e10vq
Table of Contents

 
 
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 September 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   (I.R.S. Employer
incorporation or organization)   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 November 6, 2009, there were 131,134,398 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

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EXHIBIT 10.1   
AMENDMENT TO STANDBY LETTER OF CREDIT FACILITY      
 
EXHIBIT 10.2   
SECOND AMENDMENT TO EACH OF THE THREE-YEAR AND FIVE YEAR UNSECURED LETTER OF
CREDIT FACILITY AGREEMENTS
     
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I.   FINANCIAL STATEMENTS

 


Table of Contents

Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2009 (Unaudited) and December 31, 2008
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    September 30,     December 31,  
    2009     2008  
    (Unaudited)          
Assets
               
Fixed maturities, at fair value
(amortized cost: 2009 - $4,566,801; 2008 - $2,553,018)
  $ 4,590,143     $ 2,454,501  
Short-term investments, at fair value
(amortized cost: 2009 - $595,557; 2008 - $379,537)
    594,581       377,036  
Other investments, at fair value
(amortized cost: 2009 - $126,301)
    129,012        
Cash and cash equivalents
    393,788       449,848  
 
           
Total investments and cash
    5,707,524       3,281,385  
Premiums receivable
    723,029       408,259  
Deferred acquisition costs
    139,157       108,156  
Prepaid reinsurance premiums
    101,711       22,459  
Securities lending collateral
    100,053       98,954  
Loss reserves recoverable
    172,101       208,796  
Paid losses recoverable
    10,064       1,388  
Net receivable for investments sold
          490  
Income taxes recoverable
    3,027       1,365  
Intangibles assets
    124,096       127,217  
Goodwill
    20,393       20,393  
Accrued investment income
    43,190       20,433  
Other assets
    32,726       23,185  
 
           
Total assets
  $ 7,177,071     $ 4,322,480  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 1,624,743     $ 1,305,303  
Unearned premiums
    955,049       539,450  
Reinsurance balances payable
    40,879       33,042  
Securities lending payable
    101,040       105,688  
Deferred income taxes
    26,110       21,779  
Net payable for investments purchased
    39,224        
Accounts payable and accrued expenses
    119,534       74,184  
Debentures payable
    304,300       304,300  
 
           
Total liabilities
    3,210,879       2,383,746  
 
           
 
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175
Issued and outstanding (2009 - 131,107,196; 2008 - 75,624,697)
    22,944       13,235  
Additional paid-in-capital
    2,748,121       1,412,635  
Accumulated other comprehensive (loss)
    (4,976 )     (7,858 )
Retained earnings
    1,200,103       520,722  
 
           
Total shareholders’ equity
    3,966,192       1,938,734  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 7,177,071     $ 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 (Loss)
For the three and nine months ended September 30, 2009 and 2008 (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Revenues
                               
Gross premiums written
  $ 331,028     $ 269,236     $ 1,365,951     $ 1,170,749  
Reinsurance premiums ceded
    (67,687 )     (35,139 )     (202,489 )     (121,438 )
 
                       
Net premiums written
    263,341       234,097       1,163,462       1,049,311  
Change in unearned premiums
    111,376       105,229       (141,786 )     (108,823 )
 
                       
Net premiums earned
    374,717       339,326       1,021,676       940,488  
Gain on bargain purchase, net of expenses
    302,950             287,099        
Net investment income
    29,532       36,379       83,267       108,857  
Realized gain on repurchase of debentures
                      8,752  
Net realized gains (losses) on investments
    5,429       (13,667 )     (20,642 )     (8,348 )
Net unrealized gains (losses) on investments
    50,437       (14,649 )     109,839       (72,608 )
Other income
    1,101       1,269       2,875       3,666  
Foreign exchange (losses)
    (5,244 )     (44,933 )     (1,012 )     (35,843 )
 
                       
Total revenues
    758,922       303,725       1,483,102       944,964  
 
                       
 
                               
Expenses
                               
Losses and loss expenses
    134,152       318,464       390,736       580,578  
Policy acquisition costs
    64,236       60,425       190,125       173,545  
General and administrative expenses
    46,036       30,120       125,315       101,139  
Share compensation expenses
    5,862       6,012       18,848       19,818  
Finance expenses
    11,257       14,517       29,732       48,796  
 
                       
Total expenses
    261,543       429,538       754,756       923,876  
 
                       
 
                               
Net income (loss) before taxes
    497,379       (125,813 )     728,346       21,088  
Income tax benefit (expenses)
    1,799       (487 )     3,301       (4,992 )
 
                       
Net income (loss)
  $ 499,178     $ (126,300 )   $ 731,647     $ 16,096  
 
                       
 
                               
Comprehensive income
                               
Foreign currency translation adjustments
    (915 )     (1,556 )     2,882       (1,479 )
 
                       
Comprehensive income (loss)
  $ 498,263     $ (127,856 )   $ 734,529     $ 14,617  
 
                       
 
                               
Earnings per share
                               
Weighted average number of common shares and common share equivalents outstanding
                               
Basic
    92,492,373       74,864,724       81,458,329       74,435,840  
Diluted
    95,834,809       74,864,724       84,626,505       77,922,718  
 
                               
Basic earnings (loss) per share
  $ 5.38     $ (1.71 )   $ 8.92     $ 0.15  
 
                       
Diluted earnings (loss) per share
  $ 5.21     $ (1.71 )   $ 8.65     $ 0.14  
 
                       
 
                               
Cash dividends declared per share
  $ 0.20     $ 0.20     $ 0.60     $ 0.60  
 
                       
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 nine months ended September 30, 2009 and 2008 (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    September 30, 2009     September 30, 2008  
    (Unaudited)     (Unaudited)  
Common shares
               
Balance — Beginning of period
  $ 13,235     $ 12,985  
Issue of common shares
    9,709       119  
 
           
Balance — End of period
  $ 22,944     $ 13,104  
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 1,412,635     $ 1,384,604  
Issue of common shares, net of expenses
    1,311,207       (518 )
Share compensation expenses
    24,279       19,818  
 
           
Balance — End of period
  $ 2,748,121     $ 1,403,904  
 
           
 
               
Accumulated other comprehensive (loss)
               
Balance — Beginning of period
  $ (7,858 )   $ (49 )
Currency translation adjustments
    2,882       (1,479 )
 
           
Balance — End of period
  $ (4,976 )   $ (1,528 )
 
           
 
               
Retained earnings
               
Balance — Beginning of period
  $ 520,722     $ 537,260  
Dividends
    (52,266 )     (52,225 )
Net Income
    731,647       16,096  
 
           
Balance — End of period
  $ 1,200,103     $ 501,131  
 
           
 
               
Total shareholders’ equity
  $ 3,966,192     $ 1,916,611  
 
           
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 nine months ended September 30, 2009 and 2008 (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    September 30,     September 30,  
    2009     2008  
    (Unaudited)     (Unaudited)  
Cash flows provided by (used in) operating activities
               
Net income
  $ 731,647     $ 16,096  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expenses
    24,279       19,818  
Realized gain on repurchase of debentures
          (8,752 )
Bargain purchase gain
    (352,349 )      
Net realized losses on investments
    20,642       8,348  
Net unrealized (gains) losses on investments
    (109,838 )     72,608  
Amortization of intangible assets
    24,792       3,121  
Foreign exchange (gains) losses on cash and cash equivalents included in net income
    (10,487 )     19,768  
Amortization of premium on fixed maturities
    8,969       2,226  
Change in:
               
Premiums receivable
    (134,007 )     (134,822 )
Deferred acquisition costs
    (8,914 )     (26,635 )
Prepaid reinsurance premiums
    (75,617 )     (28,149 )
Loss reserves recoverable
    42,634       (41,145 )
Paid losses recoverable
    (8,621 )     4,279  
Income taxes recoverable
    (1,486 )     2,436  
Accrued investment income
    66       (4,466 )
Other assets
    (557 )     3,861  
Reserve for losses and loss expenses
    (8,900 )     369,962  
Unearned premiums
    210,099       147,461  
Reinsurance balances payable
    3,903       17,779  
Deferred income taxes
    4,731       6,083  
Accounts payable and accrued expenses
    (12,602 )     (52,500 )
 
           
Net cash provided by operating activities
    348,384       397,377  
 
           
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    2,247,581       1,770,892  
Proceeds on maturities of investments
    466,065       264,103  
Purchases of fixed maturities
    (2,792,562 )     (2,355,159 )
Sales (purchases) of short-term investments, net
    91,354       (74,290 )
Purchases of other investments
    (2,047 )      
Decrease in securities lending collateral
    4,649       2,597  
Purchase of subsidiary, net of cash acquired
    (376,878 )      
 
           
Net cash (used in) investing activities
    (361,838 )     (391,857 )
 
           
Cash flows provided by (used in) financing activities
               
Repurchase of debentures
          (36,948 )
Issue of common shares, net of expenses
    (1,774 )     (398 )
Dividends paid
    (50,938 )     (50,570 )
(Decrease) in securities lending payable
    (4,649 )     (2,597 )
 
           
Net cash (used in) financing activities
    (57,361 )     (90,513 )
 
           
Effect of foreign currency rate changes on cash and cash equivalents
    14,755       (24,338 )
Net (decrease) in cash
    (56,060 )     (109,331 )
Cash and cash equivalents — beginning of period
    449,848       444,698  
 
           
Cash and cash equivalents — end of period
  $ 393,788       335,367  
 
           
Taxes paid (recovered) during the period
  $ 1,395       (2,467 )
 
           
Interest paid during the period
  $ 20,016       20,802  
 
           
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.
2. Significant accounting policies
     In addition to the policies set forth below, the significant accounting policies described in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 should be read and considered.
a) Business combinations
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC Holdings, Ltd. (“IPC”). The transaction was accounted for as an acquisition method business combination. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair value at the acquisition date. The consideration for the net assets acquired was concluded upon prior to the assessment of the fair value of the net assets at the acquisition date. Therefore, the excess of the value of the net assets acquired over the purchase price was recorded as gain on bargain purchase and is shown as a separate component of revenues in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2009. Significant judgment is required to arrive at an estimate of fair value and changes to assumptions used could lead to a materially different result. Certain amounts in IPC’s financial statements have been reclassified to conform to the Company’s accounting policies.
b) Other investments
     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust. All investment transactions are recorded on a first-in-first-out basis and realized gains and losses on the sale 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)
investments are determined on the basis of amortized cost. Other investments are carried at fair value with interest and dividend income, income distributions and realized and unrealized gains and losses included in net investment income. The fair value of other investments is generally established on the basis of the net valuation criteria established by the managers of the investments. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. In addition, due to a lag in reporting, some of the Company’s fund managers, fund administrators, or both, are unable to provide final fund valuations as of the Company’s current reporting date. In these circumstances, the Company estimates the fair value of these funds by starting with the prior month’s fund valuation, adjusting these valuations for capital calls, redemptions or distributions and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which the Company estimates the return for the current period, it uses all credible information available. This principally includes preliminary estimates reported by its fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to the Company with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which the Company has reported results, or other valuation methods, as necessary. Actual final fund valuations may differ, perhaps materially so, from the Company’s estimates and these differences are recorded in the period they become known as a change in estimate.
3. Recent accounting pronouncements
     In December 2007, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on “Business Combinations” and “Consolidation” 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 further authoritative guidance on business combinations that amended previous 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 this update, 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 — The purchase price is determined as of the acquisition date, which is the date that the acquirer obtains control. Under previous guidance, the date the business combination was announced was used as the effective date in determining the purchase price;
  Transaction Expenses — All costs associated with purchase transactions must be expensed as incurred. Under previous guidance, all such costs could be capitalized and included as part of transaction purchase price, adding to the amount of goodwill recognized;
  Restructuring Costs — 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 those for which an acquirer is obligated at the time of the closing. Under previous guidance, 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 — 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. Under previous guidance, 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

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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)
  Noncontrolling Interests — 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. Under previous guidance, 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. A noncontrolling interest is now recognized in the equity section, presented separately from the controlling interest’s equity. Under previous guidance, noncontrolling interest in general was recorded in the mezzanine section.
     As a result of the adoption of this update the Company has expensed as incurred the transaction costs related to the definitive Amalgamation Agreement dated July 9, 2009 among IPC, Validus Holdings, Ltd and Validus, Ltd (the “Amalgamation Agreement”) with IPC, as described in Note 4. The adoption of this update on business combinations and consolidation materially impacts the consolidated financial statement recognition and measurement of current and future acquisitions.
     In June 2008, the FASB issued authoritative guidance on the “Balance Sheet” presentation of instruments granted in Share-based Payment transactions. This update 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. This update is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In January 2009, the FASB issued authoritative guidance on “Investments—Other” and the beneficial interests in securitized financial assets that amends certain recognition aspects of other-than-temporary impairments (“OTTI”). This update is effective prospectively for interim and annual periods ending after December 15, 2008. Retrospective application of this update to a prior interim or annual period is prohibited. As the Company’s investment portfolio is classified as trading, the adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
     In April 2009, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” and the recognition and presentation of other-than-temporary impairments (“OTTI”). The fair value measurement update includes guidance on; (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 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 updates are effective for interim and annual periods ending after June 15, 2009. The adoption of these updates has not had a material impact on the Company’s consolidated financial statements.
     In April 2009, the FASB issued authoritative guidance on interim disclosures about fair value of “Financial Instruments". This update expands the fair value disclosures required for specified financial instruments for interim periods of publicly traded entities. This update 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. This update is effective for interim and annual periods ending after June 15, 2009. As this update only expands certain disclosures requirements it has not had a material impact on the Company’s consolidated financial statements.

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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)
     In May 2009, the FASB issued authoritative guidance on management’s assessment of “Subsequent Events”. This update 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. This update is effective prospectively for interim and annual periods ending after June 15, 2009. The adoption of this update 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 authoritative guidance on accounting for “Transfers and Servicing” of financial assets which amends previous derecognition guidance. This update addresses practices that have developed 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. This update is effective for financial asset transfers in the interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued authoritative guidance which amends the “Consolidation” guidance that applies to Variable Interest Entities (“VIEs”). This update amends the guidance for the identification of VIEs and their primary beneficiaries and the financial statement disclosures required. This update is effective for interim and annual periods beginning after November 15, 2009. Early adoption is prohibited. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
     In June 2009, the FASB issued authoritative guidance which prescribes the use of the FASB Accounting Standards Codification (the “Codification”) as the authoritative source of U.S. “Generally Accepted Accounting Principles” (“GAAP”). All of its content carries the same level of authority, effectively superseding previous guidance to include only two levels of U.S. GAAP: authoritative and nonauthoritative. This update is effective for interim and annual periods ending after September 15, 2009. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In August 2009, the FASB updated guidance on “Fair Value Measurements and Disclosures” of liabilities. This update clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use one or more prescribed valuation techniques to estimate fair value. This update is effective for the first interim or annual reporting period beginning after August 28, 2009. The adoption of this update will not have a material impact on the Company’s consolidated financial statements and affected disclosures only.
     In August 2009, the FASB proposed updated guidance on improving “Fair Value Measurements and Disclosures”. The proposed updated would clarify existing requirements regarding disclosures of inputs and valuation techniques and levels of disaggregation. In addition, the proposed updated would require new disclosures on (1) sensitivity disclosures regarding the effect of changing Level 3 inputs if the change in the fair value measurement would change significantly, (2) significant transfers in and out of Levels 1 and 2 and the reasons that such transfers were made, and (3) additional disclosure in the reconciliation of Level 3 activity, including information on a gross basis for purchases, sales, issuances, and settlements. An effective date has not been established. As this update only expands certain disclosure requirements it is not expected to have a material impact on the Company’s consolidated financial statements.
     In September 2009, the FASB updated guidance on accounting for uncertainty in “Income Taxes” and disclosure amendments for nonpublic entities. This update provides guidance on (1) what constitutes a tax position for a pass-through or not-for-profit entity, (2) determining when an income tax is attributed to the reporting entity or its

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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)
owners, and (3) application of accounting for uncertainty in income taxes to a group of related entities composed of both taxable and nontaxable entities. The guidance is effective for interim and annual periods ending after September 15, 2009. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
     In September 2009, the FASB updated guidance on “Fair Value Measurements and Disclosures” of certain alternative investments. This guidance offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share. This guidance is effective for interim and annual reporting periods ending after December 15, 2009. Early adoption is permitted. This update was not adopted for the Company’s interim period ended September 30, 2009. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
4. Business combination
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”). Pursuant to an Amalgamation Agreement, the Company acquired all of IPC’s outstanding common shares in exchange for 0.9727 Company common shares and $7.50 cash per IPC common share. IPC’s operations are focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The acquisition of IPC was undertaken to gain a strategic advantage in the current reinsurance market and increase the Company’s capital base.
     The aggregate purchase price paid by the Company was $1,746,224 for adjusted tangible net assets acquired of $2,076,902. The global financial crisis and related market illiquidity have led to several publicly traded companies trading at substantial discounts. This was the primary factor responsible for a purchase price less than the book value of IPC’s net assets, and the recognition of a bargain purchase gain on acquisition.
     The estimates of fair values for tangible assets acquired and liabilities assumed are determined by management based on various market and income analyses and recent asset appraisals. Significant judgment is required to arrive at these estimates of fair value and changes to assumptions used could lead to materially different results.
     An adjustment of $50,000 was made to IPC’s net assets acquired in respect of the termination fee (the “Max Termination Fee”) paid under the Agreement and Plan of Amalgamation among Max Capital Group Ltd. (“Max”), IPC and IPC Limited (the “Max Amalgamation Agreement”). This Max Termination Fee was advanced to IPC by Validus on July 9, 2009, but was repayable in certain circumstances.
     In addition, the Company at closing recorded a $21,671 intangible asset for the acquired IPC customer relationships. This intangible asset relates to the acquired broker distribution network and is fair valued using a variation of the income approach. Under this approach, the Company estimated the present value of expected future cash flows to an assumed hypothetical market participant resulting from the existing IPC customer relationships, considering attrition, and discounting at a weighted average cost of capital. The composition of purchase price and fair value of net assets acquired is summarized as follows:
                 
Total allocable purchase price                
IPC shares outstanding at September 4, 2009
    56,110,096          
Exchange ratio
    0.9727          
Validus common shares issued
    54,578,268          

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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)
                 
Total allocable purchase price                
Validus closing share price on September 4, 2009
  $ 24.10          
Total value of Validus shares to be issued
          $ 1,315,337  
Total cash consideration paid at $7.50 per IPC share
            420,826  
Share compensation awards issued to IPC employees pursuant to the Amalgamation Agreement and earned prior to the Amalgamation
            10,061  
 
             
Total allocable purchase price
            1,746,224  
 
               
Tangible Assets Acquired
               
Cash and investments
  $ 2,463,374          
Receivables (a)
    202,278          
 
             
Tangible Assets Acquired
            2,665,652  
 
               
Liabilities Acquired
               
Net loss reserves and paid losses recoverable
  $ 304,957          
Unearned premiums, net of expenses
    180,370          
Other liabilities
    53,423          
 
             
Liabilities acquired
            538,750  
 
               
Net tangible assets acquired, at fair value
            2,126,902  
Max Termination Fee
            (50,000 )
Net tangible assets acquired, at fair value, adjusted
            2,076,902  
 
             
Bargain purchase gain before establishment of intangible assets
            330,678  
Intangible asset — customer relationships
            21,671  
 
             
Bargain purchase gain on acquisition of IPC
          $ 352,349  
 
             
 
(a)   The fair value of receivables approximates the gross contractual amounts receivable.
     The Company also incurred transaction and termination expenses related to the acquisition. Transaction expenses are primarily comprised of legal, corporate advisory, and audit related services. Termination expenses are primarily comprised of severance costs and accelerated share compensation costs in connection with certain IPC employment contracts that have been terminated. Finally, the customer relationships intangible asset has been fully amortized as it not expected to significantly contribute to the Company’s future cash flows beyond the balance sheet date. The gain on bargain purchase, net of expenses has been presented as a separate line item in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss), and is composed of the following:
                 
    September 30, 2009  
    Three months ended     Nine months ended  
Bargain purchase gain on acquisition of IPC
  $ 352,349     $ 352,349  
Transaction expenses
    (13,597 )     (29,448 )
Termination expenses
    (14,131 )     (14,131 )
Amortization of intangible asset — customer relationships
    (21,671 )     (21,671 )
 
           
Gain on bargain purchase, net of expenses
  $ 302,950     $ 287,099  
 
           

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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 selected unaudited information has been provided to present a summary of the results of IPC since the acquisition date, that have been included within the Validus Re segment in the consolidated financial statements.
         
    From Acquisition Date to  
    September 30, 2009  
Net premiums written
  $ (658 )
Total revenue
    57,434  
Total expenses
    13,550  
 
     
Net income
  $ 43,884  
 
     
Supplemental Pro Forma Information
          Operating results of IPC have been included in the consolidated financial statements from the September 4, 2009 acquisition date. The following selected unaudited pro forma information has been provided to present a summary of the combined results of the Company and IPC, assuming the transaction had been effected on January 1, 2008. The unaudited pro forma data is for informational purposes only and does not necessarily represent results that would have occurred if the transaction had taken place on the basis assumed above.
                 
    Three months ended  
    September 30, 2009     September 30, 2008  
Net premiums written
  $ 288,605     $ 293,647  
Total revenue
    609,620       327,033  
Total expenses
    274,365       545,898  
Net income
    335,255       (218,865 )
Basic earnings per share
  $ 3.61     $ (2.95 )
 
           
Diluted earnings per share
  $ 3.50     $ (2.95 )
 
           
                 
    Nine months ended  
    September 30, 2009     September 30, 2008  
Net premiums written
  $ 1,544,270     $ 1,407,062  
Total revenue
    1,620,181       1,122,443  
Total expenses
    841,921       1,074,763  
Net income
    778,260       47,680  
Basic earnings per share
  $ 9.49     $ 0.57  
 
           
Diluted earnings per share
  $ 9.20     $ 0.54  
 
           
5. Investments
     During the first quarter of 2007, the Company adopted authoritative guidance on fair value measurements and disclosures and financial instruments. 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. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

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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)
(a) Classification within the fair value hierarchy
     Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices 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.
     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s August 31, 2009 NAV was used as a partial basis for fair value measurement in the Company’s September 30, 2009 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions from the underlying third-party funds. The Company combines the fund investment manager’s primarily market approach NAV with relevant valuation sources obtained on a timelier basis. As this combined approach valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. The foundation for the income approach is the amount and timing of future cash flows. To determine the reasonableness of the combined approach NAV, the Company assesses the variance between the combined approach NAV and the one-month delayed fund investment manager’s NAV. These variances are recorded in the following reporting period.
     On August 28, 2009, the Company sold short equity index futures contracts with the goal of hedging until closing of the IPC acquisition and liquidation of IPC’s mutual fund equity portfolio exposure. The contracts were closed when the equity positions were fully redeemed on September 9, 2009. The Company experienced a $3.3 million realized investment loss as a result of the futures contracts.
     At September 30, 2009, the Company’s investments were allocated between Levels 1, 2 and 3 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)
                                 
    Level 1     Level 2     Level 3     Total  
U.S. Government and Government Agency
  $     $ 1,182,985     $     $ 1,182,985  
Non-U.S. Government and Government Agency
          464,940             464,940  
States, municipalities, political subdivision
          8,642             8,642  
Agency residential mortgage-backed securities
          645,849             645,849  
Non-Agency residential mortgage-backed securities
          66,400       96,527       162,927  
U.S. corporate
          1,170,782             1,170,782  
Non-U.S. corporate
          827,048             827,048  
Catastrophe bonds
          21,368             21,368  
Asset-backed securities
          52,381             52,381  
Commercial mortgage-backed securities
          53,221             53,221  
 
                       
Total fixed maturities
          4,493,616       96,527       4,590,143  
Total short-term investments
    592,325       2,256             594,581  
Total other investments
          11,614       117,398       129,012  
 
                       
Total
  $ 592,325     $ 4,507,486     $ 213,925     $ 5,313,736  
 
                       
     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 September 30, 2009, Level 3 investments totaled $213,925, representing 4.0% 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 September 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)
                 
    Nine months ended     Year ended  
    September 30, 2009     December 31, 2008  
Level 3 investments — Beginning of period
  $ 111,318     $  
Payments and purchases
    115,351        
Sales and maturities
    (822 )     (59 )
Realized losses
    (1,284 )      
Unrealized losses
    1,133       (14,603 )
Amortization
    (11,771 )     (4,048 )
Transfers in
          130,028  
 
           
Level 3 investments — End of period
  $ 213,925     $ 111,318  
 
           
(b) Net investment income
     Net investment income was derived from the following sources:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
Fixed maturities and short-term investments
  $ 29,427     $ 32,443     $ 82,341     $ 98,654  
Cash and cash equivalents
    742       4,308       2,623       11,524  
Securities lending income
    171       261       683       1,150  
 
                       
Gross investment income
    30,340       37,012       85,647       111,328  
Investment expenses
    (808 )     (633 )     (2,380 )     (2,471 )
 
                       
Net investment income
  $ 29,532     $ 36,379     $ 83,267     $ 108,857  
 
                       
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized gains (losses) and the change in unrealized gains (losses) on investments:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
Fixed maturities, short-term and other investments and cash equivalents
                               
Gross realized gains
  $ 9,795     $ 3,653     $ 23,175     $ 14,965  
Gross realized losses
    (4,366 )     (17,320 )     (43,817 )     (23,313 )
 
                       
Net realized gains (losses) on investments
    5,429       (13,667 )     (20,642 )     (8,348 )
Change in unrealized gains (losses) on securities lending
    1,441       (2,422 )     5,747       (3,316 )
Change in unrealized gains (losses) on investments
    48,996       (12,227 )     104,092       (69,292 )
 
                       
Total net realized gains (losses) and change in unrealized gains (losses) on investments
  $ 55,866     $ (28,316 )   $ 89,197     $ (80,956 )
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at September 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 unrealized     Gross unrealized     Estimated fair  
    Amortized Cost     gains     losses     value  
U.S. Government and Government Agency
  $ 1,165,337     $ 17,707     $ (59 )   $ 1,182,985  
Non-U.S. Government and Government Agency
    467,741       7,365       (10,166 )     464,940  
States, municipalities, political subdivision
    8,500       142             8,642  
Agency residential mortgage-backed securities
    629,725       16,431       (307 )     645,849  
Non-Agency residential mortgage-backed securities
    198,597       817       (36,487 )     162,927  
U.S. corporate
    1,146,483       25,432       (1,133 )     1,170,782  
Non-U.S. corporate
    825,255       8,731       (6,938 )     827,048  
Catastrophe bonds
    20,757       731       (120 )     21,368  
Asset-backed securities
    52,196       723       (538 )     52,381  
Commercial mortgage-backed securities
    52,210       1,015       (4 )     53,221  
 
                       
Total fixed maturities
    4,566,801       79,094       (55,752 )     4,590,143  
Total short-term investments
    595,557       38       (1,014 )     594,581  
Total other investments
    126,301       2,711             129,012  
 
                       
Total
  $ 5,288,659     $ 81,843     $ (56,766 )   $ 5,313,736  
 
                       
     The amortized cost, gross unrealized gains and losses and estimated fair value of investments at December 31, 2008 were as follows:
                                 
            Gross unrealized     Gross unrealized     Estimated fair  
    Amortized Cost     gains     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 September 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.

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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)
                                 
    September 30, 2009     December 31, 2008  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 2,831,934       61.7 %   $ 1,941,349       79.1 %
AA
    578,547       12.6 %     146,923       6.0 %
A
    978,886       21.3 %     338,966       13.8 %
BBB
    71,914       1.6 %     12,427       0.5 %
 
                       
Investment grade
    4,461,281       97.2 %     2,439,665       99.4 %
BB
    33,907       0.7 %     7,416       0.3 %
B
    42,358       1.0 %     7,420       0.3 %
CCC
    51,045       1.1 %           0.0 %
NR
    1,552       0.0 %           0.0 %
 
                       
Non-Investment grade
    128,862       2.8 %     14,836       0.6 %
 
                       
Total fixed maturities
  $ 4,590,143       100.0 %   $ 2,454,501       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at September 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.
                                 
    September 30, 2009     December 31, 2008  
            Estimated fair             Estimated fair  
    Amortized cost     value     Amortized cost     value  
Due in one year or less
  $ 322,574     $ 323,395     $ 277,137     $ 279,727  
Due after one year through five years
    2,896,645       2,932,941       1,143,494       1,134,275  
Due after five years through ten years
    412,464       416,835       17,451       17,493  
Due after ten years
    2,391       2,595       31,045       28,858  
 
                       
 
    3,634,074       3,675,766       1,469,127       1,460,353  
Asset-backed and mortgage-backed securities
    932,727       914,377       1,083,891       994,148  
 
                       
Total
  $ 4,566,801     $ 4,590,143     $ 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 September 30, 2009, approximately $269,231 (December 31, 2008: $199,186) of letters of credit were issued and outstanding under this facility for which $365,238 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 September 30, 2009, $100,000 (December 31, 2008: $100,000) of letters of credit were issued and outstanding under this facility for which $129,041 of investments were pledged as collateral (December 31, 2008: $144,149). In addition, $1,297,788 of investments were held in trust at September 30, 2009, (December 31, 2008: $1,100,235). Of those, $1,188,295 were 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).
     The Company assumed two letters of credit facilities as part of the IPC Acquisition. A $250,000 Credit Agreement between IPC Holdings, Ltd., IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a $350,000 Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At September 30, 2009, the IPC Syndicated Facility had $38,602 letters of credit issued and outstanding for which

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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)
$39,760 investments were pledged as collateral. At September 30, 2009, the IPC Bi-Lateral Facility had $91,071 letters of credit issued and outstanding for which $321,760 of investments were held in an associated collateral account.
(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 September 30, 2009, the Company had $98,840 (December 31, 2008: $103,266) in securities on loan. During the nine months ended September 30, 2009, the Company recorded a $5,747 unrealized gain on this collateral on its Statements of Operations (September 30, 2008: unrealized loss $3,316).
     Securities lending collateral reinvested is primarily comprised of corporate floating rate securities with an average reset period of 23.4 days (December 31, 2008: 26.7 days). As at September 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
  $     $ 14,140     $     $ 14,140  
Agency
          14,879             14,879  
Asset-backed securities
          11,382             11,382  
Cash equivalents and short-term investments
    4,981       54,671             59,652  
 
                       
Total
  $ 4,981     $ 95,072     $     $ 100,053  
 
                       
     As at December 31, 2008, the securities lending collateral reinvested lending by the Company in connection with its securities 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  
Cash equivalents and 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 September 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.

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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)
                                 
    September 30, 2009     December 31, 2008  
    Estimated fair             Estimated fair        
    value     % of total     value     % of total  
AAA
  $ 85,919       85.8 %   $ 45,137       45.7 %
AA
    8,985       9.0 %     37,608       37.9 %
A
          0.0 %     8,729       8.8 %
NR
    168       0.2 %     90       0.1 %
 
                       
 
    95,072       95.0 %     91,564       92.5 %
NR- Cash (1)
    4,981       5.0 %     7,390       7.5 %
 
                       
Total
  $ 100,053       100.0 %   $ 98,954       100.0 %
 
                       
 
(1)   This amount relates to cash and is therefore not a rated security.
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested held at September 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.
                                 
    September 30, 2009     December 31, 2008  
            Estimated fair             Estimated fair  
    Amortized cost     value     Amortized cost     value  
Due in one year or less
  $ 74,587     $ 74,530     $ 24,390     $ 23,152  
Due after one year through five years
    26,453       25,523       81,298       75,802  
 
                       
Total
  $ 101,040     $ 100,053     $ 105,688     $ 98,954  
 
                       
6. 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. At September 30, 2009, 99.3% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $62,631 of IBNR recoverable (December 31, 2008: $71,580). Reinsurance recoverables by reinsurer are as follows:
                                 
    September 30, 2009     December 31, 2008  
    Reinsurance             Reinsurance        
    recoverable     % of Total     reoverable     % of Total  
Top 10 reinsurers
  $ 167,265       91.8 %     198,403       94.4 %
Other reinsurers’ balances > $1 million
    6,105       3.4 %     8,987       4.3 %
Other reinsurers’ balances < $1 million
    8,795       4.8 %     2,794       1.3 %
 
                       
Total
  $ 182,165       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)
                     
    September 30, 2009  
        Reinsurance        
Top 10 Reinsurers   Rating   recoverable     % of Total  
Fully collateralized reinsurers
  NR   $ 55,601       33.1 %
Hannover Re
  AA-     28,711       17.2 %
Lloyd’s Syndicates
  A     25,977       15.5 %
Allianz
  AA     14,035       8.4 %
Munich Re
  AA-     11,742       7.0 %
Swiss Re
  A+     11,003       6.6 %
Aspen
  A     7,282       4.4 %
Transatlantic Re
  A+     5,781       3.5 %
Platinum
  A     3,941       2.4 %
Brit
  A     3,192       1.9 %
 
               
Total
      $ 167,265       100.0 %
 
               
     At September 30, 2009 and December 31, 2008, the provision for uncollectible reinsurance relating to losses recoverable was $3,221 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 $182,165 reinsurance recoverable at September 30, 2009, $55,601 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 September 30, 2009 and 2008 Validus Re ceded $392 and $3,994 of premiums written through this agreement, respectively. The earned portions of premiums ceded for the three months ended September 30, 2009 and 2008 were $392 and $7,744, respectively. For the nine months ended September 30, 2009 and 2008 Validus Re ceded $1,491 and $18,554 of premiums written through this agreement, respectively. The earned portions of premiums ceded for the nine months ended September 30, 2009 and 2008 were $1,671 and $14,230, respectively.
7. 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.

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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 September 4, 2009, the Company acquired all of the outstanding shares of IPC from a group of institutional and other investors. Pursuant to the Amalgamation Agreement, the Company acquired all of IPC’s outstanding common shares in exchange for the Company’s common shares and cash. The Company issued 54,556,762 common shares (excluding 21,506 restricted share awards) valued at $24.10 per share as partial consideration for the IPC Acquisition.
     The following table is a summary of the common shares issued and outstanding:
         
    Common shares
Common shares outstanding, December 31, 2008
    75,624,697  
IPC Acquisition issuance
    54,556,762  
Restricted share awards vested
    376,354  
Restricted share units vested
    51,423  
Employee seller shares vested
    248,085  
Options exercised
    12,033  
Warrants exercised
    237,842  
 
       
Common shares outstanding, September 30, 2009
    131,107,196  
 
       
         
    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 months ended September 30, 2009, nil warrants were exercised. During the nine months ended September 30, 2009, 728,010 warrants were exercised which resulted in the net share issuance of 237,842 common shares. During the three months ended September 30, 2008, nil warrants were exercised. During the nine months ended September 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 September 30, 2009 were 4,543 (December 31, 2008: 4,430).
d) Dividends
     On November 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 December 31, 2009 to holders of record on December 15, 2009.

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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. 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 Directors. No SARs or performance shares 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.
     In accordance with the terms of the Amalgamation Agreement, the IPC 2007 Stock Incentive Plan, was assumed by Validus on the acquisition date and this resulted in the issuance of 21,603 restricted share awards, 218,804 restricted share units, 199,315 performance share units and 650,557 non-qualified options.
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 either ratably or at the end of the required service period from the date of grant. All options granted in 2009 were as a result of the Amalgamation Agreement. 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 free   Weighted average        
Year   interest rate   dividend yield   Expected life (years)   Expected volatility
2007 and prior years
  4.5%   0.0%   7   30.0%
2008   3.5%   3.2%   7   30.0%
2009   3.9%   3.7%   2   34.6%
     Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company uses the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses 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 $1,063 were recorded for the three months ended September 30, 2009 (2008: $1,080). Share compensation expenses of $3,037 were recorded for the nine months ended September 30, 2009 (2008: $3,171). 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 nine months ended September 30, 2009 was as follows:
                         
                    Weighted average  
            Weighted average     grant date exercise  
    Options     grant date fair value     price  
Options outstanding, December 31, 2008
    2,799,938     $ 7.57     $ 18.23  
Options granted
    650,557       3.42       27.27  
Options exercised
    (12,033 )     6.32       21.11  
Options forfeited
    (7,646 )     10.30       20.39  
 
                 
Options outstanding, September 30, 2009
    3,430,816     $ 6.80     $ 19.93  
 
                 
Options exercisable at September 30, 2009
    1,520,416     $ 7.56     $ 17.89  
 
                 

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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 options for the year ended December 31, 2008 was as follows:
                         
                    Weighted average  
            Weighted average     grant date exercise  
    Options     grant date fair value     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 September 30, 2009, there were $5,794 (December 31, 2008: $9,139) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.5 years (December 31, 2008: 2.2 years).
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 $3,621 were recorded for the three months ended September 30, 2009 (2008: $3,767). Share compensation expenses of $12,008 were recorded for the nine months ended September 30, 2009 (2008: $10,334). 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 nine months ended September 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
    736,030       24.62  
Restricted shares vested
    (459,910 )     22.32  
Restricted shares forfeited
    (4,517 )     21.19  
 
           
Restricted shares outstanding, September 30, 2009
    2,579,005     $ 23.34  
 
           
     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  
 
           

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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 September 30, 2009, there were $40,978 (December 31, 2008: $35,915) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.9 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 $1,285 were recorded for the three months ended September 30, 2009 (2008: $1,153). Share compensation expenses of $3,874 were recorded for the nine months ended September 30, 2009 (2008: $6,286). 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 nine months ended September 30, 2009 was as follows:
                 
    Employee seller     Weighted average  
    shares     grant date fair value  
Employee seller shares outstanding, December 31, 2008
    663,375     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
    (248,085 )     22.01  
Employee seller shares forfeited
    (3,799 )     22.01  
 
           
Employee seller shares outstanding, September 30, 2009
    411,491     $ 22.01  
 
           
     Activity with respect to unvested employee seller shares for the year ended December 31, 2008 was as follows:
                 
    Employee seller     Weighted average  
    shares     grant 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 September 30, 2009, there were $8,146 (December 31, 2008: $12,157) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 1.8 years (December 31, 2008: 2.5 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 $2,802 were recorded for the three months ended September 30, 2009 (2008: $12). Share compensation expenses of $2,838 were recorded for the nine months ended

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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)
September 30, 2009 (2008: $27) 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 nine months ended September 30, 2009 was as follows:
                 
            Weighted average  
    Restricted share units     grant date fair value  
Restricted share units outstanding, December 31, 2008
    11,853     $ 25.28  
Restricted share units granted
    228,136       24.76  
Restricted share units vested
    (51,753 )     24.76  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, September 30, 2009
    188,236     $ 24.79  
 
           
     Activity with respect to unvested restricted share units for the year ended December 31, 2008 was as follows:
                 
            Weighted average  
    Restricted share units     grant 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 September 30, 2009, there were $687 (December 31, 2008: $223) of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 3.2 years (December 31, 2008: 4.6 years). Additional restricted share units are issued in lieu of accrued dividends from unvested restricted share units. As at September 30, 2009, unvested restricted share units issued in lieu of dividends were 708 (December 31, 2008: 315).
f) Performance share units
     In accordance with the terms of the Amalgamation Agreement, the IPC 2007 Stock Incentive Plan, the plan under which the IPC Performance Share Units were granted, was assumed by Validus.
     The PSUs contain both a market and performance based component. The market component is defined as the relative total shareholder return as compared to the BSX Bermuda Insurance Index. The performance component relates to the annual return on equity on an operating basis based on opening shareholders’ equity. At inception of the three year cycle for the PSU awards, IPC estimated the fair value of the market and the performance based components of the PSUs granted under the IPC 2007 Stock incentive plan together with a forfeiture rate and recorded the compensation expense in its consolidated statements of income over the course of such period. The fair value estimate in respect of the market based component was set and earns over the requisite attribution period and is not adjusted unless the total shareholder return as compared to the BSX Bermuda Insurance Index falls below the 35th percentile minimum. The estimate in respect of the performance component was reassessed at the end of each quarter as IPC’s financial results evolved and IPC reflected any adjustments in the consolidated statements of income in the period in which they are determined. The PSUs contain a lock-in provision at the end of each year within the three year cycle.

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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)
          Share compensation expenses of $2,522 were recorded for the three and nine months ended September 30, 2009 related to performance share units. Activity with respect to unvested performance share units for the nine months ended September 30, 2009 was as follows:
                 
    Performance share     Weighted average  
    units     grant date fair value  
Performance share units outstanding, December 31, 2008
        $  
Performance share units granted
    199,315       24.76  
Performance share units vested
           
Performance share units forfeited
           
 
           
Performance share units outstanding, September 30, 2009
    199,315     $ 24.76  
 
           
     At September 30, 2009, there were $77 of total unrecognized share compensation expenses that are expected to be recognized over a weighted-average period of 2.0 years.
g) Share compensation expenses
     Total share compensation expenses include 5,431 of IPC-related termination expenses which have been included to the gain on bargain purchase, net of expenses in the Statements of Operations. The breakdown of share compensation expenses was as follows:
                                         
    Three months ended     Nine months ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
LTIP options
  $ 1,063     $ 1,080     $ 3,037     $ 3,171  
LTIP restricted shares
    3,621       3,767       12,008       10,334  
Employee seller shares
    1,285       1,153       3,874       6,286  
LTIP restricted share units
    2,802       12       2,838       27  
Performance share units
    2,522             2,522        
 
                       
Total
  $ 11,293     $ 6,012     $ 24,279     $ 19,818  
 
                       
9. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at September 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       269,231        
$250,000 IPC Syndicated facility
    250,000       38,602          
$350,000 IPC Bi-Lateral facility
    350,000       91,071          
Talbot FAL facility (2)
    100,000       100,000        
Talbot third party FAL facility (2)
    121,515       121,515        
 
                 
Total
  $ 1,871,515     $ 924,719     $ 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 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     Nine months ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,588     $ 10,765     $ 10,765  
8.480% Junior Subordinated Deferrable Debentures
    3,348       3,509       10,044       11,517  
Credit facilities
    395       218       1,235       692  
Talbot letter of credit facilities
    62       44       167       169  
Talbot other interest
          (194 )           (81 )
Talbot third party FAL facility
    3,864       7,352       7,521       25,734  
 
                       
Total
  $ 11,257     $ 14,517     $ 29,732     $ 48,796  
 
                       
(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%

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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)
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 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
  $ 6,672  
2010
    26,688  
2011
    169,887  
2012
    160,842  
2013 and thereafter
     
 
     
Total minimum future payments
  $ 364,089  
 
     
(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 and September 4, 2009, which provides for letter of credit availability for Validus Re and our other subsidiaries and revolving credit availability for the Company (the “Three Year Facility”) (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 on October 25, 2007 and September 4, 2009, which provides for letter of credit availability for Validus Re and our other subsidiaries (the “Five Year Facility” and together with the Three Year Facility, the “Credit Facilities”). The Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc.
     As amended, 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 70% of consolidated net worth as calculated using the pro forma balance sheet included in the definitive proxy statement relating to the IPC Acquisition and, commencing with the end of the fiscal quarter ending September 30, 2009 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

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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)
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 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 September 30, 2009 and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
     As of September 30, 2009, we had $269,231 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 the Credit Facilities 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 (as described below) 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 September 4, 2009 the Company entered into the Second Amendment to the Credit Facilities to provide for, among other things, the IPC Acquisition.
     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. On July 23, 2009 the Company entered into the First Amendment to the Talbot FAL Facility to provide for, among other things, the IPC Acquisition. As amended, 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 70% of consolidated net worth as calculated using the pro forma balance sheet included in the definitive proxy statement relating to the IPC Acquisition, and commencing with the end of the fiscal quarter ending September 30, 2009 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 September 30, 2009 the Company had $100,000 in outstanding letters of credit under this facility and was in compliance with all covenants and restrictions.
     IPC obtains letters of credit through the IPC Syndicated Facility and the IPC Bi-Lateral Facility. In July, 2009, certain terms of these facilities were amended including suspending IPCRe’s ability to increase existing letters of credit or to issue new letters of credit. With respect of the IPC Syndicated Facility, IPCRe provides the banks security by depositing cash in the amount of 103% of the aggregate letters of credit outstanding. Effective September 30, 2009, there were outstanding letters of credit of $129,673 of which $38,602 were issued from the IPC Syndicated Facility with $91,071 issued from the IPC Bi-Lateral Facility.

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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) 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 September 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.
10. 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 September 30, 2009, 3.8% 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 1.8% 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. The amounts of cash, investments and letters of credit at September 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 are 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.

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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) 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 September 30, 2009 exchange rate of £1 equals $1.60 and assuming the maximum 3% assessment the Company would be assessed approximately $19,200.
11. 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. Merrill 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 $576 during the three months ended September 30, 2009 (2008: $401) and $1,554 during the nine months ended September 30, 2009 (2008: $1,624), of which $1,219 was included in accounts payable and accrued expenses at September 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 $373 during the three months ended September 30, 2009 (2008: $291) and $1,099 during the nine months ended September 30, 2009 (2008: $1,038), of which $317 was included in accounts payable and accrued expenses at September 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 $nil during the three months ended September 30, 2009 (2008: $nil) and $6,634 during the nine months ended September 30, 2009 (2008: $5,885), of which $7,147 was included in premiums receivable at September 30, 2009 (December 31, 2008: $4,412). The earned premium adjustments of $1,710 (2008: $(194)) and $5,101 (2008: $2,389) were recorded for the three and nine months ended September 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 $158 (2008: $433) of reinsurance premiums ceded during the three months ended September 30, 2009 and recognized $nil (2008: $nil) of gross premiums written and $953 (2008: $1,531) of reinsurance premiums ceded during the nine months ended September 30, 2009, of which $319 was included in reinsurance balances payable at September 30, 2009 (December 31, 2008: $60).

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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)
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 $118 of finance expenses to such management and staff in respect of such provision of FAL for the three months ended September 30, 2009 (2008: $227) and $261 for the nine months ended September 30, 2009 (2008: $806), all of which was included in accounts payable and accrued expenses at September 30, 2009 (December 31, 2008: $803). An amount of $9 was included in general and administrative expenses in respect of the reimbursement of expenses relating to such FAL provision for the three months ended September 30, 2009 (2008: $nil). An amount of $25 was included in general and administrative expenses in respect of the reimbursement of expenses relating to such FAL provision for the nine months ended September 30, 2009 (2008: $2).
12. Earnings per share
     The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2009 and 2008:
                                 
    Three months ended     Nine months ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
Basic earnings (loss) per share
                               
Income (loss)
  $ 499,178     $ (126,300 )   $ 731,647     $ 16,096  
less: Dividends and distributions declared on outstanding warrants
    (1,591 )     (1,739 )     (4,917 )     (5,217 )
 
                       
Income (loss) available to common shareholders
  $ 497,587     $ (128,039 )   $ 726,730     $ 10,879  
 
                       
Weighted average number of common shares outstanding
    92,492,373       74,864,724       81,458,329       74,435,840  
 
                       
 
                               
Basic earnings (loss) per share
  $ 5.38     $ (1.71 )   $ 8.92     $ 0.15  
 
                       
 
                               
Diluted earnings (loss) per share
                               
Income (loss)
  $ 499,178     $ (126,300 )   $ 731,647     $ 16,096  
less: Dividends and distributions declared on outstanding warrants
          (1,739 )           (5,217 )
 
                       
Income (loss) available to common shareholders
  $ 499,178     $ (128,039 )   $ 731,647     $ 10,879  
 
                       
 
                               
Weighted average number of common shares outstanding
    92,492,373       74,864,724       81,458,329       74,435,840  
Share equivalents:
                               
Warrants
    2,146,172             2,086,546       2,065,282  
Stock options
    466,525             378,144       182,268  
Unvested restricted shares
    729,739             703,486       1,239,328  
 
                       
Weighted average number of diluted common shares outstanding
    95,834,809       74,864,724       84,626,505       77,922,718  
 
                       
 
                               
Diluted earnings (loss) per share
  $ 5.21     $ (1.71 )   $ 8.65     $ 0.14  
 
                       
     Share equivalents that would result in the issuance of common shares of 175,994 and nil were outstanding for the three months ended September 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 178,473 and 94,925 were outstanding for the nine months ended September 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

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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)
13. Subsequent Event
     No material subsequent events were noted from the balance sheet date through to November 6, 2009.
14. 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 U.S. GAAP segment reporting. 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 U.S. GAAP segment reporting. 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 &        
Three months ended September 30, 2009   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 124,704     $ 227,325     $ (21,001 )   $ 331,028  
Reinsurance premiums ceded
    (38,435 )     (50,253 )     21,001       (67,687 )
 
                       
Net premiums written
    86,269       177,072             263,341  
Change in unearned premiums
    113,499       (2,123 )           111,376  
 
                       
Net premiums earned
    199,768       174,949             374,717  
Losses and loss expenses
    45,987       88,165             134,152  
Policy acquisition costs
    32,648       33,106       (1,518 )     64,236  
General and administrative expenses
    17,987       23,424       4,625       46,036  
Share compensation expenses
    1,766       1,371       2,725       5,862  
 
                       
 
                               
Underwriting income (loss)
  $ 101,380     $ 28,883     $ (5,832 )   $ 124,431  
 
                       
 
                               
Net investment income (loss)
    23,420       7,629       (1,517 )     29,532  
Net realized gains on investments
    5,397       32             5,429  
Net unrealized gains on investments
    40,893       9,544             50,437  
Other income
    1,847       772       (1,518 )     1,101  
Finance expenses
    (393 )     (3,926 )     (6,938 )     (11,257 )
Foreign exchange gains (losses)
    739       (5,983 )           (5,244 )
Gain on bargain purchase, net of expenses
                302,950       302,950  
 
                       
 
                               
Net income before taxes
    173,283       36,951       287,145       497,379  
Income tax (expense) benefit
    (41 )     1,840             1,799  
 
                       
Net income
  $ 173,242     $ 38,791     $ 287,145     $ 499,178  
 
                       
 
                               
Selected ratios (1)
                               
Losses and loss expenses
    23.0 %     50.4 %             35.8 %
Policy acquisition costs
    16.3 %     18.9 %             17.1 %
General and administrative expenses
    9.9 %     14.2 %             13.8 %
 
                         
Expense ratio
    26.2 %     33.1 %             30.9 %
 
                         
Combined ratio
    49.2 %     83.5 %             66.7 %
 
                         
 
                               
Total assets
  $ 5,087,544     $ 2,049,647     $ 39,880     $ 7,177,071  
 
                       
 
(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 &        
Three months ended September 30, 2008   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 125,029     $ 157,307     $ (13,100 )   $ 269,236  
Reinsurance premiums ceded
    (36,286 )     (11,953 )     13,100       (35,139 )
 
                       
Net premiums written
    88,743       145,354             234,097  
Change in unearned premiums
    92,653       12,576             105,229  
 
                       
Net premiums earned
    181,396       157,930             339,326  
Losses and loss expenses
    217,081       101,383             318,464  
Policy acquisition costs
    26,520       34,026       (121 )     60,425  
General and administrative expenses
    7,972       17,851       4,297       30,120  
Share compensation expenses
    1,809       1,164       3,039       6,012  
 
                       
 
                               
Underwriting (loss) income
  $ (71,986 )   $ 3,506     $ (7,215 )   $ (75,695 )
 
                       
 
                               
Net investment income
    25,984       11,737       (1,342 )     36,379  
Net realized (losses) on investments
    (12,528 )     (1,139 )           (13,667 )
Net unrealized (losses) gains on investments
    (15,946 )     1,297             (14,649 )
Other income
    121       1,269       (121 )     1,269  
Finance expenses
    (213 )     (7,201 )     (7,103 )     (14,517 )
Foreign exchange (losses)
    (22,919 )     (22,014 )           (44,933 )
 
                       
 
                               
Net (loss) before taxes
    (97,487 )     (12,545 )     (15,781 )     (125,813 )
Income tax (expense)
    (31 )     (456 )           (487 )
 
                       
Net (loss)
  $ (97,518 )   $ (13,001 )   $ (15,781 )   $ (126,300 )
 
                       
 
                               
Selected ratios (1):
                               
Losses and loss expenses
    119.7 %     64.2 %             93.9 %
Policy acquisition costs
    14.6 %     21.5 %             17.8 %
General and administrative expenses
    5.4 %     12.0 %             10.6 %
 
                         
Expense ratio
    20.0 %     33.5 %             28.4 %
 
                         
Combined ratio
    139.7 %     97.7 %             122.3 %
 
                         
 
                               
Total assets
  $ 2,741,721     $ 1,763,614     $ 4,261     $ 4,509,596  
 
                       
 
(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 following tables summarize the underwriting results of our operating segments and corporate segment:
                                 
                    Corporate &        
Nine months ended September 30, 2009   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 734,390     $ 690,357     $ (58,796 )   $ 1,365,951  
Reinsurance premiums ceded
    (94,794 )     (166,491 )     58,796       (202,489 )
 
                       
Net premiums written
    639,596       523,866             1,163,462  
Change in unearned premiums
    (101,684 )     (40,102 )           (141,786 )
 
                       
Net premiums earned
    537,912       483,764             1,021,676  
Losses and loss expenses
    142,570       248,166             390,736  
Policy acquisition costs
    90,346       102,378       (2,599 )     190,125  
General and administrative expenses
    45,928       65,565       13,822       125,315  
Share compensation expenses
    4,986       5,804       8,058       18,848  
 
                       
 
                               
Underwriting income (loss)
  $ 254,082     $ 61,851     $ (19,281 )   $ 296,652  
 
                       
 
                               
Net investment income
    64,989       22,816       (4,538 )     83,267  
Net realized (losses) on investments
    (14,282 )     (6,360 )           (20,642 )
Net unrealized gains on investments
    95,693       14,146             109,839  
Other income
    3,034       2,440       (2,599 )     2,875  
Finance expenses
    (1,233 )     (7,688 )     (20,811 )     (29,732 )
Foreign exchange (losses) gains
    (641 )     (427 )     56       (1,012 )
Gain on bargain purchase, net of expenses
                287,099       287,099  
 
                       
 
                               
Net income before taxes
    401,642       86,778       239,926       728,346  
Income tax (expense) benefit
    (107 )     3,408             3,301  
 
                       
Net income
  $ 401,535     $ 90,186     $ 239,926     $ 731,647  
 
                       
 
                               
Selected ratios (1)
                               
Losses and loss expenses
    26.5 %     51.3 %             38.2 %
Policy acquisition costs
    16.8 %     21.2 %             18.6 %
General and administrative expenses
    9.5 %     14.8 %             14.1 %
 
                         
Expense ratio
    26.3 %     36.0 %             32.7 %
 
                         
Combined ratio
    52.8 %     87.3 %             70.9 %
 
                         
 
                               
Total assets
  $ 5,087,544     $ 2,049,647     $ 39,880     $ 7,177,071  
 
                       
 
(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 &        
Nine months ended September 30, 2008   Validus Re     Talbot     Eliminations     Total  
Gross premiums written
  $ 643,898     $ 556,335     $ (29,484 )   $ 1,170,749  
Reinsurance premiums ceded
    (61,237 )     (89,685 )     29,484       (121,438 )
 
                       
Net premiums written
    582,661       466,650             1,049,311  
Change in unearned premiums
    (93,498 )     (15,325 )           (108,823 )
 
                       
Net premiums earned
    489,163       451,325             940,488  
Losses and loss expenses
    324,673       255,905             580,578  
Policy acquisition costs
    72,232       101,458       (145 )     173,545  
General and administrative expenses
    27,306       58,561       15,272       101,139  
Share compensation expenses
    4,632       3,266       11,920       19,818  
 
                       
 
                               
Underwriting income (loss)
  $ 60,320     $ 32,135     $ (27,047 )   $ 65,408  
 
                       
 
                               
Net investment income
    76,736       34,445       (2,324 )     108,857  
Realized gain on repurchase of debentures
                8,752       8,752  
Net realized (losses) gains on investments
    (13,711 )     5,363             (8,348 )
Net unrealized (losses) on investments
    (58,617 )     (13,991 )           (72,608 )
Other income
    145       3,666       (145 )     3,666  
Finance expenses
    (655 )     (25,821 )     (22,320 )     (48,796 )
Foreign exchange (losses)
    (15,647 )     (20,196 )           (35,843 )
 
                       
 
                               
Net income (loss) before taxes
    48,571       15,601       (43,084 )     21,088  
Income tax (expense)
    (78 )     (4,914 )           (4,992 )
 
                       
Net income (loss)
  $ 48,493     $ 10,687     $ (43,084 )   $ 16,096  
 
                       
 
                               
Selected ratios (1)
                               
Losses and loss expenses
    66.4 %     56.7 %             61.7 %
Policy acquisition costs
    14.8 %     22.5 %             18.5 %
General and administrative expenses
    6.5 %     13.7 %             12.9 %
 
                         
Expense ratio
    21.3 %     36.2 %             31.4 %
 
                         
Combined ratio
    87.7 %     92.9 %             93.1 %
 
                         
 
                               
Total assets
  $ 2,741,721     $ 1,763,614     $ 4,261     $ 4,509,596  
 
                       
 
(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 September 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 51,352     $ 15,204     $ (1,114 )   $ 65,442       19.8 %
Worldwide excluding United States (1)
    4,861       70,954       (2,329 )     73,486       22.2 %
Europe
    3,110       14,525       140       17,775       5.4 %
Latin America and Caribbean
    16,921       30,074       (16,833 )     30,162       9.1 %
Japan
    2,470       947       (273 )     3,144       0.9 %
Canada
    (183 )     1,619       183       1,619       0.5 %
 
                             
Sub-total, non United States
    27,179       118,119       (19,112 )     126,186       38.1 %
Worldwide including United States (1)
    10,028       18,152       (597 )     27,583       8.3 %
Marine and Aerospace (2)
    36,145       75,850       (178 )     111,817       33.8 %
 
                             
Total
  $ 124,704     $ 227,325     $ (21,001 )   $ 331,028       100.0 %
 
                             
                                         
    Three months ended September 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 82,468     $ 11,435     $     $ 93,903       34.8 %
Worldwide excluding United States (1)
    10,555       49,263       (8,489 )     51,329       19.1 %
Europe
    2,166       13,589             15,755       5.9 %
Latin America and Caribbean
    22       17,628             17,650       6.6 %
Japan
    251       426             677       0.3 %
Canada
          2,261             2,261       0.8 %
 
                             
Sub-total, non United States
    12,994       83,167       (8,489 )     87,672       32.7 %
Worldwide including United States (1)
    4,846       12,105       (4,611 )     12,340       4.5 %
Marine and Aerospace (2)
    24,721       50,600             75,321       28.0 %
 
                             
Total
  $ 125,029     $ 157,307     $ (13,100 )   $ 269,236       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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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (Unaudited)
 
(Expressed in thousands of U.S. dollars, except share and per share information)
                                         
    Nine months ended September 30, 2009  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 336,211     $ 62,096     $ (6,201 )   $ 392,106       28.7 %
Worldwide excluding United States (1)
    45,075       198,145       (11,611 )     231,609       17.0 %
Europe
    50,468       52,434       (3,073 )     99,829       7.3 %
Latin America and Caribbean
    37,040       62,670       (31,726 )     67,984       5.0 %
Japan
    19,177       4,654       (273 )     23,558       1.7 %
Canada
    469       7,998       (469 )     7,998       0.6 %
 
                             
Sub-total, non United States
    152,229       325,901       (47,152 )     430,978       31.6 %
Worldwide including United States (1)
    64,279       49,214       (2,884 )     110,609       8.1 %
Marine and Aerospace (2)
    181,671       253,146       (2,559 )     432,258       31.6 %
 
                             
Total
  $ 734,390     $ 690,357     $ (58,796 )   $ 1,365,951       100.0 %
 
                             
                                         
    Nine months ended September 30, 2008  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 342,661     $ 48,513     $ (1,979 )   $ 389,195       33.2 %
Worldwide excluding United States (1)
    37,096       166,499       (8,489 )     195,106       16.7 %
Europe
    41,900       44,599             86,499       7.4 %
Latin America and Caribbean
    5,657       33,155             38,812       3.3 %
Japan
    9,699       3,323             13,022       1.1 %
Canada
          7,976             7,976       0.7 %
 
                             
Sub-total, non United States
    94,352       255,552       (8,489 )     341,415       29.2 %
Worldwide including United States (1)
    69,758       49,377       (19,016 )     100,119       8.6 %
Marine and Aerospace (2)
    137,127       202,893             340,020       29.0 %
 
                             
Total
  $ 643,898     $ 556,335     $ (29,484 )   $ 1,170,749       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 nine months ended September 30, 2009 and 2008 and the Company’s consolidated financial condition and liquidity and capital resources at September 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 acquisitions of Talbot Holdings Ltd. (“Talbot”) and IPC on July 2, 2007 and September 4, 2009, respectively. 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2009 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 and incorporates historical IPC business. 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 September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”). Pursuant to an Amalgamation Agreement dated July 9, 2009 among IPC, Validus Holdings, Ltd and Validus, Ltd. (the “Amalgamation Agreement”), the Company acquired all of IPC’s outstanding common shares in exchange for the Company’s common shares and cash. IPC’s operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The acquisition of IPC was undertaken to increase the Company’s capital base and gain a strategic advantage in the current reinsurance market, where capital and capacity has been depleted. This acquisition creates a leading Bermuda carrier in the short-tail reinsurance and insurance market that facilitates stronger relationships with major reinsurance intermediaries.
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 had increased the supply of insurance and reinsurance which

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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 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. For the nine months ended September 30, 2009, there have been few notable large losses affecting the worldwide (re)insurance industry and no major hurricanes making landfall in the United States. Should this benign loss experience continue, it is possible that rates at the January 1, 2010 renewal period may show downward pressure; although, currently no such market pricing information is available. Validus Re gross premiums written at January 1, 2009 grew by 26.0% from the prior year period. For the nine months ended September 30, 2009, Validus Re and Talbot gross premiums written grew by 14.1% and 24.1%, respectively, from the comparable period in the prior year. These increases were largely due to rate increases coupled with modest exposure growth and the addition of new underwriting teams.
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   Nine months ended   Year ended
    September 30,   September 30,   December 31,
    2009   2008   2009   2008   2008
Annualized return on average equity
    65.3 %     (25.4 )%     38.7 %     1.1 %     2.7 %
 
                                       
     The increases in annualized return on average equity were driven primarily by an increase in net income for the three and nine months ended September 30, 2009. Net income for the three months ended September 30, 2009 increased by $625.5 million, or 495.2% compared to the three months ended September 30, 2008, due primarily to the gain on bargain purchase of IPC and the large event losses incurred for the three months ended September 30, 2008. Net income for the nine months ended September 30, 2009 increased by $715.6 million compared to the nine months ended September 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 $4.83, or 20.3%, from $23.78 at December 31, 2008 to $28.61 at September 30, 2009. The increase was substantially due to earnings generated in the nine months ended September 30, 2009, partially offset by dividend payments totaling $0.60 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 and common share equivalent in each of the first three

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quarters of 2009. On November 4, 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 December 31, 2009 to holders of record on December 15, 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, foreign exchange gains (losses) and gain on bargain purchase, net of expenses. 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 (loss) for the three months ended September 30, 2009 and 2008 was $124.4 million and ($75.7) million, respectively. Underwriting income for the nine months ended September 30, 2009 and 2008 was $296.7 million and $65.4 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 nine months ended September 30, 2009 and 2008:
                                 
    Three months ended September 30,     Nine months ended September 30,  
(Dollars in thousands)   2009     2008 (a)     2009     2008 (a)  
Gross premiums written
  $ 331,028     $ 269,236     $ 1,365,951     $ 1,170,749  
Reinsurance premiums ceded
    (67,687 )     (35,139 )     (202,489 )     (121,438 )
 
                       
Net premiums written
    263,341       234,097       1,163,462       1,049,311  
Change in unearned premiums
    111,376       105,229       (141,786 )     (108,823 )
 
                       
Net premiums earned
    374,717       339,326       1,021,676       940,488  
 
                               
Losses and loss expenses
    134,152       318,464       390,736       580,578  
Policy acquisition costs
    64,236       60,425       190,125       173,545  
General and administrative expenses
    46,036       30,120       125,315       101,139  
Share compensation expenses
    5,862       6,012       18,848       19,818  
 
                       
Total underwriting deductions
    250,286       415,021       725,024       875,080  
 
                               
Underwriting income (loss) (b)
    124,431       (75,695 )     296,652       65,408  
Net investment income
    29,532       36,379       83,267       108,857  
Other income
    1,101       1,269       2,875       3,666  
Finance expenses
    (11,257 )     (14,517 )     (29,732 )     (48,796 )
 
                       
Operating income (loss) before taxes (b)
    143,807       (52,564 )     353,062       129,135  
Tax benefit (expense)
    1,799       (487 )     3,301       (4,992 )
 
                       
Net operating income (loss) (a) (b)
    145,606       (53,051 )     356,363       124,143  
 
                               
Gain on bargain purchase, net of expenses
    302,950             287,099        
Realized gain on repurchase of debentures
                      8,752  
Net realized gains (losses) on investments
    5,429       (13,667 )     (20,642 )     (8,348 )
Net unrealized gains (losses) on investments
    50,437       (14,649 )     109,839       (72,608 )
Foreign exchange (losses)
    (5,244 )     (44,933 )     (1,012 )     (35,843 )
 
                       
Net income (loss)
  $ 499,178     $ (126,300 )   $ 731,647     $ 16,096  
 
                       
Selected ratios:
                               
Net premiums written / Gross premiums written
    79.6 %     86.9 %     85.2 %     89.6 %
 
                               
Losses and loss expenses
    35.8 %     93.9 %     38.2 %     61.7 %
Policy acquisition costs
    17.1 %     17.8 %     18.6 %     18.5 %
General and administrative expenses
    13.8 %     10.6 %     14.1 %     12.9 %
 
                       
Expense ratio
    30.9 %     28.4 %     32.7 %     31.4 %
 
                       
Combined ratio
    66.7 %     122.3 %     70.9 %     93.1 %
 
                       
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
 
b)   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 September 30,     Nine months ended September 30,  
    2009     2008 (a)     2009     2008 (a)  
Validus Re
                               
Gross premiums written
  $ 124,704     $ 125,029     $ 734,390     $ 643,898  
Reinsurance premiums ceded
    (38,435 )     (36,286 )     (94,794 )     (61,237 )
 
                       
Net premiums written
    86,269       88,743       639,596       582,661  
Change in unearned premiums
    113,499       92,653       (101,684 )     (93,498 )
 
                       
Net premiums earned
    199,768       181,396       537,912       489,163  
 
                               
Losses and loss expenses
    45,987       217,081       142,570       324,673  
Policy acquisition costs
    32,648       26,520       90,346       72,232  
General and administrative expenses
    17,987       7,972       45,928       27,306  
Share compensation expenses
    1,766       1,809       4,986       4,632  
 
                       
Total underwriting deductions
    98,388       253,382       283,830       428,843  
 
                               
 
                       
Underwriting income (loss) (b)
    101,380       (71,986 )     254,082       60,320  
 
                       
 
                               
Talbot
                               
Gross premiums written
  $ 227,325     $ 157,307     $ 690,357     $ 556,335  
Reinsurance premiums ceded
    (50,253 )     (11,953 )     (166,491 )     (89,685 )
 
                       
Net premiums written
    177,072       145,354       523,866       466,650  
Change in unearned premiums
    (2,123 )     12,576       (40,102 )     (15,325 )
 
                       
Net premiums earned
    174,949       157,930       483,764       451,325  
 
                               
Losses and loss expenses
    88,165       101,383       248,166       255,905  
Policy acquisition costs
    33,106       34,026       102,378       101,458  
General and administrative expenses
    23,424       17,851       65,565       58,561  
Share compensation expenses
    1,371       1,164       5,804       3,266  
 
                       
Total underwriting deductions
    146,066       154,424       421,913       419,190  
 
                               
 
                       
Underwriting income (loss) (b)
    28,883       3,506       61,851       32,135  
 
                       
 
                               
Corporate & Eliminations
                               
Gross premiums written
  $ (21,001 )   $ (13,100 )   $ (58,796 )   $ (29,484 )
Reinsurance premiums ceded
    21,001       13,100       58,796       29,484  
 
                       
Net premiums written
                       
Change in unearned premiums
                       
 
                       
Net premiums earned
                       
 
                               
Losses and loss expenses
                       
Policy acquisition costs
    (1,518 )     (121 )     (2,599 )     (145 )
General and administrative expenses
    4,625       4,297       13,822       15,272  
Share compensation expenses
    2,725       3,039       8,058       11,920  
 
                       
Total underwriting deductions
    5,832       7,215       19,281       27,047  
 
                               
 
                       
Underwriting income (loss) (b)
    (5,832 )     (7,215 )     (19,281 )     (27,047 )
 
                       
 
                               
 
                       
Total underwriting income (b)
  $ 124,431     $ (75,695 )   $ 296,652     $ 65,408  
 
                       
 
a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
 
b)   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 September 30, 2009 compared to three months ended September 30, 2008
     Net income (loss) for the three months ended September 30, 2009 was $499.2 million compared to ($126.3) million for the three months ended September 30, 2008, an increase of $625.5 million or 495.2%. The primary factors driving the increase in net income were:
  Gain on bargain purchase, net of expenses of $303.0 million on the IPC Acquisition;
  Increase in underwriting income of $200.1 million due primarily to reduced losses and loss expenses of $184.3 and increased net premiums earned of $35.4 million. For the three months ended September 30, 2008, the Company incurred $183.4 million and $22.1 million, respectively, as a result of Hurricanes Ike and Gustav;
  Increase in net realized gains on investments of $19.1 million due to the disposition of selected fixed maturities to finance the purchase of IPC;
  Increase in net unrealized gains on investments of $65.1 million, respectively, due to improved market conditions for fixed income securities; and
  Decreased foreign exchange (losses) of $39.7 million was due to the increased value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. Foreign exchange (losses) for the three months ended September 30, 2009 were ($5.2) million, as compared to ($44.9) million for the three months ended September 30, 2008.
     The change in net income for the three months ended September 30, 2009 of $625.5 million is described in the following table:
                                 
    Three months ended September 30, 2009  
    Increase (decrease) over the three months ended September 30, 2008 (a)  
                    Corporate and        
                    other reconciling        
(Dollars in thousands)   Validus Re     Talbot     items     Total  
Hurricanes Ike and Gustav — net losses and loss expenses (b)
  $ 172,635     $ 32,878     $     $ 205,513  
Hurricanes Ike and Gustav — net reinstatement premiums (b)
    (19,268 )     (392 )           (19,660 )
Other underwriting income
    19,999       (7,109 )     1,383       14,273  
 
                       
Underwriting income (c)
    173,366       25,377       1,383       200,126  
Net investment income
    (2,564 )     (4,108 )     (175 )     (6,847 )
Other income
    1,726       (497 )     (1,397 )     (168 )
Finance expenses
    (180 )     3,275       165       3,260  
 
                       
 
    172,348       24,047       (24 )     196,371  
Taxes
    (10 )     2,296             2,286  
 
                       
 
    172,338       26,343       (24 )     198,657  
 
                               
Gain on bargain purchase, net of expenses
                302,950       302,950  
Net realized (losses) gains on investments
    17,925       1,171             19,096  
Net unrealized gains (losses) on investments
    56,839       8,247             65,086  
Foreign exchange (losses) gains
    23,658       16,031             39,689  
 
                       
 
                               
Net income
  $ 270,760     $ 51,792     $ 302,926     $ 625,478  
 
                       

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(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
 
(b)   Hurricanes Ike and Gustav net losses and loss expenses and net reinstatement premiums recognized for the three months ended September 30, 2008; therefore, figures exclude loss development in subsequent periods.
 
(c)   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.”
Gross Premiums Written
     Gross premiums written for the three months ended September 30, 2009 were $331.0 million compared to $269.2 million for the three months ended September 30, 2008, an increase of $61.8 million or 23.0%. The increase in gross premiums written was driven primarily by the property, marine and specialty lines which increased by $17.6 million, $12.5 million and $31.6 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)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 141,480       42.7 %   $ 123,831       46.0 %     14.3 %
Marine
    95,772       29.0 %     83,273       30.9 %     15.0 %
Specialty
    93,776       28.3 %     62,132       23.1 %     50.9 %
 
                               
Total
  $ 331,028       100.0 %   $ 269,236       100.0 %     23.0 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re gross premiums written for the three months ended September 30, 2009 were $124.7 million compared to $125.0 million for the three months ended September 30, 2008, a decrease of $0.3 million or 0.3%. 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)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 80,578       64.6 %   $ 97,545       78.0 %     (17.4 )%
Marine
    28,408       22.8 %     19,154       15.3 %     48.3 %
Specialty
    15,718       12.6 %     8,330       6.7 %     88.7 %
 
                               
Total
  $ 124,704       100.0 %   $ 125,029       100.0 %     (0.3 )%
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     The decrease in Validus Re gross premiums written was driven by a decrease in the property lines of $17.0 million offset by $9.3 million and $7.4 million increases in the marine and specialty lines, respectively. The decrease in the property line was due primarily to a $15.2 million reduction in reinstatement premiums on Hurricanes Ike and Gustav losses in 2008. The increase in the marine line was due primarily to an additional $12.5 million of off-shore energy gross premiums written recognized for the three months ended September 30, 2009. Gross premiums written under the quota share, surplus treaty and excess of loss contracts with Talbot increased by $7.9 million as compared to the three months ended September 30, 2008. The quota share, surplus treaty and excess of loss contracts with Talbot are eliminated upon consolidation.

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Talbot. Talbot gross premiums written for the three months ended September 30, 2009 were $227.3 million compared to $157.3 million for the three months ended September 30, 2008, an increase of $70.0 million or 44.5%. The $227.3 million of gross premiums written translated at third quarter 2008 rates of exchange would have been $238.4 million during the three months ended September 30, 2009, an increase of $81.1 million, or 51.5%. 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)   September 30, 2009     September 30, 2008     % Change  
Property
  $ 79,155       34.8 %   $ 35,194       22.4 %     124.9 %
Marine
    69,621       30.6 %     66,676       42.4 %     4.4 %
Specialty
    78,549       34.6 %     55,437       35.2 %     41.7 %
 
                               
Total
  $ 227,325       100.0 %   $ 157,307       100.0 %     44.5 %
 
                               
     The increase in the property lines was due primarily to $31.6 million of gross premiums written on the onshore energy lines and an $11.2 million increase in gross premiums written by Validus Reaseguros, Inc., which acts as an approved Lloyd’s coverholder for Syndicate 1183 targeting the Latin American and Caribbean markets, and commenced operations during 2008. The increase in the specialty lines was due primarily to $20.0 million of additional gross premiums written by the new aviation team.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended September 30, 2009 were $67.7 million compared to $35.1 million for the three months ended September 30, 2008, an increase of $32.5 million. This was due primarily to an increase of $28.6 million on the property lines retrocession as described below.
                                         
    Reinsurance premiums ceded  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 56,466       83.4 %   $ 27,823       79.1 %     102.9 %
Marine
    6,504       9.6 %     4,977       14.2 %     30.7 %
Specialty
    4,717       7.0 %     2,339       6.7 %     101.7 %
 
                               
Total
  $ 67,687       100.0 %   $ 35,139       100.0 %     92.6 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re reinsurance premiums ceded for the three months ended September 30, 2009 were $38.4 million compared to $36.3 million for the three months ended September 30, 2008, an increase of $2.1 million.
                                         
    Reinsurance premiums ceded  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 33,991       88.4 %   $ 32,265       88.9 %     5.3 %
Marine
    4,444       11.6 %     3,871       10.7 %     14.8 %
Specialty
          0.0 %     150       0.4 %     (100.0 )%
 
                               
Total
  $ 38,435       100.0 %   $ 36,286       100.0 %     5.9 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     Reinsurance premiums ceded on the property lines increased by $1.7 million, due to the purchase of an additional $34.0 million of catastrophe retrocessional coverage for IPC’s U.S. property exposures, off-set by the

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advanced second quarter 2009 renewal of retrocessional coverage via ultimate net loss agreements that incepted in 2008 during the three months ended September 30, 2008.
Talbot. Talbot reinsurance premiums ceded for the three months ended September 30, 2009 were $50.3 million compared to $12.0 million for the three months ended September 30, 2008, an increase of $38.3 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)   September 30, 2009     September 30, 2008     % Change  
Property
  $ 40,728       81.0 %   $ 4,466       37.4 %     812.0 %
Marine
    4,317       8.6 %     3,663       30.6 %     17.9 %
Specialty
    5,208       10.4 %     3,824       32.0 %     36.2 %
 
                               
Total
  $ 50,253       100.0 %   $ 11,953       100.0 %     320.4 %
 
                               
     Reinsurance premiums ceded on the property lines increased by $36.3 million, due primarily to $23.7 million of reinsurance premiums ceded on the additional gross premiums written on onshore energy lines, as discussed above. Reinsurance premiums ceded under third party quota share, surplus treaty and excess of loss contracts on the property lines increased by $27.6 million, as compared to the three months ended September 30, 2008. Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re for the three months ended September 30, 2009 were $21.0 million compared to $13.1 million for the three months ended September 30, 2008, an increase of $7.9 million. The quota share, surplus treaty and excess of loss with Validus Re are eliminated upon consolidation.
Net Premiums Written
     Net premiums written for the three months ended September 30, 2009 were $263.3 million compared to $234.1 million for the three months ended September 30, 2008, an increase of $29.2 million, or 12.5%. The ratios of net premiums written to gross premiums written for the three months ended September 30, 2009 and 2008 were 79.6% and 86.9%, 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)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 85,014       32.3 %   $ 96,008       41.1 %     (11.5 )%
Marine
    89,268       33.9 %     78,296       33.4 %     14.0 %
Specialty
    89,059       33.8 %     59,793       25.5 %     48.9 %
 
                               
Total
  $ 263,341       100.0 %   $ 234,097       100.0 %     12.5 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re net premiums written for the three months ended September 30, 2009 were $86.3 million compared to $88.7 million for the three months ended September 30, 2008, a decrease of $2.5 million or 2.8%. Details of net premiums written by line of business are provided below.
                                         
    Net premiums written  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 46,587       54.0 %   $ 65,280       73.6 %     (28.6 )%
Marine
    23,964       27.8 %     15,283       17.2 %     56.8 %
Specialty
    15,718       18.2 %     8,180       9.2 %     92.2 %
 
                               
Total
  $ 86,269       100.0 %   $ 88,743       100.0 %     (2.8 )%
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.

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     The decrease in Validus Re net premiums written was driven by a decrease in the property lines of $18.7 million. This decrease was due primarily to a $15.2 million reduction in reinstatement premiums on Hurricanes Ike and Gustav losses, as discussed above and increase in ceded premium of $2.1. The ratios of net premiums written to gross premiums written were 69.2% and 71.0% for the three months ended September 30, 2009 and 2008, respectively.
Talbot. Talbot net premiums written for the three months ended September 30, 2009 were $177.1 million compared to $145.4 million for the three months ended September 30, 2008, an increase of $31.7 million or 21.8%. Details of net premiums written by line of business are provided below:
                                         
    Net premiums written  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008     % Change  
Property
  $ 38,427       21.7 %   $ 30,728       21.1 %     25.1 %
Marine
    65,304       36.9 %     63,013       43.4 %     3.6 %
Specialty
    73,341       41.4 %     51,613       35.5 %     42.1 %
 
                               
Total
    $177,072       100.0 %   $ 145,354       100.0 %     21.8 %
 
                               
     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 months ended September 30, 2009 and 2008 were 77.9% and 92.4%, respectively. This decrease was due primarily to the 25.0% ratio of net premiums written to gross premiums written on the onshore energy lines for the three months ended September 30, 2009.
Change in Unearned Premiums
     Change in unearned premiums for the three months ended September 30, 2009 was $111.4 million compared to $105.2 million for the three months ended September 30, 2008, a change of $6.1 million or 5.8%.
                         
    Change in unearned premiums  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Change in gross unearned premium
  $ 95,638     $ 96,183       (0.6 )%
Change in prepaid reinsurance premium
    15,738       9,046       74.0 %
 
                   
Net change in unearned premium
  $ 111,376     $ 105,229       5.8 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re’s change in unearned premiums for the three months ended September 30, 2009 were $113.5 million compared to $92.7 million for the three months ended September 30, 2008, a change of $20.8 million or 22.5%.
                         
    Change in unearned premiums  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Change in gross unearned premium
  $ 99,768     $ 75,463       32.2 %
Change in prepaid reinsurance premium
    13,731       17,190       (20.1 )%
 
                   
Net change in unearned premium
  $ 113,499     $ 92,653       22.5 %
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.

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     The increase in gross unearned premium was due primarily to an additional $32.5 million of gross unearned premium resulting from the consolidation of IPCRe for the three months ended September 30, 2009.
Talbot. The Talbot change in unearned premiums for the three months ended September 30, 2009 was ($2.1) million compared to $12.6 million for the three months ended September 30, 2008, a change of $14.7 million, or 116.9%.
                         
    Change in unearned premiums  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008     % Change  
Change in gross unearned premium
  $ (4,130 )   $ 20,720       (119.9 )%
Change in prepaid reinsurance premium
    2,007       (8,144 )     (124.6 )%
 
                   
Net change in unearned premium
  $ (2,123 )   $ 12,576       (116.9 )%
 
                   
     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 September 30, 2009, as compared to the three months ended September 30, 2008. The lower change in prepaid reinsurance premiums in the three months ended September 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 September 30, 2009.
Net Premiums Earned
     Net premiums earned for the three months ended September 30, 2009 were $374.7 million compared to $339.3 million for the three months ended September 30, 2008, an increase of $35.4 million or 10.4%. The increase in net premiums earned was driven by increased premiums earned of $18.4 million and $17.0 million in the Validus Re and Talbot segments, respectively.
                                         
    Net premiums earned  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 177,916       47.4 %   $ 165,028       48.6 %     7.8 %
Marine
    114,114       30.5 %     101,110       29.8 %     12.9 %
Specialty
    82,687       22.1 %     73,188       21.6 %     13.0 %
 
                               
Total
  $ 374,717       100.0 %   $ 339,326       100.0 %     10.4 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re net premiums earned for the three months ended September 30, 2009 were $199.8 million compared to $181.4 million for the three months ended September 30, 2008, an increase of $18.4 million or, 10.1%. The increase in net premiums earned was due primarily to $31.8 million of property net premiums earned resulting from the consolidation of IPCRe Limited (“IPCRe”), which offset the increase in ceded earned premiums attributable to purchases of retrocessional cover during the three months ended September 30, 2009.
                                         
    Net premiums earned  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 141,547       70.9 %   $ 132,307       73.0 %     7.0 %
Marine
    35,397       17.7 %     29,980       16.5 %     18.1 %
Specialty
    22,824       11.4 %     19,109       10.5 %     19.4 %
 
                               
Total
    $199,768       100.0 %   $ 181,396       100.0 %     10.1 %
 
                               

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(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     The increase in Validus Re net premiums earned was driven by an increase in the property lines of $9.2 million due primarily to $31.8 million of property net premiums earned resulting from the consolidation of IPCRe, offset by the $15.2 million decrease in reinstatement premiums earned as compared to the three months ended September 30, 2008, as discussed above.
Talbot. Talbot net premiums earned for the three months ended September 30, 2009 were $174.9 million compared to $157.9 million for the three months ended September 30, 2008, an increase of $17.0 million or 10.8%.
                                         
    Net premiums earned  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008     % Change  
Property
  $ 36,369       20.8 %   $ 32,721       20.7 %     11.1 %
Marine
    78,717       45.0 %     71,130       45.1 %     10.7 %
Specialty
    59,863       34.2 %     54,079       34.2 %     10.7 %
 
                               
Total
  $ 174,949       100.0 %   $ 157,930       100.0 %     10.8 %
 
                               
     The increase in net premiums earned is due primarily to the increased levels of net premiums written by the new underwriting teams over the twelve months ended September 30, 2009, as compared with the twelve months ended September 30, 2008, as discussed above.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended September 30, 2009 were $134.2 million compared to $318.5 million for the three months ended September 30, 2008, a decrease of $184.3 million or 57.9%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended September 30, 2009 and 2008 were 35.8% and 93.9%, respectively. Details of loss ratios by line of business are provided below.
                         
    Three months ended   Three months ended   Percentage
    September 30, 2009   September 30, 2008 (a)   point change
Property
    13.5 %     122.4 %     (108.9 )
Marine
    65.5 %     99.6 %     (34.1 )
Specialty
    42.7 %     21.4 %     21.3  
All lines
    35.8 %     93.9 %     (58.1 )
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended September 30, 2009:

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    Three months ended September 30, 2009  
(Dollars in thousands)   Validus     Talbot     Eliminations     Total  
Gross reserves at period beginning
  $ 489,340     $ 845,537     $ (22,942 )   $ 1,311,935  
Losses recoverable at period beginning
    (61,798 )     (130,810 )     22,942       (169,666 )
 
                       
Net reserves at period beginning
    427,542       714,727             1,142,269  
Net reserves acquired in IPC acquisition
    304,957                   304,957  
Incurred losses- current year
    65,259       100,919             166,178  
Change in prior accident years
    (19,272 )     (12,754 )           (32,026 )
 
                       
Incurred losses
    45,987       88,165             134,152  
 
Exchange rate effects
    2,383       (4,992 )           (2,609 )
 
Paid losses
    (55,242 )     (70,885 )           (126,127 )
 
                       
Net reserves at period end
    725,627       727,015             1,452,642  
Losses recoverable
    57,608       143,064       (28,571 )     172,101  
 
                       
Gross reserves at period end
  $ 783,235     $ 870,079     $ (28,571 )   $ 1,624,743  
 
                       
     The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. Favorable loss development on prior years totaled $32.0 million. Favorable loss reserve development benefitted the Company’s loss ratio by 8.5 percentage points for the three months ended September 30, 2009. For the three months ended September 30, 2009, the Company did not experience any notable losses. For the three months ended September 30, 2008, the Company incurred $183.4 million and $22.1 million of losses attributable to Hurricanes Ike and Gustav, which represent 54.0 and 6.5 percentage points of the loss ratio, respectively.
     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 September 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 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 for the three months ended September 30, 2009.
                         
    As at September 30, 2009  
                    Total gross reserve for  
(Dollars in thousands)   Gross case reserves     Gross IBNR     losses and loss expenses  
Property
  $ 393,729     $ 322,935     $ 716,664  
Marine
    354,584       249,262       603,846  
Specialty
    129,543       174,690       304,233  
 
                 
Total
  $ 877,856     $ 746,887     $ 1,624,743  
 
                 
                         
    As at September 30, 2009  
                    Total net reserve for losses  
(Dollars in thousands)   Net case reserves     Net IBNR     and loss expenses  
Property
  $ 390,524     $ 304,084     $ 694,608  
Marine
    261,032       231,781       492,813  
Specialty
    115,231       149,990       265,221  
 
                 
Total
  $ 766,787     $ 685,855     $ 1,452,642  
 
                 

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     During the three months ended September 30, 2008, the Company incurred losses related to Hurricanes Ike and Gustav of $183.4 million and $22.1 million, respectively, as detailed in the chart below.
                         
    Net Losses and Loss     Net Reinstatement     Net Effect on Net  
(Dollars in thousands)   Expenses (1)     Premiums     (Loss) Income (2)  
Hurricane Ike
                       
Validus Re
                       
Property
  $ 120,286     $ (13,867 )   $ 106,419  
Marine
    36,778       (4,098 )     32,680  
Specialty
    125             125  
 
                 
All lines
    157,189       (17,965 )     139,224  
 
                 
 
                       
Talbot
                       
Property
    15,161       (386 )     14,775  
Marine
    10,478       (6 )     10,472  
Specialty
    544             544  
 
                 
All lines
    26,183       (392 )     25,791  
 
                 
 
                       
Total
                       
Property
    135,447       (14,253 )     121,194  
Marine
    47,256       (4,104 )     43,152  
Specialty
    669             669  
 
                 
All lines
  $ 183,372     $ (18,357 )   $ 165,015  
 
                 
 
                       
Hurricane Gustav
                       
Validus Re
                       
Property
  $ 13,946     $ (1,303 )   $ 12,643  
Marine
    1,500             1,500  
Specialty
                 
 
                 
All lines
    15,446       (1,303 )     14,143  
 
                 
 
                       
Talbot
                       
Property
    3,695             3,695  
Marine
    2,500             2,500  
Specialty
    500             500  
 
                 
All lines
    6,695             6,695  
 
                 
 
                       
Total
                       
Property
    17,641       (1,303 )     16,338  
Marine
    4,000             4,000  
Specialty
    500             500  
 
                 
All lines
  $ 22,141     $ (1,303 )   $ 20,838  
 
                 
 
                       
Hurricanes Ike and Gustav
                       
Property
  $ 153,088     $ (15,556 )   $ 137,532  
Marine
    51,256       (4,104 )     47,152  
Specialty
    1,169             1,169  
 
                 
All lines
  $ 205,513     $ (19,660 )   $ 185,853  
 
                 
 
(1)   Net of reinsurance.
 
(2)   Net effect on net (loss) income includes the sum of estimates of net claims and claim expenses incurred, and earned reinstatement premiums assumed and ceded.

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Validus Re. Validus Re losses and loss expenses for the three months ended September 30, 2009 were $46.0 million compared to $217.1 million for the three months ended September 30, 2008, a decrease of $171.1 million or 78.8%. Validus Re net paid losses for the three months ended September 30, 2009 were $55.2 million compared to $40.2 million for the three months ended September 30, 2008, an increase of $15.1 million or 37.6%, 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 23.0% and 119.7% for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009, Validus Re did not experience any notable loss events. For the three months ended September 30, 2008, Validus Re incurred $157.2 million and $15.4 million of losses attributable to Hurricanes Ike and Gustav, which represent 86.7 and 8.5 percentage points of the loss ratio, respectively. Validus Re segment loss ratios, excluding prior year development and loss events identified above, for the three months ended September 30, 2009 and 2008 were 32.6% and 26.4%, respectively. Details of loss ratios by line of business and period of incurrence are provided below.
                         
                    Percentage  
    2009     2008 (a)     point change  
Property — current year
    28.2 %     123.2 %     (95.0 )
Property — change in prior accident years
    (23.3 )%     (4.8 )%     (18.5 )
 
                 
Property — loss ratio
    4.9 %     118.4 %     (113.5 )
 
                       
Marine — current year
    32.7 %     174.6 %     (141.9 )
Marine — change in prior accident years
    47.8 %     14.7 %     33.1  
 
                 
Marine — loss ratio
    80.5 %     189.3 %     (108.8 )
 
                       
Specialty — current year
    60.3 %     27.8 %     32.5  
Specialty — change in prior accident years
    (13.8 )%     (8.6 )%     (5.2 )
 
                 
Specialty — loss ratio
    46.5 %     19.2 %     27.3  
 
                       
All lines — current year
    32.6 %     121.6 %     (89.0 )
All lines — change in prior accident years
    (9.6 )%     (1.9 )%     (7.7 )
 
                 
All lines — loss ratio
    23.0 %     119.7 %     (96.7 )
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     For the three months ended September 30, 2009, the property lines include $39.9 million related to current year losses and $33.0 million of favorable development relating to prior accident years. This favorable development is attributable to reduced loss estimates for Hurricane Ike and the October 2007 Peruvian mining loss, as well as lower than expected claim development elsewhere. For the three months ended September 30, 2008, Validus Re’s property lines incurred $120.3 million and $13.9 million of losses attributable to Hurricanes Ike and Gustav, which represented 90.9 and 10.5 percentage points of the loss ratio, respectively. Validus Re property line loss ratios, excluding prior year development and loss events identified above, for the three months ended September 30, 2009 and 2008 were 28.2% and 21.8%, respectively.
     For the three months ended September 30, 2009, the marine lines include $11.6 million related to current year losses and $16.9 million of adverse development relating to prior accident years. This adverse development is primarily attributable to increased loss estimates for Hurricanes Ike and Gustav. For the three months ended September 30, 2008, Validus Re’s marine lines incurred $36.8 million and $1.5 million of losses attributable to Hurricanes Ike and Gustav, which represented 122.7 and 5.0 percentage points of the loss ratio, respectively. Validus Re marine line loss ratios, excluding prior year development and loss events identified above, for the three months ended September 30, 2009 and 2008 were 32.7% and 46.9%, respectively.
     For the three months ended September 30, 2009, the specialty lines include $13.8 million related to current year losses and $3.1 million of favorable development relating to prior accident years. For the three months ended

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September 30, 2008, Validus Re’s specialty lines incurred $0.1 million of losses attributable to Hurricane Ike, which represented 0.7 percentage points of the loss ratio. Validus Re specialty lines loss ratios, excluding prior year development and the loss event identified above, for the three months ended September 30, 2009 and 2008 were 60.3% and 27.1%, respectively. This difference is primarily attributable to a larger than expected number of specialty lines losses, as well as higher than expected 2009 claim development elsewhere.
Talbot. Talbot losses and loss expenses for the three months ended September 30, 2009 were $88.2 million compared to $101.4 million for the three months ended September 30, 2008, a decrease of $13.2 million, or 13.0%. The loss ratio was 50.4% and 64.2% for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009, Talbot did not experience any notable loss events. For the three months ended September 30, 2008, Talbot incurred $26.2 million and $6.7 million of losses attributable to Hurricanes Ike and Gustav, which represent 16.6 and 4.2 percentage points of the loss ratio, respectively. For the three months ended September 30, 2009, $100.9 million of losses and loss expenses related to current year losses and $12.8 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 September 30,        
                    Percentage  
    2009     2008     point change  
Property — current year
    56.1 %     139.0 %     (82.9 )
Property — change in prior accident years
    (8.9 )%     (0.2 )%     (8.7 )
 
                 
Property — loss ratio
    47.2 %     138.8 %     (91.6 )
 
                       
Marine — current year
    58.7 %     79.0 %     (20.3 )
Marine — change in prior accident years
    0.1 %     (17.2 )%     17.3  
 
                 
Marine — loss ratio
    58.8 %     61.8 %     (3.0 )
 
                       
Specialty — current year
    57.3 %     41.3 %     16.0  
Specialty — change in prior accident years
    (16.0 )%     (19.1 )%     3.1  
 
                 
Specialty — loss ratio
    41.3 %     22.2 %     19.1  
 
                       
All lines — current year
    57.7 %     78.5 %     (20.8 )
All lines — change in prior accident years
    (7.3 )%     (14.3 )%     7.0  
 
                 
All lines — loss ratio
    50.4 %     64.2 %     (13.8 )
     For the three months ended September 30, 2009, the property lines include $20.4 million related to current year losses and $3.2 million of favorable development relating to prior accident years. For the three months ended September 30, 2008, Talbot’s property lines incurred $15.2 million and $3.7 million of losses attributable to Hurricanes Ike and Gustav, which represented 46.3 and 11.3 percentage points of the loss ratio, respectively. Talbot property line loss ratio, excluding prior year development for the three months ended September 30, 2009 and 2008 were 56.1% and 81.4%, respectively.
     For the three months ended September 30, 2009, the marine lines include $46.2 million related to current year. For the three months ended September 30, 2008, Talbot’s marine lines incurred $10.5 million and $2.5 million of losses attributable to Hurricanes Ike and Gustav, which represented 14.7 and 3.5 percentage points of the loss ratio, respectively. Talbot marine line loss ratios, excluding prior year development, for the three months ended September 30, 2009 and 2008 were 58.7% and 60.8%, respectively.
     For the three months ended September 30, 2009, the specialty lines include $34.3 million relating to current year losses and $9.6 million due to favorable development on prior accident years. This favorable development is primarily due to further favorable development on the financial institutions lines. For the three months ended September 30, 2008, Talbot’s specialty lines incurred $0.5 million and $0.5 million of losses attributable to Hurricanes Ike and Gustav, which represented 1.0 and 0.9 percentage points of the loss ratio, respectively. Talbot

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specialty lines loss ratios, excluding prior year development and the loss events identified above, for the three months ended September 30, 2009 and 2008 were 57.3% and 39.4%, respectively.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended September 30, 2009 were $64.2 million compared to $60.4 million for the three months ended September 30, 2008, an increase of $3.8 million or 6.3%. Policy acquisition costs as a percent of net premiums earned for the three months ended September 30, 2009 and 2008 were 17.1% and 17.8%, respectively.
                                         
    Policy acquisition costs  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 24,919       38.8 %   $ 24,189       40.0 %     3.0 %
Marine
    21,586       33.6 %     20,796       34.4 %     3.8 %
Specialty
    17,731       27.6 %     15,440       25.6 %     14.8 %
 
                               
Total
  $ 64,236       100.0 %   $ 60,425       100.0 %     6.3 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Validus Re. Validus Re policy acquisition costs for the three months ended September 30, 2009 were $32.6 million compared to $26.5 million for the three months ended September 30, 2008, an increase of $6.1 million or 23.1%.
                                         
    Policy acquisition costs  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Property
  $ 22,884       70.1 %   $ 19,027       71.8 %     20.3 %
Marine
    6,392       19.6 %     4,990       18.8 %     28.1 %
Specialty
    3,372       10.3 %     2,503       9.4 %     34.7 %
 
                               
Total
  $ 32,648       100.0 %   $ 26,520       100.0 %     23.1 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     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 September 30, 2009 and 2008 were 16.3% and 14.6%, respectively. The policy acquisition ratio increased on the property and marine lines due primarily to the effects of Hurricanes Ike and Gustav reinstatement premiums earned without related policy acquisition costs for three months ended September 30, 2008. The policy acquisition ratio increased on the specialty lines due primarily to an upwards premium adjustment on a specialty lines proportional contract with a high portion of policy acquisition costs for three months ended September 30, 2008.
Talbot. Talbot policy acquisition costs for the three months ended September 30, 2009 were $33.1 million compared to $34.0 million for the three months ended September 30, 2008, a decrease of $0.9 million or 2.7%.
                                         
    Policy acquisition costs  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008     % Change  
Property
  $ 3,553       10.7 %   $ 5,283       15.5 %     (32.7 )%
Marine
    15,194       45.9 %     15,806       46.5 %     (3.9 )%
Specialty
    14,359       43.4 %     12,937       38.0 %     11.0 %
 
                               
Total
    $33,106       100.0 %   $ 34,026       100.0 %     (2.7 )%
 
                               

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     Policy acquisition costs as a percent of net premiums earned were 18.9% and 21.5%, respectively, for the three months ended September 30, 2009 and 2008. This decrease is primarily due to the high value of commissions receivable on quota share and surplus treaties and the onshore energy lines within the property lines.
General and Administrative Expenses
     General and administrative expenses for the three months ended September 30, 2009 were $46.0 million compared to $30.1 million for the three months ended September 30, 2008, an increase of $15.9 million or 52.8%. The increase was a result of increased expenses in both the Validus Re and Talbot segments.
                                         
    General and administrative expenses  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Validus Re
  $ 17,987       39.1 %   $ 7,972       26.4 %     125.6 %
Talbot
    23,424       50.9 %     17,851       59.3 %     31.2 %
Corporate & Eliminations
    4,625       10.0 %     4,297       14.3 %     7.6 %
 
                               
Total
  $ 46,036       100.0 %   $ 30,120       100.0 %     52.8 %
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     General and administrative expense ratios for the three months ended September 30, 2009 and 2008 was 13.8% and 10.6%, 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  
    September 30, 2009     September 30, 2008 (a)  
            Expenses as % of             Expenses as % of  
            Net Earned             Net Earned  
(Dollars in thousands)   Expenses     Premiums     Expenses     Premiums  
General and Administrative
  $ 46,036       12.2 %   $ 30,120       8.8 %
Share Compensation
    5,862       1.6 %     6,012       1.8 %
 
                       
Total
  $ 51,898       13.8 %   $ 36,132       10.6 %
 
                       
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     General and administrative expenses of $46.0 million in the three months ended September 30, 2009 represents 12.2 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 September 30, 2009 were $18.0 million compared to $8.0 million for the three months ended September 30, 2008, an increase of $10.0 million or 125.6%. General and administrative expenses have increased primarily as a result of an additional accrual for the performance bonus compared to a performance bonus reduction for the three months ended September 30, 2008 and the increase in staff to 121 at September 30, 2009 from 86 at September 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 months ended September 30, 2009 and 2008 were 9.0% and 4.4%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended September 30, 2009 were $23.4 million compared to $17.9 million for the three months ended September 30, 2008, an increase of $5.6 million or 31.2%. General and administrative expenses have increased primarily as a result of the increase in staff to 213 at September 30, 2009 from 175 at September 30, 2008 and expenses related to the new onshore energy and aviation

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underwriting teams. Talbot’s general and administrative expenses as a percent of net premiums earned for the three months ended September 30, 2009 and 2008 were 13.4% and 11.3%, respectively.
Corporate & Eliminations. Corporate general and administrative expenses for the three months ended September 30, 2009 were $4.6 million compared to $4.3 million for the three months ended September 30, 2008, an increase of $0.3 million or 7.6%. 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 September 30, 2009 were $5.9 million compared to $6.0 million for the three months ended September 30, 2008, a decrease of $0.2 million or 2.5%. 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 expenses  
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Validus Re
  $ 1,766       30.1 %   $ 1,809       30.1 %     (2.4 )%
Talbot
    1,371       23.4 %     1,164       19.4 %     17.8 %
Corporate & Eliminations
    2,725       46.5 %     3,039       50.5 %     (10.3 )%
 
                               
Total
  $ 5,862       100.0 %   $ 6,012       100.0 %     (2.5 )%
 
                               
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     Share compensation expense of $5.9 million in the three months ended September 30, 2009 represents 1.6 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expense for the three months ended September 30, 2009 was $1.8 million compared to $1.8 million for the three months ended September 30, 2008. Share compensation expense as a percent of net premiums earned for the three months ended September 30, 2009 and 2008 were 0.9% and 1.0%, respectively.
Talbot. Talbot share compensation expense for the three months ended September 30, 2009 was $1.4 million compared to $1.2 million for the three months ended September 30, 2008. Share compensation expense as a percent of net premiums earned for the three months ended September 30, 2009 and 2008 was 0.8% and 0.7%, respectively.
Corporate & Eliminations. Corporate share compensation expense for the three months ended September 30, 2009 was $2.7 million compared to $3.0 million for the three months ended September 30, 2008, a decrease of $0.3 million or 10.3%. 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 September 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 September 30, 2009 and 2008.

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    Three months ended     Three months ended     Percentage  
    September 30, 2009     September 30, 2008 (a)     point change  
Losses and loss expenses ratio
    35.8 %     93.9 %     (58.1 )
Policy acquisition cost ratio
    17.1 %     17.8 %     (0.7 )
General and administrative expense ratio (1)
    13.8 %     10.6 %     3.2  
 
                 
Expense ratio
    30.9 %     28.4 %     2.5  
 
                 
Combined ratio
    66.7 %     122.3 %     (55.6 )
 
                 
 
(1)   Includes general and administrative expense and share compensation expense.
                         
    Three months ended     Three months ended     Percentage  
Validus Re   September 30, 2009     September 30, 2008 (a)     point change  
Losses and loss expenses ratio
    23.0 %     119.7 %     (96.7 )
Policy acquisition cost ratio
    16.3 %     14.6 %     1.7  
General and administrative expense ratio
    9.9 %     5.4 %     4.5  
 
                 
Expense ratio
    26.2 %     20.0 %     6.2  
 
                 
Combined ratio
    49.2 %     139.7 %     (90.5 )
 
                 
                         
    Three months ended     Three months ended     Percentage  
Talbot   September 30, 2009     September 30, 2008     point change  
Losses and loss expenses ratio
    50.4 %     64.2 %     (13.8 )
Policy acquisition cost ratio
    18.9 %     21.5 %     (2.6 )
General and administrative expense ratio
    14.2 %     12.0 %     2.2  
 
                 
Expense ratio
    33.1 %     33.5 %     (0.4 )
 
                 
Combined ratio
    83.5 %     97.7 %     (14.2 )
 
                 
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
Underwriting Income (Loss)
     Underwriting income (loss) for the three months ended September 30, 2009 was $124.4 million compared to ($75.7) million for the three months ended September 30, 2008, an increase of $200.1 million, or 264.4%.
                                         
    Three months ended September 30,        
            % of Sub             % of Sub        
(Dollars in thousands)   2009     total     2008 (a)     total     % Change  
Validus Re
  $ 101,380       77.8 %   $ (71,986 )     105.1 %     240.8 %
Talbot
    28,883       22.2 %     3,506       (5.1 )%     723.8 %
 
                               
Sub total
    130,263       100.0 %     (68,480 )     100.0 %     290.2 %
 
                                   
Corporate & Eliminations
    (5,832 )             (7,215 )             19.2 %
 
                                   
Total
  $ 124,431             $ (75,695 )             264.4 %
 
                                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     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 certain Consolidated Statement of Operations and Comprehensive Income line items, as described below.

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    Three months ended     Three months ended  
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)  
Underwriting income (loss)
  $ 124,431     $ (75,695 )
Net investment income
    29,532       36,379  
Other income
    1,101       1,269  
Finance expenses
    (11,257 )     (14,517 )
Foreign exchange (losses) gains
    (5,244 )     (44,933 )
Gain on bargain purchase, net of expenses
    302,950        
Net realized gains (losses) on investments
    5,429       (13,667 )
Net unrealized gains (losses) on investments
    50,437       (14,649 )
 
           
Net income (loss) before tax
  $ 497,379     $ (125,813 )
 
           
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     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.
     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 September 30, 2009 was $29.5 million compared to $36.4 million for the three months ended September 30, 2008, a decrease of $6.8 million or 18.8%. 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

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investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended September 30, 2009 and 2008 are as presented below.
                         
    Three months ended     Three months ended        
(Dollars in thousands)   September 30, 2009     September 30, 2008 (a)     % Change  
Fixed maturities and short-term investments
  $ 29,427     $ 32,443       (9.3 )%
Cash and cash equivalents
    742       4,308       (82.8 )%
Securities lending income
    171       261       (34.5 )%
 
                   
Total gross investment income
    30,340       37,012       (18.0 )%
Investment expenses
    (808 )     (633 )     27.6 %
 
                   
Net investment income
  $ 29,532     $ 36,379       (18.8 )%
 
                   
 
(a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     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 months ended September 30, 2009 and 2008 were $0.6 million and $0.3 million, respectively. Investment management fees earned by GSAM for the three months ended September 30, 2009 and 2008 were $0.4 million and $0.3 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 2.56% and 4.49% for the three months ended September 30, 2009 and 2008, respectively, and the average duration at September 30, 2009 was 2.2 years (December 31, 2008 — 1.8 years).
Finance Expenses
     Finance expenses for the three months ended September 30, 2009 were $11.3 million compared to $14.5 million for the three months ended September 30, 2008, a decrease of $3.3 million or 22.5%. 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.
                         
    Three months ended September 30,        
(Dollars in thousands)   2009     2008 (a)     % Change  
9.069% Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,588       0.0 %
8.480% Junior Subordinated Deferrable Debentures
    3,348       3,509       (4.6 )%
Credit facilities
    395       218       81.2 %
Talbot FAL facilities
    62       44       40.9 %
Talbot other interest
          (194 )   NM  
Talbot third party FAL facility
    3,864       7,352       (47.4 )%
 
                   
Finance expenses
  $ 11,257     $ 14,517       (22.5 )%
 
                   
 
NM: Not Meaningful

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  (a)   The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently, 2008 data does not include IPC financial results.
     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 September 30,  
                                    FAL Finance Charges as % of Total  
Underwriting Year of Account   FAL Finance Charges     Total Syndicate Profit     Syndicate Profit  
(Dollars in thousands)   2009     2008     2009     2008     2009     2008 (1)  
2006 (1)
  $     $ 4,801     $     $ 12,614     NM       38.1 %
2007
    3,864       2,551       11,696       5,583       33.0 %     45.7 %
2008
                5,936       (19,051 )   NM     NM  
2009
                24,254           NM     NM  
 
                                       
Total
  $ 3,864     $ 7,352     $ 41,886     $ (854 )     9.2 %     (860.9 )%
 
                                       
 
                                               
Percentage excluding years in deficit                     9.2 %     40.4 %
 
(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 September 30, 2009 were $3.8 million compared to $7.4 million for the three months ended September 30, 2008, a decrease of $3.5 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.
                 
    Three months ended     Three months ended  
(Dollars in thousands)   September 30, 2009     September 30, 2008  
Total syndicate profit
  $ 41,886     $ (854 )
FAL Finance expenses
    (3,864 )     (7,352 )
Managing agent’s fee (1)
    2,428       2,302  
Managing agent’s profit commission (2)
    5,145       3,241  
Investment income (3)
    4,077       2,613  
Other segment operating income (expenses), net
    (10,310 )     (10,291 )
Share compensation (expenses)
    (1,371 )     (1,163 )
Intangible amortization (expenses)
    (1,040 )     (1,040 )
Tax benefit (expense)
    1,840       (457 )
 
           
Talbot segment net income
  $ 38,791     $ (13,001 )
 
           
 
(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.

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Gain on Bargain Purchase, Net of Expenses
     On September 4, 2009, the Company acquired all of the outstanding shares of IPC from a group of institutional and other investors. Pursuant to the Amalgamation Agreement, the Company acquired all of IPC’s outstanding common shares in exchange for the Company’s common shares and cash. The purchase price paid by the Company was $1,746.2 million for net assets acquired of $2,076.9 million. The Company expensed as incurred $27.7 million of transaction expenses and $21.7 million for amortization of intangibles related to the acquisition for the three months ended September 30, 2009, resulting in a gain on bargain purchase of $303.0 million for the three months ended September 30, 2009. Transaction expenses are comprised of primarily legal, corporate advisory, IPC employee termination benefits and audit related services.
Net Realized (Losses) Gains on Investments
     Net realized gains on investments for the three months ended September 30, 2009 were $5.4 million compared to losses of ($13.7) million for the three months ended September 30, 2008. The net realized gains for the three months ended September 30, 2009 resulted primarily from the disposition of selected fixed maturities to finance the purchase of IPC.
     On August 28, 2009, the Company sold short equity index futures contracts with a goal of hedging IPC’s mutual fund equity portfolio exposure. The contracts were closed when the equity positions were fully redeemed on September 9, 2009. The Company experienced a ($3.3) million realized investment (loss) as a result of the futures contracts.
Net Unrealized Gains (Losses) on Investments
     Net unrealized gains on investments for the three months ended September 30, 2009 were $50.4 million compared to losses of ($14.6) million for the three months ended September 30, 2008. The net unrealized gains in the three months ended September 30, 2009 resulted primarily from improved market conditions for fixed income securities.
     The net unrealized gains on investments for the three months ended September 30, 2009 included a $2.0 million unrealized gain on the fund of hedge funds purchased in the IPC Acquisition. The fund of hedge funds was included in other investments on the balance sheet as at September 30, 2009.
     Net unrealized gains on investments are recorded as a component of net income. The Company has adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance sheet date. Consistent with these standards, 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 $0.6 million decrease in net unrealized loss on investments for the three months ended September 30, 2009. Further details are provided in the Investments section below.
Other Income
     Other income for the three months ended September 30, 2009 was $1.1 million compared to $1.3 million for the three months ended September 30, 2008, a decrease of $0.2 million or 13.2%.
Foreign Exchange Gains (Losses)
     Foreign exchange (losses) for the three months ended September 30, 2009 were ($5.2) million compared to ($44.9) million for the three months ended September 30, 2008, a decrease of $39.7 million. The decrease in foreign exchange (losses) was due primarily to the increased value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. For the three months ended September 30, 2009, Validus Re recognized foreign exchange gains of $0.7 million that were offset by Talbot foreign exchange (losses) of ($6.0) million. For the three months ended September 30, 2009, Talbot segment foreign exchange (losses) were ($6.0) million compared to (losses) of ($22.0) million for the three months ended September 30, 2008, a decrease of $16.0 million. The decrease in Talbot segment foreign exchange (losses) was due primarily to; (1) a $5.5 million increased gain on the recurring revaluation of net unearned premiums and deferred acquisition costs; (2) a $15.2 million increase due to the absence, in the three months ended September 30, 2009, of a non-recurring loss on revaluation of foreign exchange to reporting currency and the sale of U.S. dollars for the three months ended September 30, 2008; and (3) an ($8.1) million (loss) related to a prior year tax adjustment. The British pound sterling to U.S. dollar exchange rates were 1.65 and 1.59 at June 30, 2009 and September 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.

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     At September 30, 2009, Talbot’s balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $89.3 million and $19.3 million, respectively. These balances consisted of British pounds sterling and Canadian dollars of $63.3 million and $6.7 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic 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 September 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 (losses) 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.
Tax Benefit (Expense)
     Tax benefit for the three months ended September 30, 2009 was $1.8 million compared to an (expense) of ($0.5) million for the three months ended September 30, 2008, a change of $2.3 million.

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     The following table presents results of operations for the three and nine months ended September 30, 2009 and 2008:
                                 
    Three months ended September 30,     Nine months ended September 30,  
(Dollars in thousands)   2009     2008 (a)     2009     2008 (a)  
Gross premiums written
  $ 331,028     $ 269,236     $ 1,365,951     $ 1,170,749  
Reinsurance premiums ceded
    (67,687 )     (35,139 )     (202,489 )     (121,438 )
 
                       
Net premiums written
    263,341       234,097       1,163,462       1,049,311  
Change in unearned premiums
    111,376       105,229       (141,786 )     (108,823 )
 
                       
Net premiums earned
    374,717       339,326       1,021,676       940,488  
 
                               
Losses and loss exp