys authorized share capital is 571,428,571 ordinary voting and non-voting
ordinary shares with a par value of $0.175 each. The holders of ordinary voting shares are
entitled to receive dividends and are allocated one vote per share, provided that, if the
controlled shares of any shareholder or group of related shareholders constitute more than
9.09 percent of the outstanding common shares of the Company, their voting power will be
reduced to 9.09 percent. |
|||
As of December 31, 2005, the Company had issued 58,423,174 common shares at a price of
$17.50 in a private offering. Shares issued consisted of both voting common shares and
non-voting common shares which are identical in all respects, other than with respect to
voting and conversion of non-voting common shares. Of the shares issued at December 31,
2005, 14,057,138 were non-voting and an additional 5,714,285 shares converted to non-voting
upon the filing of the Companys registration statement. Proceeds from this issuance,
after offering expenses, were $999,997. These proceeds were used for general corporate
purposes. |
|||
The Company issued an additional 59,427 voting shares in a private offering in
February, 2006 at a price of $17.50 for net proceeds of $1,030. |
|||
On July 2, 2007, the Company acquired Talbot and agreed to issue an additional 18,415 common shares to certain
employees of Talbot. These employees had elected to receive common shares of the Company in
lieu of a cash settlement for the purchase of their Talbot shares. The issued common shares
of the Company were valued at $23.00 per share and were issued on
July 30, 2007. |
|||
On July 30, 2007, Validus completed its IPO, selling 15,244,888 common shares at a
price of $22.00 per share. The net proceeds to the Company from the IPO were approximately
$310,731, after deducting the underwriters discount and fees. On July 31, 2007, the
Company used $188,971 of the net proceeds to fully repay borrowings and to pay accrued
interest under its unsecured credit facility. The Company used the remaining $121,760 of
net proceeds to make an $117,963 capital contribution to Validus Re to support the future
growth of reinsurance operations and to pay certain expenses related to the Talbot
acquisition and made a $3,000 payment to Aquiline in connection with the termination of the
Advisory Agreement. |
|||
On August 27, 2007, the Company issued an additional 453,933 common shares at a price
of $22.00 per share pursuant to the underwriters option to
purchase additional common shares. The net proceeds to the Company of
$9,349 were contributed to Validus Re. Inclusive
of the net proceeds from the underwriters option to purchase additional common shares,
total proceeds from the IPO were approximately $320,080 and capital contributed to Validus
Re was approximately $127,312. |
|||
b) | Warrants |
||
The Companys founder and sponsoring investors provided their insurance industry
expertise, resources and relationships during the period ended December 31, 2005 to ensure
that the Company would be fully operational with key management in place in time for the
January 2006 renewal season. In return for these services the founder and sponsoring
investors were issued Warrants. Until July 30, 2007 and the IPO, agreements with the
founder and sponsoring investors provided that the Warrants represented, in the aggregate,
12.0% of the fully diluted shares of the Company (assuming exercise of all options,
Warrants and any other rights to purchase common shares) and were subject to adjustment
such that the Warrants would continue to represent, in the aggregate, 12.0% of the fully
diluted shares of the Company until such time as the Company consummated an initial public
offering, amalgamation, merger or another such similar corporate event. In consideration
for the founders and sponsoring investors commitments, the Company had issued as at
September 30, 2007 Warrants to the founding shareholder and sponsoring investors to
purchase, in the aggregate, up to 8,711,729 (December 31, 2006
to 8,455,320) common shares. Of those issued 2,090,815 (December 31, 2006 1,557,188) of the Warrants are to
purchase non-voting |
20
common shares. The Warrants will expire ten years from the date of issue and will be
exercisable at a price per share of $17.50, equal to the price per share paid by investors
in the private offering. The 12% agreement expired on the consummation of the IPO. |
|||
In February 2006 and July 2007 additional Warrants were issued to the founding
shareholder and sponsoring investors to maintain the allocation at 12.0% of the fully
diluted shares of the Company pursuant to a particular anti-dilution provision of the
Warrants. Such provision is no longer applicable effective with the completion of the IPO,
although the Warrants continue to have certain anti-dilution protections in respect of
asset distributions, share dividends and common stock dividends, among other events. 8,593
Warrants were issued in February 2006 and 256,409 Warrants were issued in July 2007. |
|||
The Warrants may be settled using either the physical settlement or net-share
settlement methods. The Warrants have been classified as equity instruments, in accordance
with EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock. The Warrants were initially measured at an
aggregate fair value of $75,091 and recorded as addition to additional paid-in capital.
The founding shareholders Warrants in the amount of $25,969 were accounted for as a
deduction from additional paid-in capital and the balance of $49,122 was expensed. The
additional Warrants issued for the period ended December 31, 2006 increased the fair value
to $75,168 with the increase of $77 expensed. The additional Warrants issued for the period
ended September 30, 2007 increased the fair value to $78,060 with the increase of $2,893
expensed. |
|||
The fair value of each Warrant issued was estimated on the date of grant using the
Black-Scholes option-pricing model. The volatility assumption used, of approximately 30.0%,
was derived from the historical volatility of the share price of a range of publicly-traded
Bermuda reinsurance companies of a similar business nature to the Company. No allowance was
made for any potential illiquidity associated with the private trading of the Companys
shares. The other assumptions in the option-pricing model were as follows: risk free
interest rate of 4.5%, expected life of ten years and a dividend yield of nil. |
|||
c) | Dividends |
||
The Company did not declare any dividends for the three month and nine month periods
ended September 30, 2007 and 2006. |
10. | Debt and financing arrangements |
a) | Financing structure and finance expenses |
The financing structure at September 30, 2007 was: |
In Use / | ||||||||
Commitment | Outstanding | |||||||
9.069% Junior Subordinated Deferrable Debentures |
$ | 150,000 | $ | 150,000 | ||||
8.480% Junior Subordinated Deferrable Debentures |
200,000 | 200,000 | ||||||
364-day $200,000 unsecured facility |
200,000 | | ||||||
$500,000 letter of credit facility |
500,000 | 84,440 | ||||||
Talbot
Standby LoC facility |
30,000 | 30,000 | ||||||
Talbot Revolving Loan facility |
7,500 | | ||||||
Talbot third party FAL facility (1) |
174,365 | 174,365 | ||||||
Total |
$ | 1,261,865 | $ | 638,805 | ||||
(1) | The third party FAL facility comprises $121,515 which supports the 2007 underwriting
year (most of which also supports the 2005 and/or 2006 underwriting years) and $52,850
which supports the 2005 and /or 2006 underwriting years but not the 2007 underwriting year. |
21
Three months ended | Nine months ended | |||||||
September 30, 2007 | September 30, 2007 | |||||||
9.069%
Junior Subordinated Deferrable Debentures |
$ | 3,593 | $ | 10,774 | ||||
8.480% Junior Subordinated Deferrable Debentures |
4,294 | 4,598 | ||||||
Credit facilities |
1,141 | 2,101 | ||||||
Talbot
Standby LoC facility |
| | ||||||
Talbot Revolving Loan facility |
76 | 76 | ||||||
Talbot third party FAL facility |
8,782 | 8,782 | ||||||
Total |
$ | 17,886 | $ | 26,331 | ||||
b) | Junior subordinated deferrable debentures |
On June 15, 2006, the Company participated in a private placement of $150,000 of
junior subordinated deferrable interest debentures due 2036 (the 9.069% Junior
Subordinated Deferrable Debentures). The 9.069% Junior Subordinated Deferrable Debentures
mature on June 15, 2036, are redeemable at the Companys option at par beginning June 15,
2011, and require quarterly interest payments by the Company to the holders of the 9.069%
Junior Subordinated Deferrable Debentures. Interest will be payable at 9.069% per annum
through June 15, 2011, and thereafter at a floating rate of three-month LIBOR plus 355
basis points, reset quarterly. The proceeds of $150,000 from the sale of the 9.069% Junior
Subordinated Deferrable Debentures, after the deduction of commissions paid to the
placement agents in the transaction and other expenses, are being used by the Company to
fund ongoing reinsurance operations and for general working capital purposes. Debt
issuance costs of $3,750 were deferred as an asset and are amortized to income over the
five year optional redemption period. |
|||
On June 21, 2007, the Company participated in a private placement of $200,000 of
junior subordinated deferrable interest debentures due 2037 (the 8.480% Junior
Subordinated Deferrable Debentures). The 8.480% Junior Subordinated Deferrable Debentures
mature on June 15, 2037, are redeemable at the Companys option at par beginning June 15,
2012, and require quarterly interest payments by the Company to the holders of the 8.480%
Junior Subordinated Deferrable Debentures. Interest will be payable at 8.480% per annum
through June 15, 2012, and thereafter at a floating rate of three-month LIBOR plus 295
basis points, reset quarterly. The proceeds of $200,000 from the sale of the 8.480% Junior
Subordinated Deferrable Debentures, after the deduction of commissions paid to the
placement agents in the transaction and other expenses, were used by the Company to fund
the purchase of Talbot Holdings Ltd, as discussed in Note 13. Debt issuance costs of $2,000
were deferred as an asset and are amortized to income over the five year optional
redemption period. |
|||
Future expected payments of interest and principal on the Junior Subordinated
Deferrable Debentures are as follows: |
2007 |
$ | 7,641 | ||
2008 |
30,564 | |||
2009 |
30,564 | |||
2010 |
30,564 | |||
2011 and thereafter |
382,240 | |||
Total minimum future payments |
$ | 481,573 | ||
22
c) | Credit facilities |
23
d) | Funds at Lloyds |
11. | Income taxes |
The Company provides for income taxes based upon amounts reported in the financial
statements and the provisions of currently enacted tax laws. The Company is registered in
Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the
Company is not taxed on any Bermuda income or capital gains taxes and has received an
undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or
capital gains taxes being imposed, the Company will be exempt from those taxes until 2016. |
||
The Company has subsidiaries based in the United Kingdom and Canada that are subject to the
tax laws of those countries. Under current law, these subsidiaries are taxed at the applicable
corporate tax rates. One of the Companys subsidiaries is deemed to be engaged in business in
the United States and is therefore subject to US corporate tax. |
||
Income tax (credit) / expense is comprised of current and deferred tax as follows: |
Three months | Nine months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2007 | 2007 | |||||||
Current |
$ | 511 | $ | 550 | ||||
Deferred |
977 | 977 | ||||||
Income tax (credit)/expense |
$ | 1,488 | $ | 1,527 | ||||
24
Three months | Nine months | ||||||||
ended | ended | ||||||||
September 30, | September 30, | ||||||||
2007 | 2007 | ||||||||
Expected tax provision at the weighted average rate |
$ | 41,716 | $ | 79,979 | |||||
Items not subject to tax |
(40,612 | ) | (78,867 | ) | |||||
Difference
between weighted average and U.S. tax rate |
383 | 383 | |||||||
Adjustments to prior period tax |
1 | 32 | |||||||
Income tax expense |
$ | 1,488 | $ | 1,527 | |||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Underwriting profit taxable in future periods |
$ | 35,843 | $ | | ||||
UK tax losses carried forward at 31st December |
(23,183 | ) | | |||||
Recoveries on 2005 year of account taxable in 2008 |
7,342 | | ||||||
Revenue to be taxed in future periods |
5,755 | | ||||||
Other Timing Differences |
914 | |||||||
$ | 26,671 | $ | | |||||
Deferred tax asset: |
||||||||
Timing Differences |
$ | (6,411 | ) | $ | | |||
(6,411 | ) | | ||||||
Net deferred tax liability |
$ | 20,260 | $ | | ||||
12. | Commitments and contingencies |
a) | Concentrations of credit risk |
b) | Employment agreements |
25
c) | Operating leases |
2007 |
$ | 2,029 | ||
2008 |
2,379 | |||
2009 |
2,379 | |||
2010 |
2,379 | |||
2011 and thereafter |
3,450 | |||
Total minimum future rentals |
$ | 12,616 | ||
d) | Funds at Lloyds |
2005 | 2006 | 2007 | ||||||||||
Underwriting year | Underwriting year | Underwriting year | ||||||||||
Common to all three years |
$ | 80,650 | $ | 80,650 | $ | 80,650 | ||||||
Common to 2005/6 only |
20,000 | 20,000 | | |||||||||
Common to 2006/7 only |
| 25,340 | 25,340 | |||||||||
2005 only |
30,350 | | | |||||||||
2006 only |
| 2,500 | | |||||||||
2007 only |
| | 15,525 | |||||||||
Total |
$ | 131,000 | $ | 128,490 | $ | 121,515 | ||||||
2005 | 2006 | 2007 | ||||||||||
Underwriting year | Underwriting year | Underwriting year | ||||||||||
Talbot third party FAL
facility |
$ | 131,000 | $ | 128,490 | $ | 121,515 | ||||||
Talbot FAL facility |
30,000 | 30,000 | 30,000 | |||||||||
Group funds |
100,787 | 110,075 | 115,000 | |||||||||
Total FAL |
$ | 261,787 | $ | 268,565 | $ | 266,515 | ||||||
26
13. | Related party transactions |
The transactions listed below are classified as related party transactions as each
counterparty has either a direct or indirect shareholding in the Company. |
a) | The Company entered into an agreement on December 7, 2005 under which the Companys
founding investor Aquiline Capital Partners, LLC and its related companies (Aquiline)
were engaged to provide services in connection with the Companys formation and initial
capitalization, including without limitation to ensure that the Company would be fully
operational with key management in place in time for the January 2006 renewal season. In
connection with this agreement, Aquiline received $12,300 in fees during 2005 which were
included as organizational costs within additional paid-in capital. Aquiline entities,
which own 6,857,143 shares in the Company, are allocated a warrant percentage of 6.55%
and employ three of the Companys directors who do not receive compensation from Validus. |
||
b) | The Company entered into an advisory agreement on December 7, 2005 with Aquiline.
Under this agreement, Aquiline from time to time provides advisory and consulting
services in relation to the affairs of the Company and its subsidiaries with respect to
the formation and initial capitalization of the Company and its subsidiaries, the
structure and timing of public and private offerings of debt and equity securities of the
Company and its subsidiaries and other financings, property dispositions and other
acquisitions to be performed by Aquiline. Under the terms of this agreement, the Company
pays an annual advisory fee of $1,000 payable in advance for a period of five years from
the date of initial funding until the termination date. Prior to the termination date,
upon the earlier to occur of (a) a change in control and (b) a first public offering, the
Company shall immediately pay in full to Aquiline the remaining unpaid advisory fees.
Certain officers and employees of Aquiline also invested in the Company and some of these
individuals also serve as directors of the Company. Upon the IPO closing on July 30,
2007, the Company paid Aquiline the remaining $3,000 of advisory fees per the management
agreement and expensed the balance of 2007 prepaid advisory services. |
||
c) | The Company and Aquiline engaged Merrill Lynch to provide services in connection
with the initial capitalization of Validus. In connection with this agreement, Merrill
Lynch received $8,100 in fees during 2005 which were included as a direct equity offering
expense within additional paid-in capital. Merrill Lynch entities, which own 5,714,285
shares in the Company, are allocated a warrant percentage of 0.67%, and have an employee
on the Board of Directors who does not receive compensation from Validus. Merrill Lynch
Warrants are convertible to non-voting shares as described in note 7(a). In addition,
entities affiliated with Merrill Lynch were the initial purchasers of $40,000 of the
9.069% Junior Subordinated Deferrable Debentures. |
||
Merrill Lynch was engaged by the Company to provide financial advisory services
related to the purchase of Talbot. On July 30, 2007, Validus completed its initial public
offering and subsequent offering per the underwriters option to purchase additional common shares. As an
underwriter of the offering, Merrill Lynchs discount and fees were $8,466. |
|||
d) | The Company entered into an agreement on December 8, 2005 with BlackRock Financial
Management, Inc. (BlackRock) under which BlackRock was appointed as an investment
manager of part of its investment portfolio. This agreement was entered into on an arms
length basis on terms generally available in the market. The Company incurred $539 and
$339 during the three months ended September 30, 2007 and 2006 and $1,293 and $897 during
the nine months ended September 30, 2007 and 2006, of which $325 was included in accounts
payable and accrued expenses at September 30, 2007 (December 31, 2006: $429). Merrill
Lynch is a shareholder of Blackrock. |
||
e) | The Company entered into an agreement on December 8, 2005 with Goldman Sachs Asset
Management and its affiliates (GSAM) under which GSAM was appointed as an investment
manager of part of the Companys investment portfolio. This agreement was entered into on
an arms length basis on terms available generally in the market. Goldman Sachs entities,
which own 14,057,143 shares in the Company, are allocated a warrant percentage of 2.21%,
and have an employee on the Board of Directors who does not receive compensation from
Validus. The |
27
Company incurred $201 and $315 during the three months ended September 30, 2007 and 2006
and $587 and $635 during the nine months ended September 30, 2007 and 2006 of such
investment management fees, of which $190 was included in accounts payable and accrued
expenses at September 30, 2007 (December 31, 2006: $180). |
|||
On July 2, 2007 the Company paid Goldman Sachs $4,045 for financial advisory consulting
services related to the initial public offering and the purchase of Talbot. |
|||
On July 30, 2007, Validus completed its initial public offering and subsequent offering per
the underwriters option to purchase additional common shares. As an underwriter Goldman
Sachs discount and fees were $8,429. |
|||
f) | In November 2006, the Company entered into a property quota share reinsurance
contract with a subsidiary of Allied World Assurance Holdings Ltd. (Allied World)
pursuant to which the Company assumed an approximate 10% share of the reinsurance assumed
under the contract. $30,000 of gross premiums written in the fourth quarter of 2006 was
recorded on this contract. Pursuant to a separate reinsurance
agreement with an Allied World subsidiary, the Company has ceded premiums, net of recoveries, to Allied World of $44 for
the three and nine months ended September 30, 2007. A balance due to Allied World of $61
was included in reinsurance balances payable at September 30, 2007 (December 31, 2006:
nil).The contract terms were negotiated on an arms-length basis. Funds affiliated with
Goldman Sachs are shareholders of Allied World. |
||
g) | Pursuant to a reinsurance agreement, the Company has
ceded premiums to Group Ark Insurance Holdings Ltd. (Group Ark) of $83 for the three
and nine months ended September 30, 2007. A balance due to Group Ark of $139 was included
in reinsurance balances payable at September 30, 2007 (December 31, 2006: nil). The
contract terms were negotiated on an arms-length basis. Aquiline is a shareholder of
Group Ark. |
14. | Earnings per share |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net income available to common
shareholders |
$ | 136,525 | $ | 69,676 | $ | 264,027 | $ | 114,045 | ||||||||
Weighted average shares basic
ordinary shares outstanding |
69,107,336 | 58,482,601 | 62,024,179 | 58,475,306 | ||||||||||||
Share equivalents
Warrants |
2,058,548 | | 1,720,334 | | ||||||||||||
Restricted Shares |
669,086 | 168,562 | 488,059 | 108,855 | ||||||||||||
Options |
33,865 | | 11,288 | | ||||||||||||
Weighted average shares diluted |
71,868,835 | 58,651,163 | 64,243,860 | 58,584,161 | ||||||||||||
Basic earnings per share |
$ | 1.98 | $ | 1.19 | $ | 4.26 | $ | 1.95 | ||||||||
Diluted earnings per share |
$ | 1.90 | $ | 1.19 | $ | 4.11 | $ | 1.95 | ||||||||
28
15. | Share consolidation |
16. | Segment information |
29
Corporate and | ||||||||||||||||
other | ||||||||||||||||
reconciling | ||||||||||||||||
Three months ended September 30, 2007 | Validus Re | Talbot | items | Total | ||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Gross premiums written |
$ | 102,229 | $ | 143,042 | $ | | $ | 245,271 | ||||||||
Reinsurance premiums ceded |
(7,291 | ) | (615 | ) | | (7,906 | ) | |||||||||
Net premiums written |
94,938 | 142,427 | | 237,365 | ||||||||||||
Change in unearned premiums |
57,055 | 1,106 | | 58,161 | ||||||||||||
Net premiums earned |
151,993 | 143,533 | | 295,526 | ||||||||||||
Losses and loss expense |
38,131 | 49,132 | | 87,263 | ||||||||||||
Policy acquisition costs |
18,161 | 32,784 | | 50,945 | ||||||||||||
General and administrative expenses |
9,527 | 25,258 | 7,008 | 41,793 | ||||||||||||
Stock compensation expenses |
1,281 | 731 | 4,120 | 6,132 | ||||||||||||
Underwriting income |
$ | 84,893 | $ | 35,628 | $ | (11,128 | ) | $ | 109,393 | |||||||
Net investment income |
22,706 | 13,360 | 494 | 36,560 | ||||||||||||
Net realized gains (losses) on investments |
1,122 | (112 | ) | | 1,010 | |||||||||||
Net unrealized gains (losses) on investments |
5,881 | 1,800 | 7,681 | |||||||||||||
Foreign exchange gains |
4,372 | 1,446 | | 5,818 | ||||||||||||
Other income |
| 1,330 | | 1,330 | ||||||||||||
Fair value of Warrants |
| | (2,893 | ) | (2,893 | ) | ||||||||||
Aquiline termination fee |
| | (3,000 | ) | (3,000 | ) | ||||||||||
Finance expenses |
(174 | ) | (8,858 | ) | (8,854 | ) | (17,886 | ) | ||||||||
Net income before taxes |
118,800 | 44,594 | (25,381 | ) | 138,013 | |||||||||||
Taxes |
8 | 1,480 | | 1,488 | ||||||||||||
Net income |
$ | 118,792 | $ | 43,114 | $ | (25,381 | ) | $ | 136,525 | |||||||
Loss and
loss expense ratio(1) |
25.1 | % | 34.2 | % | 29.5 | % | ||||||||||
Policy acquisition cost ratio(1) |
11.9 | % | 22.8 | % | 17.2 | % | ||||||||||
General and administrative expense ratio(1) |
7.1 | % | 18.1 | % | 16.2 | % | ||||||||||
Combined ratio(1) |
44.1 | % | 75.2 | % | 63.0 | % | ||||||||||
Total assets |
$ | 2,442,649 | $ | 1,678,359 | $ | 5,594 | $ | 4,126,602 | ||||||||
30
Corporate and | ||||||||||||||||
other | ||||||||||||||||
reconciling | ||||||||||||||||
Three months ended September 30, 2006 | Validus Re | Talbot | Items | Total | ||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Gross premiums written |
$ | 116,505 | $ | | $ | | $ | 116,505 | ||||||||
Reinsurance premiums ceded |
(38,892 | ) | | | (38,892 | ) | ||||||||||
Net premiums written |
77,613 | | 77,613 | |||||||||||||
Change in unearned premiums |
14,885 | | | 14,885 | ||||||||||||
Net premiums earned |
92,498 | | | 92,498 | ||||||||||||
Losses and loss expense |
11,577 | | | 11,577 | ||||||||||||
Policy acquisition costs |
10,638 | | | 10,638 | ||||||||||||
General and administrative expenses |
6,987 | | 4,749 | 11,736 | ||||||||||||
Stock compensation expenses |
526 | | 1,379 | 1,905 | ||||||||||||
Underwriting income |
$ | 62,770 | $ | | $ | (6,128 | ) | $ | 56,642 | |||||||
Net investment income |
16,271 | | | 16,271 | ||||||||||||
Net realized gains (losses) on investments |
(154 | ) | | | (154 | ) | ||||||||||
Foreign exchange gains |
369 | | | 369 | ||||||||||||
Finance expenses |
(8 | ) | (3,445 | ) | (3,453 | ) | ||||||||||
Net income before taxes |
79,248 | | (9,572 | ) | 69,676 | |||||||||||
Taxes |
| | | | ||||||||||||
Net income |
$ | 79,248 | $ | | $ | (9,572 | ) | $ | 69,676 | |||||||
Loss and loss expense ratio |
12.5 | % | 12.5 | % | ||||||||||||
Policy acquisition cost ratio |
11.5 | % | 11.5 | % | ||||||||||||
General and administrative expense ratio |
8.1 | % | 14.7 | % | ||||||||||||
Combined ratio |
32.1 | % | 38.8 | % | ||||||||||||
Total assets |
$ | 1,620,966 | $ | | $ | 3,924 | $ | 1,624,890 | ||||||||
31
Corporate and | ||||||||||||||||
other | ||||||||||||||||
reconciling | ||||||||||||||||
Nine months ended September 30, 2007 | Validus Re | Talbot | items | Total | ||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||
Gross premiums written |
$ | 654,599 | $ | 143,042 | $ | | $ | 797,641 | ||||||||
Reinsurance premiums ceded |
(65,029 | ) | (615 | ) | | (65,644 | ) | |||||||||
Net premiums written |
589,570 | 142,427 | | 731,997 | ||||||||||||
Change in unearned premiums |
(193,055 | ) | 1,106 | | (191,949 | ) | ||||||||||
Net premiums earned |
396,515 | 143,533 | | 540,048 | ||||||||||||
Losses and loss expense |
127,294 | 49,132 | | 176,426 | ||||||||||||
Policy acquisition costs |
48,216 | 32,784 | | 81,000 | ||||||||||||
General and administrative expenses |
23,553 | 25,258 | 15,277 | 64,088 | ||||||||||||
Share compensation expense |
2,824 | 731 | 6,499 | 10,054 | ||||||||||||
Underwriting income |
$ | 194,628 | $ | 35,628 | $ | (21,776 | ) | $ | 208,480 | |||||||
Net investment income |
60,942 | 13,360 | 497 | 74,799 | ||||||||||||
Net realized gains (losses) on investments |
935 | (112 | ) | | 823 | |||||||||||
Net unrealized gains (losses) on
investments |
1,336 | 1,800 | | 3,136 | ||||||||||||
Foreign exchange gains |
7,764 | 1,446 | | 9,210 | ||||||||||||
Other income |
| 1,330 | | 1,330 | ||||||||||||
Fair value of Warrants |
| | (2,893 | ) | (2,893 | ) | ||||||||||
Aquiline termination fee |
| | (3,000 | ) | (3,000 | ) | ||||||||||
Finance expenses |
(1,143 | ) | (8,858 | ) | (16,330 | ) | (26,331 | ) | ||||||||
Net income before taxes |
264,462 | 44,594 | (43,502 | ) | 265,554 | |||||||||||
Taxes |
47 | 1,480 | | 1,527 | ||||||||||||
Net income |
$ | 264,415 | $ | 43,114 | $ | (43,502 | ) | $ | 264,027 | |||||||
Loss and loss expense ratio |
32.1 | % | 34.2 | % | 32.7 | % | ||||||||||
Policy acquisition cost ratio |
12.2 | % | 22.8 | % | 15.0 | % | ||||||||||
General and administrative expense ratio |
6.6 | % | 18.1 | % | 13.7 | % | ||||||||||
Combined ratio |
50.9 | % | 75.2 | % | 61.4 | % | ||||||||||
Total assets |
$ | 2,442,649 | $ | 1,678,359 | $ | 5,594 | $ | 4,126,602 | ||||||||
32
Corporate and | ||||||||||||||||
other | ||||||||||||||||
reconciling | ||||||||||||||||
Nine months ended September 30, 2006 | Validus Re | Talbot | items | Total | ||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Gross premiums written |
$ | 475,284 | $ | | $ | | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(64,051 | ) | | | (64,051 | ) | ||||||||||
Net premiums written |
411,233 | | | 411,233 | ||||||||||||
Change in unearned premiums |
(209,872 | ) | | | (209,872 | ) | ||||||||||
Net premiums earned |
201,361 | 201,361 | ||||||||||||||
Losses and loss expense |
67,058 | | | 67,058 | ||||||||||||
Policy acquisition costs |
24,575 | | | 24,575 | ||||||||||||
General and administrative expenses |
13,092 | | 12,258 | 25,350 | ||||||||||||
Share compensation expense |
1,561 | | 4,096 | 5,657 | ||||||||||||
Underwriting income |
$ | 95,075 | | $ | (16,354 | ) | $ | 78,721 | ||||||||
Net investment income |
40,345 | | 25 | 40,370 | ||||||||||||
Net realized gains (losses) on
investments |
(894 | ) | | | (894 | ) | ||||||||||
Foreign exchange gains |
1,061 | | | 1,061 | ||||||||||||
Fair value of Warrants |
| (77 | ) | (77 | ) | |||||||||||
Finance expenses |
(11 | ) | (5,125 | ) | (5,136 | ) | ||||||||||
Net income (loss) before taxes |
135,576 | (21,531 | ) | 114,045 | ||||||||||||
Taxes |
| | | | ||||||||||||
Net income |
135,576 | | (21,531 | ) | 114,045 | |||||||||||
Loss and loss expense ratio |
33.3 | % | 33.3 | % | ||||||||||||
Policy acquisition cost ratio |
12.2 | % | 12.2 | % | ||||||||||||
General and
administrative expense ratio |
7.3 | % | 15.4 | % | ||||||||||||
Combined ratio |
52.8 | % | 60.9 | % | ||||||||||||
Total assets |
$ | 1,620,966 | $ | | $ | 3,924 | $ | 1,624,890 | ||||||||
Three months ended September 30, 2007 | ||||||||||||||||
Gross premiums written | ||||||||||||||||
Validus Re | Talbot | Total | % | |||||||||||||
United States |
$ | 68,575 | $ | 14,681 | $ | 83,256 | 34.1 | % | ||||||||
Worldwide excluding United
States (1) |
5,602 | 56,303 | 61,905 | 25.2 | % | |||||||||||
Europe |
2,576 | 12,447 | 15,023 | 6.1 | % | |||||||||||
Latin America and Caribbean |
444 | 6,443 | 6,887 | 2.8 | % | |||||||||||
Japan |
258 | 306 | 564 | 0.2 | % | |||||||||||
Canada |
| 2,383 | 2,383 | 1.0 | % | |||||||||||
Sub-total, non United States |
8,880 | 77,882 | 86,762 | 35.3 | % | |||||||||||
Worldwide including United
States (1) |
11,056 | 12,588 | 23,644 | 9.6 | % | |||||||||||
Marine and Aerospace (2) |
13,718 | 37,891 | 51,609 | 21.0 | % | |||||||||||
Total |
$ | 102,229 | $ | 143,042 | $ | 245,271 | 100.0 | % | ||||||||
33
Three months ended September 30, 2006 | ||||||||||||||||
Gross premiums written | ||||||||||||||||
Validus Re | Talbot | Total | % | |||||||||||||
United States |
$ | 60,853 | $ | | $ | 60,853 | 52.1 | % | ||||||||
Worldwide excluding United
States (1) |
8,234 | | 8,234 | 7.1 | % | |||||||||||
Europe |
6,072 | | 6,072 | 5.2 | % | |||||||||||
Latin America and Caribbean |
1,505 | | 1,505 | 1.3 | % | |||||||||||
Japan |
309 | | 309 | 0.3 | % | |||||||||||
Canada |
1,263 | | 1,263 | 1.1 | % | |||||||||||
Sub-total, non United States |
17,383 | | 17,383 | 15.0 | % | |||||||||||
Worldwide including United
States (1) |
4,137 | | 4,137 | 3.6 | % | |||||||||||
Marine and Aerospace (2) |
34,132 | | 34,132 | 29.3 | % | |||||||||||
Total |
$ | 116,505 | $ | | $ | 116,505 | 100.0 | % | ||||||||
Nine months ended September 30, 2007 | ||||||||||||||||
Gross premiums written | ||||||||||||||||
Validus Re | Talbot | Total | % | |||||||||||||
United States |
$ | 329,644 | $ | 14,681 | $ | 344,325 | 43.2 | % | ||||||||
Worldwide excluding United
States (1) |
35,072 | 56,303 | 91,375 | 11.5 | % | |||||||||||
Europe |
46,940 | 12,447 | 59,387 | 7.4 | % | |||||||||||
Latin America and Caribbean |
7,549 | 6,443 | 13,992 | 1.8 | % | |||||||||||
Japan |
7,673 | 306 | 7,979 | 1.0 | % | |||||||||||
Canada |
| 2,383 | 2,383 | 0.3 | % | |||||||||||
Sub-total, non United States |
97,234 | 77,882 | 175,116 | 22.0 | % | |||||||||||
Worldwide including United
States (1) |
80,335 | 12,588 | 92,923 | 11.6 | % | |||||||||||
Marine and Aerospace (2) |
147,386 | 37,891 | 185,277 | 23.2 | % | |||||||||||
Total |
$ | 654,599 | $ | 143,042 | $ | 797,641 | 100.0 | % | ||||||||
Nine months ended September 30, 2006 | ||||||||||||||||
Gross premiums written | ||||||||||||||||
Validus Re | Talbot | Total | % | |||||||||||||
United States |
$ | 209,292 | $ | | $ | 209,292 | 44.0 | % | ||||||||
Worldwide excluding United
States (1) |
37,592 | | 37,592 | 7.9 | % | |||||||||||
Europe |
36,319 | | 36,319 | 7.6 | % | |||||||||||
Latin America and Caribbean |
15,404 | | 15,404 | 3.2 | % | |||||||||||
Japan |
6,279 | | 6,279 | 1.3 | % | |||||||||||
Canada |
2,103 | | 2,103 | 0.4 | % | |||||||||||
Sub-total, non United States |
97,697 | | 97,697 | 20.4 | % | |||||||||||
Worldwide including United
States (1) |
41,216 | | 41,216 | 8.7 | % | |||||||||||
Marine and Aerospace (2) |
127,079 | | 127,079 | 26.7 | % | |||||||||||
Total |
$ | 475,284 | $ | | $ | 475,284 | 100.0 | % | ||||||||
34
17. | Subsequent events |
35
36
37
38
39
40
41
At September 30, 2007 | ||||||||||||
Total gross | ||||||||||||
reserve | ||||||||||||
Gross case | Gross | for losses and | ||||||||||
reserves | IBNR | loss expenses | ||||||||||
(Dollars in thousands) | ||||||||||||
Validus Re |
$ | 62,328 | $ | 101,111 | $ | 163,439 | ||||||
Talbot |
387,820 | 373,272 | 761,092 | |||||||||
Total |
$ | 450,148 | $ | 474,383 | $ | 924,531 | ||||||
At December 31, 2006 | ||||||||||||
Total gross | ||||||||||||
reserve | ||||||||||||
Gross case | Gross | for losses and | ||||||||||
reserves | IBNR | loss expenses | ||||||||||
(Dollars in thousands) | ||||||||||||
Validus Re |
$ | 38,114 | $ | 39,249 | $ | 77,363 | ||||||
Talbot |
| | | |||||||||
Total |
$ | 38,114 | $ | 39,249 | $ | 77,363 | ||||||
42
Reserve for losses | ||||
Change in assumption | and loss expenses | |||
(Dollars in thousands) | ||||
Six month deceleration |
$ | 650,886 | ||
Three month deceleration |
700,951 | |||
No change (selected) |
759,416 | |||
Three month acceleration |
821,145 | |||
Six month acceleration |
889,442 |
Reserve for losses | ||||
Change in assumption | and loss expenses | |||
(Dollars in thousands) | ||||
10% favorable |
$ | 731,097 | ||
5% favorable |
745,281 | |||
No change (selected) |
759,416 | |||
5% unfavorable |
773,649 | |||
10% unfavorable |
787,832 |
43
44
Three months | Three months | Nine months | Nine months | |||||||||||||
ended | ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September | |||||||||||||
2007 | 2006 | 2007 | 30, 2006 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Gross premiums written |
$ | 245,271 | $ | 116,505 | $ | 797,641 | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(7,906 | ) | (38,892 | ) | (65,644 | ) | (64,051 | ) | ||||||||
Net premiums written |
237,365 | 77,613 | 731,997 | 411,233 | ||||||||||||
Change in unearned premiums |
58,161 | 14,885 | (191,949 | ) | (209,872 | ) | ||||||||||
Net premiums earned |
295,526 | 92,498 | 540,048 | 201,361 | ||||||||||||
Losses and loss expenses |
87,263 | 11,577 | 176,426 | 67,058 | ||||||||||||
Policy acquisition costs |
50,945 | 10,638 | 81,000 | 24,575 | ||||||||||||
General and administrative expenses |
41,793 | 11,736 | 64,088 | 25,350 | ||||||||||||
Share compensation expense |
6,132 | 1,905 | 10,054 | 5,657 | ||||||||||||
Total underwriting expenses |
186,133 | 35,856 | 331,568 | 122,640 | ||||||||||||
Underwriting income (2) |
109,393 | 56,642 | 208,480 | 78,721 | ||||||||||||
Net investment income |
36,560 | 16,272 | 74,799 | 40,370 | ||||||||||||
Other income |
1,330 | | 1,330 | | ||||||||||||
Finance expenses |
(17,886 | ) | (3,453 | ) | (26,331 | ) | (5,136 | ) | ||||||||
Operating income before taxes |
129,397 | 69,461 | 258,278 | 113,955 | ||||||||||||
Taxes |
1,488 | | 1,527 | | ||||||||||||
Operating income after tax |
127,909 | 69,461 | 256,751 | 113,955 | ||||||||||||
Fair value of warrants issued |
(2,893 | ) | | (2,893 | ) | (77 | ) | |||||||||
Aquiline termination fee |
(3,000 | ) | | (3,000 | ) | | ||||||||||
Net realized losses on investments |
1,010 | (154 | ) | 823 | (894 | ) | ||||||||||
Net unrealized losses on investments (3) |
7,681 | | 3,136 | | ||||||||||||
Foreign exchange gains |
5,818 | 369 | 9,210 | 1,061 | ||||||||||||
Net income after taxes |
$ | 136,525 | $ | 69,676 | $ | 264,027 | $ | 114,045 | ||||||||
Comprehensive income (loss) |
||||||||||||||||
Unrealized losses arising during period (3) |
| 7,353 | | 190 | ||||||||||||
Foreign currency translation adjustments |
(640 | ) | | (640 | ) | | ||||||||||
Adjustment for reclassification of losses realized in income |
| 154 | | 894 | ||||||||||||
Comprehensive income (loss) |
$ | 135,885 | $ | 77,183 | $ | 263,387 | $ | 115,129 | ||||||||
Selected ratios |
||||||||||||||||
Net premiums written/Gross premiums written |
96.8 | % | 66.6 | % | 91.8 | % | 86.5 | % | ||||||||
Losses and loss expenses ratio |
29.5 | % | 12.5 | % | 32.7 | % | 33.3 | % | ||||||||
Policy acquisition cost ratio |
17.3 | % | 11.5 | % | 15.0 | % | 12.2 | % | ||||||||
General and administrative expense ratio |
16.2 | % | 14.8 | % | 13.7 | % | 15.4 | % | ||||||||
Expense ratio |
33.5 | % | 26.3 | % | 28.7 | % | 27.6 | % | ||||||||
Combined ratio |
63.0 | % | 38.8 | % | 61.4 | % | 60.9 | % | ||||||||
45
Three months | Three months | Nine months | Nine months | |||||||||||||
ended | ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 (1) | 2007 | 2006 (1) | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
VALIDUS RE |
||||||||||||||||
Gross premiums written |
$ | 102,229 | $ | 116,505 | $ | 654,599 | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(7,291 | ) | (38,892 | ) | (65,029 | ) | (64,051 | ) | ||||||||
Net premiums written |
94,938 | 77,613 | 589,570 | 411,233 | ||||||||||||
Change in unearned premiums |
57,055 | 14,885 | (193,055 | ) | (209,872 | ) | ||||||||||
Net premiums earned |
151,993 | 92,498 | 396,515 | 201,361 | ||||||||||||
Losses and loss expenses |
38,131 | 11,577 | 127,294 | 67,058 | ||||||||||||
Policy acquisition costs |
18,161 | 10,638 | 48,216 | 24,575 | ||||||||||||
General and administrative expenses |
9,527 | 6,987 | 23,553 | 13,092 | ||||||||||||
Share compensation
expense |
1,281 | 526 | 2,824 | 1,561 | ||||||||||||
Total underwriting expenses |
67,100 | 29,728 | 201,887 | 106,286 | ||||||||||||
Underwriting income (3) |
84,893 | 62,770 | 194,628 | 95,075 | ||||||||||||
TALBOT |
||||||||||||||||
Gross premiums written |
$ | 143,042 | $ | | $ | 143,042 | $ | | ||||||||
Reinsurance premiums ceded |
(615 | ) | | (615 | ) | | ||||||||||
Net premiums written |
142,427 | | 142,427 | | ||||||||||||
Change in unearned premiums |
1,106 | | 1,106 | | ||||||||||||
Net premiums earned |
143,533 | | 143,533 | | ||||||||||||
Losses and loss expenses |
49,132 | | 49,132 | | ||||||||||||
Policy acquisition costs |
32,784 | | 32,784 | | ||||||||||||
General and administrative expenses |
25,258 | | 25,258 | | ||||||||||||
Share compensation
expense |
731 | | 731 | | ||||||||||||
Total underwriting expenses |
107,905 | | 107,905 | | ||||||||||||
Underwriting income (2) |
35,628 | | 35,628 | | ||||||||||||
CORPORATE |
||||||||||||||||
General and administrative expenses |
7,008 | 4,749 | 15,277 | 12,258 | ||||||||||||
Share
compensation |
4,120 | 1,379 | 6,499 | 4,096 | ||||||||||||
Total underwriting income (2) |
109,393 | 56,642 | 208,480 | 78,721 | ||||||||||||
(1) | Talbot 2006 results are included in discussion of segment results for
comparison purposes only and are not consolidated in Validus results
for 2006 periods |
|
(2) | Non-GAAP Financial Measures. In presenting the Companys results,
management has included and discussed certain schedules containing
underwriting income (loss) that is not calculated under standards or
rules that comprise U.S. GAAP. Such measures are referred to as
non-GAAP. Non-GAAP measures may be defined or calculated differently
by other companies. These measures should not be viewed as a
substitute for those determined in accordance with U.S. GAAP. A
reconciliation of this measure to net income, the most comparable
U.S. GAAP financial measure, is presented in the section below
entitled Underwriting Income. |
|
(3) | The Company has early adopted FAS 157 and FAS 159 as of January 1,
2007 and elected the fair value option on all securities previously
accounted for as available-for-sale. Validus Re unrealized gains and
losses on available-for-sale investments at December 31, 2006 of
$875,000 previously included in the accumulated other comprehensive
income, were treated as a cumulative-effect adjustment as of January
1, 2007. The cumulative-effect adjustment transferred the balance of
unrealized gains and losses from accumulated other comprehensive
income to retained earnings and had no impact on the results of
operations for the annual or interim periods beginning January 1,
2007. The Companys investments are accounted for as trading for the
annual or interim periods beginning January 1, 2007 and as such, all
unrealized gains and losses are included in net income. Upon
acquisition by Validus, Talbot adopted FAS 157 and FAS 159. On
January 1, 2007 Talbot had unrealized gains and losses on
available-for-sale investments of $769,000. |
46
| The consolidation of Talbot for the first time in the third quarter of 2007 increased
underwriting income by $35.6 million. |
||
| An increase in Validus Re underwriting income of $22.1 million or 35.2% as a result of
net premiums earned which were increased by $59.5 million or 64.3% compared to the same
period in; |
||
| An increase in net investment income of $20.3 million or 124.7% as a result of growth in
the Validus Re investment portfolio and the addition of the Talbot portfolio, |
||
| Increased realized and unrealized gains on investments of $8.8 million. The majority of
this increase is due to the early adoption on FAS 157 and FAS 159 resulting in unrealized
gains on investments being recorded in net income rather than comprehensive income, and; |
||
| An increase in foreign exchange gains of $5.4 million due primarily to the weakening
U.S. dollar. |
| Increased finance expenses of $14.4 million, primarily resulting from $4.3 million
finance expense on the 8.480% Junior Subordinated Deferrable Debentures, $8.9 million of
Talbot Funds at Lloyds (FAL) finance expense and $1.0 million finance expense on
unsecured credit facility borrowings of $188.0 million, and; |
||
| Fair value of warrants issued expense equal to $2.9 million due to an anti-dilution
provision of the warrants arising from the issuance of restricted common shares in the
Talbot acquisition. |
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006(1) | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 115,173 | 47.0 | % | $ | 80,078 | 68.7 | % | 43.8 | % | ||||||||||
Marine |
63,361 | 25.8 | % | 28,463 | 24.5 | % | 122.6 | % | ||||||||||||
Specialty |
66,737 | 27.2 | % | 7,964 | 6.8 | % | 738.0 | % | ||||||||||||
Total |
$ | 245,271 | 100.0 | % | $ | 116,505 | 100.0 | % | 110.5 | % | ||||||||||
(1) | The results of operations for Talbot are consolidated only from the July 2007 date of acquisition. Consequently,
2006 data does not include Talbot financial results. |
47
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 86,623 | 84.7 | % | $ | 80,078 | 68.7 | % | 8.2 | % | ||||||||||
Marine |
8,345 | 8.2 | % | 28,463 | 24.5 | % | (70.7 | )% | ||||||||||||
Specialty |
7,261 | 7.1 | % | 7,964 | 6.8 | % | (8.8 | )% | ||||||||||||
Total |
$ | 102,229 | 100.0 | % | $ | 116,505 | 100.0 | % | (12.3 | )% | ||||||||||
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006(1) | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 28,550 | 20.0 | % | $ | 40,122 | 28.4 | % | (28.8 | )% | ||||||||||
Marine |
55,016 | 38.4 | % | 52,162 | 37.0 | % | 5.5 | % | ||||||||||||
Specialty |
59,476 | 41.6 | % | 48,880 | 34.6 | % | 21.7 | % | ||||||||||||
Total |
$ | 143,042 | 100.0 | % | $ | 141,164 | 100.0 | % | 1.3 | % | ||||||||||
(1) | Talbot results for the three months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition. |
| the energy account which recorded strong growth due to new construction opportunities
and increased asset values resulting from higher oil prices; and |
||
| the addition of two new classes in 2007, accident and health and bloodstock and
livestock, which added $9.3 million of gross premiums written. |
48
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 (1) | |||||||||||||||||||
Reinsurance | Reinsurance | |||||||||||||||||||
Reinsurance | Premiums | Reinsurance | Premiums | |||||||||||||||||
Premiums Ceded | Ceded (%) | Premiums Ceded | Ceded (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 7,266 | 91.9 | % | $ | 17,645 | 45.4 | % | (58.8 | )% | ||||||||||
Marine |
(30 | ) | (0.4 | )% | 21,247 | 54.6 | % | NM | ||||||||||||
Specialty |
670 | 8.5 | % | | 0.0 | % | NM | |||||||||||||
Total |
$ | 7,906 | 100.0 | % | $ | 38,892 | 100.0 | % | (79.7 | )% | ||||||||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results. |
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 (1) | |||||||||||||||||||
Reinsurance | Reinsurance | |||||||||||||||||||
Reinsurance | Premiums | Reinsurance | Premiums | |||||||||||||||||
Premiums Ceded | Ceded (%) | Premiums Ceded | Ceded (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 7,282 | 99.9 | % | $ | 17,645 | 45.4 | % | (58.7 | )% | ||||||||||
Marine |
9 | 0.1 | % | 21,247 | 54.6 | % | NM | |||||||||||||
Specialty |
| 0.0 | % | | 0.0 | % | NM | |||||||||||||
Total |
$ | 7,291 | 100.0 | % | $ | 38,892 | 100.0 | % | (81.3 | )% | ||||||||||
49
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 (1) | |||||||||||||||||||
Net premiums | Net premiums | Net premiums | Net premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 107,907 | 45.5 | % | $ | 62,433 | 80.4 | % | 72.8 | % | ||||||||||
Marine |
63,391 | 26.7 | % | 7,216 | 9.3 | % | 778.5 | % | ||||||||||||
Specialty |
66,067 | 27.8 | % | 7,964 | 10.3 | % | 729.6 | % | ||||||||||||
Total |
$ | 237,365 | 100.0 | % | $ | 77,613 | 100.0 | % | 205.8 | % | ||||||||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results |
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||
Net premiums | Net premiums | Net premiums | Net premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 79,341 | 83.6 | % | $ | 62,433 | 80.4 | % | 27.1 | % | ||||||||||
Marine |
8,336 | 8.8 | % | 7,216 | 9.3 | % | 15.5 | % | ||||||||||||
Specialty |
7,261 | 7.6 | % | 7,964 | 10.3 | % | (8.8 | )% | ||||||||||||
Total |
$ | 94,938 | 100.0 | % | $ | 77,613 | 100.0 | % | 22.3 | % | ||||||||||
Three months ended | Three months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006(1) | |||||||||||||||||||
Net premiums | Net premiums | Net premiums | Net premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 28,566 | 20.1 | % | $ | 38,930 | 28.1 | % | (26.6 | )% | ||||||||||
Marine |
55,055 | 38.6 | % | 50,605 | 36.5 | % | 8.8 | % | ||||||||||||
Specialty |
58,806 | 41.3 | % | 48,985 | 35.4 | % | 20.0 | % | ||||||||||||
Total |
$ | 142,427 | 100.0 | % | $ | 138,520 | 100.0 | % | 2.8 | % | ||||||||||
(1) | Talbot results for the three months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition. |
50
Three months | Three months | |||||||||||
ended September 30 | ended September | |||||||||||
2007 | 30, 2006(1) | % Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Change in gross unearned premium |
$ | 23,102 | $ | 16,268 | 42.0 | % | ||||||
Change in prepaid reinsurance premium |
(21,996 | ) | (27,709 | ) | (20.6 | )% | ||||||
Net change in unearned premium |
$ | 1,106 | $ | (11,441 | ) | 109.7 | % | |||||
(1) | Talbot results for the three months ended September 30, 2006 are presented
for comparative purposes. The results of operations for Talbot are
consolidated only from the July 2007 date of acquisition |
Three months ended September 30, | |||||||||||||||||||||
% of | |||||||||||||||||||||
2007 | Total | 2006 (1) | % of Total | % Change | |||||||||||||||||
Property |
$ | 149,294 | 50.5 | % | $ | 65,574 | 70.9 | % | 127.7 | % | |||||||||||
Marine |
75,338 | 25.5 | % | 16,636 | 18.0 | % | 352.9 | % | |||||||||||||
Specialty |
70,894 | 24.0 | % | 10,288 | 11.1 | % | 589.1 | % | |||||||||||||
Total |
$ | 295,526 | 100.0 | % | $ | 92,498 | 100.0 | % | 219.5 | % | |||||||||||
51
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results |
Three months ended September 30, | |||||||||||||||||||||
% of | |||||||||||||||||||||
2007 | Total | 2006 | % of Total | % Change | |||||||||||||||||
Property |
$ | 116,985 | 77.0 | % | $ | 65,574 | 70.9 | % | 78.4 | % | |||||||||||
Marine |
20,375 | 13.4 | % | 16,636 | 18.0 | % | 22.5 | % | |||||||||||||
Specialty |
14,633 | 9.6 | % | 10,288 | 11.1 | % | 42.2 | % | |||||||||||||
Total |
$ | 151,993 | 100.0 | % | $ | 92,498 | 100.0 | % | 64.3 | % | |||||||||||
Three months ended September 30, | Percentage | |||||||||||
2007 | 2006 (1) | point change | ||||||||||
Property |
28.0 | % | 13.7 | % | 14.3 | |||||||
Marine |
42.3 | % | 6.5 | % | 35.8 | |||||||
Specialty |
19.2 | % | 14.9 | % | 4.3 | |||||||
Total |
29.5 | % | 12.5 | % | 17.0 | |||||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results. |
52
Three months ended September 30, 2007 | ||||||||||||
Validus Re | Talbot | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Reserves at period beginning |
$ | 137,974 | $ | | $ | 137,974 | ||||||
Net loss reserves acquired in
Talbot purchase |
| 588,068 | 588,068 | |||||||||
Incurred losses current year |
41,658 | 70,062 | 111,720 | |||||||||
Change in prior accident years |
(3,527 | ) | (20,930 | ) | (24,457 | ) | ||||||
Incurred losses |
38,131 | 49,132 | 87,263 | |||||||||
Paid losses |
(12,714 | ) | (44,350 | ) | (57,064 | ) | ||||||
Foreign exchange |
| 3,175 | 3,175 | |||||||||
Net reserves at period end |
163,391 | 596,025 | 759,416 | |||||||||
Losses recoverable |
50 | 165,065 | 165,115 | |||||||||
Gross reserves at period end |
$ | 163,441 | $ | 761,090 | $ | 924,531 | ||||||
Total gross | ||||||||||||
Three months ended September 30, 2007 | reserve for losses | |||||||||||
Gross case reserves | Gross IBNR | and loss expenses | ||||||||||
(Dollars in thousands) | ||||||||||||
Property |
$ | 152,884 | $ | 145,824 | $ | 298,708 | ||||||
Marine |
242,944 | 159,520 | 402,464 | |||||||||
Specialty |
54,321 | 169,038 | 223,359 | |||||||||
Total |
$ | 450,149 | $ | 474,382 | $ | 924,531 | ||||||
Three months ended September 30, | Percentage | |||||||||||
2007 | 2006 | point change | ||||||||||
Property |
23.0 | % | 13.7 | % | 9.3 | % | ||||||
Marine |
36.0 | % | 6.5 | % | 29.5 | % | ||||||
Specialty |
26.4 | % | 14.9 | % | 11.5 | % | ||||||
Total |
25.1 | % | 12.5 | % | 12.6 | % | ||||||
53
Three months ended September 30, | Percentage | |||||||||||
2007 | 2006 (1) | point change | ||||||||||
Property |
46.1 | % | 46.9 | % | (0.8 | ) | ||||||
Marine |
44.6 | % | 65.3 | % | (20.7 | ) | ||||||
Specialty |
17.3 | % | (13.9 | )% | 31.2 | |||||||
Total |
34.2 | % | 30.9 | % | 3.3 | |||||||
(1) | Talbot results for the three months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition |
Three months ended September 30, | ||||||||
2007 | 2006 (1) | |||||||
Property |
$ | 21,503 | $ | 8,777 | ||||
Marine |
13,349 | 515 | ||||||
Specialty |
16,093 | 1,346 | ||||||
Total |
$ | 50,945 | $ | 10,638 | ||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results |
54
Three months ended September 30, | ||||||||
2007 | 2006 | |||||||
Property |
$ | 14,799 | $ | 8,777 | ||||
Marine |
1,306 | 515 | ||||||
Specialty |
2,056 | 1,346 | ||||||
Total |
$ | 18,161 | $ | 10,638 | ||||
| expenses of $26.0 million resulting from the consolidation of Talbot for the first
time in the third quarter of 2007 |
||
| compensation expense of $2.7 million in respect of the Employee Seller shares issued
to Talbot employees as part of the purchase of the group by Validus This expense is
non-cash and has no net effect on shareholders equity, as it balanced by an increase in
additional paid-in capital. Share compensation expense represented 0.9 percentage
points of the loss ratio for the three months ended September 30, 2007. |
Three months ended September 30, | ||||||||
2007 | 2006 (1) | |||||||
Validus Re |
$ | 10,808 | $ | 7,513 | ||||
Talbot |
25,989 | | ||||||
Corporate |
11,128 | 6,128 | ||||||
Total |
$ | 47,925 | $ | 13,641 | ||||
(1) | The results of operations for Talbot are consolidated
only from the July 2007 date of acquisition.
Consequently, 2006 data does not include Talbot
financial results. |
55
Three months ended | Three months ended | Percentage | ||||||||||
September 30, 2007 | September 30, 2006 | point change | ||||||||||
Losses and loss expenses ratio |
29.5 | % | 12.5 | % | 17.0 | % | ||||||
Policy acquisition cost ratio |
17.2 | % | 11.5 | % | 5.7 | % | ||||||
General and administrative expense ratio(1) |
16.2 | % | 14.7 | % | 1.5 | % | ||||||
Expense ratio |
33.4 | % | 26.2 | % | 7.2 | % | ||||||
Combined ratio |
63.0 | % | 38.8 | % | 24.2 | % | ||||||
(1) | Includes Corporate general and administrative expense, including share
compensation expense for the Talbot employee seller shares.. |
Three months ended | Three months ended | Percentage | ||||||||||
September 30, 2007 | September 30, 2006 | point change | ||||||||||
Losses and loss expenses ratio |
25.1 | % | 12.5 | % | 12.6 | % | ||||||
Policy acquisition cost ratio |
11.9 | % | 11.5 | % | 0.4 | % | ||||||
General and administrative expense ratio |
7.1 | % | 8.1 | % | (1.0 | )% | ||||||
Expense ratio |
19.1 | % | 19.6 | % | (0.5 | )% | ||||||
Combined ratio |
44.1 | % | 32.1 | % | 12.0 | % | ||||||
56
Three months ended | Three months ended | Percentage | ||||||||||
September 30, 2007 | September 30, 2006(1) | point change | ||||||||||
Losses and loss expenses ratio |
34.2 | % | 30.9 | % | 3.3 | % | ||||||
Policy acquisition cost ratio |
22.8 | % | 22.4 | % | 0.4 | % | ||||||
General and administrative expense ratio |
18.1 | % | 13.2 | % | (1.8 | )% | ||||||
Expense ratio |
40.9 | % | 35.6 | % | (1.4 | )% | ||||||
Combined ratio |
75.2 | % | 66.5 | % | 2.0 | % | ||||||
(1) | Talbot results for the three months ended September 30, 2006 are presented for comparative
purposes. The results of operations for Talbot are consolidated only from the July 2007
date of acquisition |
Three months ended September 30, | ||||||||||||||||
2007 | % of Subtotal | 2006 | % of Subtotal | |||||||||||||
Validus Re |
$ | 84,893 | 70.4 | % | $ | 62,770 | 100 | % | ||||||||
Talbot |
35,628 | 29.6 | % | | | |||||||||||
Subtotal |
120,521 | 100 | % | 62,770 | 100 | % | ||||||||||
Corporate |
(11,128 | ) | (6,128 | ) | ||||||||||||
Total |
$ | 109,393 | 56,642 | |||||||||||||
Three months ended | Three months ended | |||||||
September 30, 2007 | September 30, 2006 | |||||||
(Dollars in thousands) | ||||||||
Underwriting income |
$ | 109,393 | $ | 56,642 | ||||
Net investment income |
36,560 | 16,272 | ||||||
Other income |
1,330 | | ||||||
Finance expenses |
(17,886 | ) | (3,453 | ) | ||||
Net realized (losses) gains on investments |
1,010 | (154 | ) | |||||
Net unrealized gains (losses) on investments |
7,681 | | ||||||
Foreign exchange gains (losses) |
5,818 | 369 | ||||||
Fair value of warrants issued |
(2,893 | ) | | |||||
Aquiline termination fee |
(3,000 | ) | | |||||
Net income before taxes |
$ | 138,013 | $ | 69,676 | ||||
57
Three months ended | Three months ended | |||||||||||
September 30, 2007 | September 30, 2006 | % Change | ||||||||||
(Dollars in thousands) | ||||||||||||
Fixed maturities and short-term investments |
$ | 24,135 | $ | 8,885 | 171.6 | % | ||||||
Cash and cash equivalents |
13,252 | 8,064 | 64.3 | % | ||||||||
Total investment income |
37,387 | 16,949 | 120.6 | % | ||||||||
Investment expenses |
(827 | ) | (677 | ) | 22.2 | % | ||||||
Net investment income |
$ | 36,560 | $ | 16,272 | 124.7 | % | ||||||
58
| $4.3 million on the 8.480% Junior Subordinated Deferrable Debentures |
||
| $1.0 million on unsecured credit facility borrowings of $188.0 million |
||
| $8.9 million of FAL finance expense resulting from the consolidation of Talbot for
the first time in the third quarter of 2007 |
Three months | Three months | |||||||
ended September | ended September | |||||||
30, 2007 | 30, 2006 | |||||||
9.069% Junior Subordinated Deferrable Debentures |
$ | 3,593 | $ | 3,453 | ||||
8.480% Junior Subordinated Deferrable Debentures |
4,294 | | ||||||
Credit facilities |
1,141 | | ||||||
Talbot FAL facility |
| | ||||||
Talbot unsecured facility |
76 | | ||||||
Talbot third party FAL facility |
8,782 | | ||||||
Total |
$ | 17,886 | $ | 3,453 | ||||
Three months | Three months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2007 | 2006 (1) | |||||||
2005 & prior/2004 &
prior |
$ | 4,744 | $ | 7,173 | ||||
2006/2005 |
3,223 | 317 | ||||||
2007/2006 |
815 | 1,083 | ||||||
$ | 8,782 | $ | 8,573 | |||||
59
(1) | Talbot results for the three months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition. |
Three months | Three months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2007 | 2006 (1) | |||||||
2005 & prior/2004 &
prior |
$ | 31,295 | $ | 19,216 | ||||
2006/2005 |
9,334 | 14,063 | ||||||
2007/2006 |
5,234 | 18,907 | ||||||
$ | 45,863 | $ | 52,186 | |||||
(1) | Talbot results for the three months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition. |
60
61
Three months | Three months | Nine months | Nine months | |||||||||||||
ended | ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September | |||||||||||||
2007 | 2006 | 2007 | 30, 2006 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Gross premiums written |
$ | 245,271 | $ | 116,505 | $ | 797,641 | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(7,906 | ) | (38,892 | ) | (65,644 | ) | (64,051 | ) | ||||||||
Net premiums written |
237,365 | 77,613 | 731,997 | 411,233 | ||||||||||||
Change in unearned premiums |
58,161 | 14,885 | (191,949 | ) | (209,872 | ) | ||||||||||
Net premiums earned |
295,526 | 92,498 | 540,048 | 201,361 | ||||||||||||
Losses and loss expenses |
87,263 | 11,577 | 176,426 | 67,058 | ||||||||||||
Policy acquisition costs |
50,945 | 10,638 | 81,000 | 24,575 | ||||||||||||
General and administrative expenses |
41,793 | 11,736 | 64,088 | 25,350 | ||||||||||||
Share compensation expense |
6,132 | 1,905 | 10,054 | 5,657 | ||||||||||||
Total underwriting expenses |
186,133 | 35,856 | 331,568 | 122,640 | ||||||||||||
Underwriting income (2) |
109,393 | 56,642 | 208,480 | 78,721 | ||||||||||||
Net investment income |
36,560 | 16,272 | 74,799 | 40,370 | ||||||||||||
Other income |
1,330 | | 1,330 | | ||||||||||||
Finance expenses |
(17,886 | ) | (3,453 | ) | (26,331 | ) | (5,136 | ) | ||||||||
Operating income before taxes |
129,397 | 69,461 | 258,278 | 113,955 | ||||||||||||
Taxes |
1,488 | | 1,527 | | ||||||||||||
Operating income after tax |
127,909 | 69,461 | 256,751 | 113,955 | ||||||||||||
Fair value of warrants issued |
(2,893 | ) | | (2,893 | ) | (77 | ) | |||||||||
Aquiline termination fee |
(3,000 | ) | | (3,000 | ) | | ||||||||||
Net realized losses on investments |
1,010 | (154 | ) | 823 | (894 | ) | ||||||||||
Net unrealized losses on investments (3) |
7,681 | | 3,136 | | ||||||||||||
Foreign exchange gains |
5,818 | 369 | 9,210 | 1,061 | ||||||||||||
Net income after taxes |
$ | 136,525 | $ | 69,676 | $ | 264,027 | $ | 114,045 | ||||||||
Comprehensive income (loss) |
||||||||||||||||
Unrealized losses arising during period (3) |
| 7,353 | | 190 | ||||||||||||
Foreign currency translation adjustments |
(640 | ) | | (640 | ) | | ||||||||||
Adjustment for reclassification of losses realized in income |
| 154 | | 894 | ||||||||||||
Comprehensive income (loss) |
$ | 135,885 | $ | 77,183 | $ | 263,387 | $ | 115,129 | ||||||||
Selected ratios |
||||||||||||||||
Net premiums written/Gross premiums written |
96.8 | % | 66.6 | % | 91.8 | % | 86.5 | % | ||||||||
Losses and loss expenses ratio |
29.5 | % | 12.5 | % | 32.7 | % | 33.3 | % | ||||||||
Policy acquisition cost ratio |
17.3 | % | 11.5 | % | 15.0 | % | 12.2 | % | ||||||||
General and administrative expense ratio |
16.2 | % | 14.8 | % | 13.7 | % | 15.4 | % | ||||||||
Expense ratio |
33.5 | % | 26.3 | % | 28.7 | % | 27.6 | % | ||||||||
Combined ratio |
63.0 | % | 38.8 | % | 61.4 | % | 60.9 | % | ||||||||
62
Three months | Three months | Nine months | Nine months | |||||||||||||
ended | ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2007 | 2006 (1) | 2007 | 2006 (1) | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
VALIDUS RE |
||||||||||||||||
Gross premiums written |
$ | 102,229 | $ | 116,505 | $ | 654,599 | $ | 475,284 | ||||||||
Reinsurance premiums ceded |
(7,291 | ) | (38,892 | ) | (65,029 | ) | (64,051 | ) | ||||||||
Net premiums written |
94,938 | 77,613 | 589,570 | 411,233 | ||||||||||||
Change in unearned premiums |
57,055 | 14,885 | (193,055 | ) | (209,872 | ) | ||||||||||
Net premiums earned |
151,993 | 92,498 | 396,515 | 201,361 | ||||||||||||
Losses and loss expenses |
38,131 | 11,577 | 127,294 | 67,058 | ||||||||||||
Policy acquisition costs |
18,161 | 10,638 | 48,216 | 24,575 | ||||||||||||
General and administrative expenses |
9,527 | 6,987 | 23,553 | 13,092 | ||||||||||||
Share compensation
expense |
1,281 | 526 | 2,824 | 1,561 | ||||||||||||
Total underwriting expenses |
67,100 | 29,728 | 201,887 | 106,286 | ||||||||||||
Underwriting income (2) |
84,893 | 62,770 | 194,628 | 95,075 | ||||||||||||
TALBOT |
||||||||||||||||
Gross premiums written |
$ | 143,042 | $ | | $ | 143,042 | $ | | ||||||||
Reinsurance premiums ceded |
(615 | ) | | (615 | ) | | ||||||||||
Net premiums written |
142,427 | | 142,427 | | ||||||||||||
Change in unearned premiums |
1,106 | | 1,106 | | ||||||||||||
Net premiums earned |
143,533 | | 143,533 | | ||||||||||||
Losses and loss expenses |
49,132 | | 49,132 | | ||||||||||||
Policy acquisition costs |
32,784 | | 32,784 | | ||||||||||||
General and administrative expenses |
25,258 | | 25,258 | | ||||||||||||
Share compensation
expense |
731 | | 731 | | ||||||||||||
Total underwriting expenses |
107,905 | | 107,905 | | ||||||||||||
Underwriting income (2) |
35,628 | | 35,628 | | ||||||||||||
CORPORATE |
||||||||||||||||
General and administrative expenses |
7,008 | 4,749 | 15,277 | 12,258 | ||||||||||||
Share
compensation |
4,120 | 1,379 | 6,499 | 4,096 | ||||||||||||
Total underwriting income (2) |
109,393 | 56,642 | 208,480 | 78,721 | ||||||||||||
(1) | Talbot 2006 results are included in discussion of segment results for
comparison purposes only and are not consolidated in Validus results
for 2006 periods |
|
(2) | Non-GAAP Financial Measures. In presenting the Companys results,
management has included and discussed certain schedules containing
underwriting income that is not calculated under standards or rules
that comprise U.S. GAAP. Such measures are referred to as non-GAAP.
Non-GAAP measures may be defined or calculated differently by other
companies. These measures should not be viewed as a substitute for
those determined in accordance with U.S. GAAP. A reconciliation of
this measure to net income, the most comparable U.S. GAAP financial
measure, is presented in the section below entitled Underwriting
Income. |
|
(3) | The Company has early adopted FAS 157 and FAS 159 as of January 1,
2007 and elected the fair value option on all securities previously
accounted for as available-for-sale. Validus Re unrealized gains and
losses on available-for-sale investments at December 31, 2006 of
$875,000 previously included in the accumulated other comprehensive
income, were treated as a cumulative-effect adjustment as of January
1, 2007. The cumulative-effect adjustment transferred the balance of
unrealized gains and losses from accumulated other comprehensive
income to retained earnings and had no impact on the results of
operations for the annual or interim periods beginning January 1,
2007. The Companys investments are accounted for as trading for the
annual or interim periods beginning January 1, 2007 and as such, all
unrealized gains and losses are included in net income. Upon
acquisition by Validus, Talbot adopted FAS 157 and FAS 159. On
January 1, 2007 Talbot had unrealized gains and losses on
available-for-sale investments of $769,000. |
63
| The consolidation of Talbot for the first time in the third quarter of 2007 increased
underwriting income by $35.6 million |
||
| An increase in Validus Re underwriting income of $99.6 million or 104.7% as a result of
an increase of $195.2 million in net premiums earned; |
||
| An increase in net investment income of $34.4 million or 85.3% as a result of growth in
the Validus Re investment portfolio and the addition of the Talbot portfolio, |
||
| Increased realized and unrealized gains on investments of $4.9 million. The majority of
this increase is due to the early adoption on FAS 157 and FAS 159 resulting in unrealized
gains on investments being recorded in net income rather than comprehensive income, and; |
||
| An increase in foreign exchange gains of $8.1 million due primarily to the weakening
U.S. dollar |
| Increased finance expenses of $21.2 million, primarily resulting from $4.6 million
finance expense on the 8.480% Junior Subordinated Deferrable Debentures, $8.9 million of
Talbot FAL finance expense and $0.9 million finance expense on unsecured credit facility
borrowings of $188.0 million, and; |
||
| Fair value of warrants issued expense equals to $2.9 million due to an anti-dilution
provision of the warrants arising from the issuance of restricted common shares in to the
Talbot acquisition |
Nine months ended | Nine months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 (1) | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 510,643 | 64.0 | % | $ | 329,043 | 69.2 | % | 55.2 | % | ||||||||||
Marine |
173,659 | 21.8 | % | 97,980 | 20.6 | % | 77.2 | % | ||||||||||||
Specialty |
113,339 | 14.2 | % | 48,261 | 10.2 | % | 134.8 | % | ||||||||||||
Total |
$ | 797,641 | 100.0 | % | $ | 475,284 | 100.0 | % | 67.8 | % | ||||||||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results |
64
Nine months ended | Nine months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 482,093 | 73.7 | % | $ | 329,043 | 69.2 | % | 46.5 | % | ||||||||||
Marine |
118,643 | 18.1 | % | 97,980 | 20.6 | % | 21.1 | % | ||||||||||||
Specialty |
53,863 | 8.2 | % | 48,261 | 10.2 | % | 11.6 | % | ||||||||||||
Total |
$ | 654,599 | 100.0 | % | $ | 475,284 | 100.0 | % | 37.7 | % | ||||||||||
Nine months ended | Nine months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006(1) | |||||||||||||||||||
Gross premiums | Gross premiums | Gross premiums | Gross premiums | |||||||||||||||||
written | written (%) | written | written (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 130,618 | 24.0 | % | $ | 137,875 | 28.9 | % | (5.3 | )% | ||||||||||
Marine |
205,002 | 37.7 | % | 177,838 | 37.3 | % | 15.3 | % | ||||||||||||
Specialty |
208,608 | 38.3 | % | 161,116 | 33.8 | % | 29.5 | % | ||||||||||||
Total |
$ | 544,228 | 100.0 | % | $ | 476,829 | 100.0 | % | 14.1 | % | ||||||||||
(1) | Talbot results for the nine months ended September 30, 2006 are
presented for comparative purposes. The results of operations for
Talbot are consolidated only from the July 2007 date of acquisition. |
| the energy account which recorded strong growth due to new construction opportunities
and increased asset values resulting from the higher oil price; and |
||
| the addition of two new classes in 2007, accident and health and bloodstock and
livestock, which added $20.8 million of gross premiums written. |
65
Nine months ended | Nine months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 (1) | |||||||||||||||||||
Reinsurance | Reinsurance | |||||||||||||||||||
Reinsurance | Premiums | Reinsurance | Premiums | |||||||||||||||||
Premiums Ceded | Ceded (%) | Premiums Ceded | Ceded (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 31,380 | 47.8 | % | $ | 33,190 | 51.8 | % | (5.5 | )% | ||||||||||
Marine |
32,169 | 49.0 | % | 30,861 | 48.2 | % | 4.2 | % | ||||||||||||
Specialty |
2,095 | 3.2 | % | | 0.0 | % | NM | |||||||||||||
Total |
$ | 65,644 | 100.0 | % | $ | 64,051 | 100.0 | % | 2.5 | % | ||||||||||
(1) | The results of operations for Talbot are consolidated only from the
July 2007 date of acquisition. Consequently, 2006 data does not
include Talbot financial results. |
Nine months ended | Nine months ended | |||||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||||||
Reinsurance | Reinsurance | |||||||||||||||||||
Reinsurance | Premiums | Reinsurance | Premiums | |||||||||||||||||
Premiums Ceded | Ceded (%) | Premiums Ceded | Ceded (%) | % Change | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||
Property |
$ | 31,396 | 48.3 | % | $ | 33,190 | 51.8 | % | (5.4 | )% | ||||||||||
Marine |
32,208 | 49.5 | % | 30,861 | 48.2 | % | 4.4 | % | ||||||||||||
Specialty |
1,425 | 2.2 | % | | 0.0 | % | NM | |||||||||||||
To |