Test Environment

Validus Reports First Quarter 2018 Financial Results

01 May 2018

PEMBROKE, Bermuda--(BUSINESS WIRE)--May 1, 2018-- Validus Holdings, Ltd. (“Validus” or the “Company”) (NYSE:VR) today reported a net (loss) attributable to Validus common shareholders of $(4.1) million, or $(0.05) per diluted common share, for the three months ended March 31, 2018, compared to net income available to Validus common shareholders of $94.6 million, or $1.17 per diluted common share, for the three months ended March 31, 2017.

Net operating income available to Validus common shareholders was $42.6 million, or $0.53 per diluted common share, for the three months ended March 31, 2018, compared to $76.8 million, or $0.95 per diluted common share, for the three months ended March 31, 2017.

As previously announced on January 22, 2018, the Company entered into a definitive agreement and plan of merger (the “Merger”) with American International Group, Inc. (“AIG”). The Merger is expected to close in mid-2018, subject to regulatory approvals and other customary closing conditions. During the three months ended March 31, 2018, the Company incurred transaction expenses of $7.8 million in relation to the Merger.

Book value per common share at March 31, 2018 was $44.14, compared to $44.06 at December 31, 2017. Book value per diluted common share at March 31, 2018 was $42.79, compared to $42.71 at December 31, 2017, reflecting a quarterly increase of 1.1%, inclusive of common dividends.

(Loss) income (attributable) available to Validus common shareholders by segment for the three months ended March 31, 2018 and March 31, 2017 was as follows:

    Three Months Ended March 31,

(Expressed in millions of U.S. dollars, except per share information)

  2018   2017
Reinsurance segment - Underwriting income   $ 41.4     $ 84.6  
Insurance segment - Underwriting (loss)   (12.8 )   (16.4 )
Asset Management segment income   7.3     6.1  
Total segmental income   35.9     74.3  

Total managed investment return(a)

  (2.8 )   52.8  
Corporate expenses   (29.4 )   (33.9 )
Other items   (7.8 )   1.4  
Net (loss) income (attributable) available to Validus common shareholders   $ (4.1 )   $ 94.6  
Net (loss) income per diluted share (attributable) available to Validus common shareholders   $ (0.05 )   $ 1.17  

Net operating income available to Validus common shareholders(b)

  $ 42.6     $ 76.8  
Net operating income per diluted share available to Validus common shareholders(b)   $ 0.53     $ 0.95  
(a)   Total managed investment return includes returns generated on managed assets governed by the Company’s investment policy statement (“IPS”) and excludes returns on non-managed assets held in support of consolidated AlphaCat variable interest entities which are not governed by the Company’s IPS.
(b)   Net operating income available to Validus common shareholders is presented after tax and is considered a non-GAAP financial measure. A reconciliation of net (loss) income (attributable) available to Validus common shareholders, the most comparable GAAP measure, to net operating income available to Validus common shareholders is presented at the end of this release.
 

This earnings release should be read in conjunction with the Company's first quarter 2018 investor financial supplement that has been posted to the Investors section of the Company's website located at www.validusholdings.com.

First Quarter 2018 Results

Highlights for the first quarter 2018 were as follows:

  • Gross premiums written for the three months ended March 31, 2018 were $1,832.5 million compared to $1,190.9 million for the three months ended March 31, 2017, an increase of $641.6 million, or 53.9% driven by increases in all segments.
  • Reinsurance premiums ceded for the three months ended March 31, 2018 were $376.3 million compared to $200.1 million for the three months ended March 31, 2017, an increase of $176.2 million, or 88.0%. The increase was primarily driven by increases in the Insurance and Reinsurance segments.
  • Net premiums earned for the three months ended March 31, 2018 were $618.9 million compared to $575.4 million for the three months ended March 31, 2017, an increase of $43.6 million, or 7.6%. The increase was primarily driven by an increase in the Asset Management and Insurance segments and was partially offset by a decrease in the Reinsurance segment.
  • Loss ratio for the three months ended March 31, 2018 and 2017 was 52.0% and 46.9%, respectively, and included the following:
    • Non-notable losses of $nil during the three months ended March 31, 2018 compared to $19.8 million, or 3.4 percentage points of the loss ratio during the three months ended March 31, 2017;
    • Favorable loss reserve development on prior accident years of $7.6 million during the three months ended March 31, 2018, which benefited the loss ratio by 1.2 percentage points compared to favorable development of $61.2 million during the three months ended March 31, 2017, which benefited the loss ratio by 10.6 percentage points. Excluding the Asset Management segment, which includes losses attributable to AlphaCat’s third party investors and noncontrolling interests, favorable development during the three months ended March 31, 2018 was $33.4 million; and
    • Attritional losses of $329.1 million, or 53.2 percentage points of the loss ratio during the three months ended March 31, 2018 compared to $311.1 million, or 54.1 percentage points of the loss ratio during the three months ended March 31, 2017.
  • Combined ratio for the three months ended March 31, 2018 and 2017 was 90.9% and 83.2%, respectively, an increase of 7.7 percentage points.
  • Total managed investment return from our managed investment portfolio for the three months ended March 31, 2018 was $(2.8) million compared to $52.8 million for the three months ended March 31, 2017.
  • Annualized return on average equity for the three months ended March 31, 2018 of (0.5)%, compared to 10.2% for the three months ended March 31, 2017.
  • Annualized net operating return on average equity for the three months ended March 31, 2018 of 4.9%, compared to 8.3% for the three months ended March 31, 2017.

Reinsurance Segment

Highlights for the first quarter 2018 were as follows:

  • Gross premiums written for the three months ended March 31, 2018 were$765.6 million compared to$643.1 million for the three months ended March 31, 2017, an increase of$122.4 million, or 19.0% and included the following:
    • Property premiums of $274.0 million during the three months ended March 31, 2018, compared to $216.7 million during the three months ended March 31, 2017, an increase of $57.3 million, or 26.5%, primarily driven by increased participation on a number of catastrophe excess of loss programs and new proportional business written;
    • Specialty - short-tail premiums of $352.1 million during the three months ended March 31, 2018, compared to $376.9 million during the three months ended March 31, 2017, a decrease of $24.8 million, or 6.6%. The decrease was primarily driven by the non-renewal of one significant agriculture contract and was partially offset by new composite business written; and
    • Specialty - other premiums of $139.5 million during the three months ended March 31, 2018, compared to $49.6 million during the three months ended March 31, 2017, an increase of $89.9 million, or 181.2%, primarily driven by new casualty business written and the timing of renewals.
  • Reinsurance premiums ceded for the three months ended March 31, 2018 were $190.2 million compared to $114.4 million for the three months ended March 31, 2017, an increase of $75.7 million, or 66.2%. The increase was primarily driven by an increase in the property lines of $48.0 million as a result of new aggregate and proportional covers purchased and an increase in the specialty - other lines of $20.7 million as a result of a new casualty retrocession cover.
  • Net premiums earned for the three months ended March 31, 2018 were $224.8 million compared to $231.7 million for the three months ended March 31, 2017, a decrease of $6.9 million, or 3.0%.
  • Loss ratio for the three months ended March 31, 2018 and 2017 was 46.0% and 34.9%, respectively, and included the following:
    • Non-notable losses of $nil during the three months ended March 31, 2018, compared to $5.1 million, or 2.2 percentage points during the three months ended March 31, 2017;
    • Favorable loss reserve development on prior accident years of $17.8 million during the three months ended March 31, 2018, which benefited the loss ratio by 7.9 percentage points compared to favorable development of $31.1 million during the three months ended March 31, 2017, which benefited the loss ratio by 13.4 percentage points. The favorable development of $17.8 million during the three months ended March 31, 2018 was primarily driven by favorable development on attritional losses; and
    • Attritional losses of $121.3 million, or 53.9 percentage points of the loss ratio during the three months ended March 31, 2018 compared to $106.9 million, or 46.1 percentage points of the loss ratio during the three months ended March 31, 2017. The increase in the attritional loss ratio was primarily due to $10.0 million of losses from Winter Storm Friederike which did not meet the non-notable loss threshold and the earned impact of higher retrocession purchases as noted above.
  • Policy acquisition cost ratio for the three months ended March 31, 2018 was 21.5% compared to 18.8% for the three months ended March 31, 2017, an increase of 2.7 percentage points. The increase was primarily driven by the earned impact of higher retrocession purchases as noted above and a change in business mix in the specialty classes.
  • General and administrative expenses for the three months ended March 31, 2018 were $28.9 million compared to $20.0 million for the three months ended March 31, 2017, an increase of $8.9 million or 44.8%. The increase was primarily driven by an increase in the performance bonus accrual and a higher allocation of costs to the segment.
  • Combined ratio for the three months ended March 31, 2018 and 2017 was 81.6% and 63.5%, respectively, an increase of 18.1 percentage points.
  • Underwriting income for the three months ended March 31, 2018 was $41.4 million compared to $84.6 million for the three months ended March 31, 2017, a decrease of $43.3 million or 51.1%.

Insurance Segment

On May 1, 2017, the Company completed its acquisition of Crop Risk Services (“CRS”). The results of CRS have been presented within the specialty - short-tail line of business in the Insurance segment from the date of acquisition.

Highlights for the first quarter 2018 were as follows:

  • Gross premiums written for the three months ended March 31, 2018 were$785.8 million compared to$382.8 million for the three months ended March 31, 2017, an increase of$403.0 million, or 105.3% and included the following:
    • Property premiums of $92.0 million during the three months ended March 31, 2018, compared to $81.5 million during the three months ended March 31, 2017, an increase of $10.4 million, or 12.8%;
    • Specialty - short-tail premiums of $538.3 million during the three months ended March 31, 2018, compared to $179.2 million during the three months ended March 31, 2017, an increase of $359.1 million, or 200.4%. The increase was primarily driven by new agriculture business written through CRS; and
    • Specialty - other premiums of $155.5 million during the three months ended March 31, 2018, compared to $122.0 million during the three months ended March 31, 2017, an increase of $33.5 million, or 27.4%, primarily driven by increased participation on renewals and the build out of product offerings in U.S. liability lines.
  • Reinsurance premiums ceded for the three months ended March 31, 2018 were $191.6 million compared to $79.0 million for the three months ended March 31, 2017, an increase of $112.6 million, or 142.6%. The increase was primarily driven by an increase in the specialty - short-tail lines of $78.7 million driven by ceded agriculture premiums relating to new business written through CRS and an increase in the specialty - other lines of $20.1 million as a result of the continued build out of U.S. liability lines as noted above.
  • Net premiums earned for the three months ended March 31, 2018 were $299.5 million compared to $279.1 million for the three months ended March 31, 2017, an increase of $20.4 million, or 7.3%. The increase was primarily due to agriculture net premiums earned relating to new business written through CRS.
  • Loss ratio for the three months ended March 31, 2018 and 2017 was 61.2% and 66.9%, respectively, and included the following:
    • Non-notable losses of $nil during the three months ended March 31, 2018 compared to $14.7 million, or 5.3 percentage points of the loss ratio during the three months ended March 31, 2017;
    • Favorable loss reserve development on prior accident years of $15.5 million during the three months ended March 31, 2018, which benefited the loss ratio by 5.2 percentage points compared to favorable development of $26.7 million during the three months ended March 31, 2017, which benefited the loss ratio by 9.6 percentage points. The favorable development of $15.5 million during the three months ended March 31, 2018 was primarily driven by favorable development on attritional losses; and
    • Attritional losses of $198.9 million, or 66.4 percentage points of the loss ratio during the three months ended March 31, 2018 compared to $198.6 million, or 71.2 percentage points of the loss ratio during the three months ended March 31, 2017.
  • Policy acquisition cost ratio for the three months ended March 31, 2018 was 20.0% compared to 21.9% for the three months ended March 31, 2017, a decrease of 1.9 percentage points.
  • General and administrative expenses for the three months ended March 31, 2018 were $68.1 million compared to $45.3 million for the three months ended March 31, 2017, an increase of $22.8 million or 50.3%. General and administrative expenses for the three months ended March 31, 2018 included $12.0 million of CRS expenses, of which $1.7 million related to the amortization of intangible assets acquired. The remaining increase was primarily driven by an increase in the performance bonus accrual and a higher allocation of costs to the segment.
  • Combined ratio for the three months ended March 31, 2018 and 2017 was 104.9% and 106.2%, respectively, a decrease of 1.3 percentage points.
  • Underwriting (loss) for the three months ended March 31, 2018 was $(12.8) million compared to $(16.4) million for the three months ended March 31, 2017, a decrease of $3.6 million or 21.9%.

Asset Management Segment

Highlights for the first quarter 2018 were as follows:

  • Assets under management were $3.7 billion as at April 1, 2018, compared to $3.4 billion as at January 1, 2018, of which third party assets under management were $3.5 billion as at April 1, 2018, compared to $3.2 billion as at January 1, 2018. During the three months ended April 1, 2018, a total of $200.4 million of capital was raised, of which $198.1 million was raised from third parties. During the three months ended April 1, 2018, $4.3 million was returned to investors, of which $3.4 million was returned to third party investors.
  • Fee revenues earned for the three months ended March 31, 2018 were $6.7 million compared to $5.3 million during the three months ended March 31, 2017, an increase of $1.4 million or 26.1%. Third party fee revenues earned during the three months ended March 31, 2018 were $6.2 million compared to $4.6 million during the three months ended March 31, 2017, an increase of $1.6 million or 33.7%. The increase in third party fee revenues was primarily driven by an increase in management fees as a result of an increase in assets under management over the last twelve months.
  • Total expenses for the three months ended March 31, 2018 were $4.7 million compared to $4.0 million during the three months ended March 31, 2017, an increase of $0.7 million, or 17.8%. The increase was driven by a higher allocation of costs to the segment.
  • Validus’ share of investment income from AlphaCat Funds and Sidecars for the three months ended March 31, 2018 was $5.3 million compared to $4.8 million during the three months ended March 31, 2017, an increase of $0.5 million, or 9.6%.
  • Asset Management segment income for the three months ended March 31, 2018 was $7.3 million compared to $6.1 million during the three months ended March 31, 2017, an increase of $1.1 million, or 18.5%.

Managed investments

Highlights for the first quarter 2018 were as follows:

  • Managed net investment income for the three months ended March 31, 2018 was $39.8 million compared to $36.2 million for the three months ended March 31, 2017, an increase of $3.6 million, or 9.9%.
  • Annualized effective yield on managed investments for the three months ended March 31, 2018 was 2.33%, compared to 2.27% for the three months ended March 31, 2017, an increase of 6 basis points.
  • Net realized gains on managed investments for the three months ended March 31, 2018 were $1.1 million compared to (losses) of $(2.9) million for the three months ended March 31, 2017.
  • Change in net unrealized (losses) on managed investments for the three months ended March 31, 2018 of $(56.8) million compared to gains $14.3 million for the three months ended March 31, 2017. Changes in unrealized (losses) on managed investments during the three months ended March 31, 2018 were primarily driven by the impact of interest rate increases on the Company’s managed fixed maturity portfolio.
  • Income from investment affiliates for the three months ended March 31, 2018 was $13.1 million compared to $5.2 million for the three months ended March 31, 2017, an increase of $7.9 million, or 151.9%. The income from investment affiliates represents equity earnings on investments in funds managed by Aquiline Capital Partners LLC.

Corporate expenses and other items

Highlights for the first quarter 2018 were as follows:

  • General and administrative expenses for the three months ended March 31, 2018 were $12.3 million compared to $18.0 million for the three months ended March 31, 2017, a decrease of $5.7 million, or 31.5%. The decrease was primarily driven by a higher allocation of costs to reporting segments during the three months ended March 31, 2018.
  • Share compensation expenses for the three months ended March 31, 2018 were $4.0 million compared to $3.4 million for the three months ended March 31, 2017, an increase of $0.6 million, or 18.3%.
  • Finance expenses for the three months ended March 31, 2018 were $14.1 million compared to $13.9 million for the three months ended March 31, 2017, an increase of $0.2 million, or 1.6%.
  • Dividends on preferred shares for the three months ended March 31, 2018 were $5.8 million compared to $2.2 million for the three months ended March 31, 2017, an increase of $3.6 million, or 164.5% due to $250.0 million of new preferred shares issued during the second quarter of 2017.
  • Tax (benefit) for the three months ended March 31, 2018 was $(6.8) million compared to $(3.5) million for the three months ended March 31, 2017. The tax (benefit) during the three months ended March 31, 2018 mainly related to operating losses in the Insurance segment and unrealized losses on the Company’s investment portfolio.
  • Foreign exchange (losses) for the three months ended March 31, 2018 were $nil compared to gains of $1.1 million for the three months ended March 31, 2017.
  • Transaction expenses for the three months ended March 31, 2018 were $7.8 million compared to $nil for the three months ended March 31, 2017 and were primarily composed of legal and financial advisory services in relation to the Company’s Merger with AIG.

Shareholders’ Equity and Capitalization

As at March 31, 2018, total shareholders’ equity was $4.2 billion including $334.4 million of noncontrolling interests and $400.0 million of preferred shares. Shareholders’ equity available to Validus common shareholders was $3.5 billion as at March 31, 2018. Total capitalization available to Validus at March 31, 2018 was $4.7 billion, including $539.6 million of junior subordinated deferrable debentures and $245.6 million of senior notes. Total capitalization at March 31, 2018 was $6.4 billion, including $1.4 billion of redeemable noncontrolling interests and $334.4 million of noncontrolling interests related to AlphaCat.

Book value per common share was $44.14 at March 31, 2018 based on 79,329,028 common shares outstanding, compared to $44.06 at December 31, 2017 based on 79,319,550 common shares outstanding. Book value per diluted common share was $42.79 at March 31, 2018 based on 81,818,916 diluted common shares outstanding, compared to $42.71 at December 31, 2017 based on 81,823,409 diluted common shares outstanding, an increase of 1.1%, inclusive of dividends for the three months ended March 31, 2018. Book value per diluted common share is a non-GAAP financial measure. A reconciliation of book value per common share, the most comparable GAAP measure, to book value per diluted common share is presented at the end of this release.

Share Repurchases

The Company did not repurchase any common shares during the three months ended March 31, 2018. A summary of the common share repurchases made to date under the Company’s previously announced share repurchase programs is as follows:

    Total shares repurchased under publicly announced repurchase program
               

Approximate dollar

               

value of shares

   

Total number of

 

Aggregate

     

that may yet be

   

shares

 

Purchase

 

Average Price per

 

purchased under

(Dollars in thousands, except share and per share amounts)  

repurchased

 

Price(a)

 

Share(a)

 

the Program

Cumulative inception-to-date to April 30, 2018   81,035,969     $ 2,730,975     $ 33.70     $ 293,426
(a)   Share transactions are on a trade date basis through April 30, 2018 and are inclusive of commissions. Average share price is rounded to two decimal places.
 

About Validus Holdings, Ltd.

Validus Holdings, Ltd. is a leading global provider of reinsurance, insurance, and asset management services, delivering its premier solutions through four diversified yet complementary operating companies: Validus Reinsurance, Ltd., a global reinsurance group focused primarily on treaty reinsurance; Talbot Underwriting Ltd., a specialty (re)insurance group operating within the Lloyd’s market through Syndicate 1183; Western World Insurance Group, Inc., a U.S. specialty lines organization; and AlphaCat Managers, Ltd., a Bermuda‐based investment advisor managing capital for third parties and Validus through insurance‐linked securities and other property catastrophe and specialty reinsurance investments.

Research and analytics are at the core of Validus’ operations and provide its team of expert practitioners with the knowledge and insight required to effectively model and interpret risk – an approach that consistently benefits clients and ensures their needs are met. Validus maintains a worldwide presence with more than 1,000 employees in 17 offices across all major regions and is listed on the New York Stock Exchange under the ticker symbol VR.

More information about the Validus group of companies can be found at validusholdings.com.

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at March 31, 2018 and December 31, 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
   

March 31,

 

December 31,

   

2018

 

2017

Assets        
Fixed maturity investments trading, at fair value (amortized cost: 2018—$5,874,140; 2017—$5,876,261)   $ 5,803,022     $ 5,858,348  
Short-term investments trading, at fair value (amortized cost: 2018—$3,638,995; 2017—$3,381,714)   3,638,940     3,381,757  
Other investments, at fair value (cost: 2018—$331,950; 2017—$330,416)   357,246     355,218  
Investments in investment affiliates, equity method (cost: 2018—$75,302; 2017—$61,944)   113,471     100,137  
Cash and cash equivalents   672,173     754,990  
Restricted cash   302,277     394,663  
Total investments and cash   10,887,129     10,845,113  
Premiums receivable   1,865,460     939,487  
Deferred acquisition costs   309,825     213,816  
Prepaid reinsurance premiums   390,900     132,938  
Securities lending collateral   4,210     2,717  
Loss reserves recoverable   979,944     1,233,997  
Paid losses recoverable   59,892     46,873  
Income taxes recoverable   7,705     9,044  
Deferred tax asset   56,739     52,467  
Receivable for investments sold   31,512     12,182  
Intangible assets   169,168     171,411  
Goodwill   229,573     229,573  
Accrued investment income   29,621     29,096  
Other assets   578,964     508,165  
Total assets   $ 15,600,642     $ 14,426,879  
         
Liabilities        
Reserve for losses and loss expenses   $ 4,632,629     $ 4,831,390  
Unearned premiums   2,242,368     1,147,186  
Reinsurance balances payable   398,861     331,645  
Securities lending payable   4,210     2,717  
Deferred tax liability   3,633     4,600  
Payable for investments purchased   85,946     74,496  
Accounts payable and accrued expenses   520,916     1,225,875  
Notes payable to AlphaCat investors   1,268,194     1,108,364  
Senior notes payable   245,614     245,564  
Debentures payable   539,572     539,158  
Total liabilities   9,941,943     9,510,995  
Commitments and contingent liabilities        
Redeemable noncontrolling interests   1,423,110     1,004,094  
Shareholders’ equity        
Preferred shares (Issued and Outstanding: 2018—16,000; 2017—16,000)   400,000     400,000  
Common shares (Issued: 2018—162,003,969; 2017—161,994,491; Outstanding: 2018—79,329,028; 2017—79,319,550)   28,351     28,349  
Treasury shares (2018—82,674,941; 2017—82,674,941)   (14,468 )   (14,468 )
Additional paid-in capital   824,356     814,641  
Accumulated other comprehensive income (loss)   9,405     (22,192 )
Retained earnings   2,653,588     2,688,742  
Total shareholders’ equity available to Validus   3,901,232     3,895,072  
Noncontrolling interests   334,357     16,718  
Total shareholders’ equity   4,235,589     3,911,790  
Total liabilities, noncontrolling interests and shareholders’ equity   $ 15,600,642     $ 14,426,879  
 

Validus Holdings, Ltd.

Consolidated Statements of (Loss) Income

For the three months ended March 31, 2018 and 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
    Three Months Ended March 31,
    2018   2017
Revenues        
Gross premiums written   $ 1,832,456     $ 1,190,857  
Reinsurance premiums ceded   (376,294 )   (200,106 )
Net premiums written   1,456,162     990,751  
Change in unearned premiums   (837,220 )   (415,375 )
Net premiums earned   618,942     575,376  
Net investment income   52,072     40,214  
Net realized gains (losses) on investments   2,200     (1,164 )
Change in net unrealized (losses) gains on investments   (57,381 )   13,348  
Income from investment affiliates   13,068     5,188  
Other insurance related income and other income   25,540     1,330  
Foreign exchange gains   525     1,569  
Total revenues   654,966     635,861  
Expenses        
Losses and loss expenses   321,545     269,585  
Policy acquisition costs   116,456     111,628  
General and administrative expenses   114,726     87,924  
Share compensation expenses   9,729     9,491  
Finance expenses   14,263     13,943  
Transaction expenses   7,756      
Total expenses   584,475     492,571  
Income before taxes and (income) attributable to AlphaCat investors   70,491     143,290  
Tax benefit   6,833     3,549  
(Income) attributable to AlphaCat investors   (10,862 )   (7,503 )
Net income   66,462     139,336  
Net (income) attributable to noncontrolling interests   (64,712 )   (42,572 )
Net income available to Validus   1,750     96,764  
Dividends on preferred shares   (5,828 )   (2,203 )
Net (loss) income (attributable) available to Validus common shareholders   $ (4,078 )   $ 94,561  
         
Selected ratios:        
Ratio of net to gross premiums written   79.5 %   83.2 %
         
Losses and loss expense ratio   52.0 %   46.9 %
         
Policy acquisition cost ratio   18.8 %   19.4 %
General and administrative expense ratio   20.1 %   16.9 %
Expense ratio   38.9 %   36.3 %
Combined ratio   90.9 %   83.2 %
 

Validus Holdings, Ltd.

Segment Information

For the three months ended March 31, 2018 and 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
Reinsurance Segment   Three Months Ended March 31,
    2018   2017
Underwriting revenues        
Gross premiums written   $ 765,573     $ 643,141  
Reinsurance premiums ceded   (190,194 )   (114,446 )
Net premiums written   575,379     528,695  
Change in unearned premiums   (350,627 )   (297,040 )
Net premiums earned   224,752     231,655  
Other insurance related income   2     2  
Total underwriting revenues   224,754     231,657  
Underwriting deductions        
Losses and loss expenses   103,473     80,881  
Policy acquisition costs   48,340     43,535  
General and administrative expenses   28,915     19,969  
Share compensation expenses   2,663     2,623  
Total underwriting deductions   183,391     147,008  
Underwriting income   $ 41,363     $ 84,649  
 
 
Insurance Segment   Three Months Ended March 31,
    2018   2017
Underwriting revenues        
Gross premiums written   $ 785,795     $ 382,790  
Reinsurance premiums ceded   (191,637 )   (79,000 )
Net premiums written   594,158     303,790  
Change in unearned premiums   (294,620 )   (24,696 )
Net premiums earned   299,538     279,094  
Other insurance related income   2,170     996  
Total underwriting revenues   301,708     280,090  
Underwriting deductions        
Losses and loss expenses   183,389     186,610  
Policy acquisition costs   60,057     61,192  
General and administrative expenses   68,050     45,276  
Share compensation expenses   2,989     3,373  
Total underwriting deductions   314,485     296,451  
Underwriting (loss)   $ (12,777 )   $ (16,361 )
 

Validus Holdings, Ltd.

Segment Information

For the three months ended March 31, 2018 and 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
Asset Management Segment   Three Months Ended March 31,
    2018   2017
Fee revenues        
Third party   $ 6,209     $ 4,644  
Related party   443     631  
Total fee revenues   6,652     5,275  
Expenses        
General and administrative expenses   4,547     3,844  
Share compensation expenses   41     82  
Finance expenses   78     31  
Tax (benefit)   (7 )   (1 )
Foreign exchange losses (gains)   1     (1 )
Total expenses   4,660     3,955  
Income before investment income from funds and sidecars   1,992     1,320  

Investment income from funds and sidecars(a)

       
AlphaCat Sidecars   32     (112 )

AlphaCat ILS Funds - Lower Risk(b)

  1,234     2,189  

AlphaCat ILS Funds - Higher Risk(b)

  3,820     2,367  
BetaCat ILS Funds   186     368  
Validus' share of investment income from funds and sidecars   5,272     4,812  
Asset Management segment income   $ 7,264     $ 6,132  
(a)   The investment income from funds and sidecars is based on equity accounting.
(b)   Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
Corporate and Investments   Three Months Ended March 31,
    2018   2017
Managed investments        
Managed net investment income (a)   $ 39,791     $ 36,192  
Net realized gains (losses) on managed investments (a)   1,142     (2,892 )
Change in net unrealized (losses) gains on managed investments (a)   (56,777 )   14,349  
Income from investment affiliates   13,068     5,188  
Total managed investment return   (2,776 )   52,837  
Corporate expenses        
General and administrative expenses   12,309     17,961  
Share compensation expenses   4,036     3,413  

Finance expenses (a)

  14,090     13,864  
Dividends on preferred shares   5,828     2,203  
Tax (benefit) (a)   (6,826 )   (3,548 )
Total Corporate expenses   29,437     33,893  
Other items        
Foreign exchange (losses) gains (a)   (3 )   1,103  
Other income   44     94  
Transaction expenses   (7,756 )    
Total other items   (7,715 )   1,197  
Total Corporate and Investments   $ (39,928 )   $ 20,141  
(a)   These items exclude the components which are included in the Asset Management segment income and amounts which are consolidated from variable interest entities.
 

Validus Holdings, Ltd.

Segment Information

For the three months ended March 31, 2018 and 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
    Three Months Ended March 31, 2018
           

Asset

           
           

Management

           
           

Segment and

           
   

Reinsurance

 

Insurance

 

Consolidated

 

Corporate &

       
   

Segment

 

Segment

 

VIEs

 

Investments

  Eliminations   Total
Underwriting revenues                        
Gross premiums written   $ 765,573     $ 785,795     $ 286,625     $     $ (5,537 )   $ 1,832,456  
Reinsurance premiums ceded   (190,194 )   (191,637 )           5,537     (376,294 )
Net premiums written   575,379     594,158     286,625             1,456,162  
Change in unearned premiums   (350,627 )   (294,620 )   (191,973 )           (837,220 )
Net premiums earned   224,752     299,538     94,652             618,942  
Other insurance related income   2     2,170     28,080         (4,756 )   25,496  
Total underwriting revenues   224,754     301,708     122,732         (4,756 )   644,438  
Underwriting deductions                        
Losses and loss expenses   103,473     183,389     34,683             321,545  
Policy acquisition costs   48,340     60,057     8,059             116,456  
General and administrative expenses   28,915     68,050     10,208     12,309     (4,756 )   114,726  
Share compensation expenses   2,663     2,989     41     4,036         9,729  
Total underwriting deductions   183,391     314,485     52,991     16,345     (4,756 )   562,456  
Underwriting income (loss)   $ 41,363     $ (12,777 )   $ 69,741     $ (16,345 )   $     $ 81,982  
Net investment return (a)           12,735     (2,776 )       9,959  
Other items (b)           362     (20,807 )       (20,445 )
(Income) attributable to AlphaCat investors           (10,862 )           (10,862 )
Net (income) attributable to noncontrolling interests           (64,712 )           (64,712 )
Net income (loss) available (attributable) to Validus common shareholders   $ 41,363     $ (12,777 )   $ 7,264     $ (39,928 )   $     $ (4,078 )
 
 
    Three Months Ended March 31, 2017
           

Asset

           
           

Management

           
           

Segment and

           
   

Reinsurance

 

Insurance

 

Consolidated

 

Corporate &

       
   

Segment

 

Segment

 

VIEs

 

Investments

  Eliminations   Total
Underwriting revenues                        
Gross premiums written   $ 643,141     $ 382,790     $ 164,926     $     $     $ 1,190,857  
Reinsurance premiums ceded   (114,446 )   (79,000 )   (6,660 )           (200,106 )
Net premiums written   528,695     303,790     158,266             990,751  
Change in unearned premiums   (297,040 )   (24,696 )   (93,639 )           (415,375 )
Net premiums earned   231,655     279,094     64,627             575,376  
Other insurance related income   2     996     5,161         (4,923 )   1,236  
Total underwriting revenues   231,657     280,090     69,788         (4,923 )   576,612  
Underwriting deductions                        
Losses and loss expenses   80,881     186,610     2,094             269,585  
Policy acquisition costs   43,535     61,192     6,901             111,628  
General and administrative expenses   19,969     45,276     9,641     17,961     (4,923 )   87,924  
Share compensation expenses   2,623     3,373     82     3,413         9,491  
Total underwriting deductions   147,008     296,451     18,718     21,374     (4,923 )   478,628  
Underwriting income (loss)   $ 84,649     $ (16,361 )   $ 51,070     $ (21,374 )   $     $ 97,984  
Net investment return (a)           4,749     52,837         57,586  
Other items (b)           388     (11,322 )       (10,934 )
(Income) attributable to AlphaCat investors           (7,503 )           (7,503 )
Net (income) attributable to noncontrolling interests           (42,572 )           (42,572 )
Net income (loss) available (attributable) to Validus common shareholders   $ 84,649     $ (16,361 )   $ 6,132     $ 20,141     $     $ 94,561  
(a)   Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income from investment affiliates.
(b)   Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit, foreign exchange gains (losses) and other income (loss).
 

Non-GAAP Financial Measures

In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the following non-GAAP book value financial measures are key financial indicators for evaluating performance and measuring overall growth: book value per diluted common share, book value per diluted common share plus accumulated dividends and tangible book value per diluted common share. A reconciliation of book value per common share, a GAAP financial measure, to the non-GAAP book value financial measures has been included below.

In addition to presenting net (loss) income (attributable) available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating income available to Validus common shareholders, a non-GAAP financial measure, provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.

Net operating income available to Validus common shareholders, a non-GAAP financial measure, is calculated by the addition or subtraction of certain Consolidated Statement of (Loss) Income line items from net (loss) income (attributable) available to Validus common shareholders, the most directly comparable GAAP financial measure, and measures the performance of the Company’s operations without the influence of gains or losses on investments and foreign currencies and other items as noted in the reconciliation below. The Company excludes these items from its calculation of net operating income available to Validus common shareholders because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities and other factors. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. The Company believes the reporting of net operating income available to Validus common shareholders enhances the understanding of results by highlighting the underlying profitability of the Company’s core (re)insurance operations. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing, as well as loss frequency and severity. Over time it 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.

Return on average equity, a GAAP financial measure, and net operating return on average equity, a non-GAAP financial measure, represents the returns generated on common shareholders’ equity during the period and are presented below.

Validus Holdings, Ltd.

Non-GAAP Financial Measures Reconciliation

Book Value per Common Share, Book Value per Diluted Common Share and Tangible Book Value per Diluted Common Share

As at March 31, 2018 and December 31, 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
    March 31, 2018
           

Per Share

    Equity Amount   Common Shares  

Amount (a)

Book value per common share (b)   $ 3,501,232     79,329,028     $

44.14

 

Non-GAAP Adjustments:            
Unvested restricted shares       2,489,888      
Book value per diluted common share (c)   3,501,232     81,818,916     $ 42.79  
Goodwill   (229,573 )        
Intangible assets   (169,168 )        
Tangible book value per diluted common share (c)   $ 3,102,491     81,818,916     $ 37.92  
             
Book value per diluted common share (c)           $ 42.79  
Accumulated dividends           13.46  
Book value per diluted common share plus accumulated dividends (c)           $ 56.25  
 
    December 31, 2017
           

Per Share

    Equity Amount   Common Shares  

Amount (a)

Book value per common share (b)   $ 3,495,072     79,319,550     $ 44.06  
Non-GAAP Adjustments:            
Unvested restricted shares       2,503,859      
Book value per diluted common share (c)   3,495,072     81,823,409     $ 42.71  
Goodwill   (229,573 )        
Intangible assets   (171,411 )        
Tangible book value per diluted common share (c)   $ 3,094,088     81,823,409     $ 37.81  
             
Book value per diluted common share (c)           $ 42.71  
Accumulated dividends           13.08  
Book value per diluted common share plus accumulated dividends (c)           $ 55.79  
(a)   Per share amounts are calculated by dividing the equity amount by the common shares.
(b)   The equity amount used in the calculation of book value per common share represents total shareholders' equity available to Validus excluding the liquidation value of the preferred shares.
(c)   Non-GAAP financial measure.
 

Validus Holdings, Ltd.

Non-GAAP Financial Measures Reconciliation

Net Operating Income available to Validus Common Shareholders, Net Operating Income per Diluted Share

available to Validus Common Shareholders and Annualized Net Operating Return on Average Equity

For the three months ended March 31, 2018 and 2017

(Expressed in thousands of U.S. dollars, except share and per share information)

 
    Three Months Ended March 31,
    2018   2017
Net (loss) income (attributable) available to Validus common shareholders   $ (4,078 )   $ 94,561  
Non-GAAP Adjustments:        
Net realized (gains) losses on investments   (2,200 )   1,164  
Change in net unrealized losses (gains) on investments   57,381     (13,348 )
(Income) from investment affiliates   (13,068 )   (5,188 )
Foreign exchange (gains)   (525 )   (1,569 )
Other (income)   (44 )   (94 )
Transaction expenses   7,756      
Net income attributable to noncontrolling interests   429     728  
Tax (benefit) expense (a)   (3,094 )   580  
Net operating income available to Validus common shareholders (b)   $ 42,557     $ 76,834  
         
Weighted average number of diluted common shares outstanding   79,325,688     80,739,142  
         
(Loss) earnings per diluted share (attributable) available to Validus common shareholders   $ (0.05 )   $ 1.17  
Non-GAAP Adjustments:        
Net realized (gains) losses on investments   (0.03 )   0.01  
Change in net unrealized losses (gains) on investments   0.72     (0.17 )
(Income) from investment affiliates   (0.17 )   (0.06 )
Foreign exchange (gains)   (0.01 )   (0.02 )
Other (income)        
Transaction expenses   0.10      
Net income attributable to noncontrolling interests   0.01     0.01  
Tax (benefit) expense (a)   (0.04 )   0.01  
Net operating income per diluted share available to Validus common shareholders (b)   $ 0.53     $ 0.95  
         
Average shareholders' equity available to Validus common shareholders (c)   $ 3,498,152     $ 3,725,084  
         
Annualized return on average equity   (0.5 %)   10.2 %
Annualized net operating return on average equity (b)   4.9 %   8.3 %
(a)   Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
(b)   Non-GAAP financial measure.
(c)   Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares.
 

Cautionary Note Regarding Forward-Looking Statements

Certain statements herein may include projections, goals, assumptions and statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and Validus may make related oral, forward-looking statements on or following the date hereof. These projections, goals, assumptions and statements are not historical facts but instead represent only Validus’ belief regarding future events, many of which, by their nature, are inherently uncertain and outside Validus’ control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal,” or “estimate.” Accordingly, there are or will be important factors that could cause Validus’ actual results and financial condition to differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements.

We believe that these factors include, but are not limited to, the following: 1) unpredictability and severity of catastrophic events; 2) rating agency actions; 3) adequacy of Validus’ risk management and loss limitation methods; 4) cyclicality of demand and pricing in the insurance and reinsurance markets; 5) statutory or regulatory developments including tax policy, reinsurance and other regulatory matters; 6) Validus’ ability to implement its business strategy during “soft” as well as “hard” markets; 7) adequacy of Validus’ loss reserves; 8) continued availability of capital and financing; 9) retention of key personnel; 10) competition; 11) potential loss of business from one or more major insurance or reinsurance brokers; 12) Validus’ ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements; 13) general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates); 14) the integration of businesses Validus may acquire or new business ventures Validus may start; 15) the effect on Validus’ investment portfolios of changing financial market conditions including inflation, interest rates, liquidity and other factors; 16) acts of terrorism or outbreak of war; 17) availability of reinsurance and retrocessional coverage; 18) the inability to complete the proposed transaction with AIG (the “proposed transaction”) because, among other reasons, conditions to the closing of the proposed transaction may not be satisfied or waived; 19) uncertainty as to the timing of completion of the proposed transaction; 20) the inability to complete the proposed transaction due to the failure to satisfy other conditions to completion of the proposed transaction, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; 21) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; 22) risks related to disruption of management’s attention from Validus’ ongoing business operations due to the proposed transaction; 23) the effect of the announcement of the proposed transaction on Validus’ relationships with its clients, operating results and business generally; and 24) the outcome of any legal proceedings to the extent initiated against Validus or others following the announcement of the proposed transaction, as well as Validus’ management’s response to any of the aforementioned factors.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein and elsewhere, including the risk factors included in Validus’ most recent reports on Form 10-K and Form 10-Q and other documents of Validus on file with or furnished to the Securities and Exchange Commission (“SEC”). Any forward-looking statements made in this material are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Validus will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Validus or its business or operations. Except as required by law, Validus undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Source: Validus Holdings, Ltd.

Investors:
Validus Holdings, Ltd.
Investor.Relations@validusholdings.com
+1-441-278-9000
or
Media:
Brunswick Group
Mustafa Riffat / Charlotte Connerton
+1-212-333-3810