Document

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
Form 10-Q 
__________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Commission file number 001-33606
__________________________________________________
valirgbcroppeda12.jpg
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

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

As of April 30, 2018, there were 79,329,028 outstanding Common Shares, $0.175 par value per share, of the registrant.

 



Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 


2

Table of Contents

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


2

Table of Contents

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at March 31, 2018 (unaudited) and December 31, 2017
(Expressed in thousands of U.S. dollars, except share and per share information)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Fixed maturity investments trading, at fair value (amortized cost: 2018—$5,874,140; 2017—$5,876,261)
$
5,803,022

 
$
5,858,348

Short-term investments trading, at fair value (amortized cost: 2018—$3,638,995; 2017—$3,381,714)
3,638,940

 
3,381,757

Other investments, at fair value (cost: 2018—$331,950; 2017—$330,416)
357,246

 
355,218

Investments in investment affiliates, equity method (cost: 2018—$75,302; 2017—$61,944)
113,471

 
100,137

Cash and cash equivalents
672,173

 
754,990

Restricted cash
302,277

 
394,663

Total investments and cash
10,887,129

 
10,845,113

Premiums receivable
1,865,460

 
939,487

Deferred acquisition costs
309,825

 
213,816

Prepaid reinsurance premiums
390,900

 
132,938

Securities lending collateral
4,210

 
2,717

Loss reserves recoverable
979,944

 
1,233,997

Paid losses recoverable
59,892

 
46,873

Income taxes recoverable
7,705

 
9,044

Deferred tax asset
56,739

 
52,467

Receivable for investments sold
31,512

 
12,182

Intangible assets
169,168

 
171,411

Goodwill
229,573

 
229,573

Accrued investment income
29,621

 
29,096

Other assets
578,964

 
508,165

Total assets
$
15,600,642

 
$
14,426,879

Liabilities
 

 
 

Reserve for losses and loss expenses
$
4,632,629

 
$
4,831,390

Unearned premiums
2,242,368

 
1,147,186

Reinsurance balances payable
398,861

 
331,645

Securities lending payable
4,210

 
2,717

Deferred tax liability
3,633

 
4,600

Payable for investments purchased
85,946

 
74,496

Accounts payable and accrued expenses
520,916

 
1,225,875

Notes payable to AlphaCat investors
1,268,194

 
1,108,364

Senior notes payable
245,614

 
245,564

Debentures payable
539,572

 
539,158

Total liabilities
9,941,943

 
9,510,995

Commitments and contingent liabilities


 


Redeemable noncontrolling interests
1,423,110

 
1,004,094

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

 
400,000

Common shares (Issued: 2018—162,003,969; 2017—161,994,491; Outstanding: 2018—79,329,028; 2017—79,319,550)
28,351

 
28,349

Treasury shares (2018—82,674,941; 2017—82,674,941)
(14,468
)
 
(14,468
)
Additional paid-in capital
824,356

 
814,641

Accumulated other comprehensive income (loss)
9,405

 
(22,192
)
Retained earnings
2,653,588

 
2,688,742

Total shareholders’ equity available to Validus
3,901,232

 
3,895,072

Noncontrolling interests
334,357

 
16,718

Total shareholders’ equity
4,235,589

 
3,911,790

Total liabilities, noncontrolling interests and shareholders’ equity
$
15,600,642

 
$
14,426,879


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

3

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of (Loss) Income and Comprehensive Income
For the Three Months Ended March 31, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended March 31,
 
2018
 
2017
 
(unaudited)
Revenues
 
Gross premiums written
$
1,832,456

 
$
1,190,857

Reinsurance premiums ceded
(376,294
)
 
(200,106
)
Net premiums written
1,456,162

 
990,751

Change in unearned premiums
(837,220
)
 
(415,375
)
Net premiums earned
618,942

 
575,376

Net investment income
52,072

 
40,214

Net realized gains (losses) on investments
2,200

 
(1,164
)
Change in net unrealized (losses) gains on investments
(57,381
)
 
13,348

Income from investment affiliates
13,068

 
5,188

Other insurance related income and other income
25,540

 
1,330

Foreign exchange gains
525

 
1,569

Total revenues
654,966

 
635,861

Expenses
 
 
 
Losses and loss expenses
321,545

 
269,585

Policy acquisition costs
116,456

 
111,628

General and administrative expenses
114,726

 
87,924

Share compensation expenses
9,729

 
9,491

Finance expenses
14,263

 
13,943

Transaction expenses
7,756

 

Total expenses
584,475

 
492,571

Income before taxes and (income) attributable to AlphaCat investors
70,491

 
143,290

Tax benefit
6,833

 
3,549

(Income) attributable to AlphaCat investors
(10,862
)
 
(7,503
)
Net income
66,462

 
139,336

Net (income) attributable to noncontrolling interests
(64,712
)
 
(42,572
)
Net income available to Validus
1,750

 
96,764

Dividends on preferred shares
(5,828
)
 
(2,203
)
Net (loss) income (attributable) available to Validus common shareholders
$
(4,078
)
 
$
94,561

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
66,462

 
$
139,336

Other comprehensive income (loss), net of tax:
 
 
 
Change in foreign currency translation adjustments
1,837

 
597

Change in minimum pension liability
(38
)
 
68

Change in fair value of cash flow hedges
28,763

 
98

Other comprehensive income, net of tax
30,562

 
763

Comprehensive (income) attributable to noncontrolling interests
(64,712
)
 
(42,572
)
Comprehensive income available to Validus
$
32,312

 
$
97,527

 
 
 
 
(Loss) earnings per common share
 
 
 
Basic (loss) earnings per share (attributable) available to Validus common shareholders
$
(0.05
)
 
$
1.19

(Loss) earnings per diluted share (attributable) available to Validus common shareholders
$
(0.05
)
 
$
1.17

Cash dividends declared per common share
$
0.38

 
$
0.38

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 
 
Basic
79,325,688

 
79,133,671

Diluted
79,325,688

 
80,739,142


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

4

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Three Months Ended March 31,
 
2018
 
2017
 
(unaudited)
Preferred shares
 
 
 
Balance, beginning and end of period
$
400,000

 
$
150,000

 
 
 
 
Common shares
 
 
 
Balance, beginning of period
$
28,349

 
$
28,224

Common shares issued, net
2

 
1

Balance, end of period
$
28,351

 
$
28,225

 
 
 
 
Treasury shares
 
 
 
Balance, beginning and end of period
$
(14,468
)
 
$
(14,376
)
 
 
 
 
Additional paid-in capital
 
 
 
Balance, beginning of period
$
814,641

 
$
821,023

Common shares (redeemed) issued, net
(14
)
 
(168
)
Share compensation expenses
9,729

 
9,491

Balance, end of period
$
824,356

 
$
830,346

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance, beginning of period
$
(22,192
)
 
$
(23,216
)
Other comprehensive income
30,562

 
763

Amounts reclassified from accumulated other comprehensive income (loss)
1,035

 

Balance, end of period
$
9,405

 
$
(22,453
)
 
 
 
 
Retained earnings
 
 
 
Balance, beginning of period
$
2,688,742

 
$
2,876,636

Net income
66,462

 
139,336

Net (income) attributable to noncontrolling interests
(64,712
)
 
(42,572
)
Dividends on common shares
(31,076
)
 
(31,063
)
Dividends on preferred shares
(5,828
)
 
(2,203
)
Balance, end of period
$
2,653,588

 
$
2,940,134

 
 
 
 
Total shareholders’ equity available to Validus
$
3,901,232

 
$
3,911,876

Noncontrolling interests
334,357

 
330,597

Total shareholders’ equity
$
4,235,589

 
$
4,242,473


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

5

Table of Contents

Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2018 and 2017 (unaudited)
(Expressed in thousands of U.S. dollars)
 
Three Months Ended March 31,
 
2018
 
2017
 
(unaudited)
Cash flows provided by (used in) operating activities
 
 
 
Net income
$
66,462

 
$
139,336

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Share compensation expenses
9,729

 
9,491

Amortization of discount on Senior Notes
27

 
27

(Income) from investment and operating affiliates
(13,068
)
 
(5,188
)
Net realized and change in net unrealized losses (gains) on investments
55,181

 
(12,184
)
Amortization of intangible assets
2,243

 
1,416

Foreign exchange (gains) included in net income
(9,885
)
 
(4,938
)
Amortization of premium on fixed maturity investments
3,899

 
3,536

Change in operational balance sheet items:
 
 
 
Premiums receivable
(924,817
)
 
(488,653
)
Deferred acquisition costs
(96,009
)
 
(82,953
)
Prepaid reinsurance premiums
(257,962
)
 
(121,050
)
Loss reserves recoverable
255,701

 
(20,743
)
Paid losses recoverable
(13,069
)
 
(2,619
)
Reserve for losses and loss expenses
(207,632
)
 
53,436

Unearned premiums
1,095,182

 
536,425

Reinsurance balances payable
66,720

 
63,070

Other operational balance sheet items, net
13,240

 
(50,610
)
Net cash provided by operating activities
45,942

 
17,799

 
 
 
 
Cash flows provided by (used in) investing activities
 
 
 
Proceeds on sales of fixed maturity investments
785,662

 
743,631

Proceeds on maturities of fixed maturity investments
166,651

 
123,269

Purchases of fixed maturity investments
(963,990
)
 
(676,349
)
Purchases (sales) of short-term investments, net
(257,214
)
 
11,030

Purchases of other investments, net
(1,137
)
 
(34,295
)
Increase in securities lending collateral
(1,493
)
 
(607
)
(Investments in) distributions from investment affiliates, net
(266
)
 
10,922

Net cash (used in) provided by investing activities
(271,787
)
 
177,601

 
 
 
 
Cash flows provided by (used in) financing activities
 
 
 
Net proceeds on issuance of notes payable to AlphaCat investors
155,966

 
73,048

Redemption of common shares, net
(12
)
 
(167
)
Dividends paid on preferred shares
(5,828
)
 
(2,203
)
Dividends paid on common shares
(31,032
)
 
(30,092
)
Increase in securities lending payable
1,493

 
607

Third party investments in redeemable noncontrolling interests
385,300

 
103,699

Third party redemptions of redeemable noncontrolling interests
(173,986
)
 
(68,296
)
Third party investments in noncontrolling interests
281,300

 
154,980

Third party distributions of noncontrolling interests

 
(62,770
)
Third party subscriptions deployed on funds and sidecars, net
(578,666
)
 
(144,452
)
Net cash provided by financing activities
34,535

 
24,354

Effect of foreign currency rate changes on cash and cash equivalents and restricted cash
16,107

 
5,798

Net (decrease) increase in cash and cash equivalents and restricted cash
(175,203
)
 
225,552

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

 
490,932

Cash and cash equivalents and restricted cash—end of period
$
974,450

 
$
716,484

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Taxes paid during the year
$
460

 
$
16

Interest paid during the year
$
19,068

 
$
19,073

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


6

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


1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
During the fourth quarter of 2017, the Company changed its reportable segments to “Reinsurance,” “Insurance,” and “Asset Management.” The change in reportable segments and primary lines of business had no impact on the Company’s historical consolidated financial positions, results of operations or cash flows as previously reported. Where applicable, all prior periods presented have been reclassified to conform to this new presentation.
The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of every voting interest entity (“VOE”) in which the Company has a controlling financial interest and variable interest entity (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.
In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the amounts included in the Consolidated Financial Statements reflect management’s best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
the reserve for losses and loss expenses;
the premium written on a line slip or proportional basis;
the valuation of goodwill and intangible assets;
the loss reserves recoverable, including the provision for uncollectible amounts; and
the valuation of invested assets and other financial instruments.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).
2. Recent accounting pronouncements
Accounting Standards Adopted in 2018
In May 2014, the FASB issued Accounting Standards Updated (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing.” The amendments in these ASUs clarify the implementation guidance within ASU 2014-09 on principal versus agent considerations and

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

the aspects of identifying performance obligations, respectively, while retaining the related principals in those areas. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients.” The amendments in this ASU do not change the core principal of the guidance in Topic 606. Rather, the amendments provide clarifying guidance in a few narrow areas and add practical expedients to reduce the potential for diversity in practice as well as the cost and complexity of applying the guidance. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606 - Revenue from Contracts with Customers.” The amendments in this ASU affect narrow aspects of the guidance issued in ASU 2014-09. The amendments in these ASUs became effective for the Company on January 1, 2018.
This guidance impacts the timing of performance fee recognition by AlphaCat Managers Ltd. (“AlphaCat Managers”). Previously, the performance fees were recognized by AlphaCat Managers monthly, on a seasonal basis, in line with the underlying insurance contract portfolio of the AlphaCat sidecars and higher risk ILS funds it manages. However, upon adoption of this guidance, performance fees are now only recognized when it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur. While performance fees are variable and dependent on the results of these entities, the adoption of this guidance did not have a material impact on the results of the Company.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and measurement of financial assets and financial liabilities.” The amendments in this ASU address certain aspects of recognition, measurement and disclosure of financial instruments. The amendments in this ASU became effective for the Company on January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” This ASU is directed at reducing diversity in practice and addresses eight specific issues in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU became effective for the Company on January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740) - Intra- Entity Transfers of Assets Other Than Inventory,” This ASU aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Prior to the effective date of this ASU, U.S. GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The ASU requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU does not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The amendments in this ASU became effective for the Company on January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issues ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU became effective for the Company on January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In May 2017, the FASB issues ASU 2017-09, “Compensation - Stock Compensation (Topic 718).” This ASU is directed at reducing diversity in practice when applying the accounting guidance to a change in the terms or conditions of a share-based payment award. The amendments in this ASU became effective for the Company on January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

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

3. Business combinations
American International Group, Inc. (“AIG”)
On January 21, 2018, the Company entered into a definitive agreement and plan of merger (the “Merger Agreement”) with AIG. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions set forth therein, the Company will merge with an existing AIG subsidiary in accordance with the Bermuda Companies Act (the “Merger”), with the Company surviving the Merger as a wholly–owned subsidiary of AIG (the “Surviving Company”).
Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $68.00 in cash per common share. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares will remain issued and outstanding as a “Series A Preferred Share” and “Series B Preferred Share,” respectively, of the Surviving Company.
The Merger is expected to close in mid-2018, subject to regulatory approvals and other customary closing conditions. The Merger Agreement permits the Company to pay out regular quarterly cash dividends not to exceed $0.38 per common share, with its quarterly dividend for the second fiscal quarter for 2018 to be paid prior to the closing of the Merger even if such closing occurs prior to the regular record or payment date of such dividend.
Crop Risk Services (“CRS”)
On May 1, 2017, Western World, a wholly–owned subsidiary of the Company acquired all of the outstanding capital stock of CRS for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford, a wholly–owned subsidiary of Western World, was granted the required licenses to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.    
The CRS acquisition was undertaken to expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Insurance segment in the Consolidated Financial Statements from the date of acquisition.
For further information regarding the acquisition of CRS please refer to Note 5, “Business combinations,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

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

Fair Value
 
Amortized 
Cost or Cost
 
Fair Value
Managed investments
 
 
 
 
 
 
 
U.S. government and government agency
$
598,080

 
$
589,161

 
$
733,510

 
$
727,397

Non-U.S. government and government agency
318,542

 
318,345

 
310,845

 
312,239

U.S. states, municipalities and political subdivisions
186,551

 
184,964

 
201,347

 
201,303

Agency residential mortgage-backed securities
992,087

 
968,258

 
984,387

 
978,049

Non-agency residential mortgage-backed securities
43,522

 
43,487

 
40,264

 
40,373

U.S. corporate
1,553,311

 
1,534,805

 
1,531,498

 
1,533,395

Non-U.S. corporate
417,264

 
415,156

 
420,522

 
422,249

Bank loans
475,154

 
468,815

 
450,320

 
442,951

Asset-backed securities
744,051

 
741,712

 
657,234

 
658,303

Commercial mortgage-backed securities
325,058

 
318,392

 
315,002

 
312,395

Total fixed maturities
5,653,620

 
5,583,095

 
5,644,929

 
5,628,654

Short-term investments
188,306

 
188,251

 
229,968

 
230,011

Other investments
 
 
 
 
 
 
 
Hedge funds
6,954

 
15,758

 
6,954

 
15,774

Private equity investments
64,424

 
79,774

 
63,684

 
78,407

Fixed income investment funds
199,802

 
200,944

 
203,167

 
204,426

Overseas deposits
60,770

 
60,770

 
56,611

 
56,611

Total other investments
331,950

 
357,246

 
330,416

 
355,218

Investments in investment affiliates (a)
75,302

 
113,471

 
61,944

 
100,137

Total managed investments
$
6,249,178

 
$
6,242,063

 
$
6,267,257

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
Catastrophe bonds
$
220,520

 
$
219,927

 
$
231,332

 
$
229,694

Short-term investments
3,450,689

 
3,450,689

 
3,151,746

 
3,151,746

Total non-managed investments
3,671,209

 
3,670,616

 
3,383,078

 
3,381,440

Total investments
$
9,920,387

 
$
9,912,679

 
$
9,650,335

 
$
9,695,460

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


10

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

(a)
Fixed maturity investments
The following table sets forth certain information regarding Standard & Poor’s credit quality ratings (or an equivalent rating with another recognized rating agency) of the Company’s fixed maturity investments as at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
Fair Value
 
% of Total
 
Fair Value
 
% of Total
Managed fixed maturities
 
 
 
 
 
 
 
AAA
$
2,648,321

 
45.7
%
 
$
2,715,074

 
46.4
%
AA
419,695

 
7.2
%
 
442,397

 
7.6
%
A
1,159,233

 
20.0
%
 
1,137,795

 
19.4
%
BBB
830,866

 
14.3
%
 
828,392

 
14.1
%
Total investment grade managed fixed maturities
5,058,115

 
87.2
%
 
5,123,658

 
87.5
%
BB
170,818

 
2.9
%
 
168,967

 
2.9
%
B
240,099

 
4.1
%
 
237,131

 
4.0
%
CCC
21,783

 
0.4
%
 
18,217

 
0.3
%
NR
92,280

 
1.6
%
 
80,681

 
1.4
%
Total non-investment grade managed fixed maturities
524,980

 
9.0
%
 
504,996

 
8.6
%
Total managed fixed maturities
$
5,583,095

 
96.2
%
 
$
5,628,654

 
96.1
%
 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
BB
21,607

 
0.4
%
 
22,110

 
0.3
%
B
2,379

 
%
 
3,265

 
0.1
%
NR
195,941

 
3.4
%
 
204,319

 
3.5
%
Total non-investment grade non-managed catastrophe bonds
219,927

 
3.8
%
 
229,694

 
3.9
%
Total non-managed catastrophe bonds
219,927

 
3.8
%
 
229,694

 
3.9
%
Total fixed maturities
$
5,803,022

 
100.0
%
 
$
5,858,348

 
100.0
%


11

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

The amortized cost and fair values for the Company’s fixed maturity investments held at March 31, 2018 and December 31, 2017 are shown below by contractual maturity. Actual maturity may differ from contractual maturity due to prepayment rights associated with certain investments.
 
March 31, 2018
 
December 31, 2017
 
Amortized Cost or Cost
 
Fair Value
 
Amortized Cost or Cost
 
Fair Value
Managed fixed maturities
 
 
 
 
 
 
 
Due in one year or less
$
346,118

 
$
344,749

 
$
343,360

 
$
343,541

Due after one year through five years
2,453,565

 
2,424,185

 
2,527,018

 
2,513,620

Due after five years through ten years
560,679

 
554,188

 
577,347

 
577,109

Due after ten years
188,540

 
188,124

 
200,317

 
205,264

 
3,548,902

 
3,511,246

 
3,648,042

 
3,639,534

Asset-backed and mortgage-backed securities
2,104,718

 
2,071,849

 
1,996,887

 
1,989,120

Total managed fixed maturities
$
5,653,620

 
$
5,583,095

 
$
5,644,929

 
$
5,628,654

 
 
 
 
 
 
 
 
Non-managed catastrophe bonds
 
 
 
 
 
 
 
Due in one year or less
$
67,370

 
$
67,926

 
$
88,797

 
$
88,367

Due after one year through five years
147,400

 
146,238

 
140,035

 
138,844

Due after five years through ten years
5,750

 
5,763

 
2,500

 
2,483

Total non-managed catastrophe bonds
220,520

 
219,927

 
231,332

 
229,694

Total fixed maturities
$
5,874,140

 
$
5,803,022

 
$
5,876,261

 
$
5,858,348

(b)
Other investments
The following tables set forth certain information regarding the Company’s other investment portfolio as at March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
 
Fair Value
 
Investments with redemption restrictions
 
Investments without redemption restrictions
 
Redemption frequency (a)
 
Redemption notice period (a)
Hedge funds
 
$
15,758

 
$
15,758

 
$

 
 
 
 
Private equity investments
 
79,774

 
79,774

 

 
 
 
 
Fixed income investment funds
 
200,944

 
200,944

 

 

 

Overseas deposits
 
60,770

 
60,770

 

 
 
 
 
Total other investments
 
$
357,246

 
$
357,246

 
$

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

 
15,774

 

 
 
 
 
Private equity investments
 
78,407

 
78,407

 

 
 
 
 
Fixed income investment funds
 
204,426

 
200,532

 
3,894

 
Daily
 
Daily to 2 days
Overseas deposits
 
56,611

 
56,611

 

 
 
 
 
Total other investments
 
$
355,218

 
$
351,324

 
$
3,894

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

12

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

Other investments include investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities. Certain debt-like investments totaling $193,053 (December 31, 2017: $186,734) are either rated or consist of underlying securities or instruments which carry credit ratings issued by nationally recognized statistical rating organizations. Other equity-like investments totaling $164,193 (December 31, 2017: $168,484) are unrated given the nature of their underlying assets, such as private equity investments, and as such do not carry credit ratings.
Certain securities included in other investments are subject to redemption restrictions. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments will liquidate over five to ten-year periods from inception of the funds. Furthermore, the underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by annual and quarterly funding and release processes for Lloyd’s market participants.
The Company’s maximum exposure to any of these alternative investments is limited to the invested amounts and any remaining capital commitments. Refer to Note 15, “Commitments and contingencies,” for further details. As at March 31, 2018, the Company does not have any plans to sell any of the other investments listed above.
(c)
Investments in investment affiliates
Included in the Company’s managed investment portfolio as at March 31, 2018 are investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (“Aquiline III”), Aquiline Technology Growth Fund L.P. (“Aquiline Tech”) and Aquiline Armour Co-Invest L.P. (“Aquiline Armour”) (collectively the “Aquiline partnerships”).
For further information regarding the Company’s Aquiline partnerships refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31,
 
2018
 
2017
Investment affiliates, beginning of year
$
100,137

 
$
100,431

Net capital contributions (distributions)
266

 
(10,922
)
Income from investment affiliates
13,068

 
5,188

Investment affiliates, end of year
$
113,471

 
$
94,697

As at March 31, 2018, the Company’s total unfunded investment commitment to the Aquiline partnerships was $107,386 (December 31, 2017: $125,996).


13

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

The following table presents the Company’s investments in the Aquiline partnerships as at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
Investment at cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
Aquiline II
$
33,008

 
%
 
8.1
%
 
$
49,208

Aquiline III
24,737

 
%
 
9.0
%
 
47,114

Aquiline Tech
3,858

 
%
 
10.6
%
 
3,450

Aquiline Armour
13,699

 
%
 
15.2
%
 
13,699

Total investments in investment affiliates
$
75,302

 
 
 
 
 
$
113,471

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

 
%
 
8.1
%
 
$
51,914

Aquiline III
24,737

 
%
 
9.0
%
 
44,733

Aquiline Tech
3,858

 
%
 
10.6
%
 
3,490

Total investments in investment affiliates
$
61,944

 
 
 
 
 
$
100,137

(d)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended March 31,
 
2018
 
2017
Managed investments
 
 
 
Fixed maturities and short-term investments
$
37,769

 
$
31,671

Other investments
4,223

 
6,870

Cash and cash equivalents and restricted cash
1,139

 
610

Securities lending income
3

 
13

Total gross investment income
43,134

 
39,164

Investment expenses
(3,343
)
 
(2,972
)
Total managed net investment income
$
39,791

 
$
36,192

Non managed investments
 
 
 
Fixed maturities and short-term investments
$
4,148

 
$
3,060

Cash and cash equivalents and restricted cash
8,133

 
962

Total non-managed net investment income
12,281

 
4,022

Total net investment income
$
52,072

 
$
40,214

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

14

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

(e)
Net realized gains (losses) and change in net unrealized (losses) gains on investments
The following table sets forth an analysis of net realized gains (losses) and the change in net unrealized (losses) gains on investments:
 
Three Months Ended March 31,
 
2018
 
2017
Managed investments
 
 
 
Gross realized gains
$
6,830

 
$
2,690

Gross realized (losses)
(5,688
)
 
(5,582
)
Net realized gains (losses) on investments
1,142

 
(2,892
)
Change in net unrealized (losses) gains on investments
(56,777
)
 
14,349

Total net realized and change in net unrealized (losses) gains on managed investments
$
(55,635
)
 
$
11,457

Non-managed investments
 
 
 
Gross realized gains
$
1,235

 
$
1,728

Gross realized (losses)
(177
)
 

Net realized gains on investments
1,058

 
1,728

Change in net unrealized (losses) on investments
(604
)
 
(1,001
)
Total net realized and change in net unrealized gains on non-managed investments
454

 
727

Total net realized and change in net unrealized (losses) gains on total investments
$
(55,181
)
 
$
12,184

(f)
Pledged investments and cash
As at March 31, 2018, the Company had $6,120,705 (December 31, 2017: $5,853,744) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $6,092,111 were held in trust (December 31, 2017: $5,789,081). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions, as collateral for derivative instruments and to facilitate the accreditation of Validus Reinsurance, Ltd. (“Validus Re”), Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Lloyd’s Syndicate 1183 (the “Talbot Syndicate”) as alien (re)insurers by certain regulators.
In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the amount of $540,239 (December 31, 2017: $576,864). For further details on the credit facilities, refer to Note 13 “Debt and financing arrangements.”

15

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

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

16

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

At March 31, 2018, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Fair value based on NAV practical expedient (a)
 
Total
Managed investments
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$

 
$
589,161

 
$

 
$

 
$
589,161

Non-U.S. government and government agency

 
318,345

 

 

 
318,345

U.S. states, municipalities and political subdivisions

 
184,964

 

 

 
184,964

Agency residential mortgage-backed securities

 
968,258

 

 

 
968,258

Non-agency residential mortgage-backed securities

 
43,487

 

 

 
43,487

U.S. corporate

 
1,534,805

 

 

 
1,534,805

Non-U.S. corporate

 
415,156

 

 

 
415,156

Bank loans

 
241,312

 
227,503

 

 
468,815

Asset-backed securities

 
639,896

 
101,816

 

 
741,712

Commercial mortgage-backed securities

 
318,392

 

 

 
318,392

Total fixed maturities

 
5,253,776

 
329,319

 

 
5,583,095

Short-term investments
175,526

 
12,725

 

 

 
188,251

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
15,758

 
15,758

Private equity investments

 

 

 
79,774

 
79,774

Fixed income investment funds

 
9,458

 
17,933

 
173,553

 
200,944

Overseas deposits

 

 

 
60,770

 
60,770

Total other investments

 
9,458

 
17,933

 
329,855

 
357,246

Investments in investment affiliates (b)

 

 

 

 
113,471

Total managed investments
$
175,526

 
$
5,275,959

 
$
347,252

 
$
329,855

 
$
6,242,063

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$

 
$
154,230

 
$
65,697

 
$

 
$
219,927

Short-term investments
3,450,689

 

 

 

 
3,450,689

Total non-managed investments
3,450,689

 
154,230

 
65,697

 

 
3,670,616

Total investments
$
3,626,215

 
$
5,430,189

 
$
412,949

 
$
329,855

 
$
9,912,679

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



17

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

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

 
$
727,397

 
$

 
$

 
$
727,397

Non-U.S. government and government agency

 
312,239

 

 

 
312,239

U.S. states, municipalities and political subdivisions

 
201,303

 

 

 
201,303

Agency residential mortgage-backed securities

 
978,049

 

 

 
978,049

Non-agency residential mortgage-backed securities

 
40,373

 

 

 
40,373

U.S. corporate

 
1,533,395

 

 

 
1,533,395

Non-U.S. corporate

 
422,249

 

 

 
422,249

Bank loans

 
232,886

 
210,065

 

 
442,951

Asset-backed securities

 
554,490

 
103,813

 

 
658,303

Commercial mortgage-backed securities

 
312,395

 

 

 
312,395

Total fixed maturities

 
5,314,776

 
313,878

 

 
5,628,654

Short-term investments
198,054

 
31,957

 

 

 
230,011

Other investments
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
15,774

 
15,774

Private equity investments

 

 

 
78,407

 
78,407

Fixed income investment funds

 
13,351

 
17,404

 
173,671

 
204,426

Overseas deposits

 

 

 
56,611

 
56,611

Total other investments

 
13,351

 
17,404

 
324,463

 
355,218

Investments in investment affiliates (b)

 

 

 

 
100,137

Total managed investments
$
198,054

 
$
5,360,084

 
$
331,282

 
$
324,463

 
$
6,314,020

Non-managed investments
 
 
 
 
 
 
 
 
 
Catastrophe bonds
$

 
$
152,233

 
$
77,461

 
$

 
$
229,694

Short-term investments
3,151,746

 

 

 

 
3,151,746

Total non-managed investments
3,151,746

 
152,233

 
77,461

 

 
3,381,440

Total investments
$
3,349,800

 
$
5,512,317

 
$
408,743

 
$
324,463

 
$
9,695,460

(a)
In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(b)
In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.
At March 31, 2018, managed Level 3 investments totaled $347,252 (December 31, 2017: $331,282), representing 5.6% (December 31, 2017: 5.2%) of total managed investments.

18

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

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

19

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

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

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

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

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

Overseas deposits
The Company’s share of a portfolio of Lloyd’s overseas deposits is managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair values of the deposits are based on the portfolio level reporting that is provided by Lloyd’s. The fair values of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.
(c)
Level 3 investments
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31, 2018
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
210,065

 
$
77,461

 
$
17,404

 
$
103,813

 
$
408,743

Purchases
30,785

 
18,825

 
529

 

 
50,139

Sales

 

 

 
(70
)
 
(70
)
Settlements
(13,842
)
 
(31,484
)
 

 

 
(45,326
)
Realized gains

 
1,235

 

 

 
1,235

Change in net unrealized gains (losses)
495

 
(340
)
 

 
(1,927
)
 
(1,772
)
Level 3 investments, end of period
$
227,503

 
$
65,697

 
$
17,933

 
$
101,816

 
$
412,949

 
Three Months Ended March 31, 2017
 
Bank Loans
 
Catastrophe Bonds
 
Fixed Income Investment Funds
 
Asset Backed Securities
 
Total
Level 3 investments, beginning of period
$
246,496

 
$
48,375

 
$
12,168

 
$
23,931

 
$
330,970

Purchases
23,176

 
61,091

 

 

 
84,267

Settlements
(33,110
)
 
(38,780
)
 
392

 

 
(71,498
)
Realized gains

 
3,134

 

 

 
3,134

Change in net unrealized gains (losses)
132

 
(1,144
)
 

 
(49
)
 
(1,061
)
Level 3 investments, end of period
$
236,694

 
$
72,676

 
$
12,560

 
$
23,882

 
$
345,812

There were no transfers into or out of Level 3 during the three months ended March 31, 2018 or 2017.
(d)
Financial instruments not carried at fair value
ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at March 31, 2018, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

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

6. Variable interest entities
The Company consolidates all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs are primarily entities in the AlphaCat segment.
(a)
Consolidated VIEs
AlphaCat sidecars
Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of reinsurance and investment entities, referred to as “sidecars,” for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities returns capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company. The Company’s maximum exposure to any of these sidecars is the amount of capital invested at any given time.
AlphaCat ILS funds
The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012. The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the maximum permitted portfolio expected loss of the fund. The permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7%, whereas higher risk ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). All of the AlphaCat ILS funds are VIEs and were consolidated by the Company through May 31, 2017. However, on June 1, 2017, the Company redeemed its investment in one of the lower risk AlphaCat ILS funds. As a result, the Company was no longer deemed to be the primary beneficiary and therefore this fund was deconsolidated effective June 1, 2017.
The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time and any remaining capital commitments.
AlphaCat Re and AlphaCat Master Fund
The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “Master Funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the Asset Management segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “Feeder Funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated to the Feeder Funds and direct third party investors using variable funding notes. The Master Funds are VIEs and are consolidated by the Company.
Notes Payable to AlphaCat Investors
The Master Funds issue variable funding notes to the Feeder Funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the Feeder Funds, together with investments made by third parties in the Feeder Funds and on a direct basis, are provided as consideration for the notes to the Master Funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months; however, the variable funding notes do not have a stated maturity date since repayment is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the Feeder Funds and direct third party investors via the variable funding notes.
Any notes issued by the Master Funds to the consolidated Feeder Funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re directly to third party investors and non-consolidated Feeder Funds remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of (Loss) Income and Comprehensive Income as (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

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

One of the AlphaCat ILS funds (the “Fund”) issued both common shares and structured notes to the Company and third party investors in order to capitalize the fund. The Fund deploys its capital through AlphaCat Re; therefore, the structured notes do not have a stated maturity date since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares of the Fund and earn an interest rate of 6.5% (2017: 7%) per annum, payable on a cumulative basis in arrears.
As the Fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors, with any related interest included in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income as loss (income) attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
The following tables present reconciliations of the beginning and ending notes payable to AlphaCat investors during the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31, 2018
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
936,164

 
$
172,200

 
$
1,108,364

Issuance of notes payable to AlphaCat investors
506,540

 
179,972

 
686,512

Redemption of notes payable to AlphaCat investors
(530,546
)
 

 
(530,546
)
Foreign exchange losses
3,864

 

 
3,864

Notes payable to AlphaCat investors, end of period
$
916,022

 
$
352,172

 
$
1,268,194

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Variable Funding Notes
 
Structured Notes
 
Total
Notes payable to AlphaCat investors, beginning of period
$
278,202

 
$

 
$
278,202

Issuance of notes payable to AlphaCat investors
274,010

 
103,320

 
377,330

Redemption of notes payable to AlphaCat investors
(208,956
)
 

 
(208,956
)
Notes payable to AlphaCat investors, end of period
$
343,256

 
$
103,320

 
$
446,576

The income attributable to AlphaCat investors for the three months ended March 31, 2018 was $10,862 (2017: $7,503). As at March 31, 2018, amounts due to AlphaCat investors totaling $43,442 (December 31, 2017: $18,054) were included in accounts payable and accrued expenses.
BetaCat ILS funds
The BetaCat ILS funds follow a passive buy-and-hold investment strategy, investing exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, referred to collectively as “Cat Bonds”) focused on property and casualty risks and issued under Rule 144A of the Securities Act of 1933, as amended. Two of the three BetaCat ILS funds are VIEs, one of which is consolidated by the Company. The remaining fund is a VOE and is consolidated by the Company as it owns all of the fund’s voting equity interests. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time.
The following table presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
Total Assets
 
Total Liabilities
 
Total Assets
 
Total Liabilities
AlphaCat sidecars
$
25,952

 
$
3,071

 
$
25,975

 
$
3,267

AlphaCat ILS funds - Lower Risk
1,046,458

 
11,156

 
1,107,503

 
259,630

AlphaCat ILS funds - Higher Risk
1,431,945

 
676,225

 
1,310,071

 
912,341

AlphaCat Re and AlphaCat Master Fund
3,878,359

 
3,878,189

 
3,398,082

 
3,397,912

BetaCat ILS funds
104,857

 
2,207

 
77,221

 
261


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

Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 4, “Investments,” as non-managed investments.
(b)
Non-Consolidated VIEs
The Company invests in private equity and other investment vehicles as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company’s involvement in these entities is passive in nature. The Company’s maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs. Refer to Note 4, “Investments,” for further details.
7. Noncontrolling interests
Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. Such investments held by third parties are therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests, a mezzanine item between liabilities and shareholders’ equity. If and when a redemption notice is received, the fair value of the redemption is reclassified to accounts payable and accrued expenses.
The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the three months ended March 31, 2018 and 2017:
 
Redeemable
Noncontrolling Interests
 
Noncontrolling Interests
 
Total<