Test Environment

Validus Reports Fourth Quarter and Full Year 2017 Financial Results

01 Feb 2018

PEMBROKE, Bermuda--(BUSINESS WIRE)--Feb. 1, 2018-- Validus Holdings, Ltd. (“Validus” or the “Company”) (NYSE:VR) today reported a net (loss) attributable to Validus common shareholders of $(8.7) million, or $(0.11) per diluted common share, for the three months ended December 31, 2017, compared to net income available to Validus common shareholders of $7.8 million, or $0.10 per diluted common share, for the three months ended December 31, 2016. Net (loss) attributable to Validus common shareholders was $(63.5) million, or $(0.80) per diluted common share, for the year ended December 31, 2017, compared to net income available to Validus common shareholders of $359.4 million, or $4.36 per diluted common share, for the year ended December 31, 2016.

Net operating income available to Validus common shareholders was $4.2 million, or $0.05 per diluted common share, for the three months ended December 31, 2017, compared to $58.5 million, or $0.73 per diluted common share, for the three months ended December 31, 2016. Net operating (loss) attributable to Validus common shareholders was $(85.0) million, or $(1.07) per diluted common share, for the year ended December 31, 2017, compared to net operating income available to Validus common shareholders of $320.9 million, or $3.90 per diluted common share, for the year ended December 31, 2016.

Book value per common share at December 31, 2017 was $44.06, compared to $44.51 at September 30, 2017. Book value per diluted common share at December 31, 2017 was $42.71, compared to $43.13 at September 30, 2017, reflecting a quarterly decrease of (0.1)%, inclusive of common dividends.

Commenting on the results for the three months ended December 31, 2017, Validus’ Chairman and CEO Ed Noonan stated:

“We continue to position the Company well, utilizing both traditional retro and the Validus-sponsored Tailwind Re catastrophe bond to improve the risk return characteristics of our portfolio. Through portfolio optimization we were able to take advantage of rate increases while reducing our peak U.S. hurricane PML’s, which are down 65% since their height in 2013. Looking ahead, we are very excited to become part of the AIG Group at closing and are looking forward to being able to continue to serve our clients and brokers in new and exciting ways.”

(Loss) income (attributable) available to Validus common shareholders by segment for the three months ended December 31, 2017 and December 31, 2016 was as follows:

         
        Three Months Ended December 31,

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

      2017   2016
Reinsurance segment - Underwriting income       $ 30.7     $ 61.3  
Insurance segment - Underwriting (loss)       (36.8 )   (19.1 )
Asset Management segment - (Loss) income       (1.1 )   6.3  
Total segmental (loss) income       (7.2 )   48.5  
Total managed investment return (a)       30.3     (20.5 )
Corporate expenses       (30.9 )   (19.3 )
Other items       (0.9 )   (0.9 )
Net (loss) income (attributable) available to Validus common shareholders       $ (8.7 )   $ 7.8  
Net (loss) income per diluted share (attributable) available to Validus common shareholders       $ (0.11 )   $ 0.10  
Net operating income available to Validus common shareholders (b)       $ 4.2     $ 58.5  
Net operating income per diluted share available to Validus common shareholders(b)       $ 0.05     $ 0.73  
(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.
     

January 2018 Reinsurance Renewals - Reinsurance and Asset Management segments

During the January 2018 renewal season, the Reinsurance and Asset Management segments underwrote $921.2 million in gross premiums written, an increase of 41.6% from the January 2017 renewal period. This renewal data does not include: (i) the Insurance segment’s operations as the business is distributed relatively evenly throughout the year; or (ii) the Reinsurance and Asset Management segment's agricultural premiums.

The following table presents the Reinsurance and Asset Management segments’ January 2018 and 2017 reinsurance renewals by Catastrophe XOL, Per Risk XOL and Proportional premiums:

         
        Reinsurance and Asset Management segment's combined premium
(Dollars in thousands)       Catastrophe XOL   Per Risk XOL   Proportional   Total
2018       $ 545,536     $ 65,740     $ 309,923     $ 921,199  
2017       $ 380,870     $ 66,016     $ 203,548     $ 650,434  
Increase (decrease)       43.2 %   (0.4 )%   52.3 %   41.6 %
                             

The following table presents the Reinsurance and Asset Management segments' January 2018 and 2017 reinsurance renewals by line of business:

         
        Reinsurance segment premium
        Property   Specialty -

Short-tail

  Specialty -

Other

  Total
(Dollars in thousands)       U.S.   International      
2018       $ 147,152     $ 119,588     $ 262,444     $ 117,616     $ 646,800  
2017       $ 107,364     $ 103,298     $ 231,149     $ 45,383     $ 487,194  
Increase       37.1 %   15.8 %   13.5 %   159.2 %   32.8 %
                         
        Asset Management segment premium
        Property   Specialty -
Short-tail
  Specialty -
Other
  Total
(Dollars in thousands)       U.S.   International      
2018       $ 242,684     $ 27,467     $ 4,248     $     $ 274,399  
2017       $ 136,574     $ 21,538     $ 5,128     $     $ 163,240  
Increase (decrease)       77.7 %   27.5 %   (17.2 )%   %   68.1 %
                         
        Reinsurance and Asset Management segments’ combined premium
        Property   Specialty -
Short-tail
  Specialty -
Other
  Total
(Dollars in thousands)       U.S.   International      
2018       $ 389,836     $ 147,055     $ 266,692     $ 117,616     $ 921,199  
2017       $ 243,938     $ 124,836     $ 236,277     $ 45,383     $ 650,434  
Increase       59.8 %   17.8 %   12.9 %   159.2 %   41.6 %
                                   

During the January 2018 renewal season, the Reinsurance segment underwrote $646.8 million in gross premiums written (excluding agriculture premiums), an increase of $159.6 million, or 32.8% from the 2017 renewal season. The increase was primarily driven by:

  • An increase in the specialty - other lines of $72.2 million, or 159.2% as a result of the continued build out of the Company’s casualty portfolio and the timing of renewals; and
  • An increase in U.S. property renewals of $39.8 million, or 37.1% driven by rate increases and significant premium growth on a few lines where the Company participated with large gross positions and managed its net exposure through strategic retrocession purchases.

The Asset Management segment underwrote $274.4 million in gross premiums written during the January 2018 renewal season, an increase of $111.2 million, or 68.1% from the 2017 renewal season. The increase was primarily driven by significant rate increases in the retrocession component of the portfolio and an increase in assets under management.

This earnings release should be read in conjunction with the Company's fourth quarter 2017 investor financial supplement that has been posted to the Investors section of the Company's website located at www.validusholdings.com.

Fourth Quarter 2017 Results

Highlights for the fourth quarter 2017 were as follows:

  • Gross premiums written for the three months ended December 31, 2017 were $443.3 million compared to $339.5 million for the three months ended December 31, 2016, an increase of $103.9 million, or 30.6%. The increase was primarily driven by an increase in the Insurance segment.
  • Reinsurance premiums ceded for the three months ended December 31, 2017 were $96.4 million compared to $40.6 million for the three months ended December 31, 2016, an increase of $55.8 million, or 137.3%. The increase was primarily driven by an increase in the Reinsurance and Insurance segments.
  • Net premiums earned for the three months ended December 31, 2017 were $651.5 million compared to $540.4 million for the three months ended December 31, 2016, an increase of $111.1 million, or 20.6%. The increase was primarily driven by an increase in the Insurance and Reinsurance segments.
  • Loss ratio for the three months ended December 31, 2017 and 2016 was 73.7% and 50.9%, respectively, and included the following:
    • Notable losses of $120.8 million, or 18.5 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $52.3 million, or 9.7 percentage points of the loss ratio during the three months ended December 31, 2016. Notable losses during the three months ended December 31, 2017 included $78.0 million, or 12.0 percentage points of the loss ratio, of losses attributable to AlphaCat investors and noncontrolling interests, compared to $15.3 million, or 2.8 percentage points of the loss ratio during the three months ended December 31, 2016;
    • Non-notable losses of $9.7 million, or 1.5 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $0.3 million during the three months ended December 31, 2016;
    • Favorable loss reserve development on prior accident years of $42.9 million during the three months ended December 31, 2017, which benefited the loss ratio by 6.6 percentage points compared to favorable development of $46.8 million during the three months ended December 31, 2016, which benefited the loss ratio by 8.7 percentage points. The favorable development of $42.9 million during the three months ended December 31, 2017 was primarily driven by favorable development on attritional losses; and
    • Attritional losses of $392.3 million, or 60.3 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $269.3 million, or 49.8 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily driven by the addition of Crop Risk Services, Inc. (“CRS”) and a higher frequency of mid-size losses which did not meet the non-notable loss threshold.
  • Combined ratio for the three months ended December 31, 2017 and 2016 was 109.7% and 89.6%, respectively, an increase of 20.1 percentage points.
  • Total managed investment return from our managed investment portfolio for the three months ended December 31, 2017 was $30.3 million compared to $(20.5) million for the three months ended December 31, 2016, an increase of $50.7 million, or 247.8%.
  • Annualized return on average equity for the three months ended December 31, 2017 of (1.0)%, compared to 0.8% for the three months ended December 31, 2016.
  • Annualized net operating return on average equity for the three months ended December 31, 2017 of 0.5%, compared to 6.3% for the three months ended December 31, 2016.

Notable and Non-notable Losses

The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million.

Notable Loss Events

During the three months ended December 31, 2017, the Company incurred losses and loss expenses from fourth quarter 2017 notable loss events as described below:

         
        Northern California Wildfires
(Dollars in thousands)      

Reinsurance
segment

  Insurance

segment

 

Asset Management
segment

  Total
Net losses and loss expenses       $ 4,762     $ 10,250   $ 72,742     $ 87,754  
Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests             (67,592 )   (67,592 )
Validus’ share of net losses and loss expenses       4,762     10,250   5,150     20,162  
Less: Net impact on premiums earned (a)       (8,024 )         (8,024 )
Net loss attributable to Validus       $ (3,262 )   $ 10,250   $ 5,150     $ 12,138  
                     
        Southern California Wildfires
(Dollars in thousands)      

Reinsurance
segment

  Insurance

segment

 

Asset Management
segment

  Total
Net losses and loss expenses       $ 19,108     $ 4,387   $ 15,000     $ 38,495  
Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests             (13,837 )   (13,837 )
Validus’ share of net losses and loss expenses       19,108     4,387   1,163     24,658  
Less: Net impact on premiums earned (a)                  
Net loss attributable to Validus       $ 19,108     $ 4,387   $ 1,163     $ 24,658  
                     
        Total Notable Loss Events
(Dollars in thousands)      

Reinsurance
segment

  Insurance

segment

 

Asset Management
segment

  Total
Net losses and loss expenses       $ 23,870     $ 14,637   $ 87,742     $ 126,249  
Less: Net losses and loss expenses attributable to AlphaCat third party investors and noncontrolling interests             (81,429 )   (81,429 )
Validus’ share of net losses and loss expenses       23,870     14,637   6,313     44,820  
Less: Net impact on premiums earned (a)       (8,024 )         (8,024 )
Net loss attributable to Validus       $ 15,846     $ 14,637   $ 6,313     $ 36,796  
(a)   Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
     

Partially offsetting the losses and loss expenses noted above was net favorable development on third quarter 2017 notable loss events of $5.4 million, which benefited the loss ratio by 0.9 percentage points. During the three months ended December 31, 2016, the Company incurred losses and loss expenses from notable loss events of $52.3 million, or 9.7 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $15.3 million and reinstatement premiums of $0.7 million, the net loss attributable to the Company was $36.3 million.

Non-notable Loss Events

There were no non-notable loss events occurring during the three months ended December 31, 2017. However, as a result of loss events occurring in the fourth quarter, the Company reallocated retrocession recoveries between all 2017 loss events. As such, the Company increased its net loss estimate on the third quarter 2017 Mexico City Earthquake which caused this event to exceed the $15.0 million threshold and become a non-notable loss event. Net losses and loss expenses incurred from the Mexico City Earthquake non-notable loss event were $9.7 million, or 1.5 percentage points of the loss ratio during the three months ended December 31, 2017 and $13.5 million, or 1.9 percentage points of the loss ratio during the three months ended September 30, 2017.

Reinsurance Segment

Highlights for the fourth quarter 2017 were as follows:

  • Gross premiums written for the three months ended December 31, 2017 were$52.0 million compared to$41.8 million for the three months ended December 31, 2016, an increase of$10.1 million, or 24.3% and included the following:
    • Property premiums of $18.1 million during the three months ended December 31, 2017, compared to $8.5 million during the three months ended December 31, 2016, an increase of $9.6 million, or 113.8%, primarily driven by premium adjustments on existing business;
    • Specialty - short-tail premiums of $13.0 million during the three months ended December 31, 2017, compared to $(8.8) million during the three months ended December 31, 2016, an increase of $21.8 million, or 248.3%. The increase was primarily driven by favorable premium adjustments on Agriculture business; and
    • Specialty - other premiums of $20.8 million during the three months ended December 31, 2017, compared to $42.1 million during the three months ended December 31, 2016, a decrease of $21.3 million, or 50.5%. The decrease was primarily driven by the timing of renewals in the casualty class of business.
  • Reinsurance premiums ceded for the three months ended December 31, 2017 were $40.7 million compared to $7.8 million for the three months ended December 31, 2016, an increase of $32.9 million. The increase was primarily driven by an increase in the property lines of $33.5 million as a result of new retrocession cover purchased from Tailwind Re.
  • Net premiums earned for the three months ended December 31, 2017 were $250.6 million compared to $234.2 million for the three months ended December 31, 2016, an increase of $16.4 million, or 7.0%. The increase was primarily driven by ongoing growth in the specialty - other lines of business over the last two years.
  • Loss ratio for the three months ended December 31, 2017 and 2016 was 54.2% and 39.9%, respectively, and included the following:
    • Notable losses of $14.7 million, or 5.9 percentage points of the loss ratio during the three months ended December 31, 2017, compared to $18.6 million, or 7.9 percentage points of the loss ratio during the three months ended December 31, 2016. Notable losses during the during the three months ended December 31, 2017 included losses from fourth quarter 2017 notable loss events of $23.9 million, or 9.5 percentage points of the loss ratio, partially offset by favorable development on third quarter 2017 notable loss events of $9.2 million or 3.6 percentage points of the loss ratio;
    • Non-notable losses of $9.4 million, or 3.7 percentage points of the loss ratio during the three months ended December 31, 2017, compared to $nil during the three months ended December 31, 2016. The non-notable losses incurred during the three months ended December 31, 2017 related to adverse development on the third quarter 2017 Mexico City Earthquake loss event due to reallocation of retrocession recoveries;
    • Favorable loss reserve development on prior accident years of $21.2 million during the three months ended December 31, 2017, which benefited the loss ratio by 8.5 percentage points compared to favorable development of $34.9 million during the three months ended December 31, 2016, which benefited the loss ratio by 14.9 percentage points. The favorable development of $21.2 million during the three months ended December 31, 2017 was primarily driven by favorable development on attritional losses; and
    • Attritional losses of $132.9 million, or 53.1 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $109.8 million, or 46.9 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily due to a single mid-size loss which did not meet the non-notable loss threshold.
  • General and administrative expenses for the three months ended December 31, 2017 were $23.6 million compared to $21.2 million for the three months ended December 31, 2016, an increase of $2.4 million or 11.1%. The increase in general and administrative expenses was primarily driven by a higher allocation of costs to the segment during the three months ended December 31, 2017.
  • Combined ratio for the three months ended December 31, 2017 and 2016 was 87.8% and 73.8%, respectively, an increase of 14.0 percentage points.
  • Underwriting income for the three months ended December 31, 2017 was $30.7 million compared to $61.3 million for the three months ended December 31, 2016, a decrease of $30.5 million or 49.8%.

Insurance Segment

Highlights for the fourth quarter 2017 were as follows:

  • Gross premiums written for the three months ended December 31, 2017 were$377.0 million compared to$297.9 million for the three months ended December 31, 2016, an increase of$79.1 million, or 26.6% and included the following:
    • Property premiums of $105.0 million during the three months ended December 31, 2017, compared to $96.2 million during the three months ended December 31, 2016, an increase of $8.8 million, or 9.1%. The increase was primarily driven by the continued build out of product offerings in the U.S. short-tail property lines;
    • Specialty - short-tail premiums of $155.2 million during the three months ended December 31, 2017, compared to $86.6 million during the three months ended December 31, 2016, an increase of $68.7 million, or 79.3%. The increase was primarily driven by new agriculture business written through CRS; and
    • Specialty - other premiums of $116.8 million during the three months ended December 31, 2017, compared to $115.1 million during the three months ended December 31, 2016, an increase of $1.7 million, or 1.4%.
  • Reinsurance premiums ceded for the three months ended December 31, 2017 were $56.4 million compared to $32.9 million for the three months ended December 31, 2016, an increase of $23.5 million, or 71.6%, primarily driven by increases in the property and specialty - short-tail lines of $12.9 million and $8.6 million, respectively. The increase in the property lines was primarily driven by the growth in gross premiums written as noted above and new reinsurance cover purchased from Tailwind Re. The increase in the specialty - short-tail lines was due to an increase in ceded agriculture premiums relating to new business written through CRS.
  • Net premiums earned for the three months ended December 31, 2017 were $333.0 million compared to $240.1 million for the three months ended December 31, 2016, an increase of $92.9 million, or 38.7%. The increase was primarily driven by an increase the specialty - short-tail lines of $85.7 million due to agriculture net premiums earned relating to new business written through CRS.
  • Loss ratio for the three months ended December 31, 2017 and 2016 was 73.5% and 68.5%, respectively, and included the following:
    • Notable losses of $20.9 million, or 6.3 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $17.7 million, or 7.4 percentage points of the loss ratio during the three months ended December 31, 2016. Notable losses during the during the three months ended December 31, 2017 included losses from fourth quarter 2017 notable loss events of $14.6 million, or 4.4 percentage points of the loss ratio, and losses from third quarter 2017 notable loss events of $6.3 million, or 1.9 percentage points of the loss ratio;
    • Non-notable losses of $(2.3) million, which benefited the loss ratio by 0.7 percentage points during the three months ended December 31, 2017 compared to $0.2 million during the three months ended December 31, 2016. The reduction in non-notable losses incurred during the three months ended December 31, 2017 related to favorable development on the third quarter 2017 Mexico City Earthquake loss event;
    • Favorable loss reserve development on prior accident years of $19.7 million during the three months ended December 31, 2017, which benefited the loss ratio by 5.9 percentage points compared to favorable development of $10.8 million during the three months ended December 31, 2016, which benefited the loss ratio by 4.5 percentage points. The favorable development of $19.7 million during the three months ended December 31, 2017 was primarily driven by favorable development on attritional losses; and
    • Attritional losses of $246.0 million, or 73.8 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $157.3 million, or 65.5 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily driven by the addition of CRS and a higher frequency of mid-size losses which did not meet the non-notable loss threshold.
  • Policy acquisition cost ratio for the three months ended December 31, 2017 was 18.1% compared to 24.3% for the three months ended December 31, 2016, a decrease of 6.2 percentage points. The decrease was primarily driven by new agriculture business written during the three months ended December 31, 2017 which carries lower acquisition costs.
  • General and administrative expenses for the three months ended December 31, 2017 were $64.9 million compared to $33.1 million for the three months ended December 31, 2016, an increase of $31.9 million or 96.4%. General and administrative expenses for the three months ended December 31, 2017 included $11.8 million of CRS expenses, of which $1.8 million related to the amortization of intangible assets acquired. The remaining increase in general and administrative expenses was primarily driven by a higher allocation of costs to the segment during the three months ended December 31, 2017 and a reduction in the performance bonus accrual during the three months ended December 31, 2016.
  • Combined ratio for the three months ended December 31, 2017 and 2016 was 112.2% and 108.1%, respectively, an increase of 4.1 percentage points.
  • Underwriting (loss) for the three months ended December 31, 2017 was $(36.8) million compared to $(19.1) million for the three months ended December 31, 2016, an increase of $17.6 million or 92.1%.

Asset Management Segment

Highlights for the fourth quarter 2017 were as follows:

  • Assets under management were $3.4 billion as at January 1, 2018, compared to $2.9 billion as at October 1, 2017, of which third party assets under management were $3.2 billion as at January 1, 2018, compared to $2.7 billion as at October 1, 2017. During the three months ended January 1, 2018, a total of $1,045.3 million of capital was raised, of which $1,029.1 million was raised from third parties. During the three months ended January 1, 2018, $402.4 million was returned to investors, of which $401.4 million was returned to third party investors.
  • Fee revenues earned for the three months ended December 31, 2017 were $5.5 million compared to $4.7 million during the three months ended December 31, 2016, an increase of $0.8 million or 17.4%. Third party fee revenues earned during the three months ended December 31, 2017 were $5.1 million compared to $3.9 million during the three months ended December 31, 2016, an increase of $1.1 million or 28.8%. 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 December 31, 2017 were $2.6 million compared to $2.9 million during the three months ended December 31, 2016, a decrease of $0.3 million, or 10.1%.
  • Validus’ share of investment (loss) from AlphaCat Funds and Sidecars for the three months ended December 31, 2017 was $(4.0) million compared to income of $4.5 million during the three months ended December 31, 2016, a decrease of $8.5 million. The decrease was driven by the fourth quarter 2017 notable loss events.
  • Asset Management segment (loss) for the three months ended December 31, 2017 was $(1.1) million compared to income of $6.3 million during the three months ended December 31, 2016, a decrease of $7.4 million.

Managed investments

Highlights for the fourth quarter 2017 were as follows:

  • Managed net investment income for the three months ended December 31, 2017 was $41.6 million compared to $35.9 million for the three months ended December 31, 2016, an increase of $5.7 million, or 16.0%. The increase was primarily driven by increased returns on the Company’s portfolio of managed fixed maturities and other investments.
  • Annualized effective yield on managed investments for the three months ended December 31, 2017 was 2.44%, compared to 2.25% for the three months ended December 31, 2016, an increase of 19 basis points.
  • Net realized gains on managed investments for the three months ended December 31, 2017 were $7.2 million compared to $9.2 million for the three months ended December 31, 2016.
  • Change in net unrealized (losses) on managed investments for the three months ended December 31, 2017 was $(24.9) million compared to $(67.7) million for the three months ended December 31, 2016. Changes in unrealized (losses) on managed investments during the three months ended December 31, 2017 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 December 31, 2017 was $6.3 million compared to $2.2 million for the three months ended December 31, 2016, an increase of $4.2 million, or 192.9%. 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 fourth quarter 2017 were as follows:

  • General and administrative expenses for the three months ended December 31, 2017 were $5.6 million compared to $20.0 million for the three months ended December 31, 2016, a decrease of $14.4 million, or 72.1%. The decrease was primarily driven by a lower bonus accrual and a higher allocation of costs to reporting segments during the three months ended December 31, 2017.
  • Share compensation expenses for the three months ended December 31, 2017 were $4.1 million compared to $3.9 million for the three months ended December 31, 2016, an increase of $0.3 million, or 7.5%.
  • Finance expenses for the three months ended December 31, 2017 were $15.7 million compared to $14.5 million for the three months ended December 31, 2016, an increase of $1.2 million, or 8.2%. The increase was primarily driven by interest expenses relating to short-term borrowings which were repaid in full during the three months ended December 31, 2017.
  • Dividends paid on preferred shares for the three months ended December 31, 2017 were $5.8 million compared to $2.2 million for the three months ended December 31, 2016, 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 December 31, 2017 was $(0.4) million compared to $(21.2) million for the three months ended December 31, 2016. The tax benefit during the three months ended December 31, 2017 mainly related to operating losses in the Insurance segment and was partially offset by the re-measurement of net deferred taxes following U.S. Tax Reform. The tax benefit during the three months ended December 31, 2016 related to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Company’s acquisition of Flagstone. The release was due to the Company believing it is more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over three years beginning in 2017 and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million during the fourth quarter of 2016.
  • Foreign exchange (losses) for the three months ended December 31, 2017 were $(0.8) million compared to $(0.9) million for the three months ended December 31, 2016.

Shareholders’ Equity and Capitalization

As at December 31, 2017, total shareholders’ equity was $3.9 billion including $16.7 million of noncontrolling interests and $400.0 million of preferred shares. Shareholders’ equity available to Validus common shareholders was $3.5 billion as at December 31, 2017. Total capitalization available to Validus at December 31, 2017 was $4.7 billion, including $539.2 million of junior subordinated deferrable debentures and $245.6 million of senior notes. Total capitalization at December 31, 2017 was $5.7 billion, including $1.0 billion of redeemable noncontrolling interests and $16.7 million of noncontrolling interests related to AlphaCat.

Book value per common share was $44.06 at December 31, 2017 based on 79,319,550 common shares outstanding, compared to $44.51 at September 30, 2017 based on 79,457,253 common shares outstanding. Book value per diluted common share was $42.71 at December 31, 2017 based on 81,823,409 diluted common shares outstanding, compared to $43.13 at September 30, 2017 based on 82,001,606 diluted common shares outstanding, a decrease of 0.1%, inclusive of dividends for the three months ended December 31, 2017. 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 repurchased 175,308 common shares during the three months ended December 31, 2017. 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
(Dollars in thousands, except share and per share amounts)      

Total number of
shares
repurchased

 

Aggregate
Purchase
Price (a)

 

Average Price per
Share (a)

 

Approximate
dollar value of
shares that may
yet be purchased
under the
Program

Cumulative inception-to-date to December 31, 2016       80,508,849   $ 2,704,406   $ 33.59   $ 319,995
                     
Cumulative for the nine months ended September 30, 2017       351,812   18,343   $ 52.14   $ 301,652
                     
October 1 - 31, 2017            

$

301,652
November 1 - 30, 2017             $ 301,652
December 1 - 31, 2017       175,308   8,226   $ 46.92   $ 293,426
Cumulative for the three months ended December 31, 2017       175,308   8,226   $ 46.92    
Cumulative for the year ended December 31, 2017       527,120   26,569   $ 50.40    
Cumulative inception-to-date to December 31, 2017       81,035,969   $ 2,730,975   $ 33.70   $ 293,426
                     
Repurchases made subsequent to year-end:                    
January 1 - 31, 2018             $ 293,426
(a)   Share transactions are on a trade date basis through January 31, 2018 and are inclusive of commissions. Average share price is rounded to two decimal places.
     

Year to Date 2017 Results

Highlights for the year to date 2017 were as follows:

  • Gross premiums written for the year ended December 31, 2017 were $2,950.9 million compared to $2,648.7 million for the year ended December 31, 2016, an increase of $302.2 million, or 11.4%.
  • Reinsurance premiums ceded for the year ended December 31, 2017 were $469.6 million compared to $289.7 million for the year ended December 31, 2016, an increase of $179.9 million, or 62.1%.
  • Net premiums earned for the year ended December 31, 2017 were $2,581.1 million compared to $2,249.2 million for the year ended December 31, 2016, an increase of $331.9 million, or 14.8%.
  • Loss ratio for the year ended December 31, 2017 and 2016 was 89.1% and 47.4%, respectively, and included the following:
    • Notable losses of $1,046.9 million, or 40.6 percentage points of the loss ratio during the year ended December 31, 2017 compared to $90.2 million, or 4.0 percentage points of the loss ratio during the year ended December 31, 2016. Notable losses during the year ended December 31, 2017 included $603.4 million, or 23.4 percentage points of the loss ratio, of losses attributable to AlphaCat investors and noncontrolling interests, compared to $21.7 million, or 1.0 percentage point of the loss ratio during the year ended December 31, 2016;
    • Non-notable losses of $50.6 million, or 2.0 percentage points of the loss ratio during the year ended December 31, 2017 compared to $70.2 million, or 3.1 percentage points of the loss ratio during the year ended December 31, 2016;
    • Favorable loss reserve development on prior accident years of $222.5 million during the year ended December 31, 2017, which benefited the loss ratio by 8.6 percentage points compared to favorable development of $216.2 million during the year ended December 31, 2016, which benefited the loss ratio by 9.6 percentage points; and
    • Attritional losses of $1,425.2 million or 55.1 percentage points of the loss ratio during the year ended December 31, 2017 compared to $1,120.8 million, or 49.9 percentage points of the loss ratio during the year ended December 31, 2016.
  • Combined ratio for the year ended December 31, 2017 and 2016 was 122.6% and 84.2%, respectively, an increase of 38.4 percentage points.
  • Total managed investment return from our managed investment portfolio for the year ended December 31, 2017 was $188.8 million compared to $168.4 million for the year ended December 31, 2016, an increase of $20.4 million, or 12.1%.
  • Annualized return on average equity for the year ended December 31, 2017 of (1.7)%, compared to 9.7% for the year ended December 31, 2016.
  • Annualized net operating return on average equity for the year ended December 31, 2017 of (2.3)%, compared to 8.7% for the year ended December 31, 2016.

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 19 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 December 31, 2017 and 2016

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

 

             
        December 31,
2017
  December 31,
2016
Assets            
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,876,261; 2016—$5,584,599)       $ 5,858,348     $ 5,543,030  
Short-term investments trading, at fair value (amortized cost: 2017—$3,381,714; 2016—$2,796,358)       3,381,757     2,796,170  
Other investments, at fair value (cost: 2017—$330,416; 2016—$380,130)       355,218     405,712  
Investments in investment affiliates, equity method (cost: 2017—$61,944; 2016—$84,840)       100,137     100,431  
Cash and cash equivalents       754,990     419,976  
Restricted cash       394,663     70,956  
Total investments and cash       10,845,113     9,336,275  
Premiums receivable       939,487     725,390  
Deferred acquisition costs       213,816     209,227  
Prepaid reinsurance premiums       132,938     77,996  
Securities lending collateral       2,717     9,779  
Loss reserves recoverable       1,233,997     430,421  
Paid losses recoverable       46,873     35,247  
Income taxes recoverable       9,044     4,870  
Deferred tax asset       52,467     43,529  
Receivable for investments sold       12,182     3,901  
Intangible assets       171,411     115,592  
Goodwill       229,573     196,758  
Accrued investment income       29,096     26,488  
Other assets       508,165     134,282  
Total assets       $ 14,426,879     $ 11,349,755  
             
Liabilities            
Reserve for losses and loss expenses       $ 4,831,390     $ 2,995,195  
Unearned premiums       1,147,186     1,076,049  
Reinsurance balances payable       331,645     54,781  
Securities lending payable       2,717     10,245  
Deferred tax liability       4,600     3,331  
Payable for investments purchased       74,496     29,447  
Accounts payable and accrued expenses       1,225,875     587,648  
Notes payable to AlphaCat investors       1,108,364     278,202  
Senior notes payable       245,564     245,362  
Debentures payable       539,158     537,226  
Total liabilities       9,510,995     5,817,486  
Commitments and contingent liabilities            
Redeemable noncontrolling interests       1,004,094     1,528,001  
Shareholders’ equity            
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000)       400,000     150,000  
Common shares (Issued: 2017—161,994,491; 2016—161,279,976; Outstanding: 2017—79,319,550; 2016—79,132,252)       28,349     28,224  
Treasury shares (2017—82,674,941; 2016—82,147,724)       (14,468 )   (14,376 )
Additional paid-in capital       814,641     821,023  
Accumulated other comprehensive loss       (22,192 )   (23,216 )
Retained earnings       2,688,742     2,876,636  
Total shareholders’ equity available to Validus       3,895,072     3,838,291  
Noncontrolling interests       16,718     165,977  
Total shareholders’ equity       3,911,790     4,004,268  
Total liabilities, noncontrolling interests and shareholders’ equity       $ 14,426,879     $ 11,349,755  
                     
             
Validus Holdings, Ltd.

Consolidated Statements of (Loss) Income

For the three months and years ended December 31, 2017 and 2016

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

 

             
        Three Months Ended December 31,   Years Ended December 31,
        2017   2016   2017   2016
Revenues                    
Gross premiums written       $ 443,323     $ 339,454     $ 2,950,938     $ 2,648,705  
Reinsurance premiums ceded       (96,445 )   (40,635 )   (469,633 )   (289,705 )
Net premiums written       346,878     298,819     2,481,305     2,359,000  
Change in unearned premiums       304,599     241,580     99,783     (109,835 )
Net premiums earned       651,477     540,399     2,581,088     2,249,165  
Net investment income       48,960     38,153     177,873     150,385  
Net realized gains on investments       5,607     9,220     7,623     15,757  
Change in net unrealized (losses) gains on investments       (21,257 )   (67,460 )   3,215     16,871  
Income (loss) from investment affiliates       6,345     2,166     22,010     (2,083 )
Other insurance related income and other income (loss)       6,939     568     13,179     2,195  
Foreign exchange (losses) gains       (283 )   (901 )   (7,447 )   10,864  
Total revenues       697,788     522,145     2,797,541     2,443,154  
Expenses                    
Losses and loss expenses       479,842     275,126     2,300,178     1,065,097  
Policy acquisition costs       127,067     120,889     471,553     449,482  
General and administrative expenses       97,522     77,955     352,137     336,294  
Share compensation expenses       10,031     10,442     40,111     42,907  
Finance expenses       15,871     14,630     58,546     58,520  
Transaction expenses               4,427      
Total expenses       730,333     499,042     3,226,952     1,952,300  
(Loss) income before taxes, (loss) from operating affiliate and (income) loss attributable to AlphaCat investors       (32,545 )   23,103     (429,411 )   490,854  
Tax benefit       412     21,147     7,580     19,729  
Loss from operating affiliate                   (23 )
(Income) loss attributable to AlphaCat investors       (37,868 )   (7,080 )   16,929     (23,358 )
Net (loss) income       (70,001 )   37,170     (404,902 )   487,202  
Net loss (income) attributable to noncontrolling interests       67,136     (27,200 )   357,280     (123,363 )
Net (loss) income (attributable) available to Validus       (2,865 )   9,970     (47,622 )   363,839  
Dividends on preferred shares       (5,828 )   (2,203 )   (15,861 )   (4,455 )
Net (loss) income (attributable) available to Validus common shareholders       $ (8,693 )   $ 7,767     $ (63,483 )   $ 359,384  
                     
Selected ratios:                    
Ratio of net to gross premiums written       78.2 %   88.0 %   84.1 %   89.1 %
                     
Losses and loss expense ratio       73.7 %   50.9 %   89.1 %   47.4 %
                     
Policy acquisition cost ratio       19.5 %   22.4 %   18.3 %   20.0 %
General and administrative expense ratio       16.5 %   16.3 %   15.2 %   16.8 %
Expense ratio       36.0 %   38.7 %   33.5 %   36.8 %
Combined ratio       109.7 %   89.6 %   122.6 %   84.2 %
                             
             
Validus Holdings, Ltd.

Segment Information

For the three months and years ended December 31, 2017 and 2016

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

 

             
Reinsurance Segment       Three Months Ended December 31,   Years Ended December 31,
        2017   2016   2017   2016
Underwriting revenues                    
Gross premiums written       $ 51,960     $ 41,813     $ 1,195,207     $ 1,184,912  
Reinsurance premiums ceded       (40,716 )   (7,773 )   (209,289 )   (121,331 )
Net premiums written       11,244     34,040     985,918     1,063,581  
Change in unearned premiums       239,320     200,129     37,086     (67,432 )
Net premiums earned       250,564     234,169     1,023,004     996,149  
Other insurance related income       15     9     67     25  
Total underwriting revenues       250,579     234,178     1,023,071     996,174  
Underwriting deductions                    
Losses and loss expenses       135,804     93,503     692,719     415,505  
Policy acquisition costs       58,107     55,352     199,430     189,797  
General and administrative expenses       23,604     21,248     80,177     85,000  
Share compensation expenses       2,331     2,811     10,762     11,668  
Total underwriting deductions       219,846     172,914     983,088     701,970  
Underwriting income       $ 30,733     $ 61,264     $ 39,983     $ 294,204  
             
             
Insurance Segment       Three Months Ended December 31,   Years Ended December 31,
        2017   2016   2017   2016
Underwriting revenues                    
Gross premiums written       $ 377,014     $ 297,905     $ 1,453,133     $ 1,194,137  
Reinsurance premiums ceded       (56,378 )   (32,862 )   (261,055 )   (162,669 )
Net premiums written       320,636     265,043     1,192,078     1,031,468  
Change in unearned premiums       12,393     (24,900 )   64,007     (28,524 )
Net premiums earned       333,029     240,143     1,256,085     1,002,944  
Other insurance related income       3,957     284     7,035     1,367  
Total underwriting revenues       336,986     240,427     1,263,120     1,004,311  
Underwriting deductions                    
Losses and loss expenses       244,908     164,417     934,199     604,741  
Policy acquisition costs       60,403     58,394     241,186     232,780  
General and administrative expenses       64,945     33,069     207,186     165,529  
Share compensation expenses       3,512     3,693     12,774     14,987  
Total underwriting deductions       373,768     259,573     1,395,345     1,018,037  
Underwriting (loss)       $ (36,782 )   $ (19,146 )   $ (132,225 )   $ (13,726 )
                                     
             
Validus Holdings, Ltd.

Segment Information

For the three months and years ended December 31, 2017 and 2016

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

 

             
Asset Management Segment       Three Months Ended December 31,   Years Ended December 31,
        2017   2016   2017   2016
Fee revenues                    
Third party       $ 5,061     $ 3,928   $ 20,349     $ 18,771  
Related party       418     737   2,150     3,329  
Total fee revenues       5,479     4,665   22,499     22,100  
Expenses                    
General and administrative expenses       2,582     2,676   12,904     10,233  
Share compensation expenses       41     82   389     249  
Finance expenses       30     33   137     947  
Tax (benefit) expense       (61 )   90   8     90  
Foreign exchange losses           2   7     19  
Total expenses       2,592     2,883   13,445     11,538  
Income before investment (loss) income from AlphaCat Funds and Sidecars       2,887     1,782   9,054     10,562  
Investment (loss) income from AlphaCat Funds and Sidecars (a)                    
AlphaCat Sidecars       11     14   79     607  
AlphaCat ILS Funds - Lower Risk (b)       961     1,998   (3,102 )   8,901  
AlphaCat ILS Funds - Higher Risk (b)       (5,813 )   1,864   (22,662 )   7,471  
BetaCat ILS Funds       827     644   536     3,623  
PaCRe                 (23 )
Validus' share of investment (loss) income from AlphaCat Funds and Sidecars       (4,014 )   4,520   (25,149 )   20,579  
Asset Management segment (loss) income       $ (1,127 )   $ 6,302   $ (16,095 )   $ 31,141  
(a)   The investment income (loss) from AlphaCat 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 greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
Corporate and Investments         Three Months Ended December 31,   Years Ended December 31,
          2017   2016   2017   2016
Managed investments                      
Managed net investment income (a)         $ 41,609     $ 35,875     $ 152,955     $ 141,718  
Net realized gains on managed investments (a)         7,157     9,166     7,437     14,680  
Change in net unrealized (losses) gains on managed investments (a)         (24,861 )   (67,676 )   6,371     14,106  
Income (loss) from investment affiliates         6,345     2,166     22,010     (2,083 )
Total managed investment return         $ 30,250     $ (20,469 )   $ 188,773     $ 168,421  
Corporate expenses                      
General and administrative expenses         $ 5,582     $ 19,973     $ 48,598     $ 72,249  
Share compensation expenses         4,147     3,856     16,186     16,003  
Finance expenses (a)         15,732     14,546     58,194     57,183  
Dividends on preferred shares         5,828     2,203     15,861     4,455  
Tax (benefit) (a)         (351 )   (21,237 )   (7,588 )   (19,819 )
Total Corporate expenses         $ 30,938     $ 19,341     $ 131,251     $ 130,071  
Other items                      
Foreign exchange (losses) gains (a)         (829 )   (850 )   (8,544 )   10,778  
Other income (loss)             7     303     (766 )
Transaction expenses                 (4,427 )    
Total other items         $ (829 )   $ (843 )   $ (12,668 )   $ 10,012  
Total Corporate and Investments         $ (1,517 )   $ (40,653 )   $ 44,854     $ 48,362  
(a)   These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from variable interest entities.
     
                         

Validus Holdings, Ltd.

Segment Information

For the three months ended December 31, 2017 and 2016

(Expressed in thousands of U.S. dollars, except share and per share information)
                         
        Three Months Ended December 31, 2017
       

Reinsurance
Segment

 

Insurance
Segment

 

Asset
Management
Segment and
Consolidated
VIEs

 

Corporate &
Investments

  Eliminations   Total
Underwriting revenues                            
Gross premiums written       $ 51,960     $ 377,014     $ 14,998     $     $ (649

)

 

$

443,323  
Reinsurance premiums ceded       (40,716 )   (56,378

)

 

              649       (96,445 )
Net premiums written       11,244     320,636       14,998                   346,878  
Change in unearned premiums       239,320     12,393       52,886                   304,599  
Net premiums earned       250,564     333,029       67,884                   651,477  
Other insurance related income       15     3,957       6,778             (3,811

)

 

  6,939  
Total underwriting revenues       250,579     336,986       74,662             (3,811

)

 

  658,416  
Underwriting deductions                            
Losses and loss expenses       135,804     244,908       99,130                   479,842  
Policy acquisition costs       58,107     60,403       8,557                   127,067  
General and administrative expenses       23,604     64,945       7,202       5,582       (3,811

)

 

  97,522  
Share compensation expenses       2,331     3,512       41       4,147             10,031  
Total underwriting deductions       219,846     373,768       114,930       9,729       (3,811

)

 

  714,462  
Underwriting income (loss)       $ 30,733     $ (36,782

)

 

$ (40,268 )   $ (9,729

)

 

$     $ (56,046 )
Net investment return (a)                 9,405       30,250      

 

 

  39,655  
Other items (b)                 468       (22,038

)

 

 

      (21,570 )
(Income) attributable to AlphaCat investors                 (37,868 )                 (37,868 )
Net loss attributable to noncontrolling interests                 67,136                   67,136  
Net income (loss) available (attributable) to Validus common shareholders       $ 30,733     $ (36,782

)

 

$ (1,127 )   $ (1,517

)

 

$     $ (8,693 )
             
             
        Three Months Ended December 31, 2016    
       

Reinsurance
Segment

 

Insurance
Segment

 

Asset
Management
Segment and
Consolidated
VIEs

 

Corporate &
Investments

  Eliminations   Total
Underwriting revenues                            
Gross premiums written       $ 41,813     $ 297,905     $ (264 )   $     $     $ 339,454  
Reinsurance premiums ceded       (7,773 )   (32,862 )                       (40,635 )
Net premiums written       34,040     265,043       (264 )                 298,819  
Change in unearned premiums       200,129     (24,900 )     66,351                   241,580  
Net premiums earned       234,169     240,143       66,087            

 

 

  540,399  
Other insurance related income       9     284       4,664             (4,396 )     561  
Total underwriting revenues       234,178     240,427       70,751             (4,396 )     540,960  
Underwriting deductions                            
Losses and loss expenses       93,503     164,417       17,206                   275,126  
Policy acquisition costs       55,352     58,394       7,143                   120,889  
General and administrative expenses       21,248     33,069       8,061       19,973       (4,396 )     77,955  
Share compensation expenses       2,811     3,693       82       3,856             10,442  
Total underwriting deductions       172,914     259,573       32,492       23,829       (4,396 )     484,412  
Underwriting income (loss)       $ 61,264     $ (19,146 )   $ 38,259     $ (23,829 )   $    

$

56,548  
Net investment return (a)                 2,548       (20,469

)

          (17,921

)

Other items (b)                 (225 )     3,645             3,420  
(Income) attributable to AlphaCat investors                 (7,080 )    

            (7,080 )
Net (income) attributable to noncontrolling interests                 (27,200 )                 (27,200 )
Net income (loss) available (attributable) to Validus common shareholders       $ 61,264     $ (19,146 )   $ 6,302     $ (40,653 )   $     $ 7,767  
(a)   Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)   Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate and other income (loss).
     
         

Validus Holdings, Ltd.

Segment Information

For the years ended December 31, 2017 and 2016

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

 

         
        Year Ended December 31, 2017
       

Reinsurance
Segment

 

Insurance
Segment

 

Asset
Management
Segment and
Consolidated
VIEs

 

Corporate &
Investments

  Eliminations   Total
Underwriting revenues                            
Gross premiums written       $ 1,195,207     $ 1,453,133     $ 312,819     $     $ (10,221 )   $ 2,950,938  
Reinsurance premiums ceded       (209,289 )   (261,055 )   (9,510 )       10,221     (469,633 )
Net premiums written       985,918     1,192,078     303,309             2,481,305  
Change in unearned premiums       37,086     64,007     (1,310 )           99,783  
Net premiums earned       1,023,004     1,256,085     301,999             2,581,088  
Other insurance related income       67     7,035     23,896         (18,122 )   12,876  
Total underwriting revenues       1,023,071     1,263,120     325,895         (18,122 )   2,593,964  
Underwriting deductions                            
Losses and loss expenses       692,719     934,199     673,260             2,300,178  
Policy acquisition costs       199,430     241,186     30,937             471,553  
General and administrative expenses       80,177     207,186     34,298     48,598     (18,122 )   352,137  
Share compensation expenses       10,762     12,774     389     16,186         40,111  
Total underwriting deductions       983,088     1,395,345     738,884     64,784     (18,122 )   3,163,979  
Underwriting income (loss)       $ 39,983     $ (132,225 )   $ (412,989 )   $ (64,784 )   $     $ (570,015 )
Net investment return (a)               21,948     188,773         210,721  
Other items (b)               737     (79,135 )       (78,398 )
Loss attributable to AlphaCat investors               16,929             16,929  
Net loss attributable to noncontrolling interests               357,280             357,280  
Net income (loss) available (attributable) to Validus common shareholders       $ 39,983     $ (132,225 )   $ (16,095 )   $ 44,854     $     $ (63,483 )
         
         
        Year Ended December 31, 2016
       

Reinsurance
Segment

 

Insurance
Segment

 

Asset
Management
Segment and
Consolidated
VIEs

 

Corporate &
Investments

  Eliminations   Total
Underwriting revenues                            
Gross premiums written       $ 1,184,912     $ 1,194,137     $ 270,402     $     $ (746

)

  $ 2,648,705  
Reinsurance premiums ceded       (121,331 )   (162,669 )   (6,451 )       746     (289,705 )
Net premiums written       1,063,581     1,031,468     263,951             2,359,000  
Change in unearned premiums       (67,432 )   (28,524 )   (13,879 )           (109,835 )
Net premiums earned       996,149     1,002,944     250,072             2,249,165  
Other insurance related income       25     1,367     22,386         (20,817 )   2,961  
Total underwriting revenues       996,174     1,004,311     272,458         (20,817 )   2,252,126  
Underwriting deductions                            
Losses and loss expenses       415,505     604,741     44,851             1,065,097  
Policy acquisition costs       189,797     232,780     26,905             449,482  
General and administrative expenses       85,000     165,529     34,333     72,249     (20,817 )   336,294  
Share compensation expenses       11,668     14,987     249     16,003         42,907  
Total underwriting deductions       701,970     1,018,037     106,338     88,252     (20,817 )   1,893,780  
Underwriting income (loss)       $ 294,204     $ (13,726 )   $ 166,120     $ (88,252 )   $     $ 358,346  
Net investment return (a)               13,106     168,421     (597 )   180,930  
Other items (b)               (1,364 )   (31,807 )       (33,171 )
(Income) attributable to AlphaCat investors               (23,358 )           (23,358 )
Net (income) attributable to noncontrolling interests               (123,363 )           (123,363 )
Net income (loss) available (attributable) to Validus common shareholders       $ 294,204     $ (13,726 )   $ 31,141     $ 48,362     $ (597 )   $ 359,384  
(a)   Net investment return includes net investment income, net realized and change in net unrealized gains (losses) on investments and income (loss) from investment affiliates.
(b)   Other items includes finance expenses, transaction expenses, dividends on preferred shares, tax benefit (expense), foreign exchange gains (losses), income (loss) from operating affiliate 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 (loss) available (attributable) 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 (loss) available (attributable) 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 (loss) available (attributable) 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 (loss) available (attributable) 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 year 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 December 31, 2017 and 2016

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

 

         
        December 31, 2017
        Equity Amount   Common Shares   Per Share
Amount (a)
Book value per common share (b)       $ 3,495,072     79,319,550   $ 44.06
Non-GAAP Adjustments:                
Assumed exercise of outstanding stock options (c)(d)              
Unvested restricted shares           2,503,859    
Book value per diluted common share (e)       3,495,072     81,823,409   $ 42.71
Goodwill       (229,573 )      
Intangible assets       (171,411 )      
Tangible book value per diluted common share (e)       $ 3,094,088     81,823,409   $ 37.81
                 
Book value per diluted common share (e)               $ 42.71
Accumulated dividends               13.08
Book value per diluted common share plus accumulated dividends (e)               $ 55.79
         
         
        December 31, 2016
        Equity Amount   Common Shares   Per Share
Amount (a)
Book value per common share (b)       $ 3,688,291     79,132,252   $ 46.61
Non-GAAP Adjustments:                
Assumed exercise of outstanding stock options (c)(d)       614     26,136    
Unvested restricted shares           2,868,610    
Book value per diluted common share (e)       3,688,905     82,026,998   $ 44.97
Goodwill       (196,758 )      
Intangible assets       (115,592 )      
Tangible book value per diluted common share (e)       $ 3,376,555     82,026,998   $ 41.16
                 
Book value per diluted common share (e)               $ 44.97
Accumulated dividends               11.56
Book value per diluted common share plus accumulated dividends (e)               $ 56.53

 

(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)   Using the "as-if-converted" method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
(d)   At December 31, 2017, the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $nil (December 31, 2016: $23.48).
(e)   Non-GAAP financial measure.
     
             
Validus Holdings, Ltd.

Non-GAAP Financial Measures Reconciliation

Net Operating Income (Loss) available (attributable) to Validus Common Shareholders, Net Operating Income (Loss) per Diluted Share available (attributable) to Validus Common Shareholders and Annualized Net Operating Return on Average Equity

For the three months and years ended December 31, 2017 and 2016

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

 

             
        Three Months Ended December 31,   Years Ended December 31,
        2017   2016   2017   2016
Net (loss) income (attributable) available to Validus common shareholders       $ (8,693 )   $ 7,767     $ (63,483 )   $ 359,384  
Non-GAAP Adjustments:                    
Net realized (gains) on investments       (5,607 )   (9,220 )   (7,623 )   (15,757 )
Change in net unrealized losses (gains) on investments       21,257     67,460     (3,215 )   (16,871 )
(Income) loss from investment affiliates       (6,345 )   (2,166 )   (22,010 )   2,083  
Foreign exchange losses (gains)       283     901     7,447     (10,864 )
Other (income) loss           (7 )   (303 )   766  
Transaction expenses               4,427      
Net income (loss) attributable to noncontrolling interests       4,597     (412 )   (767 )   457  
Tax (benefit) expense (a)       (1,339 )   (5,863 )   521     1,687  
Net operating income (loss) available (attributable) to Validus common shareholders (b)       $ 4,153     $ 58,460     $ (85,006 )   $ 320,885  
                     
Weighted average number of diluted common shares outstanding       78,966,938     80,621,967     79,091,376     82,359,460  
                     
(Loss) earnings per diluted share (attributable) available to Validus common shareholders       $ (0.11 )   $ 0.10     $ (0.80 )   $ 4.36  
Non-GAAP Adjustments:                    
Net realized (gains) on investments       (0.07 )   (0.11 )   (0.10 )   (0.19 )
Change in net unrealized losses (gains) on investments       0.27     0.84     (0.04 )   (0.20 )
(Income) loss from investment affiliates       (0.08 )   (0.03 )   (0.28 )   0.03  
Foreign exchange losses (gains)           0.01     0.09     (0.14 )
Other (income) loss                   0.01  
Transaction expenses               0.06      
Net income (loss) attributable to noncontrolling interests       0.06     (0.01 )   (0.01 )   0.01  
Tax (benefit) expense (a)       (0.02 )   (0.07 )   0.01     0.02  
Net operating income (loss) per diluted share available (attributable) to

Validus common shareholders (b)

      $ 0.05     $ 0.73     $ (1.07 )   $ 3.90  
                     
Average shareholders' equity available to Validus common shareholders (c)       $ 3,515,680     $ 3,702,956     $ 3,658,591     $ 3,697,114  
                     
Annualized return on average equity       (1.0 %)   0.8 %   (1.7 %)   9.7 %
Annualized net operating return on average equity (b)       0.5 %   6.3 %   (2.3 %)   8.7 %
(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 obtain Validus shareholder approval for the proposed transaction or 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.

Additional Information and Where to Find It

In connection with the proposed transaction, Validus will file with the SEC a proxy statement on Schedule 14A and may file or furnish other documents with the SEC regarding the proposed transaction. This material is not a substitute for the proxy statement or any other document which Validus may file with the SEC. INVESTORS IN AND SECURITY HOLDERS OF VALIDUS ARE URGED TO READ THE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS THAT ARE FILED OR FURNISHED OR WILL BE FILED OR WILL BE FURNISHED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND RELATED MATTERS. Investors and security holders may obtain free copies of the proxy statement (when available) and other documents filed with or furnished to the SEC by Validus through the web site maintained by the SEC at www.sec.gov or by contacting the investor relations department of Validus.

Participants in the Solicitation

Validus and its directors and executive officers may be deemed to be participants in the solicitation of proxies from Validus’ shareholders in connection with the proposed transaction. Information regarding Validus’ directors and executive officers, including a description of their direct interests, by security holdings or otherwise, is contained in Validus’ annual proxy statement filed with the SEC on March 16, 2017. A more complete description will be available in the proxy statement on Schedule 14A. You may obtain free copies of these documents as described in the preceding paragraph filed, with or furnished to the SEC. All such documents, when filed or furnished, are available free of charge at the SEC’s website (www.sec.gov) or by directing a request to the investor relations department of Validus.

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