e10vq
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
Commission file number 001-33606
 
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
 
     
BERMUDA   98-0501001
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
19 Par-La-Ville Road, Hamilton, Bermuda HM 11
(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 þ 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 o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
         
 
  Large accelerated filer þ   Accelerated filer o
 
  Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company 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 þ
     As of August 7, 2009, there were 76,462,412 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

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 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS

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Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2009 (unaudited) and December 31, 2008
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30,     December 31,  
    2009     2008  
    (Unaudited)          
Assets
               
Fixed maturities, at fair value (amortized cost: 2009 - $2,836,299; 2008 - $2,553,018)
  $ 2,816,536     $ 2,454,501  
Short-term investments, at fair value (amortized cost: 2009 - $324,773; 2008 - $379,537)
    323,940       377,036  
Cash and cash equivalents
    390,090       449,848  
 
           
Total investments and cash
    3,530,566       3,281,385  
Premiums receivable
    679,189       408,259  
Deferred acquisition costs
    145,615       108,156  
Prepaid reinsurance premiums
    87,798       22,459  
Securities lending collateral
    166,496       98,954  
Loss reserves recoverable
    169,666       208,796  
Paid losses recoverable
    36,624       1,388  
Net receivable for investments sold
          490  
Income taxes recoverable
    1,876       1,365  
Intangible assets
    125,136       127,217  
Goodwill
    20,393       20,393  
Accrued investment income
    19,636       20,433  
Other assets
    25,455       23,185  
 
           
Total assets
  $ 5,008,450     $ 4,322,480  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 1,311,935     $ 1,305,303  
Unearned premiums
    856,138       539,450  
Reinsurance balances payable
    101,004       33,042  
Securities lending payable
    168,923       105,688  
Deferred income taxes
    22,163       21,779  
Net payable for investments purchased
    16,346        
Accounts payable and accrued expenses
    75,672       74,184  
Debentures payable
    304,300       304,300  
 
           
Total liabilities
    2,856,481       2,383,746  
 
           
 
               
Commitments and contingent liabilities
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175
Issued and outstanding (2009 - 76,151,473; 2008 - 75,624,697)
    13,327       13,235  
Additional paid-in capital
    1,424,378       1,412,635  
Accumulated other comprehensive (loss)
    (4,061 )     (7,858 )
Retained earnings
    718,325       520,722  
 
           
Total shareholders’ equity
    2,151,969       1,938,734  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 5,008,450     $ 4,322,480  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income
For the three and six months ended June 30, 2009 and 2008 (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Three months     Three months     Six months     Six months  
    ended     ended     ended     ended  
    June 30, 2009     June 30, 2008     June 30, 2009     June 30, 2008  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenues
                               
Gross premiums written
  $ 425,032     $ 379,919     $ 1,034,924     $ 901,513  
Reinsurance premiums ceded
    (62,291 )     (1,399 )     (134,803 )     (86,299 )
 
                       
Net premiums written
    362,741       378,520       900,121       815,214  
Change in unearned premiums
    (34,541 )     (69,222 )     (253,162 )     (214,052 )
 
                       
Net premiums earned
    328,200       309,298       646,959       601,162  
Net investment income
    26,963       36,435       53,735       72,478  
Realized gain on repurchase of debentures
          8,752             8,752  
Net realized (losses) gains on investments
    (2,650 )     (2,425 )     (26,071 )     5,319  
Net unrealized gains (losses) on investments
    37,249       (42,982 )     59,402       (57,959 )
Other income
    1,017       1,462       1,774       2,397  
Foreign exchange gains
    8,432       911       4,232       9,090  
 
                       
Total revenues
    399,211       311,451       740,031       641,239  
 
                               
Expenses
                               
Losses and loss expenses
    124,751       122,089       256,585       262,113  
Policy acquisition costs
    64,438       56,419       125,887       113,120  
General and administrative expenses
    41,200       33,912       79,279       71,019  
Share compensation expenses
    5,632       7,271       12,986       13,806  
Finance expenses
    10,752       12,762       18,475       34,279  
Transaction expenses
    15,851             15,851        
 
                       
Total expenses
    262,624       232,453       509,063       494,337  
 
                       
 
                               
Net income before taxes
    136,587       78,998       230,968       146,902  
Income tax benefit (expense)
    976       (3,077 )     1,502       (4,506 )
 
                       
Net income
  $ 137,563     $ 75,921     $ 232,470     $ 142,396  
 
                       
 
                               
Comprehensive income
                               
Foreign currency translation adjustments
    3,993       10       3,797       77  
 
                       
Comprehensive income
  $ 141,556     $ 75,931     $ 236,267     $ 142,473  
 
                       
 
                               
Earnings per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    76,138,038       74,233,425       75,941,308       74,221,398  
Diluted
    78,942,065       77,257,545       79,022,355       77,793,636  
 
                               
Basic earnings per share
  $ 1.79     $ 1.00     $ 3.02     $ 1.87  
 
                       
Diluted earnings per share
  $ 1.74     $ 0.98     $ 2.94     $ 1.83  
 
                       
 
                               
Cash dividends declared per share
  $ 0.20     $ 0.20     $ 0.40     $ 0.40  
 
                       
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
 
For the six months ended June 30, 2009 and 2008 (Unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30, 2009     June 30, 2008  
    (Unaudited)     (Unaudited)  
Common shares
               
Balance — Beginning of period
  $ 13,235     $ 12,985  
Issue of common shares
    92       8  
 
           
Balance — End of period
  $ 13,327     $ 12,993  
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 1,412,635     $ 1,384,604  
Issue of common shares, net of expenses
    (1,243 )     503  
Share compensation expense
    12,986       13,806  
 
           
Balance — End of period
  $ 1,424,378     $ 1,398,913  
 
           
 
               
Accumulated other comprehensive (loss) income
               
Balance — Beginning of period
  $ (7,858 )   $ (49 )
Currency translation adjustments
    3,797       77  
 
           
Balance — End of period
  $ (4,061 )   $ 28  
 
           
 
               
Retaining earnings (deficit)
               
Balance — Beginning of period
  $ 520,722     $ 537,260  
Dividends
    (34,867 )     (34,809 )
Net income
    232,470       142,396  
 
           
Balance — End of period
  $ 718,325     $ 644,847  
 
           
 
               
Total shareholders’ equity
  $ 2,151,969     $ 2,056,781  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
 
For the six months ended June 30, 2009 and 2008 (Unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    June 30, 2009     June 30, 2008  
    (Unaudited)     (Unaudited)  
Cash flows provided by (used in) operating activities
               
Net income for the period
  $ 232,470     $ 142,396  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expense
    12,986       13,806  
Realized gain on repurchase of debentures
          (8,752 )
Net realized losses (gains) on sales of investments
    26,071       (5,319 )
Net unrealized (gains) losses on investments
    (59,402 )     57,959  
Amortization of intangible assets
    2,081       2,081  
Foreign exchange (gains) on cash and cash equivalents included in net income
    (9,593 )     (6,254 )
Amortization of premium on fixed maturities
    4,123       1,753  
Change in:
               
Premiums receivable
    (264,194 )     (208,431 )
Deferred acquisition costs
    (37,460 )     (40,715 )
Prepaid reinsurance premiums
    (63,532 )     (22,867 )
Loss reserves recoverable
    42,977       1,480  
Paid losses recoverable
    (34,083 )     5,122  
Income taxes recoverable
    (522 )     482  
Accrued investment income
    680       (4,520 )
Other assets
    258       (700 )
Reserve for losses and loss expenses
    (18,001 )     104,284  
Unearned premiums
    316,689       236,193  
Reinsurance balances payable
    66,957       29,501  
Deferred income taxes
    (2,504 )     3,489  
Accounts payable and accrued expenses
    (6,190 )     (53,581 )
 
           
Net cash provided by operating activities
    209,811       247,407  
 
           
 
               
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    1,509,773       1,109,536  
Proceeds on the maturities of investments
    311,221       100,787  
Purchases of fixed maturities
    (2,122,514 )     (1,460,975 )
Sales of short-term investments, net
    53,781       109,580  
(Increase) in securities lending collateral
    (63,235 )     (35,644 )
 
           
Net cash (used in) investing activities
    (310,974 )     (176,716 )
 
           
 
               
Cash flows provided by (used in) financing activities
               
Repurchase of debentures
          (36,948 )
Issue of common shares, net of expenses
    (1,182 )     511  
Dividends paid
    (33,973 )     (33,642 )
Increase in securities lending payable
    63,235       35,644  
 
           
Net cash provided by (used in) financing activities
    28,080       (34,435 )
 
           
 
               
Effect of foreign currency rate changes on cash and cash equivalents
    13,325       6,306  
 
               
Net (decrease) increase in cash
    (59,758 )     42,562  
 
               
Cash and cash equivalents — Beginning of period
    449,848       444,698  
 
           
Cash and cash equivalents — End of period
  $ 390,090     $ 487,260  
 
           
Taxes paid during the period
  $ 1,199     $ 410  
 
           
Interest paid during the period
  $ 13,344     $ 14,625  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
1. Basis of preparation and consolidation
     These unaudited consolidated financial statements include Validus Holdings, Ltd. 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. This Quarterly Report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
     In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, the valuation of goodwill and intangible assets, reinsurance recoverable balances including the provision for unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.
2. Recent accounting pronouncements
     In December 2007, the FASB issued Statements No. 141(R), “Business Combinations” (“FAS 141(R)”) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“FAS 160”) which are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In April 2009, the FASB issued FASB Staff Position FAS 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). FSP FAS 141(R)-1 has amended FAS 141(R)’s guidance on the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets acquired and liabilities assumed in a business combination that arise from contingencies.
     Significant changes arising from FAS 141 (R) and FSP FAS 141(R)-1 which impact current and future acquisitions include the determination of the purchase price and treatment of transaction expenses, restructuring charges and negative goodwill as follows;
  Purchase Price — Under FAS 141(R), the purchase price is determined as of the acquisition date, which is the date that the acquirer obtains control. Previously, the date the business combination was announced was used as the effective date in determining the purchase price;
 
  Transaction Expenses — Under FAS 141(R), all costs associated with purchase transactions must be expensed as incurred. Previously, all such costs could be capitalized and included as part of transaction purchase price, adding to the amount of goodwill recognized;
 
  Restructuring Costs — Under FAS 141(R), expected restructuring costs are not recorded at the closing date, but rather after the transaction. The only costs to be included as a liability at the closing date are

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
    those for which an acquirer is obligated at the time of the closing. Previously, restructuring costs that were planned to occur after the closing of the transaction were recognized and recorded at the closing date as a liability;
 
  Negative Goodwill/Bargain Purchases — Under FAS 141(R), where total fair value of net assets acquired exceeds consideration paid (creating “negative goodwill”), the acquirer will record a gain as a result of the bargain purchase, to be recognized through the income statement at the close of the transaction. Previously, negative goodwill was recognized as a pro rata reduction of the assets assumed to allow the net assets acquired to equal the consideration paid; and
 
  Noncontrolling Interests —Under FAS 141(R), in a partial or step acquisition where control is obtained, 100% of goodwill and identifiable net assets are recognized at fair value and the noncontrolling (sometimes called minority interest) interest is also recorded at fair value. Previously, in a partial acquisition only the controlling interest’s share of goodwill was recognized, the controlling interest’s share of identifiable net assets was recognized at fair value and the noncontrolling interest’s share of identifiable net assets was recognized at carrying value. Under FAS 160, a noncontrolling interest is now recognized in the equity section, presented separately from the controlling interest’s equity. Previously, noncontrolling interest in general was recorded in the mezzanine section.
     As a result of the adoption of FAS 141(R) and FSP FAS 141(R)-1 the Company has expensed as incurred the transaction costs related to the definitive amalgamation agreement with IPC Holdings, Ltd. (“IPC”), as described in Note 11. The adoption of FAS 141(R) and FSP FAS 141(R)-1 materially impacts the consolidated financial statement recognition and measurement of current and future acquisitions.
     In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 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.” FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 has not had a material impact on the Company’s consolidated financial statements.
     In January 2009, the FASB issued FASB Staff Position EITF 99-20-1 “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 amends certain recognition aspects of other-than-temporary impairments (“OTTI”). FSP EITF 99-20-1 is effective prospectively for interim and annual periods ending after December 15, 2008. Retrospective application of FSP EITF 99-20-1 to a prior interim or annual period is prohibited. As the Company’s investment portfolio is classified as trading, the adoption of the FSP EITF 99-20-1 has not had a material impact on the Company’s consolidated financial statements.
     In April 2009, the FASB issued FASB Staff Positions FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”) and FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with FAS 157, Fair Value Measurements, specifically; (1) estimating the fair value of an asset or liability (financial and nonfinancial) when the volume and level of activity for the asset or liability have significantly decreased; and (2) identifying transactions that are not orderly. The primary change to the OTTI model for debt securities, as a result of FSP FAS 115-2 and FAS 124-2, is the change in focus from an entity’s intent and ability to hold a security until recovery. Instead, an OTTI is triggered if; (1) an entity has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery; or (3) it does not expect to recover the entire amortized cost basis of the security. Both FSPs are effective for interim and annual

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
periods ending after June 15, 2009. The adoption of FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 have not had a material impact on the Company’s consolidated financial statements.
     In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of Statement 107 to interim periods for publicly traded entities. The FSP also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim basis and to highlight any changes of the methods and significant assumptions from prior periods. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. As FSP FAS 107-1 and APB 28-1 only expands certain disclosures requirements it has not had a material impact on the Company’s consolidated financial statements.
     In May 2009, the FASB issued Statements No. 165, “Subsequent Events” (“FAS 165”), which provides guidance on management’s assessment of subsequent events. FAS 165 clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued. FAS 165 is effective prospectively for interim and annual periods ending after June 15, 2009. The adoption of FAS 165 has not had a material impact on management’s existing processes for assessing subsequent events, and consequently the Company’s consolidated financial statements.
     In June 2009, the FASB issued Statements No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (“FAS 166”) which amends the derecognition guidance in FAS 140. FAS 166 addresses practices that have developed since the issuance of FAS 140 that are not consistent with the original intent and key requirements and concerns that derecognized financial assets and related obligations should continue to be reported in the transferors’ financial statements. FAS 166 is effective for financial asset transfers in the interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of FAS 166 is not expected to have a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued Statements No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”) which amends the consolidation guidance that applies to Variable Interest Entities (“VIEs”). FAS 167 amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. FAS 167 is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of FAS 167 is not expected to have a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued Statements No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“FAS 168”) which prescribes the use of the FASB Accounting Standards Codification (the “Codification”) as the authoritative source of U.S. GAAP. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding FAS 162 to include only two levels of U.S. GAAP: authoritative and nonauthoritative. FAS 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of FAS 168 will not have a material impact on the Company’s consolidated financial statements.
3. Investments
     During the first quarter of 2007, the Company adopted FAS 157 and FAS 159. Prior to January 1, 2007, the Company’s 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. The Company believes that accounting for its investment portfolio as trading more closely reflects its investment guidelines. Beginning on January 1, 2007, the Company’s investments in fixed maturities were classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     During the third quarter of 2008, the Company adopted FSP FAS 157-3. Consistent with this statement, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Effective for interim and annual periods ending after June 15, 2009, FSP FAS 157-3 has been superseded by FSP 157-4.
(a) Classification within the fair value hierarchy under FAS 157
     Under FAS 157, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy in FAS 157 prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices but for which the Company typically obtained independent external valuation information including U.S. and U.K. Treasuries, overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Sustainably all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. Treasuries, sovereign debt, corporate debt and U.S. agency and non-agency mortgage and asset-backed securities. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. Financial instruments in this category include certain residential mortgage-backed securities.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     At June 30, 2009, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 994,086     $     $ 994,086  
Non-U.S. Government and Government Agency
          139,766             139,766  
States, municipalities, political subdivision
          8,543             8,543  
Agency residential mortgage-backed securities
          542,352             542,352  
Non-Agency residential mortgage-backed Securities
          80,804       100,952       181,756  
U.S. corporate
          619,633             619,633  
Non-U.S. corporate
          169,017             169,017  
Catastrophe bonds
          18,776             18,776  
Asset-backed securities
          76,238             76,238  
Commercial mortgage-backed securities
          66,369             66,369  
 
                       
Total fixed maturities
          2,715,584       100,952       2,816,536  
Total short-term investments
    318,872       5,068             323,940  
 
                       
Total
  $ 318,872     $ 2,720,652     $ 100,952     $ 3,140,476  
 
                       
     At December 31, 2008, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 768,344     $     $ 768,344  
Non-U.S. Government and Government Agency
          96,073             96,073  
States, municipalities, political subdivision
          15,516             15,516  
Agency residential mortgage-backed securities
          433,736             433,736  
Non-Agency residential mortgage-backed securities
          119,813       111,318       231,131  
U.S. corporate
          443,847             443,847  
Non-U.S. corporate
          125,700             125,700  
Catastrophe bonds
          10,872             10,872  
Asset-backed securities
          137,023             137,023  
Commercial mortgage-backed securities
          192,259             192,259  
 
                       
Total fixed maturities
          2,343,183       111,318       2,454,501  
Total short-term investments
    365,357       11,679             377,036  
 
                       
Total
  $ 365,357     $ 2,354,862     $ 111,318     $ 2,831,537  
 
                       
     At June 30, 2009, Level 3 investments totaled $100,952, representing 3.2% of total investments measured at fair value on a recurring basis. At December 31, 2008, Level 3 investments totaled $111,318, representing 3.9% of total investments measured at fair value on a recurring basis.
     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 as at June 30, 2009 and December 31, 2008:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    Six months ended     Year ended  
    June 30, 2009     December 31, 2008  
Level 3 investments — Beginning of period
  $ 111,318     $  
Payments and purchases
           
Sales and maturities
    (822 )     (59 )
Realized losses
    (1,284 )      
Unrealized losses
    (1,495 )     (14,603 )
Amortization
    (6,765 )     (4,048 )
Transfers in
          130,028  
 
           
Level 3 investments — End of period
  $ 100,952     $ 111,318  
 
           
(b) Net investment income
     Net investment income was derived from the following sources:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
Fixed maturities and short-term investments
  $ 26,396     $ 34,519     $ 52,914     $ 66,210  
Cash and cash equivalents
    1,120       2,378       1,881       7,216  
Securities lending income
    173       455       512       890  
 
                       
Total gross investment income
    27,689       37,352       55,307       74,316  
Investment expenses
    (726 )     (917 )     (1,572 )     (1,838 )
 
                       
Net investment income
  $ 26,963     $ 36,435     $ 53,735     $ 72,478  
 
                       
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized (losses) gains and the change in unrealized gains (losses) on investments:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
Fixed maturities, short-term investments and cash equivalents
                               
Gross realized gains
  $ 3,928     $ 2,957     $ 13,381     $ 11,313  
Gross realized losses
    (6,578 )     (5,382 )     (39,452 )     (5,994 )
 
                       
Net realized (losses) gains on investments
    (2,650 )     (2,425 )     (26,071 )     5,319  
Change in unrealized gains (losses) of securities lending
    3,214       317       4,306       (895 )
Change in unrealized gains (losses) of investments
    34,035       (43,299 )     55,096       (57,064 )
 
                       
Total net realized (losses) gains and change in unrealized gains (losses) of investments
  $ 34,599     $ (45,407 )   $ 33,331     $ (52,640 )
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at June 30, 2009 were as follows:

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
            Gross     Gross     Estimated fair  
    Amortized Cost     unrealized gains     unrealized losses     value  
U.S. Government and Government Agency
  $ 978,409     $ 16,256     $ (579 )   $ 994,086  
Non-U.S. Government and Government Agency
    143,249       5,609       (9,092 )     139,766  
States, municipalities, political subdivision
    8,500       43             8,543  
Agency residential mortgage-backed securities
    529,386       13,535       (569 )     542,352  
Non-Agency residential mortgage-backed securities
    231,737             (49,981 )     181,756  
U.S. corporate
    610,405       12,722       (3,494 )     619,633  
Non-U.S. corporate
    173,440       2,416       (6,839 )     169,017  
Catastrophe bonds
    19,009       84       (317 )     18,776  
Asset-backed securities
    76,254       981       (997 )     76,238  
Commercial mortgage-backed securities
    65,910       494       (35 )     66,369  
 
                       
Total fixed maturities
    2,836,299       52,140       (71,903 )     2,816,536  
Total short-term investments
    324,773       57       (890 )     323,940  
 
                       
Total
  $ 3,161,072     $ 52,197     $ (72,793 )   $ 3,140,476  
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2008 were as follows:
                                 
            Gross     Gross     Estimated fair  
    Amortized Cost     unrealized gains     unrealized losses     value  
U.S. Government and Government Agency
  $ 732,155     $ 36,189     $     $ 768,344  
Non-U.S. Government and Government Agency
    115,389       4,403       (23,719 )     96,073  
States, municipalities, political subdivision
    14,954       562             15,516  
Agency residential mortgage-backed securities
    425,533       8,358       (155 )     433,736  
Non-Agency residential mortgage-backed securities
    299,346       6       (68,221 )     231,131  
U.S. corporate
    454,810       2,126       (13,089 )     443,847  
Non-U.S. corporate
    140,807       1,696       (16,803 )     125,700  
Catastrophe bonds
    11,012       2       (142 )     10,872  
Asset-backed securities
    141,209             (4,186 )     137,023  
Commercial mortgage-backed securities
    217,803             (25,544 )     192,259  
 
                       
Total fixed maturities
    2,553,018       53,342       (151,859 )     2,454,501  
Total short-term investments
    379,537       55       (2,556 )     377,036  
 
                       
Total
  $ 2,932,555     $ 53,397     $ (154,415 )   $ 2,831,537  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at June 30, 2009 and December 31, 2008. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    June 30, 2009     December 31, 2008  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 1,971,837       70.0 %   $ 1,941,349       79.1 %
AA
    130,921       4.7 %     146,923       6.0 %
A
    578,209       20.5 %     338,966       13.8 %
BBB
    20,252       0.7 %     12,427       0.5 %
 
                       
Investment grade
    2,701,219       95.9 %     2,439,665       99.4 %
BB
    30,668       1.1 %     7,416       0.3 %
B
    61,383       2.2 %     7,420       0.3 %
CCC
    23,266       0.8 %            
 
                       
Non-Investment grade
    115,317       4.1 %     14,836       0.6 %
 
                       
Total
  $ 2,816,536       100.0 %   $ 2,454,501       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at June 30, 2009 and December 31, 2008 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
                                 
    June 30, 2009     December 31, 2008  
    Amortized     Estimated     Amortized     Estimated  
    cost     fair value     cost     fair value  
Due in one year or less
  $ 275,126     $ 276,070     $ 277,137     $ 279,727  
Due after one year through five years
    1,633,788       1,649,817       1,143,494       1,134,275  
Due after five years through ten years
    21,715       21,437       17,451       17,493  
Due after ten years
    2,383       2,497       31,045       28,858  
 
                       
 
    1,933,012       1,949,821       1,469,127       1,460,353  
Asset-backed and mortgage-backed Securities
    903,287       866,715       1,083,891       994,148  
 
                       
Total
  $ 2,836,299     $ 2,816,536     $ 2,553,018     $ 2,454,501  
 
                       
     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At June 30, 2009, approximately $276,955 (December 31, 2008: $199,186) of letters of credit were issued and outstanding under this facility for which $358,157 of investments were pledged as collateral (December 31, 2008: $258,573). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s. At June 30, 2009, $100,000 (December 31, 2008: $100,000) of letters of credit were issued and outstanding under this facility for which $127,731 of investments were pledged as collateral (December 31, 2008: $144,149). In addition, $26,773,829 of investments are held in trust at June 30, 2009 (December 31, 2008: $1,100,235). Of those, $1,093,233 are held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2008: $1,032,267).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
(d) Securities lending
     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at June 30, 2009, the Company had $165,565 (December 31, 2008: $103,266) in securities on loan. During the six months ended June 30, 2009, the Company recorded a $4,306 unrealized gain on this collateral on its Statements of Operations (June 30, 2008: unrealized loss $895).
     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 15.5 days (December 31, 2008: 26.7 days). As at June 30, 2009, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 24,328     $     $ 24,328  
Asset-backed securities
          13,466             13,466  
Short-term investments
    75,194       53,508             128,702  
 
                       
Total
  $ 75,194     $ 91,302     $     $ 166,496  
 
                       
     As at December 31, 2008, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:
 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 57,574     $     $ 57,574  
Asset-backed securities
          18,228             18,228  
Short-term investments
    7,390       15,762             23,152  
 
                       
Total
  $ 7,390     $ 91,564     $     $ 98,954  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at June 30, 2009 and December 31, 2008. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    June 30, 2009     December 31, 2008  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 66,942       40.2 %   $ 45,137       45.7 %
AA
    17,392       10.4 %     37,608       37.9 %
A
    6,820       4.1 %     8,729       8.8 %
NR
    148       0.1 %     90       0.1 %
 
                       
 
    91,302       54.8 %     91,564       92.5 %
NR- Cash (1)
    75,194       45.2 %     7,390       7.5 %
 
                       
Total
  $ 166,496       100.0 %   $ 98,954       100.0 %
 
                       
 
(1)   This amount relates to cash and is therefore not a rated security.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested held at June 30, 2009 and December 31, 2008 are shown by contractual maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
                                 
    June 30, 2009     December 31, 2008  
    Amortized     Estimated     Amortized     Estimated fair  
    cost     fair value     cost     value  
Due in one year or less
  $ 129,180     $ 128,702     $ 24,390     $ 23,152  
Due after one year through five years
    39,743       37,794       81,298       75,802  
 
                       
Total
  $ 168,923     $ 166,496     $ 105,688     $ 98,954  
 
                       
4. 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 its 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 or retrocession agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.
a) Credit risk
     The Company 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 & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. 99.6% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) at June 30, 2009 were from reinsurers rated A- or better and included $57,224 of IBNR recoverable (December 31, 2008: $71,580). Reinsurance recoverables by reinsurer are as follows:
                                 
    June 30, 2009     December 31, 2008  
    Reinsurance             Reinsurance        
    recoverable     % of Total     recoverable     % of Total  
Top 10 reinsurers
  $ 188,303       91.3 %   $ 198,403       94.4 %
Other reinsurers balances > $1 million
    12,177       5.9 %     8,987       4.3 %
Other reinsurers balances < $1 million
    5,810       2.8 %     2,794       1.3 %
 
                       
Total
  $ 206,290       100.0 %   $ 210,184       100.0 %
 
                       

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                     
        June 30, 2009  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 74,131       39.4 %
Hannover Re
  AA-     33,860       18.0 %
Lloyd’s syndicates
  A+     28,427       15.1 %
Allianz
  AA     12,891       6.9 %
Munich Re
  AA-     12,135       6.4 %
Swiss Re
  A+     10,968       5.8 %
Aspen
  A     6,311       3.4 %
Transatlantic Re
  A+     3,435       1.8 %
Platinum Underwriters
  A     3,415       1.8 %
Axa
  AA     2,730       1.4 %
 
               
Total
      $ 188,303       100.0 %
 
               
                     
        December 31, 2008  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 83,511       41.9 %
Hannover Re
  AA-     32,855       16.6 %
Lloyd’s syndicates
  A+     25,533       12.9 %
Allianz
  AA     14,988       7.6 %
Swiss Re
  AA-     13,207       6.7 %
Munich Re
  AA-     12,813       6.5 %
Aspen
  A     6,040       3.0 %
Platinum Underwriters
  A     3,270       1.6 %
Transatlantic Re
  A+     3,096       1.6 %
Axa
  AA     3,090       1.6 %
 
               
Total
      $ 198,403       100.0 %
 
               
     At June 30, 2009 and December 31, 2008, the provision for uncollectible reinsurance relating to losses recoverable was $3,085, and $3,228, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. Of the $206,290 reinsurance recoverable at June 30, 2009, $74,131 was fully collateralized (December 31, 2008: $83,511).
     The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
b) Collateralized quota share retrocession treaties
     On December 22, 2007, Validus Re entered into a collateralized retrocessional reinsurance agreement with an unaffiliated third party whereby the Company cedes certain business underwritten in the marine offshore energy lines. For the three months ended June 30, 2009 and 2008 Validus Re ceded $209 and $2,828 of premiums written through this agreement respectively. The earned portions of premiums ceded for the three months ended June 30, 2009 and 2008 were $209 and $3,721 respectively. For the six months ended June 30, 2009 and 2008 Validus Re

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
ceded $1,099 and $14,560 of premiums written through this agreement respectively. The earned portions of premiums ceded for the six months ended June 30, 2009 and 2008 were $1,280 and $6,485 respectively.
5. Share capital
a) Authorized and issued
     The Company’s authorized share capital is 571,428,571 voting and non-voting shares with a par value of $0.175 each. The holders of common 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.
     The following table is a summary of the common shares issued and outstanding:
         
    Common shares
Common shares outstanding, December 31, 2008
    75,624,697  
Restricted share awards vested
    246,585  
Employee seller shares vested
    42,349  
Options exercised
     
Warrants exercised
    237,842  
 
       
Common shares outstanding, June 30, 2009
    76,151,473  
 
       
         
    Common shares
Common shares outstanding, December 31, 2007
    74,199,836  
Restricted share awards vested
    777,953  
Employee seller shares vested
    515,103  
Options exercised
    112,825  
Warrants exercised
    18,980  
 
       
Common shares outstanding, December 31, 2008
    75,624,697  
 
       
b) Warrants
     During the three and six months ended June 30, 2009, 728,010 warrants were exercised which resulted in the net share issuance of 237,842 common shares. During the three months ended June 30, 2008, 13,068 warrants were exercised which resulted in the net share issuance of 13,067 common shares. During the six months ended June 30, 2008, 31,580 warrants were exercised which resulted in the net share issuance of 18,980 common shares.
c) Deferred share units
     Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. The total outstanding deferred share units at June 30, 2009 were 4,508 (December 31, 2008: 4,430).
d) Dividends
     On May 4, 2009, the Company announced a quarterly cash dividend of $0.20 (2008: $0.20) per common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on June 30, 2009 to holders of record on June 15, 2009.
6. Stock plans
a) Long-term incentive plan
     The Company’s Long Term Incentive Plan (“LTIP”) provides for grants to employees of any option, stock appreciation right (“SAR”), restricted share, restricted share unit, performance share, performance unit, dividend equivalent or other share-based award. The total number of shares reserved for issuance under the LTIP is 13,126,896 shares. The LTIP is administered by the Compensation Committee of the Board of

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
Directors. No SARs, performance shares, performance units or dividend equivalents have been granted to date. Grant prices are established at the estimated fair market value of the Company’s common shares at the date of grant.
b) LTIP options
     Options granted under the LTIP may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest ratably over five years from the date of grant. No options were granted since the year ended December 31, 2008. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for all grants to date:
                                 
    Weighted average risk   Weighted average   Expected life   Expected
Year   free interest rate   dividend yield   (years)   volatility
2007 and prior years
    4.5 %     0.00 %     7       30 %
2008
    3.5 %     3.20 %     7       30 %
     Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company uses the simplified method outlined in the SEC Staff Accounting Bulletin 110 to estimate expected lives for options granted during the period as historical exercise data is not available and the options met the requirement as set out in the bulletin.
     Share compensation expenses of $918 were recorded for the three months ended June 30, 2009 (2008: $1,068). Share compensation expenses of $1,975 were recorded for the six months ended June 30, 2009 (2008: $2,091). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to the options for the six months ended June 30, 2009 was as follows:
                         
            Weighted     Weighted average  
            average grant     grant date  
    Options     date fair value     exercise price  
Options outstanding, December 31, 2008
    2,799,938     $ 7.57     $ 18.23  
Options granted
                 
Options exercised
                 
Options forfeited
    (6,536 )     10.30       20.39  
 
                 
Options outstanding, June 30, 2009
    2,793,402     $ 7.56     $ 18.22  
 
                 
Options exercisable at June 30, 2009
    1,531,092     $ 7.52     $ 17.92  
 
                 
     Activity with respect to options for the year ended December 31, 2008 was as follows:
                         
            Weighted     Weighted average  
            average grant     grant date  
    Options     date fair value     exercise price  
Options outstanding, December 31, 2007
    2,761,176     $ 7.61     $ 17.82  
Options granted
    164,166       6.73       24.73  
Options exercised
    (112,825 )     7.38       17.57  
Options forfeited
    (12,579 )     8.56       18.69  
 
                 
Options outstanding, December 31, 2008
    2,799,938     $ 7.57     $ 18.23  
 
                 
Options exercisable at December 31, 2008
    1,396,353     $ 7.46     $ 17.63  
 
                 
     At June 30, 2009, there were $6,857 (December 31, 2008: $9,139) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.8 years (December 31, 2008: 2.2 years).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
c) LTIP restricted shares
     Restricted shares granted under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $4,074 were recorded for the three months ended June 30, 2009 (2008: $3,625). Share compensation expenses of $8,386 were recorded for the six months ended June 30, 2009 (2008: $6,567). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted shares for the six months ended June 30, 2009 was as follows:
                 
            Weighted  
            average grant  
    Restricted shares     date fair value  
Restricted shares outstanding, December 31, 2008
    2,307,402     $ 22.73  
Restricted shares granted
    280,073       24.70  
Restricted shares vested
    (291,328 )     22.00  
Restricted shares forfeited
    (3,989 )     21.29  
 
           
Restricted shares outstanding, June 30, 2009
    2,292,158     $ 23.06  
 
           
     Activity with respect to unvested restricted shares for the period ended December 31, 2008 was as follows:
                 
            Weighted  
            average grant  
    Restricted shares     date fair value  
Restricted shares outstanding, December 31, 2007
    2,158,220     $ 20.44  
Restricted shares granted
    1,007,083       24.09  
Restricted shares vested
    (822,370 )     18.55  
Restricted shares forfeited
    (35,531 )     21.87  
 
           
Restricted shares outstanding, December 31, 2008
    2,307,402     $ 22.73  
 
           
     At June 30, 2009, there were $35,650 (December 31, 2008: $35,915) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.8 years (December 31, 2008: 3.2 years).
d) Employee seller shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot, the Company issued 1,209,741 restricted shares to Talbot employees (the “employee seller shares”). Upon consummation of the acquisition, the employee seller shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s Bye-laws. However, the employee seller shares are subject to a restricted period during which they are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of employee seller shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period will end for 25% of the employee seller shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that after four years forfeiture will be completely extinguished. Share compensation expenses of $619 were recorded for the three months ended June 30, 2009 (2008: $2,567). Share compensation expenses of $2,588 were recorded for the six

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
months ended June 30, 2009 (2008: $5,134). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested employee seller shares for the six months ended June 30, 2009 was as follows:
                 
            Weighted  
            average grant  
    Employee seller shares     date fair value  
Employee seller shares outstanding, December 31, 2008
    663,375     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (42,349 )     22.01  
Employee seller shares forfeited
    (3,799 )     22.01  
 
           
Employee seller shares outstanding, June 30, 2009
    617,227     $ 22.01  
 
           
     Activity with respect to unvested employee seller shares for the year ended December 31, 2008 was as follows:
                 
            Weighted  
            average grant  
    Employee seller shares     date fair value  
Employee seller shares outstanding, December 31, 2007
    1,209,741     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (515,103 )     22.01  
Employee seller shares forfeited
    (31,263 )     22.01  
 
           
Employee seller shares outstanding, December 31, 2008
    663,375     $ 22.01  
 
           
     At June 30, 2009, there were $9,904 (December 31, 2008: $12,157) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.0 years (December 31, 2008: 2.5 years).
e) Restricted share units
     Restricted share units under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions for the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. Share compensation expenses of $21 were recorded for the three months ended June 30, 2009 (2008: $11). Share compensation expenses of $37 were recorded for the six months ended June 30, 2009 (2008: $14) related to restricted share units. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period. Activity with respect to unvested restricted share units for the six months ended June 30, 2009 was as follows:
                 
            Weighted  
    Restricted     average grant  
    share units     date fair value  
Restricted share units outstanding, December 31, 2008
    11,853     $ 25.28  
Restricted share units granted
    4,044       25.03  
Restricted share units vested
    (1,569 )     24.84  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, June 30, 2009
    14,328     $ 25.25  
 
           

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     Activity with respect to unvested restricted share units for the year ended December 31, 2008 was as follows:
                 
            Weighted  
    Restricted     average grant  
    share Units     date fair value  
Restricted share units outstanding, December 31, 2007
        $  
Restricted share units granted
    11,853       25.28  
Restricted share units vested
           
Restricted share units forfeited
           
 
           
Restricted share units outstanding, December 31, 2008
    11,853     $ 25.28  
 
           
     At June 30, 2009, there were $282 (December 31, 2008: $227) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 3.2 years (December 31, 2008: 4.3 years). Additional restricted share units are issued in lieu of accrued dividends from unvested restricted share units. As at June 30, 2009 restricted share units issued in lieu of dividends were 592 (December 31, 2008: 368).
f) Share compensation expenses
     The breakdown of share compensation expenses was as follows:
                                 
    Three months ended     Three months ended     Six months ended     Six months ended  
    June 30, 2009     June 30, 2008     June 30, 2009     June 30, 2008  
LTIP options
  $ 918     $ 1,068     $ 1,975     $ 2,091  
LTIP restricted shares
    4,074       3,625       8,386       6,567  
LTIP restricted share units
    21       11       37       14  
Employee seller shares
    619       2,567       2,588       5,134  
 
                       
Total
  $ 5,632     $ 7,271     $ 12,986     $ 13,806  
 
                       
7. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at June 30, 2009 was:
                         
    Commitment     Outstanding   (1)   Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       154,300       154,300  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       276,955        
Talbot FAL facility (2)
    100,000       100,000        
Talbot third party FAL facility (2)
    121,515       121,515        
 
                 
Total
  $ 1,271,515     $ 802,770     $ 304,300  
 
                 

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     The financing structure at December 31, 2008 was:
                         
    Commitment     Outstanding   (1)   Drawn  
9.069% Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000     $ 150,000  
8.480% Junior Subordinated Deferrable Debentures
    200,000       154,300       154,300  
$200,000 unsecured letter of credit facility
    200,000              
$500,000 secured letter of credit facility
    500,000       199,186        
Talbot FAL facility (2)
    100,000       100,000        
Talbot third party FAL facility (2)
    144,015       144,015        
 
                 
Total
  $ 1,294,015     $ 747,501     $ 304,300  
 
                 
 
(1)   Indicates utilization of commitment amount, not drawn borrowings.
 
(2)   Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.
     Finance expenses for the three months ended June 30, 2009, was $10,752 (2008: $12,762). Finance expenses for the six months ended June 30, 2009, was $18,475 (2008: $34,279). 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 FAL as follows:
                                 
    Three months ended     Three months ended     Six months ended     Six months ended  
    June 30, 2009     June 30, 2008     June 30, 2009     June 30, 2008  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,589     $ 3,589     $ 7,177     $ 7,177  
8.480% Junior Subordinated Deferrable Debentures
    3,348       3,650       6,696       8,008  
Credit facilities
    476       123       840       474  
Talbot letter of credit facilities
    42       62       105       125  
Talbot other interest
          (19 )           112  
Talbot third party FAL facility
    3,297       5,357       3,657       18,383  
 
                       
Total
  $ 10,752     $ 12,762     $ 18,475     $ 34,279  
 
                       
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 Company’s 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

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
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 Validus Re segment 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 Company’s 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. Debt issuance costs of $2,000 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On April 29, 2008, the Company repurchased from an unaffiliated financial institution $45,700 principal amount of its 8.480% Junior Subordinated Deferrable Debentures due 2037 at an aggregate price of $36,560, plus accrued and unpaid interest of $474. The repurchase resulted in the recognition of a realized gain of $8,752 for the year ended December 31, 2008.
     Future expected payments of interest and principal on the Junior Subordinated Deferrable Debentures assuming that the Company exercises its call option at the earliest opportunity are as follows:
         
2009
  $ 13,344  
2010
    26,688  
2011
    169,887  
2012
    160,842  
2013 and thereafter
     
 
     
Total minimum future payments
  $ 370,761  
 
     
c) Credit facilities
     On March 12, 2007, the Company entered into a $200,000 three-year unsecured facility, as subsequently amended on October 25, 2007, which provides for letter of credit availability for Validus Re and our other subsidiaries and revolving credit availability for the Company (the full $200,000 of which is available for letters of credit and/or revolving loans), and a $500,000 five-year secured letter of credit facility, as subsequently amended, which provides for letter of credit availability for Validus Re and our other subsidiaries. The credit facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc.
     The credit facilities contain covenants that include, among other things, (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $872,000, and commencing with the end of the fiscal quarter ending March 31, 2007 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). For purposes of covenant compliance (i) “net worth is calculated with investments carried at amortized cost and (ii) “consolidated total debt” does not include the Company’s junior subordinated deferrable debentures. The credit facilities also contain restrictions on our ability to pay

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
dividends and other payments in respect of equity interests at any time that we are otherwise in default with respect to certain provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others.
     As of June 30, 2009 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the credit facilities.
     As of June 30, 2009, we had $276,955 in outstanding letters of credit under our five-year secured letter of credit facility (December 31, 2008: $199,186) and no amounts were outstanding under our three-year unsecured facility (December 31, 2008: $nil).
     On October 25, 2007, the Company entered into the First Amendment to each of its Three-Year Unsecured Letter of Credit Facility Agreement, dated as of March 12, 2007 and its Five-Year Secured Letter of Credit Facility Agreement, dated as of March 12, 2007 (together, the “Credit Facilities”), among the Company, Validus Reinsurance, Ltd., the Lenders party thereto, and JPMorgan Chase Bank, National Association, as administrative agent, to provide for, among other things, additional capacity to incur up to $100,000 under a new Funds at Lloyd’s Letter of Credit Facility (“FAL LoC Facility”) to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2008 and 2009 underwriting years of account. The amendment also modifies certain provisions in the Credit Facilities in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default.
     On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility (the “Talbot FAL Facility”) to provide Funds at Lloyd’s; this facility is guaranteed by the Company and is secured against the assets of Validus Re. The Talbot FAL Facility was provided by a syndicate of commercial banks arranged by Lloyds TSB Bank plc and ING Bank N.V., London Branch. The Talbot FAL Facility contains affirmative covenants that include, among other things, (i) the requirement that we initially maintain a minimum level of consolidated net worth of at least $1,164,265, and commencing with the end of the fiscal quarter ending December 31, 2007 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, and (ii) the requirement that we maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00.
     The Talbot FAL Facility also contains restrictions on our ability to make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others. Other than in respect of existing and future preferred and hybrid securities, the payment of dividends and other payments in respect of equity interests are not permitted at any time that we are in default with respect to certain provisions under the credit facilities. As of June 30, 2009 the Company had $100,000 in outstanding letters of credit under this facility and was in compliance with all covenants and restrictions.
d) Funds at Lloyd’s
     Talbot’s underwriting at Lloyd’s is supported by Funds at Lloyd’s (“FAL”) comprising: cash, investments and undrawn letters of credit provided by various banks on behalf of various companies and persons under reinsurance and other agreements. The FAL are provided in exchange for payment calculated principally by reference to the syndicate’s results, as appropriate, when they are declared. The amounts of cash, investments and letters of credit at June 30, 2009 supporting the 2009 underwriting year amount to $346,750 all of which is provided by the Company. A third party FAL facility comprising $121,515 which supports the 2007 and prior underwriting years has now been withdrawn from Lloyd’s and placed in escrow, however, the funds remain available to pay losses on that year.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
8. Commitments and contingencies
a) Concentrations of credit risk
     The Company’s investments are managed following prudent standards of diversification. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In addition, the Company limits its exposure to any single issuer to 3% or less, excluding treasury and agency securities. The minimum credit rating of any security purchased is A-/A3 and where investments are downgraded, the Company permits a holding of up to 2% in aggregate market value, or 10% with written pre-authorization. At June 30, 2009, 4.3% of the portfolio had a split rating below A-/A3 and the Company did not have an aggregate exposure to any single issuer of more than 1.6% of our investment portfolio, other than with respect to government and agency securities.
b) Funds at Lloyd’s
     Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on syndicate 1183’s business plan, rating environment, reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks. The amounts of cash, investments and letters of credit at June 30, 2009 amounted to $346,750 (December 31, 2008: $351,394).
     The FAL are provided for each year of account as follows:
                 
    2009     2008  
    Underwriting year     Underwriting year  
Talbot FAL facility
  $ 100,000     $ 100,000  
Group funds
    246,750       216,483  
 
           
Total
  $ 346,750     $ 316,483  
 
           
     The amounts which the Company provides as FAL is not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.
     The amounts provided under the Talbot FAL facility would become a liability of the group in the event of the syndicate declaring a loss at a level which would call on this arrangement.
c) Lloyd’s central fund
     Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s central fund. If Lloyd’s determines that the central fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2009 estimated premium income at Lloyd’s of £400,000, the June 30, 2009 exchange rate of £1 equals $1.65 and assuming the maximum 3% assessment the Company would be assessed approximately $19,800.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
9. 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 8, 2005 with BlackRock Financial Management, Inc. (“BlackRock”) under which BlackRock was appointed as an investment manager of part of Company’s investment portfolio. Merril Lynch is a shareholder of Blackrock. Merrill Lynch entities, which are now wholly-owned subsidiaries of Bank of America Corp, own 6,134,530 non-voting shares in the Company, hold warrants to purchase 1,067,187 shares and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. Merrill Lynch’s warrants are convertible to non-voting shares. Under the terms of the investment manager agreement with Blackrock, the Company incurred expenses of $527 during the three months ended June 30, 2009 (2008: $613) and $978 during the six months ended June 30, 2009 (2008: $1,223), of which $896 was included in accounts payable and accrued expenses at June 30, 2009 (December 31, 2008: $584).
b)        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 Company’s investment portfolio. Goldman Sachs entities, own 14,057,137 non-voting shares in the Company, hold warrants to purchase 1,604,410 non-voting shares, and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. The Company incurred expenses of $368 during the three months ended June 30, 2009 (2008: $364) and $726 during the six months ended June 30, 2009 (2008: $747), of which $310 was included in accounts payable and accrued expenses at June 30, 2009 (December 31, 2008: $641).
c)        Vestar Capital entities, which own 8,571,427 shares in the Company, hold warrants to purchase 972,810 shares, are shareholders of PARIS RE Holdings Limited (“Paris Re”), and have an employee on the Company’s Board of Directors who does not receive compensation from the Company. Pursuant to reinsurance agreements with Paris Re, the Company recognized gross premiums written of $28 during the three months ended June 30, 2009 (2008: $nil) and $6,634 during the six months ended June 30, 2009 (2008: $6,079), of which $6,986 was included in premiums receivable at June 30, 2009 (December 31, 2008: $4,412). The earned premium adjustments of $1,710 (2008: $776) and $3,416 (2008: $1,553) was recorded for the three and six months ended June 30, 2009, respectively.
d)        Aquiline Capital Partners, LLC and its related companies (“Aquiline”), which own 6,886,342 shares in the Company, hold warrants to purchase 3,193,865 shares, and have three employees on the Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Pursuant to reinsurance agreements with Group Ark, the Company recognized $nil (2008: $nil) of gross premiums written and $nil (2008: $nil) of reinsurance premiums ceded during the three months ended June 30, 2009 and recognized $nil (2008: $688) of gross premiums written and $800 (2008: $1.098) of reinsurance premiums ceded during the six months ended June 30, 2009, of which $500 was included in reinsurance balances payable at June 30, 2009 (December 31, 2008: $60).
e)        Certain members of the Company’s management and staff have provided guarantees to 1384 Capital Ltd, a company formed to indirectly facilitate the provision of Funds at Lloyd’s (“FAL”). The Company paid $115 of finance expenses to such management and staff in respect of such provision of FAL for the three months ended June 30, 2009 (2008: $182) and $143 for the six months ended June 30, 2009 (2008: $579), all of which was included in accounts payable and accrued expenses at June 30, 2009 (December 31, 2008: $803). An amount of $nil was included in general and administrative expenses in respect of the reimbursement of expenses relating to such FAL provision for the three months ended June 30, 2009 (2008: $nil). An amount of $16 was included in general and administrative expenses in respect of the reimbursement of expenses relating to such FAL provision for the six months ended June 30, 2009 (2008: $2).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
10. Earnings per share
     The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008:
                                 
    Three months ended     Three months ended     Six months ended     Six months ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
Basic earnings (loss) per share
                               
Net income
  $ 137,563     $ 75,921     $ 232,470     $ 142,396  
Less: Dividends and distributions declared on outstanding warrants
    (1,590 )     (1,739 )     (3,326 )     (3,478 )
 
                       
Net income available to common shareholders
  $ 135,973     $ 74,182     $ 229,144     $ 138,918  
 
                       
 
                               
Weighted average shares — basic common shares outstanding
    76,138,038       74,233,425       75,941,308       74,221,398  
 
                       
 
                               
Basic earnings per share
  $ 1.79     $ 1.00       3.02     $ 1.87  
 
                       
 
                               
Diluted earnings (loss) per share
                               
Net income
  $ 137,563     $ 75,921     $ 232,470     $ 142,396  
Less: Dividends and distributions declared on outstanding warrants
                       
 
                       
Net income available to common shareholders
  $ 137,563     $ 75,921     $ 232,470     $ 142,396  
 
                       
 
                               
Weighted average shares — basic common shares outstanding
    76,138,038       74,233,425       75,941,308       74,221,398  
Share equivalents:
                               
Warrants
    1,806,372       1,631,819       2,056,733       2,074,835  
Stock options
    300,405       32,894       333,955       171,366  
Unvested restricted shares
    697,250       1,359,407       690,359       1,326,037  
 
                       
Weighted average shares — diluted common shares outstanding
    78,942,065       77,257,545       79,022,355       77,793,636  
 
                       
 
                               
Diluted earnings per share
  $ 1.74     $ 0.98     $ 2.94     $ 1.83  
 
                       
     Share equivalents that would result in the issuance of common shares of 198,500 and 192,534 were outstanding for the three months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Share equivalents that would result in the issuance of common shares of 179,713 and 63,021 were outstanding for the six months ended June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
11. Subsequent Event
     On July 9, 2009, the Company, Validus Ltd. (a wholly owned subsidiary of the Company) and IPC Holdings, Ltd. (“IPC”) entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”), pursuant to which, subject to the terms and conditions therein, Validus Ltd. will amalgamate with IPC (the “Amalgamation”). After the effective time of the Amalgamation, the IPC’s shareholders will have the right to receive 0.9727 Validus voting common shares, par value $0.175 per share, $7.50 in cash, less any applicable withholding tax and without interest, and cash in lieu of fractional shares in exchange for each common share of IPC they hold, unless they exercise appraisal rights.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     The closing of the Amalgamation is subject to customary closing conditions, including the Company and IPC shareholder approvals. Aquiline Capital Partners LLC, Vestar Capital Partners, and New Mountain Capital, LLC, which collectively owned approximately 38% of Validus’ outstanding voting common shares as of July 27, 2009, have agreed to vote in favor of the issuance of Validus shares in connection with the transaction. Upon closing of the transaction, the Company’s current shareholders will own approximately 62% of the combined company on a fully diluted basis, with IPC shareholders owning approximately 38%.
     The boards of directors of both the Company and IPC have adopted the Amalgamation Agreement, and have deemed it fair, advisable and in the best interests of their respective companies and shareholders to enter into the Amalgamation Agreement and to consummate the transactions contemplated thereby.
     The Amalgamation Agreement contains specified termination rights for the parties. The Amalgamation Agreement also provides that, if the Amalgamation Agreement is terminated under certain circumstances, the Company will be required to pay IPC a termination fee of $16,000 or IPC will be required to pay the Company a termination fee of $16,000.
     On the same day as the execution and delivery of the Amalgamation Agreement, (1) IPC paid to Max Capital Ltd. (“Max”) $50,000 in respect of the termination fee under its amalgamation agreement with Max, and (2) Validus paid to IPC $50,000 in respect of and in reliance upon such payment by IPC to Max. In certain circumstances more fully described in the Amalgamation Agreement, IPC will be required to repay such amount to Validus in the event the Amalgamation Agreement is terminated.
     A copy of the Amalgamation Agreement is referenced as Exhibit 10.1 hereto and is incorporated herein by reference. The description herein of the Amalgamation Agreement and the transactions contemplated thereby is not complete and is qualified in its entirety by reference to Amalgamation Agreement.
     The Amalgamation Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, Validus Ltd., IPC or any of their respective subsidiaries or affiliates. The representations, warranties and covenants contained in the Amalgamation Agreement were made only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Amalgamation Agreement; may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Amalgamation Agreement instead of establishing these matters as facts (such disclosures include information that has been included in IPC’s and the Company’s public disclosures, as well as additional non-public information); and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors are not third party beneficiaries under the Amalgamation Agreement (except for the right to receive the transaction consideration from and after the consummation of the Amalgamation) and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of IPC, the Company or Validus Ltd. or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Amalgamation Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.
     In connection with the signing of the Amalgamation Agreement, the Company has withdrawn and terminated its exchange offer for all of the outstanding common shares of IPC and has instructed BNY Mellon Shareowner Services to promptly return all IPC common shares previously tendered to the Company. Additionally, the Company has terminated its solicitation efforts in connection with its other previously announced alternative steps to complete a transaction with IPC, including a scheme of arrangement and calling of a special meeting of IPC shareholders.
     On August 6, 2009, the Company filed with the SEC and announced that it will begin mailing, a joint proxy statement/prospectus in connection with the Amalgamation. The Company’s special general meeting of shareholders will be held on September 4, 2009. The Company expects the Amalgamation to close promptly following the receipt of the Company’s and IPC’s shareholder approvals, subject to the satisfaction or waiver of all closing conditions.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     On July 24, 2009, the Company announced that it has entered into the Second Amendment to each of its $500,000 five-year secured letter of credit facility and $200,000 three-year unsecured facility, and the First Amendment to its $100,000 Talbot FAL facility to amend a specific investment restriction clause to permit the completion of the IPC amalgamation agreement. The amendment also modifies and updates certain pricing and covenant terms.
     The Company has evaluated subsequent events from the balance sheet date through to August 7, 2009.
12. Segment information
     The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments have been determined under FAS 131, “Disclosures about Segments of and Enterprise and Related Information.” The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each business requires different strategies.
Validus Re
     The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace, nuclear, terrorism, life and accident & health and workers’ compensation catastrophe.
Talbot
The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial institutions, contingency, bloodstock & livestock, accident & health classes of business on an insurance or facultative reinsurance basis. Principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Corporate and other reconciling items
The Company has a “Corporate” function, which includes the activities of the parent company, and which carries out functions for the group. “Corporate” also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. The only revenue earned by “Corporate” is a minor amount of interest income that is incidental to the activities of the enterprise. For internal reporting purposes, “Corporate” is reflected separately as a business unit, however “Corporate” is not considered an operating segment under these circumstances and FAS 131. Other reconciling items include, but are not limited to, the elimination of intersegment revenues and expenses and unusual items that are not allocated to segments.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     The following tables summarize the underwriting results of our operating segments and corporate segment:
                                 
                    Corporate and        
                    other        
                    reconciling        
Three months ended June 30, 2009   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 199,560     $ 235,113     $ (9,641 )   $ 425,032  
Reinsurance premiums ceded
    (43,070 )     (28,862 )     9,641       (62,291 )
 
                       
Net premiums written
    156,490       206,251             362,741  
Change in unearned premiums
    7,207       (41,748 )           (34,541 )
 
                       
Net premiums earned
    163,697       164,503             328,200  
Losses and loss expenses
    41,121       83,630             124,751  
Policy acquisition costs
    29,120       36,114       (796 )     64,438  
General and administrative expenses
    14,149       21,927       5,124       41,200  
Share compensation expenses
    1,548       2,098       1,986       5,632  
 
                       
 
                               
Underwriting income (loss)
  $ 77,759     $ 20,734     $ (6,314 )   $ 92,179  
 
                       
 
                               
Net investment income
    20,783       7,693       (1,513 )     26,963  
Net realized (losses) on investments
    (2,140 )     (510 )           (2,650 )
Net unrealized gains on investments
    35,793       1,456             37,249  
Foreign exchange gains
    1,827       6,549       56       8,432  
Other income (expenses)
    902       911       (796 )     1,017  
Finance expenses
    (477 )     (3,339 )     (6,936 )     (10,752 )
Transaction expenses
                (15,851 )     (15,851 )
 
                       
 
                               
Net income (loss) before taxes
    134,447       33,494       (31,354 )     136,587  
 
                               
Income tax (expenses) benefit
    (28 )     1,004             976  
 
                       
 
                               
Net income (loss)
  $ 134,419     $ 34,498     $ (31,354 )   $ 137,563  
 
                       
 
                               
Loss and loss expense ratio (1)
    25.1 %     50.8 %             38.0 %
Policy acquisition cost ratio(1)
    17.8 %     22.0 %             19.6 %
General and administrative expense ratio(1)
    9.6 %     14.6 %             14.3 %
 
                         
Expense ratio
    27.4 %     36.6 %             33.9 %
 
                         
 
                               
Combined ratio(1)
    52.5 %     87.4 %             71.9 %
 
                         
 
                               
Total assets
  $ 3,013,433     $ 1,988,037     $ 6,980     $ 5,008,450  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate and        
                    other        
                    reconciling        
Three months ended June 30, 2008   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 187,820     $ 197,235     $ (5,136 )   $ 379,919  
Reinsurance premiums ceded
    (1,208 )     (5,327 )     5,136       (1,399 )
 
                       
Net premiums written
    186,612       191,908             378,520  
Change in unearned premiums
    (22,500 )     (46,722 )           (69,222 )
 
                       
Net premiums earned
    164,112       145,186             309,298  
Losses and loss expenses
    48,677       73,412             122,089  
Policy acquisition costs
    25,309       31,134       (24 )     56,419  
General and administrative expenses
    9,955       19,787       4,170       33,912  
Share compensation expenses
    1,597       1,126       4,548       7,271  
 
                       
 
                               
Underwriting income (loss)
  $ 78,574     $ 19,727     $ (8,694 )   $ 89,607  
 
                       
 
                               
Net investment income
    25,725       11,726       (1,016 )     36,435  
Realized gain on repurchase of debentures
                8,752       8,752  
Net realized (losses) gains on investments
    (3,260 )     835             (2,425 )
Net unrealized (losses) on investments
    (24,059 )     (18,923 )           (42,982 )
Foreign exchange (losses) gains
    (403 )     1,314             911  
Other income (expenses)
    24       1,462       (24 )     1,462  
Finance expenses
    (88 )     (5,400 )     (7,274 )     (12,762 )
 
                       
 
                               
Net income (loss) before taxes
    76,513       10,741       (8,256 )     78,998  
 
                               
Income tax (expenses)
    (20 )     (3,057 )           (3,077 )
 
                       
 
                               
Net income (loss)
  $ 76,493     $ 7,684     $ (8,256 )   $ 75,921  
 
                       
 
                               
Loss and loss expense ratio (1)
    29.7 %     50.6 %             39.5 %
Policy acquisition cost ratio(1)
    15.4 %     21.4 %             18.2 %
General and administrative expense ratio(1)
    7.0 %     14.4 %             13.3 %
 
                         
Expense ratio
    22.4 %     35.8 %             31.5 %
 
                         
 
                               
Combined ratio(1)
    52.1 %     86.4 %             71.0 %
 
                         
 
                               
Total assets
  $ 2,784,016     $ 1,781,576     $ 4,150     $ 4,569,742  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate and        
                    other        
                    reconciling        
Six months ended June 30, 2009   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 609,686     $ 463,033     $ (37,795 )   $ 1,034,924  
Reinsurance premiums ceded
    (56,359 )     (116,239 )     37,795       (134,803 )
 
                       
Net premiums written
    553,327       346,794             900,121  
Change in unearned premiums
    (215,183 )     (37,979 )           (253,162 )
 
                       
Net premiums earned
    338,144       308,815             646,959  
Losses and loss expenses
    96,583       160,002             256,585  
Policy acquisition costs
    57,697       69,271       (1,081 )     125,887  
General and administrative expenses
    27,941       42,141       9,197       79,279  
Share compensation expenses
    3,220       4,433       5,333       12,986  
 
                       
 
                               
Underwriting income (loss)
  $ 152,703     $ 32,968     $ (13,449 )   $ 172,222  
 
                       
 
                               
Net investment income
    41,569       15,187       (3,021 )     53,735  
Net realized (losses) on investments
    (19,679 )     (6,392 )           (26,071 )
Net unrealized gains on investments
    54,800       4,602             59,402  
Foreign exchange (losses) gains
    (1,380 )     5,556       56       4,232  
Other income (expenses)
    1,187       1,668       (1,081 )     1,774  
Finance expenses
    (840 )     (3,762 )     (13,873 )     (18,475 )
Transaction expenses
                (15,851 )     (15,851 )
 
                       
 
                               
Net income (loss) before taxes
    228,360       49,827       (47,219 )     230,968  
 
                               
Income tax (expenses) benefit
    (66 )     1,568             1,502  
 
                       
 
                               
Net income (loss)
  $ 228,294     $ 51,395     $ (47,219 )   $ 232,470  
 
                       
 
                               
Loss and loss expense ratio (1)
    28.6 %     51.8 %             39.7 %
Policy acquisition cost ratio(1)
    17.1 %     22.4 %             19.5 %
General and administrative expense ratio(1)
    9.2 %     15.1 %             14.3 %
 
                         
Expense ratio
    26.3 %     37.5 %             33.8 %
 
                         
 
                               
Combined ratio(1)
    54.9 %     89.3 %             73.5 %
 
                         
 
                               
Total assets
  $ 3,013,433     $ 1,988,037     $ 6,980     $ 5,008,450  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
                    Corporate and        
                    Other        
                    reconciling        
Six months ended June 30, 2008   Validus Re     Talbot     items     Total  
Gross premiums written
  $ 518,869     $ 399,028     $ (16,384 )   $ 901,513  
Reinsurance premiums ceded
    (24,951 )     (77,732 )     16,384       (86,299 )
 
                       
Net premiums written
    493,918       321,296             815,214  
Change in unearned premiums
    (186,151 )     (27,901 )           (214,052 )
 
                       
Net premiums earned
    307,767       293,395             601,162  
Losses and loss expenses
    107,591       154,522             262,113  
Policy acquisition costs
    45,712       67,432       (24 )     113,120  
General and administrative expenses
    19,334       40,710       10,975       71,019  
Share compensation expenses
    2,823       2,102       8,881       13,806  
 
                       
 
                               
Underwriting income (loss)
  $ 132,307     $ 28,629     $ (19,832 )   $ 141,104  
 
                       
 
                               
Net investment income
    50,752       22,708       (982 )     72,478  
Net realized (losses) gains on investments
    (1,183 )     6,502             5,319  
Net unrealized (losses) on investments
    (42,671 )     (15,288 )           (57,959 )
Realized gain on repurchase of debentures
                8,752       8,752  
Foreign exchange gains
    7,272       1,818             9,090  
Other income (expenses)
    24       2,397       (24 )     2,397  
Finance expenses
    (442 )     (18,620 )     (15,217 )     (34,279 )
 
                       
 
                               
Net income (loss) before taxes
    146,059       28,146       (27,303 )     146,902  
 
                               
Income tax (expenses)
    (48 )     (4,458 )           (4,506 )
 
                       
 
                               
Net income (loss)
  $ 146,011     $ 23,688     $ (27,303 )   $ 142,396  
 
                       
 
                               
Loss and loss expense ratio (1)
    35.0 %     52.7 %             43.6 %
Policy acquisition cost ratio(1)
    14.9 %     23.0 %             18.8 %
General and administrative expense ratio(1)
    7.1 %     14.6 %             14.1 %
 
                         
Expense ratio
    22.0 %     37.6 %             32.9 %
 
                         
 
                               
Combined ratio(1)
    57.0 %     90.3 %             76.5 %
 
                         
 
                               
Total assets
  $ 2,784,016     $ 1,781,576     $ 4,150     $ 4,569,742  
 
                       
 
(1)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
     The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
                                         
    Three months ended June 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 127,975     $ 24,480     $ (259 )   $ 152,196       35.8 %
 
                                       
Worldwide excluding United States (1)
    12,445       67,581       (1,593 )     78,433       18.4 %
Europe
    6,126       17,595       (551 )     23,170       5.5 %
Latin America and Caribbean
    7,900       15,646       (6,631 )     16,915       4.0 %
Japan
    15,500       3,256             18,756       4.4 %
Canada
    112       2,219       (112 )     2,219       0.5 %
 
                             
Sub-total, non United States
    42,083       106,297       (8,887 )     139,493       32.8 %
 
                                       
Worldwide including United States (1)
    19,557       16,461       (393 )     35,625       8.4 %
Marine and Aerospace (2)
    9,945       87,875       (102 )     97,718       23.0 %
 
                             
Total
  $ 199,560     $ 235,113     $ (9,641 )   $ 425,032       100.0 %
 
                             
 
    Three months ended June 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 132,341     $ 18,347     $ (5,136 )   $ 145,552       38.3 %
 
                                       
Worldwide excluding United States (1)
    662       58,939             59,601       15.7 %
Europe
    5,391       15,343             20,734       5.5 %
Latin America and Caribbean
    1,264       9,727             10,991       2.9 %
Japan
    9,093       2,335             11,428       3.0 %
Canada
          3,095             3,095       0.8 %
 
                             
Sub-total, non United States
    16,410       89,439             105,849       27.9 %
 
                                       
Worldwide including United States (1)
    29,632       21,226             50,858       13.4 %
Marine and Aerospace (2)
    9,437       68,223             77,660       20.4 %
 
                             
Total
  $ 187,820     $ 197,235     $ (5,136 )   $ 379,919       100.0 %
 
                             
 
    Six months ended June 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 284,859     $ 46,893     $ (5,087 )   $ 326,665       31.6 %
 
                                       
Worldwide excluding United States (1)
    40,214       127,191       (9,282 )     158,123       15.3 %
Europe
    47,358       37,908       (3,213 )     82,053       7.9 %
Latin America and Caribbean
    20,119       32,596       (14,893 )     37,822       3.6 %
Japan
    16,707       3,707             20,414       2.0 %
Canada
    652       6,378       (652 )     6,378       0.6 %
 
                             
Sub-total, non United States
    125,050       207,780       (28,040 )     304,790       29.4 %
 
                                       
Worldwide including United States (1)
    54,251       31,062       (2,287 )     83,026       8.0 %
Marine and Aerospace (2)
    145,526       177,298       (2,381 )     320,443       31.0 %
 
                             
Total
  $ 609,686     $ 463,033     $ (37,795 )   $ 1,034,924       100.0 %
 
                             

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                         
    Six months ended June 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 260,193     $ 37,078     $ (16,384 )   $ 280,887       31.1 %
 
                                       
Worldwide excluding United States (1)
    26,541       117,236             143,777       15.9 %
Europe
    39,734       31,010             70,744       7.8 %
Latin America and Caribbean
    5,635       15,527             21,162       2.3 %
Japan
    9,448       2,898             12,346       1.4 %
Canada
          5,715             5,715       0.6 %
 
                             
Sub-total, non United States
    81,358       172,386             253,744       28.0 %
 
                                       
Worldwide including United States (1)
    64,912       37,272             102,184       11.3 %
Marine and Aerospace (2)
    112,406       152,292             264,698       29.6 %
 
                             
Total
  $ 518,869     $ 399,028     $ (16,384 )   $ 901,513       100.0 %
 
                             
 
(1)   Represents risks in two or more geographic zones.
 
(2)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following is a discussion and analysis of the Company’s consolidated results of operations for the three and six months ended June 30, 2009 and 2008 and the Company’s consolidated financial condition and liquidity and capital resources at June 30, 2009 and December 31, 2008. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2008, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
     The Company was formed on October 19, 2005 and completed the acquisition of Talbot Holdings Ltd. (“Talbot”) on July 2, 2007. For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Executive Overview
     The Company underwrites from two distinct global operating subsidiaries, Validus Re and Talbot. Validus Re, the Company’s principal reinsurance operating subsidiary, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating subsidiary, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd’s of London (“Lloyd’s”) which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yachts and onshore energy business on behalf of the Talbot syndicate and others.
     The Company’s strategy is to concentrate primarily on short-tail risks, which is an area where management believes current prices and terms provide an attractive risk adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
     On July 9, 2009, the Company, Validus Ltd. (a wholly owned subsidiary of the Company) and IPC Holdings, Ltd. (“IPC”) entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”), pursuant to which, subject to the terms and conditions therein, Validus Ltd. will amalgamate with IPC (the “Amalgamation”). After the effective time of the Amalgamation, the IPC’s shareholders will have the right to receive 0.9727 the Company’s voting common shares, par value $0.175 per share, $7.50 in cash, less any applicable withholding tax and without interest, and cash in lieu of fractional shares in exchange for each common share of IPC they hold, unless they exercise appraisal rights.
     The closing of the Amalgamation is subject to customary closing conditions, including the Company and IPC shareholder approvals. Aquiline Capital Partners LLC, Vestar Capital Partners, and New Mountain Capital, LLC, which collectively owned approximately 38% of the Company’s outstanding voting common shares as of July 27, 2009, have agreed to vote in favor of the issuance of the Company’s shares in connection with the transaction. Upon closing of the transaction, the Company’s current shareholders will own approximately 62% of the combined company on a fully diluted basis, with IPC shareholders owning approximately 38%.
     The boards of directors of both the Company and IPC have adopted the Amalgamation Agreement, and have deemed it fair, advisable and in the best interests of their respective companies and shareholders to enter into the Amalgamation Agreement and to consummate the transactions contemplated thereby.

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     The Amalgamation Agreement contains specified termination rights for the parties. The Amalgamation Agreement also provides that, if the Amalgamation Agreement is terminated under certain circumstances, the Company will be required to pay IPC a termination fee of $16 million or IPC will be required to pay the Company a termination fee of $16 million.
     On the same day as the execution and delivery of the Amalgamation Agreement, (1) IPC paid to Max Capital Ltd. (“Max”) $50 million in respect of the termination fee under its amalgamation agreement with Max, and (2) the Company paid to IPC $50 million in respect of and in reliance upon such payment by IPC to Max. In certain circumstances more fully described in the Amalgamation Agreement, IPC will be required to repay such amount to the Company in the event the Amalgamation Agreement is terminated.
     A copy of the Amalgamation Agreement is referenced as Exhibit 10.1 hereto and is incorporated herein by reference. The description herein of the Amalgamation Agreement and the transactions contemplated thereby is not complete and is qualified in its entirety by reference to Amalgamation Agreement.
     The Amalgamation Agreement has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company, Validus Ltd., IPC or any of their respective subsidiaries or affiliates. The representations, warranties and covenants contained in the Amalgamation Agreement were made only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Amalgamation Agreement; may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Amalgamation Agreement instead of establishing these matters as facts (such disclosures include information that has been included in IPC’s and the Company’s public disclosures, as well as additional non-public information); and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors are not third party beneficiaries under the Amalgamation Agreement (except for the right to receive the transaction consideration from and after the consummation of the Amalgamation) and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of IPC, the Company or Validus Ltd. or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Amalgamation Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.
     In connection with the signing of the Amalgamation Agreement, the Company has withdrawn and terminated its previously announced exchange offer for all of the outstanding common shares of IPC and has instructed BNY Mellon Shareowner Services to promptly return all IPC common shares previously tendered to the Company. Additionally, the Company has terminated its solicitation efforts in connection with its other previously announced alternative steps to complete a transaction with IPC, including a scheme of arrangement and calling of a special meeting of IPC shareholders.
     On August 6, 2009, the Company filed with the SEC and announced that it will begin mailing, a joint proxy statement/prospectus in connection with the Amalgamation. The Company’s special general meeting of shareholders will be held on September 4, 2009. The Company expects the Amalgamation to close promptly following the receipt of the Company’s and IPC’s shareholder approvals, subject to the satisfaction or waiver of all closing conditions.
Business Outlook and Trends
     The Company was formed in October 2005 in response to the supply/demand imbalance resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed substantial increases in premium rates in 2006 compared to 2005 levels. During the years ended December 31, 2007 and 2008, the Company had experienced increased competition in most lines of business. Capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers has increased the supply of insurance and reinsurance which has resulted in a softening of rates in most lines. However, during 2008, the insurance and reinsurance industry incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global financial crisis.
     In the wake of these events, the January 2009 renewal season saw decreased competition and increased premium rates due to relatively scarce capital and increased demand. During 2009, the Company observed reinsurance

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demand stabilization and modest increases in credit market liquidity. The July 2009 renewal season continued to show notable rate increases as compared to the July 2008 renewal season. Validus Re gross premiums written at January 1, 2009 grew by 26.0% from the prior year and for the six month period ended June 30, 2009 Validus Re gross premiums written grew by 17.5% from the comparable period in the prior year. This increase was largely due to rate increases coupled with modest exposure growth.
Financial Measures
     The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders:
     Annualized return on average equity represents the level of net income available to shareholders generated from the average shareholders’ equity during the period. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.
                                         
    Three months ended   Six months ended   Year ended
    June 30,   June 30,   June 30,   June 30,   December 31,
    2009   2008   2009   2008   2008
Annualized return on average equity
    26.4 %     15.0 %     22.8 %     14.3 %     2.7 %
     The increases in annualized return on average equity were driven primarily by increased net income for the three and six month periods ended June 30, 2009. Net income for the three months ended June 30, 2009 increased by $61.6 million or 81.2% compared to the three months ended June 30, 2008. Net income for the six months ended June 30, 2009 increased by $90.1 million or 63.3% compared to the six months ended June 30, 2008.
     Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances.
     Diluted book value per common share is considered by management to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per common share increased by $2.30, or 9.7%, from $23.78 at December 31, 2008 to $26.08 at June 30, 2009. The increase was substantially due to earnings generated in the six months ended June 30, 2009, partially offset by dividend payments totaling $0.40 per share and per share equivalent in the period. Diluted book value per common share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book value per common share. Diluted book value per common share is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise). A reconciliation of diluted book value per common share to book value per common share is presented below in the section entitled “Non-GAAP Financial Measures.”
     Cash dividends per common share are an integral part of the value created for shareholders. The Company declared quarterly cash dividends of $0.20 per common share in each of the first two quarters of 2009. On July 28, 2009, the Company announced a quarterly cash dividend of $0.20 per each common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on September 30, 2009 to holders of record on August 20, 2009.
     Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments, and foreign exchange gains (losses). The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the three months ended June 30, 2009 and 2008 was $92.2 million and $89.6 million, respectively. Underwriting income for the six months ended

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June 30, 2009 and 2008 was $172.2 million and $141.1 million, respectively. Underwriting income is a Non-GAAP financial measure as described in detail and reconciled in the section below entitled “Underwriting Income.”
Critical Accounting Policies and Estimates
     There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements:
    Reserve for losses and loss expenses;
 
    Premiums;
 
    Reinsurance premiums ceded and reinsurance recoverable; and
 
    Investment valuation.
     Critical accounting policies and estimates are discussed further in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two segments are its significant operating subsidiaries, Validus Re and Talbot.
Results of Operations
     Validus Re commenced operations on December 16, 2005. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with U.S. GAAP and relevant SEC guidance.

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     The following table presents results of operations for the three and six ended June 30, 2009 and 2008:
                                 
    Three months ended   Three months ended   Six months ended   Six months ended
(Dollars in thousands)   June 30, 2009   June 30, 2008   June 30, 2009   June 30, 2008
Gross premiums written
  $ 425,032     $ 379,919     $ 1,034,924     $ 901,513  
Reinsurance premiums ceded
    (62,291 )     (1,399 )     (134,803 )     (86,299 )
 
               
Net premiums written
    362,741       378,520       900,121       815,214  
Change in unearned premiums
    (34,541 )     (69,222 )     (253,162 )     (214,052 )
 
               
Net premiums earned
    328,200       309,298       646,959       601,162  
 
                               
Losses and loss expenses
    124,751       122,089       256,585       262,113  
Policy acquisition costs
    64,438       56,419       125,887       113,120  
General and administrative expenses
    41,200       33,912       79,279       71,019  
Share compensation expense
    5,632       7,271       12,986       13,806  
 
               
Total underwriting expenses
    236,021       219,691       474,737       460,058  
 
                               
Underwriting income (1)
    92,179       89,607       172,222       141,104  
Net investment income
    26,963       36,435       53,735       72,478  
Other income
    1,017       1,462       1,774       2,397  
Finance (expenses)
    (10,752 )     (12,762 )     (18,475 )     (34,279 )
 
               
Operating income before taxes
    109,407       114,742       209,256       181,700  
 
                               
Income tax benefit (expense)
    976       (3,077 )     1,502       (4,506 )
 
               
 
                               
Operating income after tax
    110,383       111,665       210,758       177,194  
 
               
 
                               
Net realized gains (losses) on investments
    (2,650 )     (2,425 )     (26,071 )     5,319  
Net unrealized gains (losses) on investments
    37,249       (42,982 )     59,402       (57,959 )
Realized gain on repurchase of debentures
          8,752             8,752  
Foreign exchange gains (losses)
    8,432       911       4,232       9,090  
Transaction (expenses)
    (15,851 )           (15,851 )      
 
               
Net income after taxes
  $ 137,563     $ 75,921     $ 232,470     $ 142,396  
 
               
Comprehensive income
                               
Foreign currency translation adjustments
    3,993       10       3,797       77  
 
               
Comprehensive income
  $ 141,556     $ 75,931     $ 236,267     $ 142,473  
 
               
Selected ratios
                               
Net premiums written/ Gross premiums written
    85.3 %     99.6 %     87.0 %     90.4 %
Losses and loss expenses ratio
    38.0 %     39.5 %     39.7 %     43.6 %
Policy acquisition cost ratio
    19.6 %     18.2 %     19.5 %     18.8 %
General and administrative expense ratio
    14.3 %     13.3 %     14.3 %     14.1 %
 
               
Expense ratio
    33.9 %     31.5 %     33.8 %     32.9 %
 
               
Combined ratio
    71.9 %     71.0 %     73.5 %     76.5 %
 
               
 
(1)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) and operating income that are 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 underwriting income (loss) measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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    Three months ended   Three months ended   Six months ended   Six months ended
(Dollars in thousands)   June 30, 2009   June 30, 2008   June 30, 2009   June 30, 2008
VALIDUS RE
                               
Gross premiums written
  $ 199,560     $ 187,820     $ 609,686     $ 518,869  
Reinsurance premiums ceded
    (43,070 )     (1,208 )     (56,359 )     (24,951 )
 
               
Net premiums written
    156,490       186,612       553,327       493,918  
Change in unearned premiums
    7,207       (22,500 )     (215,183 )     (186,151 )
 
               
Net premiums earned
    163,697       164,112       338,144       307,767  
 
                               
Losses and loss expenses
    41,121       48,677       96,583       107,591  
Policy acquisition costs
    29,120       25,309       57,697       45,712  
General and administrative expenses
    14,149       9,955       27,941       19,334  
Share compensation expense
    1,548       1,597       3,220       2,823  
 
               
Total underwriting expenses
    85,938       85,538       185,441       175,460  
 
                               
Underwriting income (1)
    77,759       78,574       152,703       132,307  
 
               
 
                               
TALBOT
                               
Gross premiums written
  $ 235,113     $ 197,235     $ 463,033     $ 399,028  
Reinsurance premiums ceded
    (28,862 )     (5,327 )     (116,239 )     (77,732 )
 
               
Net premiums written
    206,251       191,908       346,794       321,296  
Change in unearned premiums
    (41,748 )     (46,722 )     (37,979 )     (27,901 )
 
               
Net premiums earned
    164,503       145,186       308,815       293,395  
 
                               
Losses and loss expenses
    83,630       73,412       160,002       154,522  
Policy acquisition costs
    36,114       31,134       69,271       67,432  
General and administrative expenses
    21,927       19,787       42,141       40,710  
Share compensation expense
    2,098       1,126       4,433       2,102  
 
               
Total underwriting expenses
    143,769       125,459       275,847       264,766  
 
               
 
                               
Underwriting income (1)
    20,734       19,727       32,968       28,629  
 
               
 
                               
CORPORATE & ELIMINATIONS
                               
Gross premiums written
  $ (9,641 )   $ (5,136 )   $ (37,795 )   $ (16,384 )
Reinsurance premiums ceded
    9,641       5,136       37,795       16,384  
 
               
Net premiums written
                       
Policy acquisition costs
    (796 )     (24 )     (1,081 )     (24 )
General and administrative expenses
    5,124       4,170       9,197       10,975  
Share compensation
    1,986       4,548       5,333       8,881  
 
               
Total underwriting expenses
    6,314       8,694       13,449       19,832  
 
                               
Underwriting income (loss) (1)
    (6,314 )     (8,694 )     (13,449 )     (19,832 )
 
               
 
                               
Total underwriting income (1)
  $ 92,179     $ 89,607     $ 172,222     $ 141,104  
 
               
 
(1)  
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed 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.”

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Three months ended June 30, 2009 compared to three months ended June 30, 2008
     Net income for the three months ended June 30, 2009 was $137.6 million compared to net income of $75.9 million for the three months ended June 30, 2008, an increase of $61.6 million or 81.2%. The primary factors driving the increase in net income were:
  Increase in net unrealized gains on investments of $80.2 million; and
 
  Increased foreign exchange gains of $7.5 million due to an increase in the value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency which resulted in foreign exchange gains of $8.4 million for the three months ended June 30, 2009, as compared gains of $0.9 million for the three months ended June 30, 2008.
 
    The items above were partially offset by the following factors:
 
  Transaction expenses of $15.9 million in relation to the proposed acquisition of and amalgamation agreement with IPC; and
 
  Decrease in net investment income of $9.5 million due to increased balances of cash and cash equivalents and lower returns on cash and fixed income investments; and
 
  Gain on repurchase of debentures of $8.8 million realized during the three months ended June 30, 2008. No such gain was realized during the three months ended June 30, 2009.
         The change in net income for the three months ended June 30, 2009 of $61.6 million is described in the following table:
                                 
    Three months ended June 30, 2009
    Increase (decrease) over the three months ended June 30, 2008
                    Corporate    
                    and other    
                    reconciling    
(Dollars in thousands)   Validus Re   Talbot   items   Total
Underwriting income
  $         (815 )   $         1,007     $         2,380     $         2,572  
Net investment income
    (4,942 )     (4,033 )     (497 )     (9,472 )
Other income
    878       (551 )     (772 )     (445 )
Finance expenses
    (389 )     2,061       338       2,010  
 
               
 
    (5,268 )     (1,516 )     1,449       (5,335 )
 
                               
Taxes
    (8 )     4,061             4,053  
 
               
 
    (5,276 )     2,545       1,449       (1,282 )
 
                               
Realized gain on repurchase of debentures
                (8,752 )     (8,752 )
Net realized (losses) gains on investments
    1,120       (1,345 )           (225 )
Net unrealized gains (losses) on investments
    59,852       20,379             80,231  
Foreign exchange (losses) gains
    2,230       5,235       56       7,521  
Transaction expenses
                (15,851 )     (15,851 )
 
               
 
                               
Net income
  $         57,926     $         26,814     $         (23,098 )   $         61,642  
 
               
Gross Premiums Written
     Gross premiums written for the three months ended June 30, 2009 were $425.0 million compared to $379.9 million for the three months ended June 30, 2008, an increase of $45.1 million or 11.9%. The increase in gross premiums written was driven primarily by the property and marine lines which increased by $38.7 million and $5.4 million, respectively. Details of gross premiums written by line of business are provided below.
                                         
    Gross premiums written  
    Three months ended     Three months ended        
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change  
Property
    $ 255,442         60.1%     $ 216,764         57.1%       17.8%
Marine
    84,431         19.9%     79,041         20.8%         6.8%
Specialty
    85,159         20.0%     84,114         22.1%         1.2%
 
                       
Total
    $ 425,032     100.0%     $ 379,919     100.0%       11.9%
 
                       

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Validus Re. Validus Re gross premiums written for the three months ended June 30, 2009 were $199.6 million compared to $187.8 million for the three months ended June 30, 2008, an increase of $11.7 million or 6.3%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Gross premiums written
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 183,898       92.1 %   $ 171,308       91.2 %     7.3 %
Marine
    3,957       2.0 %     8,750       4.7 %     (54.8 )%
Specialty
    11,705       5.9 %     7,762       4.1 %     50.8 %
 
                       
Total
  $ 199,560       100.0 %   $ 187,820       100.0 %     6.3 %
 
                       
     The increase in Validus Re gross premiums written was driven by increases in the property and specialty lines of $12.6 million and $3.9 million, respectively. The increase in the property line was due primarily to the delayed 2009 renewal of a $7.0 million proportional contract during the three months ended June 30 where the 2008 renewal occurred during the three months ended March 31. In addition, $5.1 million of additional gross premiums were written by AlphaCat Re, a Class 3 Bermuda insurance company that began writing premiums in 2009. These increases were offset by a $4.8 million decrease in the marine line due primarily to reduced gross premiums written on Gulf of Mexico exposures and fewer reinstatement premiums as compared to the three months ended June 30, 2008. Gross premiums written under the quota share and surplus treaty contracts with Talbot increased by $4.5 million as compared to the three months ended June 30, 2008. The quota share and surplus treaty contracts with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended June 30, 2009 were $235.1 million compared to $197.2 million for the three months ended June 30, 2008, an increase of $37.8 million or 19.2%. The $235.1 million of gross premiums written translated at second quarter 2008 rates of exchange would have been $249.5 million during the three months ended June 30, 2009, an increase of $52.3 million or 26.5%. Details of Talbot gross premiums written by line of business are provided below.
                                         
    Gross premiums written
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 78,769       33.5 %   $ 47,423       24.0 %     66.1 %
Marine
    82,657       35.2 %     73,126       37.1 %     13.0 %
Specialty
    73,687       31.3 %     76,686       38.9 %     (3.9 )%
 
                       
Total
  $ 235,113       100.0 %   $ 197,235       100.0 %     19.2 %
 
                       
     The increase in the property lines was due primarily to $31.2 million of gross premiums written on the Onshore Energy lines. The increase in the marine lines was due primarily to a $6.8 million increase on the Energy lines as a result of more favorable rates.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended June 30, 2009 were $62.3 million compared to $1.4 million for the three months ended June 30, 2008, an increase of $60.9 million. The increase was due primarily to a $55.2 million increase on the property lines retrocession as described below.
                                         
    Reinsurance premiums ceded
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 57,238       91.9 %   $ 2,040       145.8 %   NM
Marine
    2,633       4.2 %     793       56.7 %     232.0 %
Specialty
    2,420       3.9 %     (1,434 )     (102.5 )%     (268.8 )%
 
                       
Total
  $ 62,291       100.0 %   $ 1,399       100.0 %   NM
 
                       

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Validus Re. Validus Re reinsurance premiums ceded for the three months ended June 30, 2009 were $43.1 million compared to $1.2 million for the three months ended June 30, 2008, an increase of $41.9 million.
                                         
    Reinsurance premiums ceded
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 42,705       99.1 %   $ (1,470 )     (121.7 )%   NM  
Marine
    209       0.5 %     2,678       221.7 %     (92.2 )%
Specialty
    156       0.4 %           0.0 %   NM  
 
                       
Total
  $ 43,070       100.0 %   $ 1,208       100.0 %   NM  
 
                       
     Reinsurance premiums ceded on the property lines increased by $44.2 million, due primarily to the advanced renewal of retrocessional coverage via ultimate net loss agreements that incepted in 2008 during the three months ended September 30, 2008. These ultimate net loss agreements resulted in the recognition of $37.0 million of reinsurance premiums ceded in the three months ended June 30, 2009. The purchased retrocessional coverage includes ultimate net loss coverage that attaches at $200.0 million of onshore property losses.
Talbot. Talbot reinsurance premiums ceded for the three months ended June 30, 2009 were $28.9 million compared to $5.3 million for the three months ended June 30, 2008, an increase of $23.5 million. The increase was due primarily to increased reinsurance premiums ceded on the property lines of business.
                                         
    Reinsurance premiums ceded
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 21,758       75.3 %   $ 5,477       102.8 %     297.3 %
Marine
    4,607       16.0 %     950       17.8 %     384.9 %
Specialty
    2,497       8.7 %     (1,100 )     (20.6 )%     (327.0 )%
 
                       
Total
  $ 28,862       100.0 %   $ 5,327       100.0 %     441.8 %
 
                       
     Reinsurance premiums ceded on the property lines increased by $16.3 million, due primarily to $16.5 million of reinsurance premiums ceded on the Onshore Energy lines, as discussed above. Reinsurance premiums ceded under third party quota share and surplus treaty contracts on the property and specialty lines increased by $14.1 million and $3.3 million, respectively, as compared to the three months ended June 30, 2008. Reinsurance premiums ceded under the quota share and surplus treaty contracts with Validus Re for the three months ended June 30, 2009 were $9.6 million compared to $5.1 million for the three months ended June 30, 2008, an increase of $4.5 million. The quota share and surplus treaty contracts with Validus Re are eliminated upon consolidation.
Net Premiums Written
     Net premiums written for the three months ended June 30, 2009 were $362.7 million compared to $378.5 million for the three months ended June 30, 2008, a decrease of $15.8 million or 4.2%. The ratios of net premiums written to gross premiums written for the three months ended June 30, 2009 and 2008 were 85.3% and 99.6%, respectively. Details of net premiums written by line of business are provided below.
                                         
    Net premiums written
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 198,204       54.7 %   $ 214,724       56.7 %     (7.7 )%
Marine
    81,798       22.5 %     78,248       20.7 %     4.5 %
Specialty
    82,739       22.8 %     85,548       22.6 %     (3.3 )%
 
                       
Total
  $ 362,741       100.0 %   $ 378,520       100.0 %     (4.2 )%
 
                       
Validus Re. Validus Re net premiums written for the three months ended June 30, 2009 were $156.5 million compared to $186.6 million for the three months ended June 30, 2008, a decrease of $30.1 million or 16.1%. Details of net premiums written by line of business are provided below.

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    Net premiums written
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 141,193       90.2 %   $ 172,778       92.6 %     (18.3 )%
Marine
    3,748       2.4 %     6,072       3.3 %     (38.3 )%
Specialty
    11,549       7.4 %     7,762       4.1 %     48.8 %
 
                       
Total
  $ 156,490       100.0 %   $ 186,612       100.0 %     (16.1 )%
 
                       
     The decrease in Validus Re net premiums written was driven by a decrease in the property lines of $31.6 million. This decrease was a result primarily of the $37.0 million of reinsurance premiums ceded on the advanced renewal of retrocessional coverage via ultimate net loss agreements, offset by the gross premiums written on the renewal of a $7.0 million proportional contract, as discussed above. The ratios of net premiums written to gross premiums written were 78.4% and 99.4% for the three month periods ended June 30, 2009 and 2008, respectively.
     Talbot. Talbot net premiums written for the three months ended June 30, 2009 were $206.3 million compared to $191.9 million for the three months ended June 30, 2008, an increase of $14.3 million or 7.5%. Details of net premiums written by line of business are provided below:
                                         
                                         
    Net premiums written
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 57,011       27.6 %   $ 41,946       21.9 %     35.9 %
Marine
    78,050       37.9 %     72,176       37.6 %     8.1 %
Specialty
    71,190       34.5 %     77,786       40.5 %     (8.5 )%
 
                       
Total
  $ 206,251       100.0 %   $ 191,908       100.0 %     7.5 %
 
                       
     The increase in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written for the three month periods ended June 30, 2009 and 2008 were 87.7% and 97.3%, respectively. This decrease was due primarily to the 47.1% ratio of net premiums written to gross premiums written on the onshore energy lines for the three month period ended June 30, 2009.
Change in Unearned Premiums
     Change in unearned premiums for the three months ended June 30, 2009 was $34.5 million compared to $69.2 million for the three months ended June 30, 2008, a decrease of $34.7 million or 50.1%.
                         
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Change in gross unearned premium
  $ (57,819 )   $ (43,830 )     (31.9 )%
Change in prepaid reinsurance premium
    23,278       (25,392 )     191.7 %
 
               
Net change in unearned premium
  $ (34,541 )   $ (69,222 )     50.1 %
 
               
Validus Re. Validus Re’s change in unearned premiums for the three months ended June 30, 2009 was $(7.2) million compared to $22.5 million for the three months ended June 30, 2008, a decrease of $29.7 million or 132.0%.
 
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Change in gross unearned premium
  $ (16,316 )   $ (12,169 )     (34.1 )%
Change in prepaid reinsurance premium
    23,523       (10,331 )     327.7 %
 
               
Net change in unearned premium
  $ 7,207     $ (22,500 )     132.0 %
 
               
     The difference in gross unearned premiums reflects the benefit of earning premiums on the increased gross premiums written during the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. In respect of prepaid reinsurance premiums, the change was a result primarily of the advanced renewal of retrocessional coverage via ultimate net loss agreements, the majority of which is prepaid at June 30, 2009, as discussed above.

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Talbot. The Talbot change in unearned premiums for the three months ended June 30, 2009 was $41.7 million compared to $46.7 million for the three months ended June 30, 2008, a decrease of $5.0 million, or 10.7%.
                         
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Change in gross unearned premium
  $ (41,503 )   $ (31,661 )     (31.1 )%
Change in prepaid reinsurance premium
    (245 )     (15,061 )     98.4 %
 
               
Net change in unearned premium
  $ (41,748 )   $ (46,722 )     10.7 %
 
               
     The difference in gross unearned premiums arose principally from the increased gross premiums written in the Property lines, specifically Onshore Energy exposures and premiums written by Validus Reaseguros, Inc., which acts as an approved Lloyd’s coverholder for Syndicate 1183 on the property treaty lines, during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The lower change in prepaid reinsurance premiums in the three months ended June 30, 2009 is reflective of the increased amounts of Onshore Energy exposures and premiums written by Validus Reaseguros, Inc., which have increased levels of ceded reinsurance. This results in less seasonality in the ceded reinsurance and hence a small change in prepaid reinsurance for the three months ended June 30, 2009.
Net Premiums Earned
     Net premiums earned for the three months ended June 30, 2009 were $328.2 million compared to $309.3 million for the three months ended June 30, 2008, an increase of $18.9 million or 6.1%. The increase in net premiums earned was driven by increased premiums earned at Talbot of $19.3 million.
                                         
    Net premiums earned
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 143,843       43.8 %   $ 149,431       48.3 %     (3.7 )%
Marine
    100,953       30.8 %     86,794       28.1 %     16.3 %
Specialty
    83,404       25.4 %     73,073       23.6 %     14.1 %
 
                       
Total
  $ 328,200       100.0 %   $ 309,298       100.0 %     6.1 %
 
                       
Validus Re. Validus Re net premiums earned for the three months ended June 30, 2009 were $163.7 million compared to $164.1 million for the three months ended June 30, 2008, a decrease of $0.4 million, or 0.3%.
                                         
    Net premiums earned
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 110,185       67.3 %   $ 120,916       73.7 %     (8.9 )%
Marine
    33,584       20.5 %     26,403       16.1 %     27.2 %
Specialty
    19,928       12.2 %     16,793       10.2 %     18.7 %
 
                       
Total
  $ 163,697       100.0 %   $ 164,112       100.0 %     (0.3 )%
 
                       
     The decrease in Validus Re net premiums earned was driven by decreases in the property lines of $10.7 million. $6.2 million of this decrease was a result of the advanced renewal of retrocessional coverage via ultimate net loss agreements, as discussed above. This decrease was offset by an increase in the marine lines of $7.2 million, due partially to premium adjustments on proportional contracts.
Talbot. Talbot net premiums earned for the three months ended June 30, 2009 were $164.5 million compared to $145.2 million for the three months ended June 30, 2008, an increase of $19.3 million or 13.3%.
                                         
    Net premiums earned
    Three months ended   Three months ended    
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 33,658       20.4 %   $ 28,515       19.6 %     18.0 %
Marine
    67,369       41.0 %     60,391       41.6 %     11.6 %
Specialty
    63,476       38.6 %     56,280       38.8 %     12.8 %
 
                       
Total
  $ 164,503       100.0 %   $ 145,186       100.0 %     13.3 %
 
                       

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     The increase in net premiums earned is due primarily to the increased levels of net premiums written across all major business lines over the twelve months ended June 30, 2009, as compared with the twelve months ended June 30, 2008.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended June 30, 2009 were $124.8 million compared to $122.1 million for the three months ended June 30, 2008, an increase of $2.7 million or 2.2%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended June 30, 2009 and 2008 were 38.0% and 39.5%, respectively. Details of loss ratios by line of business are provided below.
                         
    Three months ended   Three months ended   Percentage point
    June 30, 2009   June 30, 2008   change
Property
    16.8 %     33.0 %     (16.2 )
Marine
    48.6 %     54.1 %     (5.5 )
Specialty
    61.8 %     35.3 %     26.5  
All lines
    38.0 %     39.5 %     (1.5 )
     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended June 30, 2009:
                                 
    Three months ended June 30, 2009
(Dollars in thousands)   Validus Re   Talbot   Eliminations   Total
Gross reserves at period beginning
  $ 527,475     $ 810,143     $ (18,886 )   $ 1,318,732  
Losses recoverable at period beginning
    (78,687 )     (144,396 )     18,886       (204,197 )
 
               
Net reserves at period beginning
    448,788       665,747       -       1,114,535  
 
                               
Incurred losses - current year
    44,080       93,896       -       137,976  
Incurred losses - change in prior accident years
    (2,959 )     (10,266 )     -       (13,225 )
 
               
Incurred losses
    41,121       83,630       -       124,751  
 
                               
Paid losses
    (65,440 )     (59,946 )     -       (125,386 )
Foreign exchange
    3,073       25,296       -       28,369  
 
               
Net reserves at period end
    427,542       714,727       -       1,142,269  
Losses recoverable at period end
    61,798       130,810       (22,942 )     169,666  
 
               
Gross reserves at period end
  $ 489,340     $ 845,537     $ (22,942 )   $ 1,311,935  
 
               
     The amount recorded represents management’s best estimate of expected losses and loss expenses on premiums earned. Favorable loss development on prior years totaled $13.2 million. The $10.3 million favorable loss reserve development in the Talbot segment is due primarily to $7.9 million and $4.5 million of favorable development on the property and marine lines, respectively. Favorable loss reserve development benefitted the Company’s loss ratio by 4.0 percentage points for the three months ended June 30, 2009. During the three months ended June 30, 2009, the Company incurred $11.0 million of losses, or 3.4 percentage points of the loss ratio, attributable to a commercial flight loss. During the three months ended June 30, 2008, the Company incurred $10.2 million of losses attributable to certain U.S. storm and flood loss events, which represented 3.3 percentage points of the loss ratio.
     Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation of recent losses. The Company’s actual ultimate net loss may vary materially from estimates.
     At June 30, 2009 and 2008, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the critical accounting policies and estimates as discussed in Item 7, Management’s Discussion and Analysis of Results of Operations and Financial Condition in the Company’s Annual Report on

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Form 10-K for the year ended December 31, 2008. The Company did not make any significant changes in the assumptions or methodology used in its reserving process during the three months ended June 30, 2009.
                         
    At June 30, 2009
                    Total gross
                    reserve for losses
(Dollars in thousands)   Gross case reserves   Gross IBNR   and loss expenses
Property
  $ 244,065     $ 183,234     $ 427,299  
Marine
    365,388       221,276       586,664  
Specialty
    108,461       189,511       297,972  
 
           
Total
  $ 717,914     $ 594,021     $ 1,311,935  
 
           
                         
    At June 30, 2009
                    Total net reserve
                    for losses and
(Dollars in thousands)   Net case reserves   Net IBNR   loss expenses
Property
  $ 241,625     $ 171,702     $ 413,327  
Marine
    264,169       203,171       467,340  
Specialty
    98,292       163,310       261,602  
 
           
Total
  $ 604,086     $ 538,183     $ 1,142,269  
 
           
Validus Re. Validus Re losses and loss expenses for the three months ended June 30, 2009 were $41.1 million compared to $48.7 million for the three months ended June 30, 2008, a decrease of $7.6 million or 15.5%. Validus Re net paid losses for the three months ended June 30, 2009 were $65.4 million compared to $28.5 million for the three months ended June 30, 2008, an increase of $36.9 million or 129.5%, primarily as a result of losses paid on Hurricane Ike. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 25.1% and 29.7% for the three months ended June 30, 2009 and 2008, respectively. During the three months ended June 30, 2009, Validus Re did not experience any notable loss events. During the three months ended June 30, 2008, Validus Re incurred $10.2 million of losses attributable to certain U.S. storm and flood loss events, which represented 6.2 percentage points of the loss ratio. Details of loss ratios by line of business and period of incurrence are provided below.
                         
    Three months ended June 30    
                    Percentage
    2009   2008   point change
Property - current year
    21.2 %     29.0 %     (7.8 )
Property - change in prior accident years
    (2.7 )%     (3.0 )%     0.3  
 
           
Property - loss ratio
    18.5 %     26.0 %     (7.5 )
 
                       
Marine - current year
    39.7 %     31.0 %     8.7  
Marine - change in prior accident years
    0.0 %     15.3 %     (15.3 )
 
           
Marine - loss ratio
    39.7 %     46.3 %     (6.6 )
 
                       
Specialty - current year
    37.1 %     35.4 %     1.7  
Specialty - change in prior accident years
    0.0 %     (5.1 )%     5.1  
 
           
Specialty - loss ratio
    37.1 %     30.3 %     6.8  
 
                       
All lines - current year
    26.9 %     30.0 %     (3.1 )
All lines - change in prior accident years
    (1.8 )%     (0.3 )%     (1.5 )
 
           
All lines - loss ratio
    25.1 %     29.7 %     (4.6 )
     For the three months ended June 30, 2009, the property lines include $23.4 million related to current year losses and $3.0 million of favorable development relating to prior accident years. During the three months ended June 30,

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2008, Validus Re’s property lines incurred $10.2 million of losses attributable to certain U.S. storm and flood loss events, which represented 8.4 percentage points of the property lines loss ratio. Validus Re property line loss ratios, excluding prior year development and loss events identified above, for the three months ended June 30, 2009 and 2008 were 21.2% and 20.6%, respectively.
     For the three months ended June 30, 2009, the marine lines include $13.3 million related to current year losses. Validus Re marine line loss ratios, excluding prior year development, for the three months ended June 30, 2009 and 2008 were 39.7% and 30.1%, respectively.
     For the three months ended June 30, 2009, the specialty lines include $7.4 million related to current year losses. Validus Re specialty lines loss ratios, excluding prior year development and the loss event identified above, for the three months ended June 30, 2009 and 2008 were 37.1% and 35.4%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended June 30, 2009 were $83.6 million compared to $73.4 million for the three months ended June 30, 2008, an increase of $10.2 million, or 13.9%. The loss ratio was 50.9% and 50.6% for the three months ended June 30, 2009 and 2008, respectively. During the three months ended June 30, 2009, Talbot incurred $8.3 million, or 5.0 percentage points of the loss ratio, attributable to a commercial flight loss. During the three months ended June 30, 2009, $93.9 million of losses and loss expenses related to current year losses and $10.3 million related to favorable development of prior accident years. Details of loss ratios by line of business and calendar period are provided below.
                         
    Three months ended June 30   Percentage
    2009   2008   point change
Property — current year
    34.5 %     61.8 %     (27.3 )
Property — change in prior accident years
    (23.5 )%     1.2 %     (24.7 )
 
                       
Property — loss ratio
    11.0 %     63.0 %     (52.0 )
 
                       
Marine — current year
    59.8 %     63.4 %     (3.6 )
Marine — change in prior accident years
    (6.7 )%     (5.9 )%     (0.8 )
 
                       
Marine — loss ratio
    53.1 %     57.5 %     (4.4 )
 
                       
Specialty — current year
    66.1 %     49.9 %     16.2  
Specialty — change in prior accident years
    3.5 %     (13.1 )%     16.6  
 
                       
Specialty — loss ratio
    69.6 %     36.8 %     32.8  
 
                       
All lines — current year
    57.1 %     57.9 %     (0.8 )
All lines — change in prior accident years
    (6.2 )%     (7.3 )%     1.1  
 
                       
All lines - loss ratio
    50.9 %     50.6 %     0.3  
     For the three months ended June 30, 2009, the property lines include $11.6 million related to current year losses and $7.9 million of favorable development relating to prior accident years. This favorable development is primarily attributable to lower than expected claims development together with $2.3 million of favorable development relating to Hurricane Katrina. Talbot property line loss ratio, excluding prior year development for the three months ended June 30, 2009 and 2008 were 34.5% and 61.8%, respectively. This decrease was due to significant number of non-catastrophe events in the three months ended June 30, 2008 compared to the same period in 2009.
     For the three months ended June 30, 2009, the marine lines include $40.3 million related to current year losses and $4.5 million of favorable development relating to prior accident years. This favorable development is primarily attributable to the Energy line. Talbot marine line loss ratios, excluding prior year development, for the three months ended June 30, 2009 and 2008 were 59.8% and 63.4%, respectively.
     For the three months ended June 30, 2009, the specialty lines include $42.0 million relating to current year losses and $2.2 million due to adverse development on prior accident years. For the three months ended June 30, 2009, Talbot’s specialty lines incurred $8.3 million, or 13.1 percentage points of the specialty lines loss ratio, attributable to a commercial flight loss. Talbot specialty lines loss ratios, excluding prior year development and the

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loss events identified above, for the three months ended June 30, 2009 and 2008 were 53.1% and 49.9%, respectively.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended June 30, 2009 were $64.4 million compared to $56.4 million for the three months ended June 30, 2008, an increase of $8.0 million or 14.2%. Policy acquisition costs as a percent of net premiums earned for the three months ended June 30, 2009 and 2008 were 19.6% and 18.2%, respectively.
                                         
    Policy acquisition costs
    Three months ended   Three months ended      
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 22,796       35.4 %   $ 24,623       43.6 %     (7.4 )%
Marine
    23,590       36.6 %     16,464       29.2 %     43.3 %
Specialty
    18,052       28.0 %     15,332       27.2 %     17.7 %
 
                       
Total
  $ 64,438       100.0 %   $ 56,419       100.0 %     14.2 %
 
                       
Validus Re. Validus Re policy acquisition costs for the three months ended June 30, 2009 were $29.1 million compared to $25.3 million for the three months ended June 30, 2008, an increase of $3.8 million or 15.1%.
                                         
    Policy acquisition costs
    Three months ended   Three months ended      
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 18,052       62.0 %   $ 19,430       76.7 %     (7.1 )%
Marine
    8,290       28.5 %     3,356       13.3 %     147.0 %
Specialty
    2,778       9.5 %     2,523       10.0 %     10.1 %
 
                       
Total
  $ 29,120       100.0 %   $ 25,309       100.0 %     15.1 %
 
                       
     Policy acquisition costs include brokerage, commission and excise tax and are generally driven by contract terms and are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Policy acquisition costs as a percent of net premiums earned for the three months ended June 30, 2009 and 2008 were 17.8% and 15.4%, respectively. The policy acquisition ratio increased largely due to a 12.0 percentage point increase on the marine policy acquisition ratio. The increase in the marine policy acquisition ratio was due to an increased portion of gross premiums written being earned on proportional contracts, which generally experience higher acquisition costs.
Talbot. Talbot policy acquisition costs for the three months ended June 30, 2009 were $36.1 million compared to $31.1 million for the three months ended June 30, 2008, an increase of $5.0 million or 16.0%.
                                         
    Policy acquisition costs
    Three months ended   Three months ended      
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Property
  $ 5,540       15.3 %   $ 5,217       16.8 %     6.2 %
Marine
    15,300       42.4 %     13,108       42.1 %     16.7 %
Specialty
    15,274       42.3 %     12,809       41.1 %     19.2 %
 
                       
Total
  $ 36,114       100.0 %   $ 31,134       100.0 %     16.0 %
 
                       
     Policy acquisition costs as a percent of net premiums earned were 22.0% and 21.4%, respectively, for the three month periods ended June 30, 2009 and 2008.
General and Administrative Expenses
     General and administrative expenses for the three months ended June 30, 2009 were $41.2 million compared to $33.9 million for the three months ended June 30, 2008, an increase of $7.3 million or 21.5%. The increase was a result of increased expenses in both the Validus Re and Talbot segments.

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    General and administrative expenses
    Three months ended   Three months ended      
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Validus Re
  $ 14,149       34.4 %   $ 9,955       29.4 %     42.1 %
Talbot
    21,927       53.2 %     19,787       58.3 %     10.8 %
Corporate & Eliminations
    5,124       12.4 %     4,170       12.3 %     22.9 %
 
                       
Total
  $ 41,200       100.0 %   $ 33,912       100.0 %     21.5 %
 
                       
     General and administrative expense ratios for the three month periods ended June 30, 2009 and 2008 were 14.3% and 13.3%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.
                                 
    Three months ended   Three months ended
    June 30, 2009   June 30, 2008
            Expenses as %           Expenses as %
        of Net Earned       of Net Earned
(Dollars in thousands)   Expenses   Premiums   Expenses   Premiums
General and Administrative
  $ 41,200       12.6 %   $ 33,912       10.9 %
Share Compensation
    5,632       1.7 %     7,271       2.4 %
 
               
Total
  $ 46,832       14.3 %   $ 41,183       13.3 %
 
               
     General and administrative expenses of $41.2 million in the three months ended June 30, 2009 represents 12.6 percentage points of the expense ratio. Share compensation expense is discussed in the following section.
Validus Re. Validus Re general and administrative expenses for the three months ended June 30, 2009 were $14.1 million compared to $10.0 million for the three months ended June 30, 2008, an increase of $4.2 million or 42.1%. General and administrative expenses have increased primarily as a result of the increase in staff to 105 at June 30, 2009 from 80 at June 30, 2008. General and administrative expenses are generally comprised of salaries and benefits, professional fees, rent and office expenses. Validus Re’s general and administrative expenses as a percent of net premiums earned for the three month periods ended June 30, 2009 and 2008 were 8.7% and 6.1%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended June 30, 2009 were $21.9 million compared to $19.8 million for the three months ended June 30, 2008, an increase of $2.1 million or 10.8%. General and administrative expenses have increased primarily as a result of the increase in staff to 212 at June 30, 2009 from 167 at June 30, 2008 and expenses related to the new Onshore Energy and Aviation underwriting teams. Talbot’s general and administrative expenses as a percent of net premiums earned for the three month periods ended June 30, 2009 and 2008 were 13.3% and 13.6%, respectively.
Corporate & Eliminations. Corporate general and administrative expenses for the three months ended June 30, 2009 were $5.1 million compared to $4.2 million for the three months ended June 30, 2008, an increase of $1.0 million or 22.9%. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other cost relating to the Company as a whole.
Share Compensation Expense
     Share compensation expense for the three months ended June 30, 2009 was $5.6 million compared to $7.3 million for the three months ended June 30, 2008, a decrease of $1.6 million or 22.5%. This expense is non-cash and has no net effect on total shareholders’ equity, as it is balanced by an increase in additional paid-in capital.
                                         
    Share compensation expense
    Three months ended   Three months ended      
(Dollars in thousands)   June 30, 2009   June 30, 2008   % Change
Validus Re
  $ 1,548       27.4 %   $ 1,597       22.0 %     (3.1 )%
Talbot
    2,098       37.3 %     1,126       15.5 %     86.3 %
Corporate & Eliminations
    1,986       35.3 %     4,548       62.5 %     (56.3 )%
 
                       
Total
  $ 5,632       100.0 %   $ 7,271       100.0 %     (22.5 )%
 
                       

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     Share compensation expense of $5.6 million in the three months ended June 30, 2009 represents 1.7 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expense for the three months ended June 30, 2009 was $1.5 million compared to $1.6 million for the three months ended June 30, 2008. Share compensation expense as a percent of net premiums earned for the three month periods ended June 30, 2009 and 2008 were 0.9% and 1.0%, respectively.
Talbot. Talbot share compensation expense for the three months ended June 30, 2009 was $2.1 million and $1.1 million for the three months ended June 30, 2008. The increase was due to the impact of grants made during 2008. Share compensation expense as a percent of net premiums earned for the three month periods ended June 30, 2009 and June 30, 2008 was 1.3% and 0.8%, respectively.
Corporate & Eliminations. Corporate share compensation expense for the three months ended June 30, 2009 was $2.0 million compared to $4.5 million for the three months ended June 30, 2008, a decrease of $2.6 million or 56.3%. This decrease was due primarily to several share award issuances with vesting periods greater than one year that vested during the year ended December 31, 2008 and therefore had no further amortization expense during the three months ended June 30, 2009.
Selected Ratios
     The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The net loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended June 30, 2009 and 2008.
                         
    Three months ended   Three months ended   Percentage
    June 30, 2009   June 30, 2008   point change
Losses and loss expenses ratio
    38.0 %     39.5 %     (1.5 )
Policy acquisition cost ratio
    19.6 %     18.2 %     1.4  
General and administrative expense ratio(1)
    14.3 %     13.3 %     1.0  
 
                       
Expense ratio
    33.9 %     31.5 %     2.4  
 
                       
Combined ratio
    71.9 %     71.0 %     0.9  
 
                       
 
       (1)     Includes general and administrative expense and share compensation expense
                         
    Three months ended   Three months ended   Percentage
Validus Re   June 30, 2009   June 30, 2008   point change
Losses and loss expenses ratio
    25.1 %     29.7 %     (4.6 )
Policy acquisition cost ratio
    17.8 %     15.4 %     2.4  
General and administrative expense ratio
    9.6 %     7.0 %     2.6  
 
                       
Expense ratio
    27.4 %     22.4 %     5.0  
 
                       
Combined ratio
    52.5 %     52.1 %     0.4  
 
                       
 
    Three months ended   Three months ended   Percentage
Talbot   June 30, 2009   June 30, 2008   point change
Losses and loss expenses ratio
    50.8 %     50.6 %     0.2  
Policy acquisition cost ratio
    22.0 %     21.4 %     0.6  
General and administrative expense ratio
    14.6 %     14.4 %     0.2  
 
                       
Expense ratio
    36.6 %     35.8 %     0.6  
 
                       
Combined ratio
    87.4 %     86.4 %     1.0  
 
                       

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Underwriting Income
     Underwriting income for the three months ended June 30, 2009 was $92.2 million compared to income of $89.6 million for the three months ended June 30, 2008, a change of $2.6 million or 2.9%.
                                         
    Three months ended   % of Sub    Three months ended   % of Sub     
(Dollars in thousands)   June 30, 2009   total   June 30, 2008   total   % Change
Validus Re
  $ 77,759       78.9 %   $ 78,574       79.9 %     (1.0 )%
Talbot
    20,734       21.1 %     19,727       20.1 %     5.1 %
 
                       
Sub total
    98,493       100.0 %     98,301       100.0 %     0.2 %
 
                       
Corporate & Eliminations
    (6,314 )             (8,694 )             (27.4 )%
 
                               
Total
  $ 92,179             $ 89,607               2.9 %
 
                               
     The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP measure as previously defined. Underwriting income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of net investment income, other income, finance expenses, transaction expenses, realized gain on repurchase of debentures, net realized and unrealized gains (losses) on investments and foreign exchange  gains (losses).
                 
    Three months ended   Three months ended
(Dollars in thousands)   June 30, 2009   June 30, 2008
Underwriting income
  $ 92,179     $ 89,607  
Net investment income
    26,963       36,435  
Other income
    1,017       1,462  
Finance expenses
    (10,752 )     (12,762 )
Transaction expenses
    (15,851 )      
Realized gain on repurchase of debentures
          8,752  
Net realized  gains (losses) on investments
    (2,650 )     (2,425 )
Net unrealized gains (losses) on investments
    37,249       (42,982 )
Foreign exchange  gains (losses)
    8,432       911  
 
       
Net income before taxes
  $ 136,587     $ 78,998  
 
       
     Underwriting income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.
     The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of underwriting income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its underwriting business and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results of operations in a manner similar to how management analyzes the Company’s underlying business performance. The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the bonus component of the total annual incentive compensation.

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     Underwriting income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of underwriting income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides more prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of underwriting income to net income.
Net Investment Income
     Net investment income for the three months ended June 30, 2009 was $27.0 million compared to $36.4 million for the three months ended June 30, 2008, a decrease of $9.4 million or 26.0%. Net investment income decreased as a result of reduced market yields and higher quarterly average cash balances. Net investment income is comprised of accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended June 30, 2009 and 2008 are as presented below.
                         
    Three months ended   Three months ended    
(Dollars in thousands)
  June 30, 2009   June 30, 2008   % Change
Fixed maturities and short-term investments
  $ 26,395     $ 34,519       (23.5 )%
Securities lending income
    173       455       (62.0 )%
Cash and cash equivalents
    1,120       2,378       (52.9 )%
 
               
Total investment income
    27,688       37,352       (25.9 )%
Investment expenses
    (726 )     (917 )     20.8 %
 
               
Net investment income
  $ 26,962     $ 36,435       (26.0 )%
 
               
     Investment management fees incurred relate to BlackRock Financial Management, Inc. (“BlackRock”) and Goldman Sachs Asset Management L.P. and its affiliates (“GSAM”). Each of Merrill Lynch & Co, Inc. (“Merrill Lynch”), a wholly owned subsidiary of Bank of America Corp., and Goldman Sachs are major shareholders of the Company. BlackRock is considered a related party due to its merger in February 2006 with Merrill Lynch Investment Managers. Investment management fees earned by BlackRock for the three month periods ended June 30, 2009 and June 30, 2008 were $0.5 million and $0.5 million, respectively. Investment management fees earned by GSAM for the three month periods ended June 30, 2009 and June 30, 2008 were $0.4 million and $0.4 million, respectively. Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties.
     Annualized effective investment yield is based on the weighted average investments held calculated on a simple period average and excludes net unrealized gains (losses), foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances. The Company’s annualized effective investment yield was 3.08% and 4.50% for the three months ended June 30, 2009 and 2008, respectively, and the average duration at June 30, 2009 was 1.9 years (December 31, 2008 — 1.8 years).
Finance Expenses
     Finance expenses for the three months ended June 30, 2009 were $10.8 million compared to $12.8 million for the three months ended June 30, 2008, a decrease of $2.0 million or 15.7%. The decrease was primarily a result of a $2.1 million decrease in Talbot third party FAL expense.
     Finance expenses also include the amortization of debt offering costs and discounts and fees related to our credit facilities.

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    Three months ended   Three months ended    
(Dollars in thousands)
  June 30, 2009   June 30, 2008   % Change
9.069% Junior Subordinated Deferrable Debentures
  $ 3,589     $ 3,589       -  
8.480% Junior Subordinated Deferrable Debentures
    3,348       3,650       (8.3 )%
Credit facilities
    476       123       287.0 %
Talbot FAL facilities
    42       62       (32.3 )%
Talbot other interest
    -       (19 )   NM
Talbot third party FAL facility
    3,297       5,357       (38.5 )%
 
               
Total
  $ 10,752     $ 12,762       (15.7 )%
 
               
 
NM:   Not Meaningful
     Capital in Lloyd’s entities, whether personal or corporate, is required to be set annually for the prospective year and held by Lloyd’s in trust (“Funds at Lloyd’s” or “FAL”). In underwriting years up to and including 2007, Talbot’s FAL has been provided both by Talbot and by third parties, thereafter Talbot’s FAL has been provided exclusively by the Company. Because the third party FAL providers remain “on risk” until each year of account that their support closes (normally after three years). Talbot must retain third party FAL even if a third party FAL provider has ceased to support the active underwriting year. This is achieved by placing such FAL in escrow outside Lloyd’s. Thus the total FAL facility available to the Company is the total FAL for active and prior underwriting years, although the Company can only apply specific FAL against losses incurred by an underwriting year that such FAL is contracted to support.
     For each year of account up to and including the 2007 year of account, between 30% and 40% of an amount equivalent to each underwriting years’ profit is payable to Talbot third party FAL providers. However, some of these costs are fixed. There are no FAL finance charges related to the 2008 and 2009 years of account as there were no third party FAL providers in those periods.
     The FAL finance charges relate to total syndicate profit (underwriting income, investment income and realized and unrealized capital gains and losses). FAL finance charges and total syndicate profits are analyzed by underwriting year of account as follows:
                                                 
    Three months ended June 30
                    Total Syndicate   FAL Finance Charges as
    FAL Finance Charges   Profit   % of Total Syndicate Profit
Underwriting Year of Account   2009   2008   2009   2008   2009   2008 (1)
(Dollars in thousands)
                                               
2006 (1)
  $ -     $ 1,129     $ -     $ 3,384     NM     33.4 %
2007
    3,297       4,228       8,589       14,120       38.4 %     29.9 %
2008
    -       -       8,502       (5,128 )   NM   NM
2009
    -       -       3,524       -     NM   NM
 
                               
Total
  $ 3,297     $ 5,357     $ 20,615     $ 12,376       16.0 %     43.3 %
 
                               
 
                                               
Percentage excluding years in deficit                             16.0 %     30.6 %
  (1)   The earliest year of account includes the run-off of prior (closed) years of account.
 
  NM:    Not meaningful
   FAL finance charges are based on syndicate profit but include fixed elements. FAL finance charges for the three months ended June 30, 2009 were $3.3 million compared to $5.4 million for the three months ended June 30, 2008, a decrease of $2.1 million. This decrease was due to the absence of FAL finance charges related to the 2006 year of account, which is now closed.
     Total syndicate profit, as set out in the table below, is reconciled to the Talbot segment net income by the addition or subtraction of items noted below.

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    Three months ended June 30
(Dollars in thousands)
  2009   2008
Total syndicate profit
  $ 20,615     $ 12,376  
FAL Finance expenses
    (3,297 )     (5,357 )
Managing agent’s fee (1)
    2,342       2,414  
Managing agent’s profit commission (2)
    2,961       3,068  
Investment income (3)
    4,103       2,589  
Other segment operating income (expenses), net
    9,909       (2,194 )
Share compensation (expenses)
    (2,098 )     (1,114 )
Intangible amortization (expenses)
    (1,041 )     (1,041 )
Income tax benefit (expense)
    1,004       (3,057 )
 
       
Talbot segment net income
  $ 34,498     $ 7,684  
 
       
 
  (1)   1.5% of syndicate capacity; corresponding syndicate expense reflected in total syndicate profit, above.
 
  (2)   15.0% of syndicate profit; corresponding syndicate expense reflected in total syndicate profit, above.
 
  (3)   On FAL and on non-syndicate cash balances.
Net Realized (Losses) Gains on Investments
     Net realized losses on investments for the three months ended June 30, 2009 were $(2.7) million compared to losses of $(2.4) million for the three months ended June 30, 2008.
Net Unrealized Gains (Losses) on Investments
     Net unrealized gains on investments for the three months ended June 30, 2009 were $37.2 million compared to losses of $(43.0) million for the three months ended June 30, 2008. The net unrealized gains in the three months ended June 30, 2009 resulted primarily from unrealized gains in non-agency RMBS and corporate bond sectors, partially offset by unrealized losses in U.S. government and government agency securities.
     The Company early adopted FAS 157 and the FAS 159 Fair Value Option on January 1, 2007 for its investment portfolio. As a result, for the three months ended June 30, 2009 and 2008, net unrealized gains on investments are recorded as a component of net income. Talbot also adopted FAS 157 and the FAS 159 Fair Value Option for its investment portfolio upon acquisition by the Company on July 2, 2007. The Company adopted FSP FAS 157-3 during the year ended December 31, 2008 and FSP FAS 157-4 in the three months ended June 30, 2009. Consistent with these statements, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Certain non-Agency RMBS securities were identified as trading in inactive markets. The change in fair value for the identified non-Agency RMBS securities was a $5.4 million decrease in net unrealized loss on investments for the three months ended June 30, 2009. Further details are provided in the Investments section below.
Other Income
     Other income for the three months ended June 30, 2009 was $1.0 million compared to $1.5 million for the three months ended June 30, 2008, a decrease of $0.4 million or 30.4%.
Foreign Exchange Gains (Losses)
     Foreign exchange gains for the three month period ended June 30, 2009 were $8.4 million compared to $0.9 million for the three months ended June 30, 2008, a change of $7.5 million. The foreign exchange gains during the three months ended June 30, 2009 were due primarily to an increase in the value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency. The Talbot segment accounted for $6.5 million of this gain. The British pound sterling to U.S. dollar exchange rates were 1.43 and 1.65 at Mach 31, 2009 and June 30, 2009, respectively. Certain premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect financial results in the future.
     At June 30, 2009, Talbot’s balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $110.0 million and $23.0 million, respectively. These balances consisted of British pounds sterling and Canadian dollars of $80.5 million and $7.2 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic

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exchange rates. All of Talbot’s other balance sheet items are classified as monetary items and are translated at period end exchange rates. During the three months ended June 30, 2009, this translation process resulted in foreign exchange gains that will reverse in future periods as net unearned premiums and deferred acquisition costs are earned together with gains arising from the reversal of losses incurred in previous periods. Additional foreign exchange (losses) gains may be incurred on the translation of net unearned premiums and deferred acquisition costs arising from insurance and reinsurance premiums written in future periods.
Transaction Expenses
     On July 9, 2009, the Company announced that the boards of directors of both the Company and IPC had approved a definitive amalgamation agreement. During the three months ended June 30, 2009, the Company incurred $15.9 million in relation to the proposed acquisition of and amalgamation agreement with IPC. Transaction expenses are comprised of primarily legal, corporate advisory and audit related services.
Income Tax Benefit (Expense)
     Income tax benefit for the three months ended June 30, 2009 was $1.0 million compared to an expense of $(3.1) million for the three months ended June 30, 2008, a change of $4.1 million. The income tax benefit was due to U.K. taxable losses for six months ended June 30, 2009 offsetting taxation in prior periods. These taxable losses were due primarily to Syndicate 1183’s 2008 and 2009 years of account, both of which have generated little or no profit commission revenue for Talbot’s U.K. entities. On an inception to date basis, the 2009 year of account is in an overall deficit position while the 2008 year of account only moved into surplus during the second quarter of 2009.

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     The following table presents results of operations for the three and six ended June 30, 2009 and 2008:
                                 
    Three months ended   Three months ended   Six months ended   Six months ended
(Dollars in thousands)   June 30, 2009   June 30, 2008   June 30, 2009   June 30, 2008
Gross premiums written
      $ 425,032         $ 379,919         $ 1,034,924         $ 901,513  
Reinsurance premiums ceded
    (62,291 )     (1,399 )     (134,803 )     (86,299 )
 
               
Net premiums written
    362,741       378,520       900,121       815,214  
Change in unearned premiums
    (34,541 )     (69,222 )     (253,162 )     (214,052 )
 
               
Net premiums earned
    328,200       309,298       646,959       601,162  
 
                               
Losses and loss expenses
    124,751       122,089       256,585       262,113  
Policy acquisition costs
    64,438       56,419       125,887       113,120  
General and administrative expenses
    41,200       33,912       79,279       71,019  
Share compensation expense
    5,632       7,271       12,986       13,806  
 
               
Total underwriting expenses
    236,021       219,691       474,737       460,058  
 
                               
Underwriting income (1)
    92,179       89,607       172,222       141,104  
Net investment income
    26,963       36,435       53,735       72,478  
Other income
    1,017       1,462       1,774       2,397  
Finance (expenses)
    (10,752 )     (12,762 )     (18,475 )     (34,279 )
 
               
Operating income before taxes
    109,407       114,742       209,256       181,700  
 
                               
Income tax benefit (expense)
    976       (3,077 )     1,502       (4,506 )
 
               
 
                               
Operating income after tax
    110,383       111,665       210,758       177,194  
 
               
 
                               
Net realized gains (losses) on investments
    (2,650 )     (2,425 )     (26,071 )     5,319  
Net unrealized gains (losses) on investments
    37,249       (42,982 )     59,402       (57,959 )
Realized gain on repurchase of debentures
          8,752             8,752  
Foreign exchange gains (losses)
    8,432       911       4,232       9,090  
Transaction (expenses)
    (15,851 )           (15,851 )      
 
               
Net income after taxes
      $ 137,563         $ 75,921         $ 232,470         $ 142,396  
 
               
Comprehensive income
                               
Foreign currency translation adjustments
    3,993       10       3,797       77  
 
               
Comprehensive income
      $ 141,556         $ 75,931         $ 236,267         $ 142,473  
 
               
Selected ratios
                               
Net premiums written/ Gross premiums written
    85.3 %     99.6 %     87.0 %     90.4 %
Losses and loss expenses ratio
    38.0 %     39.5 %     39.7 %     43.6 %
Policy acquisition cost ratio
    19.6 %     18.2 %     19.5 %     18.8 %
General and administrative expense ratio
    14.3 %     13.3 %     14.3 %     14.1 %
 
               
Expense ratio
    33.9 %     31.5 %     33.8 %     32.9 %
 
               
Combined ratio
    71.9 %     71.0 %     73.5 %     76.5 %
 
               
 
(1)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) and operating income that are 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 underwriting income (loss) measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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    Three months ended   Three months ended   Six months ended   Six months ended
(Dollars in thousands)   June 30, 2009   June 30, 2008   June 30, 2009   June 30, 2008
VALIDUS RE
                               
Gross premiums written
      $ 199,560         $ 187,820         $ 609,686         $ 518,869  
Reinsurance premiums ceded
    (43,070 )     (1,208 )     (56,359 )     (24,951 )
 
               
Net premiums written
    156,490       186,612       553,327       493,918  
Change in unearned premiums
    7,207       (22,500 )     (215,183 )     (186,151 )
 
               
Net premiums earned
    163,697       164,112       338,144       307,767  
 
                               
Losses and loss expenses
    41,121       48,677       96,583       107,591  
Policy acquisition costs
    29,120       25,309       57,697       45,712  
General and administrative expenses
    14,149       9,955       27,941       19,334  
Share compensation expense
    1,548       1,597       3,220       2,823  
 
               
Total underwriting expenses
    85,938       85,538       185,441       175,460  
 
                               
Underwriting income (1)
    77,759       78,574       152,703       132,307  
 
               
 
                               
TALBOT
                               
Gross premiums written
      $ 235,113         $ 197,235         $ 463,033         $ 399,028  
Reinsurance premiums ceded
    (28,862 )     (5,327 )     (116,239 )     (77,732 )
 
               
Net premiums written
    206,251       191,908       346,794       321,296  
Change in unearned premiums
    (41,748 )     (46,722 )     (37,979 )     (27,901 )
 
               
Net premiums earned
    164,503       145,186       308,815       293,395  
 
                               
Losses and loss expenses
    83,630       73,412       160,002       154,522  
Policy acquisition costs
    36,114       31,134       69,271       67,432  
General and administrative expenses
    21,927       19,787       42,141       40,710  
Share compensation expense
    2,098       1,126       4,433       2,102  
 
               
Total underwriting expenses
    143,769       125,459       275,847       264,766  
 
               
 
                               
Underwriting income (1)
    20,734       19,727       32,968       28,629  
 
               
 
                               
CORPORATE & ELIMINATIONS
                               
Gross premiums written
      $ (9,641 )       $ (5,136 )       $ (37,795 )       $ (16,384 )
Reinsurance premiums ceded
    9,641       5,136       37,795       16,384  
 
               
Net premiums written
                       
Policy acquisition costs
    (796 )     (24 )     (1,081 )     (24 )
General and administrative expenses
    5,124       4,170       9,197       10,975  
Share compensation
    1,986       4,548       5,333       8,881  
 
               
Total underwriting expenses
    6,314       8,694       13,449       19,832  
 
                               
Underwriting income (loss) (1)
    (6,314 )     (8,694 )     (13,449 )     (19,832 )
 
               
 
                               
Total underwriting income (1)
      $ 92,179         $ 89,607         $ 172,222         $ 141,104  
 
               
  (1)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed 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.”

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Six months ended June 30, 2009 compared to six months ended June 30, 2008
     Net income for the six months ended June 30, 2009 was $232.5 million compared to net income of $142.4 million for the six months ended June 30, 2008, an increase of $90.1 million or 63.3%. The primary factors driving the increase in net income were:
  Increase in net realized and unrealized gains on investments of $86.0 million; and
 
  Increase in underwriting income of $31.1 million due primarily to increased net premiums earned of $45.8 million, and increased net premiums written of $84.9 million as a result of rate increases coupled with modest exposure growth; and
 
  Reduced finance expenses of $15.8 million due to reduced FAL costs.
 
    The items above were partially offset by the following factors:
 
  Decrease in net investment income of $18.7 million due to increased balances of cash and cash equivalents and lower returns on cash and fixed income investments; and
 
  Transaction expenses of $15.9 million in relation to the proposed acquisition of and amalgamation agreement with IPC.
           The change in net income for the six months ended June 30, 2009 of $90.1 million is described in the following table:
                                 
    Six months ended June 30, 2009
    Increase (decrease) over the six months ended June 30, 2008
                    Corporate    
                    and other    
                    reconciling    
(Dollars in thousands)   Validus Re   Talbot   items   Total
Underwriting income
  $         20,396     $         4,339     $         6,383     $         31,118  
Net investment income
    (9,183 )     (7,521 )     (2,039 )     (18,743 )
Other income
    1,163       (729 )     (1,057 )     (623 )
Finance expenses
    (398 )     14,858       1,344       15,804  
 
               
 
    11,978       10,947       4,631       27,556  
 
                               
Taxes
    (18 )     6,026             6,008  
 
               
 
    11,960       16,973       4,631       33,564  
 
                               
Realized gain on repurchase of debentures
                (8,752 )     (8,752 )
Net realized (losses) gains on investments
    (18,496 )     (12,894 )           (31,390 )
Net unrealized gains (losses) on investments
    97,471       19,890             117,361  
Foreign exchange (losses) gains
    (8,652 )     3,738       56       (4,858 )
Transaction expenses
                (15,851 )     (15,851 )
 
               
 
                               
Net income
  $         82,283     $         27,707     $         (19,916 )   $         90,074  
 
               
Gross Premiums Written
     Gross premiums written for the six months ended June 30, 2009 were $1,034.9 million compared to $901.5 million for the six months ended June 30, 2008, an increase of $133.4 million or 14.8%. The increase in gross premiums written was driven primarily by the property and marine lines which increased by $83.6 million and $37.9 million, respectively.
     Details of gross premiums written by line of business are provided below.

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    Gross premiums written
    Six months ended   Six months ended    
(Dollars in thousands)
  June 30, 2009   June 30, 2008   % Change
Property
    $ 537,726         51.9 %       $ 454,145         50.4 %       18.4 %
Marine
    290,531         28.1 %       252,583         28.0 %       15.0 %  
Specialty
    206,667         20.0 %       194,785         21.6 %       6.1 %
 
                       
Total
    $ 1,034,924         100.0 %       $ 901,513         100.0 %       14.8 %
 
                       
Validus Re. Validus Re gross premiums written for the six months ended June 30, 2009 were $609.7 million compared to $518.9 million for the six months ended June 30, 2008, an increase of $90.8 million or 17.5%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Gross premiums written
    Six months ended   Six months ended    
(Dollars in thousands)
  June 30, 2009   June 30, 2008   % Change
Property
    $ 418,564         68.6 %       $ 374,418         72.1 %       11.8 %  
Marine
    125,505         20.6 %       92,791         17.9 %       35.3 %
Specialty
    65,617         10.8 %       51,660         10.0 %       27.0 %
 
                       
Total
    $ 609,686         100.0 %       $ 518,869         100.0 %       17.5 %
 
                       
     The increase in Validus Re gross premiums written was driven by increases in the property and marine lines of $44.1 million and $32.7 million, respectively. The increase in the property line was due primarily to gross premiums written on various new contracts where favorable changes in risk adjusted pricing met Validus Re’s thresholds and rate increases on existing business. The increase in the marine line was due primarily to additional gross premiums written on proportional contracts where underlying insurance coverage terms have become more favorable. The gross and net amount of reinsurance limits exposed in the Gulf of Mexico have been reduced in 2009 despite the increased gross premiums written, due to more restrictive coverage terms and, in the case of gross limits, the non-renewal of the Company’s collateralized quota share facility. The property and marine lines also benefited from $12.3 million and $5.7 million, respectively, of increased gross premiums written as a result of Talbot quota share and surplus treaty contracts. The quota share and surplus treaty contracts with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the six months ended June 30, 2009 were $463.0 million compared to $399.0 million for the six months ended June 30, 2008, an increase of $64.0 million or 16.0%. The $463.0 million of gross premiums written translated at second quarter 2008 rates of exchange would have been $501.9 million during the six months ended June 30, 2009, an increase of $102.9 million or 25.9%. Details of gross premiums written by line of business are provided below.