Validus Announces Fourth Quarter 2011 Net Income of $27.3 Million

Diluted Operating Earnings Per Share of $0.21

Diluted Book Value Per Share of $32.28 at December 31, 2011

PEMBROKE, Bermuda--()--Validus Holdings, Ltd. (“Validus” or the “Company”) (NYSE: VR) today reported net income available to Validus of $27.3 million, or $0.25 per diluted common share for the three months ended December 31, 2011, compared to $102.7 million, or $0.92 per diluted common share, for the three months ended December 31, 2010. Net income available to Validus for the year ended December 31, 2011 was $21.3 million, or $0.14 per diluted common share compared to $402.6 million, or $3.34 per diluted common share for the year ended December 31, 2010.

Net operating income available to Validus for the three months ended December 31, 2011 was $23.4 million, or $0.21 per diluted common share, compared with $156.4 million, or $1.40 per diluted common share, for the three months ended December 31, 2010. Net operating income available to Validus for the year ended December 31, 2011 was $52.3 million, or $0.44 per diluted common share, compared with $322.8 million, or $2.68 per diluted common share, for the year ended December 31, 2010.

Net operating income (loss), a non-GAAP financial measure, is defined as net income (loss) excluding net realized and unrealized gains (losses) on investments, foreign exchange gains (losses) and non-recurring items. Net operating income (loss) available (attributable) to Validus is defined as above, but excluding income (loss) available (attributable) to noncontrolling interests. Reconciliations of these measures to net income (loss) available (attributable) to Validus, the most directly comparable GAAP measures, are presented at the end of this release.

Commenting on the financial results for the year ended December 31, 2011, Ed Noonan, Validus’ Chairman and Chief Executive Officer stated: “Insured losses arising from natural catastrophes and man-made disasters were approximately $108 billion in 2011. This was the second worst year on record after 2005, the year of our formation. Despite these significant market losses, Validus was profitable in 2011 which continues our Company’s record of profitability in each year of our operations despite heavy insured loss activity and financial market turbulence over the period. Since formation, our Company has grown diluted book value per share plus accumulated dividends at an annual compounded rate of 13.3%. I am satisfied with this outcome which is the result of world class underwriting, risk, financial and operational management throughout our global businesses.”

January 2012 Reinsurance Renewals – Validus Re segment

During the January 2012 renewal season, the Validus Re segment underwrote $581.6 million in gross premiums written, an increase of 10.7% from the prior year period. This renewal data does not include Talbot’s operations as its business is distributed relatively evenly throughout the year.

Below is a table outlining the Validus Re segment’s January 2012 reinsurance renewals.


January 2012 Gross Premiums Written

Validus Re segment and AlphaCat managed premium (unaudited)

U.S.

Property

International Property


Marine

Specialty

Total (a)
(U.S. $ millions)
2012 $ 195.5 $ 174.4 $ 166.5 $ 45.2 $ 581.6(b )
2011 188.0 129.9 157.5 49.9 525.3
% Increase (Decrease) 4.0 % 34.3 % 5.7 % (9.4 )% 10.7 %

(a) The financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company during 2011 as Validus held a majority of AlphaCat Re 2011’s outstanding voting rights. On December 23, 2011 certain investors subscribed for additional shares in AlphaCat Re 2011 after which the Company no longer held a majority of AlphaCat Re 2011’s outstanding voting rights. Consequently, Validus now holds an equity method investment in AlphaCat Re 2011 and will no longer consolidate AlphaCat Re 2011’s results of operations in the Company’s 2012 results of operations.

(b) Included in the renewal information is $76.1 million of managed premium written by AlphaCat Re 2011 ($42.3 million in the U.S. Property class and $33.8 million in the International Property class).

Commenting further, Mr Noonan stated: “Validus’ short tail classes of business continue to experience strong positive rate movement. At January 1, we grew our gross managed reinsurance premiums by 10.7%. We believe that Validus Re achieved rate increases across our portfolio which exceed that of the overall market due to our commitment to pricing discipline at January 1, along with our scale and franchise value. Talbot’s Lloyd’s operations continue to show positive rate movement, with a 2011 rate change of 3.1% on a risk adjusted basis across the entire portfolio. This rate movement in a specialty insurance business reflects Talbot’s size, experienced underwriting teams and skillful cycle management.

Heading into 2012, Validus continues to operate from a position of strength. We believe that our liabilities are prudently reserved, consistent with our philosophy from inception, and our invested assets are of the highest credit quality and short duration. Our underwriting teams both at Validus Re and at Talbot enjoy market leading positions and can offer meaningful capacity and expertise to our customers and intermediaries, both on our own balance sheet and through third party capital providers. AlphaCat Re 2011, our collateralized third party capital vehicle, wrote $76.1 million of gross premiums at January 1. In sum, Validus is well positioned for 2012 and I am highly confident in our ability to capitalize on the current market conditions.”

Fourth quarter 2011 results

Highlights for the fourth quarter include the following:

  • Gross premiums written for the three months ended December 31, 2011 were $278.3 million compared to $258.7 million for the three months ended December 31, 2010, an increase of $19.5 million, or 7.6%.
  • Net premiums earned for the three months ended December 31, 2011 were $488.3 million compared to $432.8 million for the three months ended December 31, 2010, an increase of $55.5 million, or 12.8%.
  • Underwriting income for the three months ended December 31, 2011 was $12.8 million compared to $139.7 million for the three months ended December 31, 2010, a decrease of $126.9 million, or 90.9%.
  • Combined ratio of 97.4% which included $42.8 million of favorable prior accident year loss reserve development, benefiting the loss ratio by 8.8 percentage points.
  • Net operating income available to Validus for the three months ended December 31, 2011 was $23.4 million compared to $156.4 million for the three months ended December 31, 2010, a decrease of $133.0 million, or 85.0%.
  • Net income available to Validus for the three months ended December 31, 2011 was $27.3 million compared to $102.7 million for the three months ended December 31, 2010, a decrease of $75.4 million, or 73.4%.
  • Annualized return on average equity of 3.2% and annualized net operating return on average equity of 2.7%.

Full year 2011 results

Highlights for the year ended December 31, 2011 include the following:

  • Gross premiums written for the year ended December 31, 2011 were $2,124.7 million compared to $1,990.6 million for the year ended December 31, 2010, an increase of $134.1 million, or 6.7%.
  • Net premiums earned for the year ended December 31, 2011 were $1,802.1 million compared to $1,761.1 million for the year ended December 31, 2010, an increase of $41.0 million, or 2.3%.
  • Underwriting income for the year ended December 31, 2011 was $11.8 million compared to $242.4 million for the year ended December 31, 2010, a decrease of $230.7 million, or 95.1%.
  • Combined ratio of 99.4% which included $156.1 million of favorable prior accident year loss reserve development, benefiting the loss ratio by 8.7 percentage points.
  • Net operating income available to Validus for the year ended December 31, 2011 was $52.3 million compared to $322.8 million for the year ended December 31, 2010, a decrease of $270.4 million, or 83.8%.
  • Net income available to Validus for the year ended December 31, 2011 was $21.3 million compared to $402.6 million for the year ended December 31, 2010, a decrease of $381.2 million, or 94.7%.
  • Annualized return on average equity of 0.6% and annualized net operating return on average equity of 1.5%.

Notable Loss Events

For three months ended December 31, 2011, the Company incurred net losses and loss expenses of $54.1 million from notable loss events, which represented 11.1 percentage points of the loss ratio. Including the impact of ($1.3) million of reinstatement premiums, the effect of these events on net income was a decrease of $55.5 million. For the three months ended December 31, 2010, the Company incurred net losses and loss expenses of $51.8 million from notable loss events, which represented 12.0 percentage points of the loss ratio. Including the impact of ($1.6) million of reinstatement premiums, the effect of these events on net income was a decrease of $53.4 million. The Company’s loss ratio, excluding prior accident year development and notable loss events for the three months ended December 31, 2011 and 2010 was 66.3% and 32.3%, respectively.

             
Fourth Quarter 2011 Notable Loss Events (a) Three months ended December 31, 2011
Validus Re Talbot Total
(Dollars in thousands) Description   Net Losses and Loss Expenses (b) % of NPE   Net Losses and Loss Expenses (b) % of NPE   Net Losses and Loss Expenses (b) % of NPE
 
Thailand floods Multiple flooding events $ 22,964 8.2 % $ 31,184 14.9 % $ 54,148 11.1 %
Total $ 22,964 8.2 % $ 31,184 14.9 % $ 54,148 11.1 %
 
Fourth Quarter 2010 Notable Loss Events Three months ended December 31, 2010
Validus Re Talbot Total
(Dollars in thousands) Description   Net Losses and Loss Expenses (b) % of NPE   Net Losses and Loss Expenses (b) % of NPE   Net Losses and Loss Expenses (b) % of NPE
 
Queensland floods Flood $ 10,000 4.0 % $ 15,000 8.0 % $ 25,000 5.8 %
Political violence Terror attack 12,500 5.1 % - - 12,500 2.9 %
Satellite loss Failure 5,804 2.4 % 2,982 1.6 % 8,786 2.0 %
Financial institution Investment house failure - -   5,487 3.0 % 5,487 1.3 %
Total $ 28,304 11.5 % $ 23,469 12.6 % $ 51,773 12.0 %

(a) These 2011 notable loss event amounts are based on management’s estimates following a review of the Company’s potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events may vary materially from these estimates. During 2011, given the complexity and severity of notable loss events in the year, an explicit reserve for development on 2011 notable loss events was included within the Company’s IBNR reserving process. During the fourth quarter of 2011, the Company incurred a $78.0 million reserve for potential development for 2011 notable loss events. As at December 31, 2011 the reserve for potential development on 2011 and 2010 notable loss events was $96.6 million.

(b) Net of reinsurance but not including the impact of reinstatement premiums. Total reinstatement premiums were ($1.3) million for the three months ended December 31, 2011 and ($1.6) million for the three months ended December 31, 2010.

Validus Re Segment Results

Gross premiums written for the three months ended December 31, 2011 were $54.5 million compared to $34.0 million for the three months ended December 31, 2010, an increase of $20.5 million, or 60.4%. Gross premiums written for the three months ended December 31, 2011 included $32.7 million of property premiums, $9.7 million of marine premiums and $12.1 million of specialty premiums compared to $17.3 million of property premiums, $4.2 million of marine premiums and $12.5 million of specialty premiums in the three months ended December 31, 2010.

Net premiums earned for the three months ended December 31, 2011 were $279.0 million compared to $246.3 million for the three months ended December 31, 2010, an increase of $32.7 million, or 13.3%.

The combined ratio for the three months ended December 31, 2011 was 101.0% compared to 42.1% for the three months ended December 31, 2010, an increase of 58.9 percentage points.

The loss ratio for the three months ended December 31, 2011 was 81.0% compared to 20.2% for the three months ended December 31, 2010, an increase of 60.8 percentage points. For the three months ended December 31, 2011, Validus Re incurred $23.0 million of losses attributable to notable loss events, which represented 8.2 percentage points of the loss ratio. The loss ratio for the three months ended December 31, 2011 included favorable prior accident year loss reserve development of $7.1 million, benefiting the loss ratio by 2.6 percentage points.

Gross premiums written for the year ended December 31, 2011 were $1,190.2 million compared to $1,101.2 million for the year ended December 31, 2010, an increase of $89.0 million, or 8.1%. Gross premiums written for the year ended December 31, 2011 included $862.7 million of property premiums, $232.4 million of marine premiums and $95.1 million of specialty premiums compared to $790.6 million of property premiums, $227.1 million of marine premiums and $83.5 million of specialty premiums in the year ended December 31, 2010.

Net premiums earned for the year ended December 31, 2011 were $1,031.9 million compared to $1,051.2 million for the year ended December 31, 2010, a decrease of $19.3 million, or 1.8%.

The combined ratio for the year ended December 31, 2011 was 94.5% compared to 77.5% for the year ended December 31, 2010, an increase of 17.0 percentage points.

The loss ratio for the year ended December 31, 2011 was 73.6% compared to 57.2% for the year ended December 31, 2010, an increase of 16.4 percentage points. For the year ended December 31, 2011, Validus Re incurred $474.8 million of losses attributable to notable loss events, which represented 46.0 percentage points of the loss ratio. The loss ratio for the year ended December 31, 2011 included favorable prior accident year loss reserve development of $68.6 million, benefiting the loss ratio by 6.6 percentage points.

Talbot Segment Results

Gross premiums written for the three months ended December 31, 2011 were $235.2 million compared to $238.1 million for the three months ended December 31, 2010, a decrease of $2.9 million, or 1.2%. Gross premiums written for the three months ended December 31, 2011 included $51.8 million of property premiums, $74.2 million of marine premiums and $109.2 million of specialty premiums compared to $58.2 million of property premiums, $68.4 million of marine premiums and $111.5 million of specialty premiums in the three months ended December 31, 2010.

Net premiums earned for the three months ended December 31, 2011 were $209.4 million compared to $186.5 million for the three months ended December 31, 2010, an increase of $22.9 million, or 12.3%.

The combined ratio for the three months ended December 31, 2011 was 87.4% compared to 94.1% for the three months ended December 31, 2010, a decrease of 6.7 percentage points.

The loss ratio for the three months ended December 31, 2011 was 52.0% compared to 56.5% for the three months ended December 31, 2010, a decrease of 4.5 percentage points. For the three months ended December 31, 2011, Talbot incurred $31.2 million of losses attributable to notable loss events, which represented 14.9 percentage points of the loss ratio. The loss ratio for the three months ended December 31, 2011 included favorable prior accident year loss reserve development of $35.7 million, benefiting the loss ratio by 17.0 percentage points.

Gross premiums written for the year ended December 31, 2011 were $1,014.1 million compared to $981.1 million for the year ended December 31, 2010, an increase of $33.0 million, or 3.4%. Gross premiums written for the year ended December 31, 2011 included $306.3 million of property premiums, $341.8 million of marine premiums and $366.0 million of specialty premiums compared to $314.8 million of property premiums, $315.1 million of marine premiums and $351.2 million of specialty premiums in the year ended December 31, 2010.

Net premiums earned for the year ended December 31, 2011 were $770.3 million compared to $709.9 million for the year ended December 31, 2010, an increase of $60.3 million, or 8.5%.

The combined ratio for the year ended December 31, 2011 was 99.8% compared to 91.7% for the year ended December 31, 2010, an increase of 8.1 percentage points.

The loss ratio for the year ended December 31, 2011 was 63.0% compared to 54.4% for the year ended December 31, 2010, an increase of 8.6 percentage points. For the year ended December 31, 2011, Talbot incurred $159.1 million of losses attributable to notable loss events, which represented 20.7 percentage points of the loss ratio. The loss ratio for the year ended December 31, 2011 included favorable prior accident year loss reserve development of $87.5 million, benefiting the loss ratio by 11.4 percentage points.

Corporate Segment Results

Corporate segment results include executive and board expenses, internal and external audit expenses, interest and costs incurred in connection with the Company’s senior notes and junior subordinated deferrable debentures and other costs relating to the Company as a whole. General and administrative expenses for the three months ended December 31, 2011 were $9.3 million compared to $11.5 million for the three months ended December 31, 2010, a decrease of $2.3 million, or 19.6%. Share compensation expenses for the three months ended December 31, 2011 were $3.1 million compared to $3.8 million for the three months ended December 31, 2010, a decrease of $0.7 million, or 18.0%.

General and administrative expenses for the year ended December 31, 2011 were $33.7 million compared to $49.6 million for the year ended December 31, 2010, a decrease of $16.0 million, or 32.2%. Share compensation expenses for the year ended December 31, 2011 were $16.4 million compared to $14.8 million for the year ended December 31, 2010, an increase of $1.6 million, or 10.8%.

Investments

Net investment income for the three months ended December 31, 2011 was $28.1 million compared to $31.0 million for the three months ended December 31, 2010, a decrease of $2.9 million, or 9.3%. Net investment income for the year ended December 31, 2011 was $112.3 million compared to $134.1 million for the year ended December 31, 2010, a decrease of $21.8 million, or 16.3%.

Net realized gains on investments for the three months ended December 31, 2011 were $5.4 million compared to net realized (losses) of ($14.4) million for the three months ended December 31, 2010, an increase of $19.8 million, or 137.2%. Net realized gains on investments for the year ended December 31, 2011 were $28.5 million compared to $32.5 million for the year ended December 31, 2010, a decrease of $4.0 million, or 12.2%.

Net unrealized gains on investments for the three months ended December 31, 2011 were $2.2 million compared to net unrealized (losses) of ($42.7) million for the three months ended December 31, 2010, an increase of $44.8 million, or 105.1%. Net unrealized (losses) on investments for the year ended December 31, 2011 were ($20.0) million compared to gains of $46.0 million for the year ended December 31, 2010, a decrease of $65.9 million, or 143.5%.

Finance Expenses

Finance expenses for the three months ended December 31, 2011 were $13.5 million compared to $13.8 million for the three months ended December 31, 2010, a decrease of $0.3 million, or 1.9%. Finance expenses for the year ended December 31, 2011 were $54.8 million compared to $55.9 million for the year ended December 31, 2010, a decrease of $1.1 million, or 1.9%.

Shareholders’ Equity and Capitalization

As at December 31, 2011, total shareholders’ equity was $3.45 billion. Diluted book value per common share was $32.28 at December 31, 2011, compared to $32.23 at September 30, 2011. Diluted book value per common share is a non-GAAP financial measure. A reconciliation of this measure to shareholders’ equity is presented at the end of this release.

Total capitalization at December 31, 2011 was $3.99 billion, including $289.8 million of junior subordinated deferrable debentures and $247.0 million of senior notes.

Subsequent Events

The Company today is providing an initial estimate of losses from the Costa Concordia marine event that occurred on January 13, 2012. Based on a total industry insured loss estimate of $845 million to $950 million, Validus expects its loss to be in the range of $50 million to $65 million, net of reinstatement premiums and reinsurance. The Company has additional reinsurance in place if the ultimate industry loss increases above the current estimate.

The above estimates are based on Validus’ current evaluation of impacted contracts and information provided by customers and intermediaries. Due to the preliminary nature of reports and estimates of loss to date, Validus’ actual losses from this event may vary materially from these estimates.

Conference Call

The Company will host a conference call for analysts and investors on February 3, 2012 at 9:00 AM (Eastern) to discuss the fourth quarter and full year 2011 financial results and related matters. The conference call can be accessed via telephone by dialing 1-800-237-9752 (toll-free U.S.) or 1-617-847-8706 (international) and entering the pass code 57534895#. Those who intend to participate in the conference call should register at least ten minutes in advance to ensure access to the call. A telephone replay of the conference call will be available through February 17, 2012 by dialing 1-888-286-8010 (toll-free U.S) or 1-617-801-6888 (international) and entering the pass code 95640578#.

This conference call will also be available through a live audio webcast accessible through the Investor Relations section of the Company’s website located at www.validusholdings.com. A replay of the webcast will be available at the Investor Relations section of the Company's website through February 17, 2012. In addition, a financial supplement relating to our financial results for the three months and year ended December 31, 2011 is available in the Investor Relations section of the Company’s website.

About Validus Holdings, Ltd.

Validus Holdings, Ltd. is a provider of reinsurance and insurance, conducting its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. (“Validus Re”) and Talbot Holdings Ltd. (“Talbot”). Validus Re is a Bermuda based reinsurer focused on short-tail lines of reinsurance. Talbot is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd’s insurance market through Syndicate 1183.

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at December 31, 2011 and December 31, 2010

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

 
December 31, December 31,
2011   2010  
 
Assets
Fixed maturities, at fair value (amortized cost: 2011 - $4,859,705; 2010 - $4,772,037) $ 4,894,145 $ 4,823,867
Short-term investments, at fair value (amortized cost: 2011 - $280,299; 2010 - $273,444) 280,191 273,514
Other investments, at fair value (amortized cost: 2011 - $15,002; 2010 - $18,392) 16,787 21,478
Cash and cash equivalents   832,844     620,740  
Total investments and cash 6,023,967 5,739,599
Investment in non-consolidated affiliate 53,031 -
Premiums receivable 646,354 568,761
Deferred acquisition costs 121,505 123,897
Prepaid reinsurance premiums 91,381 71,417
Securities lending collateral 7,736 22,328
Loss reserves recoverable 372,485 283,134
Paid losses recoverable 90,495 27,996
Income taxes recoverable - 1,142
Intangible assets 114,731 118,893
Goodwill 20,393 20,393
Accrued investment income 25,906 33,726
Other assets   50,487     49,592  
Total assets $ 7,618,471   $ 7,060,878  
 
Liabilities
Reserve for losses and loss expenses $ 2,631,143 $ 2,035,973
Unearned premiums 772,382 728,516
Reinsurance balances payable 119,899 63,667
Securities lending payable 8,462 23,093
Deferred income taxes 16,720 24,908
Net payable for investments purchased 1,256 43,896
Accounts payable and accrued expenses 83,402 99,320
Senior notes payable 246,982 246,874
Debentures payable   289,800     289,800  
Total liabilities   4,170,046     3,556,047  
 
Commitments and contingent liabilities
 
Shareholders' equity
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2011 - 134,503,065;
2010 - 132,838,111; Outstanding: 2011 - 99,471,080; 2010 - 98,001,226) 23,538 23,247
Treasury shares (2011 - 35,031,985; 2010 - 34,836,885) (6,131 ) (6,096 )
Additional paid-in-capital 1,893,890 1,860,960
Accumulated other comprehensive (loss) (6,601 ) (5,455 )
Retained earnings   1,543,729     1,632,175  
Total shareholders' equity   3,448,425     3,504,831  
 
Total liabilities and shareholders' equity $ 7,618,471   $ 7,060,878  

Validus Holdings, Ltd.

Consolidated Statements of Operations

For the three months and years ended December 31, 2011 and 2010

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

 
  Three Months Ended December 31,     Years Ended December 31,
2011     2010   2011     2010  
Underwriting income
Gross premiums written $ 278,279 $ 258,731 $ 2,124,691 $ 1,990,566
Reinsurance premiums ceded   (16,489 )   (35,376 )   (289,241 )   (229,482 )
Net premiums written 261,790 223,355 1,835,450 1,761,084
Change in unearned premiums   226,556     209,456     (33,307 )   39  
Net premiums earned   488,346     432,811     1,802,143     1,761,123  
 
Underwriting deductions
Losses and loss expenses 334,829 155,225 1,244,401 987,586
Policy acquisition costs 81,253 75,523 314,184 292,899
General and administrative expenses 52,253 54,511 197,497 209,290
Share compensation expenses   7,237     7,871     34,296     28,911  
Total underwriting deductions   475,572     293,130     1,790,378     1,518,686  
 
Underwriting income $ 12,774 $ 139,681 $ 11,765 $ 242,437
 
Net investment income 28,080 30,962 112,296 134,103
Other income 3,517 552 5,718 5,219
Finance expenses   (13,520 )   (13,786 )   (54,817 )   (55,870 )
Operating income before taxes 30,851 157,409 74,962 325,889
Tax benefit (expense)   226     (1,058 )   (824 )   (3,126 )
Net operating income $ 31,077 156,351 74,138 322,763
 
Net realized gains (losses) on investments 5,355 (14,399 ) 28,532 32,498
Net unrealized gains (losses) on investments 2,159 (42,689 ) (19,991 ) 45,952
Foreign exchange gains (losses) 266 3,424 (22,124 ) 1,351
Transaction expenses (a)   (3,850 )   -     (17,433 )   -  
Net income $ 35,007 $ 102,687 $ 43,122 $ 402,564
Net income attributable to noncontrolling interest   (7,683 )   -     (21,793 )   -  
Net income available to Validus $ 27,324   $ 102,687   $ 21,329   $ 402,564  
 
Selected ratios:
Net premiums written / Gross premiums written 94.1 % 86.3 % 86.4 % 88.5 %
 
Losses and loss expenses 68.6 % 35.9 % 69.1 % 56.1 %
Policy acquisition costs 16.6 % 17.4 % 17.4 % 16.6 %
General and administrative expenses   12.2 %   14.4 %   12.9 %   13.5 %
Expense ratio   28.8 %   31.8 %   30.3 %   30.1 %
Combined ratio   97.4 %   67.7 %   99.4 %   86.2 %
 
(a) The transaction expenses relate to costs incurred in connection with the Company's proposed acquisition of Transatlantic Holdings, Inc. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

Validus Holdings, Ltd.

Consolidated Statements of Operations

For the three months and years ended December 31, 2011 and 2010

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

   
Three months ended December 31, Years ended December 31,
2011     2010   2011     2010  

Validus Re

Gross premiums written $ 54,528 $ 33,986 $ 1,190,220 $ 1,101,239
Reinsurance premiums ceded   (49 )   (399 )   (150,718 )   (63,147 )
Net premiums written 54,479 33,587 1,039,502 1,038,092
Change in unearned premiums   224,513     212,737     (7,611 )   13,108  
Net premiums earned 278,992 246,324 1,031,891 1,051,200
Losses and loss expenses 225,903 49,799 759,305 601,610
Policy acquisition costs 41,465 39,299 160,134 160,599
General and administrative expenses 12,109 12,659 46,353 45,617
Share compensation expenses   2,191     1,934     9,309     7,181  
Total underwriting deductions 281,668 103,691 975,101 815,007
               
Underwriting (loss) income   (2,676 )   142,633     56,790     236,193  
 
Talbot              
Gross premiums written $ 235,242 $ 238,100 $ 1,014,122 $ 981,073
Reinsurance premiums ceded   (27,931 )   (48,332 )   (218,174 )   (258,081 )
Net premiums written 207,311 189,768 795,948 722,992
Change in unearned premiums   2,043     (3,281 )   (25,696 )   (13,069 )
Net premiums earned 209,354 186,487 770,252 709,923
Losses and loss expenses 108,926 105,426 485,096 385,976
Policy acquisition costs 41,160 37,726 157,334 143,769
General and administrative expenses 30,878 30,334 117,482 114,043
Share compensation expenses   1,934     2,142     8,582     6,923  
Total underwriting deductions   182,898     175,628     768,494     650,711  
Underwriting income   26,456     10,859     1,758     59,212  
 
Corporate & Eliminations              
Gross premiums written $ (11,491 ) $ (13,355 ) $ (79,651 ) $ (91,746 )
Reinsurance premiums ceded   11,491     13,355     79,651     91,746  
Net premiums written - - - -
Change in unearned premiums   -     -     -     -  
Net premiums earned - - - -
Losses and loss expenses - - - -
Policy acquisition costs (1,372 ) (1,502 ) (3,284 ) (11,469 )
General and administrative expenses 9,266 11,518 33,662 49,630
Share compensation expenses   3,112     3,795     16,405     14,807  
Total underwriting deductions 11,006 13,811 46,783 52,968
               
Underwriting (loss)   (11,006 )   (13,811 )   (46,783 )   (52,968 )
               
Total underwriting income $ 12,774   $ 139,681   $ 11,765   $ 242,437  

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Net Operating Income (Loss) available (attributable) to Validus, Net Operating Income (Loss) per share available (attributable) to Validus and Annualized Net Operating Return on Average Equity

For the three months and years ended December 31, 2011 and 2010

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

     
Three Months Ended December 31, Years Ended December 31,
2011   2010   2011   2010  
 
Net income available to Validus $ 27,324 $ 102,687 $ 21,329 $ 402,564
Adjustments for:
Net realized (gains) losses on investments (5,355 ) 14,399 (28,532 ) (32,498 )
Net unrealized (gains) losses on investments (2,159 ) 42,689 19,991 (45,952 )
Foreign exchange (gains) losses (266 ) (3,424 ) 22,124 (1,351 )
Transaction expenses   3,850     -     17,433     -  
Net operating income available to Validus 23,394 156,351 52,345 322,763
less: Dividends and distributions
declared on outstanding warrants   (1,728 )   (1,746 )   (7,644 )   (6,991 )
Net operating income available to Validus, adjusted $ 21,666   $ 154,605   $ 44,701   $ 315,772  
 
Net income per share available to Validus - diluted $ 0.25 $ 0.92 $ 0.14 $ 3.34
Adjustments for:
Net realized (gains) losses on investments (0.06 ) 0.13 (0.28 ) (0.27 )
Net unrealized (gains) losses on investments (0.02 ) 0.38 0.19 (0.38 )
Foreign exchange (gains) losses - (0.03 ) 0.22 (0.01 )
Transaction expenses   0.04     -     0.17     -  
Net operating income per share available to Validus - diluted $ 0.21   $ 1.40   $ 0.44   $ 2.68  
 
Weighted average number of common shares
and common share equivalents 101,324,291 111,316,736 100,928,284 120,630,945
 
 
Average shareholders' equity available to Validus $ 3,446,147 $ 3,633,058 $ 3,424,153 $ 3,731,945
 
Annualized net operating return on average equity 2.7 % 17.2 % 1.5 % 8.6 %

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Book Value Per Common Share and Diluted Book Value Per Common Share

As at December 31, 2011 and December 31, 2010

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

 
  As at December 31, 2011
Equity Amount   Shares   Exercise Price   Book Value Per Share
Book value per common share  
Total shareholders' equity $ 3,448,425 99,471,080 $ 34.67
 
Diluted book value per common share
Total shareholders' equity 3,448,425 99,471,080
Assumed exercise of outstanding warrants 121,445 6,916,678 $ 17.56
Assumed exercise of outstanding stock options 45,530 2,263,012 $ 20.12
Unvested restricted shares   -   3,340,728
Diluted book value per common share $ 3,615,400   111,991,498 $ 32.28
 
As at December 31, 2010
Equity Amount Shares Exercise Price Book Value Per Share
Book value per common share
Total shareholders' equity $ 3,504,831 98,001,226 $ 35.76
 
Diluted book value per common share
Total shareholders' equity 3,504,831 98,001,226
Assumed exercise of outstanding warrants 139,272 7,934,860 $ 17.55
Assumed exercise of outstanding stock options 54,997 2,723,684 $ 20.19
Unvested restricted shares   -   3,496,096
Diluted book value per common share $ 3,699,100   112,155,866 $ 32.98

Cautionary Note Regarding Forward-Looking Statements

This press release may include forward-looking statements, both with respect to the Company and its industry, that reflect our current views with respect to future events and financial performance. Statements that include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", "may" and similar statements of a future or forward-looking nature identify forward-looking statements. All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond the Company’s control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such 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; and 17) availability of reinsurance and retrocessional coverage, as well as 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 the Company on file with or furnished to the Securities and Exchange Commission (“SEC”). Any forward-looking statements made in this press release 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, the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Non-GAAP Financial Measures

In presenting the Company’s results, management has included and discussed certain schedules containing net operating income (loss), net operating income (loss) available (attributable) to Validus, net operating income (loss) per share, underwriting income (loss), annualized net operating return on average equity and diluted book value per common share that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of net operating income (loss) available (attributable) to Validus to net income (loss) available (attributable) to Validus, the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Net Operating Income (Loss) available (attributable) to Validus, Net Operating Income (Loss) per share available (attributable) to Validus and Annualized Net Operating Return on Average Equity”. A reconciliation of underwriting income and operating income to net income, the most comparable U.S. GAAP financial measure, is presented in the “Consolidated Statements of Operations” above.

Underwriting income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments and foreign exchange gains (losses). The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity.

Underwriting profitability over time is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.

Annualized net operating return on average equity is presented in the section above entitled “Net Operating Income (Loss) available (attributable) to Validus, Net Operating Income (Loss) per share available (attributable) to Validus and Annualized Net Operating Return on Average Equity.” A reconciliation of diluted book value per common share to book value per common share, the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Book Value Per Common Share and Diluted Book Value Per Common Share.” Net operating income (loss) is calculated based on net income (loss) excluding net realized gains (losses) on investments, net unrealized gains (losses) on investments, gains (losses) arising from translation of non-US$ denominated balances and non-recurring items. Realized gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance. Gains (losses) arising from translation of non-US$ denominated balances are unrelated to our underlying business. Net operating income (loss) available (attributable) to Validus is defined as above, but excluding income (loss) available (attributable) to noncontrolling interest.

Contacts

Investors:
Validus Holdings, Ltd.
Jon Levenson, Executive Vice President
+1-441-278-9000
Jon.Levenson@validusholdings.com
or
Media:
Brunswick Group
Gemma Hart/ Greg Faje
+1-212-333-3810

Sharing

Contacts

Investors:
Validus Holdings, Ltd.
Jon Levenson, Executive Vice President
+1-441-278-9000
Jon.Levenson@validusholdings.com
or
Media:
Brunswick Group
Gemma Hart/ Greg Faje
+1-212-333-3810