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Feb 01, 2018

Validus Reports Fourth Quarter and Full Year 2017 Financial Results

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.
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or
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