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Press release from Business Wire

Validus Announces Second Quarter Net Operating Income Available to Validus of $1.03 Per Diluted Share

<p class='bwalignc'> <b>Annualized Net Operating Return on Average Equity of 11.9%</b> </p> <p class='bwalignc'> <b>Net Income Available to Validus of $30.7 Million</b> </p>

Thursday, July 25, 2013

Validus Announces Second Quarter Net Operating Income Available to Validus of $1.03 Per Diluted Share

16:15 EDT Thursday, July 25, 2013

PEMBROKE, Bermuda (Business Wire) -- Validus Holdings, Ltd. (“Validus” or the “Company”) (NYSE: VR) today reported net income available to Validus of $30.7 million, or $0.28 per diluted common share for the three months ended June 30, 2013, compared to $167.6 million, or $1.62 per diluted common share, for the three months ended June 30, 2012. Net income available to Validus for the six months ended June 30, 2013 was $254.0 million, or $2.21 per diluted common share compared to $291.9 million, or $2.80 per diluted common share, for the six months ended June 30, 2012.

Net operating income available to Validus for the three months ended June 30, 2013 was $111.4 million, or $1.03 per diluted common share, compared to $171.2 million, or $1.65 per diluted common share, for the three months ended June 30, 2012. Net operating income available to Validus for the six months ended June 30, 2013 was $327.1 million, or $2.90 per diluted common share, compared to $264.1 million, or $2.53 per diluted common share, for the six months ended June 30, 2012.

Commenting on the financial results for the quarter ended June 30, 2013, Validus' Chairman and CEO Ed Noonan stated:

“I am pleased to announce another very good quarter for Validus with diluted net operating income of $1.03 per share and an annualized net operating return on average equity of 11.9%. All three of our segments - Validus Re, AlphaCat and Talbot - performed strongly, with particularly notable numbers posted by Talbot, which had record second quarter net operating income of 56.6 million."

Net income available to Validus, diluted earnings per share available to Validus, net operating income available to Validus, and diluted operating earnings per share available to Validus by entity for the three months ended June 30, 2013 were as follows:

   

Net Income
Available to
Validus

Diluted Earnings
Per Share
Available to
Validus

Net Operating
Income Available
to Validus

Diluted
Operating
Earnings Per
Share Available
to Validus

(Expressed in millions of U.S. dollars, except per share information)
Validus Re $ 14.4 $ 73.6
PaCRe, Ltd. (6.9 ) 0.2
Other AlphaCat Companies 12.2 11.6
Talbot 41.9 56.6
Corporate & Eliminations   (30.9 )   (30.6 )  
Total $ 30.7   $ 0.28   $ 111.4   $ 1.03

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), income (loss) from investment affiliates and non-recurring items. Net operating income (loss) available (attributable) to Validus is defined as net operating income (loss) as defined above, but excludes income (loss) available (attributable) to noncontrolling interest. Reconciliations of these measures to net income (loss) and net income (loss) available (attributable) to Validus, the most directly comparable GAAP measures, are presented at the end of this release.

Second Quarter 2013 Results

Highlights for the second quarter include the following:

  • Gross premiums written for the three months ended June 30, 2013 were $702.3 million compared to $627.1 million for the three months ended June 30, 2012, an increase of $75.2 million, or 12.0%.
  • Net premiums earned for the three months ended June 30, 2013 were $547.5 million compared to $447.6 million for the three months ended June 30, 2012, an increase of $99.8 million, or 22.3%.
  • Underwriting income for the three months ended June 30, 2013 was $117.7 million compared to $149.4 million for the three months ended June 30, 2012, a decrease of $31.7 million, or 21.2%.
  • Combined ratio of 78.5% which included $41.0 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 7.5 percentage points.
  • Net operating income available to Validus for the three months ended June 30, 2013 was $111.4 million compared to $171.2 million for the three months ended June 30, 2012, a decrease of $59.8 million, or 34.9%.
  • Net income available to Validus for the three months ended June 30, 2013 was $30.7 million compared to $167.6 million for the three months ended June 30, 2012, a decrease of $136.9 million, or 81.7%.
  • Annualized return on average equity of 3.3% and annualized net operating return on average equity of 11.9%.

Highlights for the year to date include the following:

  • Gross premiums written for the six months ended June 30, 2013 were $1,807.1 million compared to $1,464.4 million for the six months ended June 30, 2012, an increase of $342.7 million, or 23.4%.
  • Net premiums earned for the six months ended June 30, 2013 were $1,078.5 million compared to $898.8 million for the six months ended June 30, 2012, an increase of $179.7 million, or 20.0%.
  • Underwriting income for the six months ended June 30, 2013 was $327.7 million compared to $218.6 million for the six months ended June 30, 2012, an increase of $109.1 million, or 49.9%.
  • Combined ratio of 69.7% which included $106.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.9 percentage points.
  • Net operating income available to Validus for the six months ended June 30, 2013 was $327.1 million compared to $264.1 million for the six months ended June 30, 2012, an increase of $63.0 million, or 23.9%.
  • Net income available to Validus for the six months ended June 30, 2013 was $254.0 million compared to $291.9 million for the six months ended June 30, 2012, a decrease of $37.9 million, or 13.0%.
  • Annualized return on average equity of 13.2% and annualized net operating return on average equity of 17.0%.

Notable Loss Events

During the three months ended June 30, 2013, the Company incurred $77.6 million of losses from a notable loss event, which represented 14.2 percentage points of the loss ratio. For the three months ended June 30, 2012, the Company did not incur any losses from notable events. Including the impact of $7.1 million of reinstatement premiums, the effect of this event on second quarter 2013 net income was a decrease of $70.4 million. The Company's loss ratio, excluding prior year development, and notable loss events for the three months ended June 30, 2013 and 2012 was 41.7% and 42.7%, respectively.

                 
Three Months Ended June 30, 2013
(Dollars in thousands)  

Second Quarter 2013 Notable
Loss Event (a)

Validus Re AlphaCat (d)   Talbot Total
Description    

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

 

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

European floods Floods $ 69,895   22.9 % $ 975   2.8 %   $ 6,717   3.2 % $ 77,587   14.2 %
Total $ 69,895   22.9 % $ 975   2.8 %   $ 6,717   3.2 % $ 77,587   14.2 %
 
 
Three Months Ended June 30, 2012
(Dollars in thousands)  

Second Quarter 2012 Notable
Loss Events (a)

Validus Re AlphaCat Talbot Total
Description    

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

None $   % $   % $   % $   %
Total $   % $   % $   % $   %
(a)   The notable loss event amounts were based on management's estimates following a review of the company's potential exposure and discussions with certain clients and brokers. Given the magnitude of this event, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from this event and the Company's actual ultimate net losses from this event may vary materially from this estimate.
 
(b) Net of reinsurance but not net of reinstatement premiums. Total reinstatement premiums were $7.1 million for the three months ended June 30, 2013.
 
(c) NPE = Net premiums earned
 
(d) The AlphaCat segment incurred loss and loss expenses of $1.0 million. The Company's share of the loss was $0.1 million as a result of Validus' investment in an AlphaCat ILS fund.

Validus Re Segment Results

Gross premiums written for the three months ended June 30, 2013 were $353.4 million compared to $340.9 million for the three months ended June 30, 2012, an increase of $12.5 million, or 3.7%. Gross premiums written for the three months ended June 30, 2013 included $304.9 million of property premiums, $10.8 million of marine premiums and $37.7 million of specialty premiums compared to $292.3 million of property premiums, $24.9 million of marine premiums and $23.7 million of specialty premiums for the three months ended June 30, 2012.

Net premiums earned for the three months ended June 30, 2013 were $304.8 million compared to $242.7 million for the three months ended June 30, 2012, an increase of $62.1 million, or 25.6%.

The combined ratio for the three months ended June 30, 2013 was 81.5% compared to 43.8% for the three months ended June 30, 2012, an increase of 37.7 percentage points.

The loss ratio for the three months ended June 30, 2013 was 60.3% compared to 21.9% for the three months ended June 30, 2012, an increase of 38.4 percentage points. The loss ratio for the three months ended June 30, 2013 included favorable loss reserve development on prior accident years of $3.0 million, benefiting the loss ratio by 1.0 percentage point.

General and administrative expenses for the three months ended June 30, 2013 were $20.4 million compared to $14.1 million for the three months ended June 30, 2012, an increase of $6.3 million or 44.4%. General and administrative expenses have increased primarily due to the acquisition of Flagstone, which accounted for $6.0 million of additional general and administrative expenses for the three months ended June 30, 2013.

Gross premiums written for the six months ended June 30, 2013 were $1,101.3 million compared to $907.7 million for the six months ended June 30, 2012, an increase of $193.6 million, or 21.3%. Gross premiums written for the six months ended June 30, 2013 included $630.9 million of property premiums, $172.2 million of marine premiums and $298.2 million of specialty premiums compared to $610.7 million of property premiums, $223.3 million of marine premiums and $73.6 million of specialty premiums for the six months ended June 30, 2012.

Net premiums earned for the six months ended June 30, 2013 were $607.9 million compared to $495.7 million for the six months ended June 30, 2012, an increase of $112.2 million, or 22.6%.

The combined ratio for the six months ended June 30, 2013 was 66.6% compared to 58.2% for the six months ended June 30, 2012, an increase of 8.4 percentage points.

The loss ratio for the six months ended June 30, 2013 was 42.3% compared to 35.8% for the six months ended June 30, 2012, an increase of 6.5 percentage points. The loss ratio for the six months ended June 30, 2013 included favorable loss reserve development on prior accident years of $31.8 million, benefiting the loss ratio by 5.2 percentage points.

General and administrative expenses for the six months ended June 30, 2013 were $49.9 million compared to $31.4 million for the six months ended June 30, 2012, an increase of $18.5 million or 58.8%. General and administrative expenses have increased primarily due to the acquisition of Flagstone, which accounted for $19.4 million of additional general and administrative expenses for the six months ended June 30, 2013.

AlphaCat Segment Results

Gross premiums written from our consolidated entities, including PaCRe, for the three months ended June 30, 2013 were $46.8 million compared to $15.2 million for the three months ended June 30, 2012, an increase of $31.6 million, or 208.5%.

Managed gross premiums written, including our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the three months ended June 30, 2013 were $46.3 million compared to $58.5 million for the three months ended June 30, 2012, a decrease of $12.3 million, or 20.9%.

Net premiums earned for the three months ended June 30, 2013 were $35.0 million compared to $3.6 million for the three months ended June 30, 2012, an increase of $31.4 million.

The combined ratio for the three months ended June 30, 2013 was 25.7% compared to 79.2% for the three months ended June 30, 2012, a decrease of 53.5 percentage points.

The loss ratio for the three months ended June 30, 2013 was 3.8% compared to 0.0% for the three months ended June 30, 2012, an increase of 3.8 percentage points.

Gross premiums written from our consolidated entities, including PaCRe, for the six months ended June 30, 2013 were $143.3 million compared to $18.7 million for the six months ended June 30, 2012, an increase of $124.6 million.

Managed gross premiums written, including our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the six months ended June 30, 2013 were $142.3 million compared to $135.9 million for the six months ended June 30, 2012, an increase of $6.4 million or 4.7%.

Net premiums earned for the six months ended June 30, 2013 were $62.6 million compared to $6.3 million for the six months ended June 30, 2012, an increase of $56.4 million.

The combined ratio for the six months ended June 30, 2013 was 25.1% compared to 66.9% for the six months ended June 30, 2012, a decrease of 41.8 percentage points.

The loss ratio for the six months ended June 30, 2013 was 2.1% compared to 0.0% for the six months ended June 30, 2012, an increase of 2.1 percentage points.

Talbot Segment Results

Gross premiums written for the three months ended June 30, 2013 were $315.5 million compared to $283.5 million for the three months ended June 30, 2012, an increase of $32.0 million, or 11.3%. Gross premiums written for the three months ended June 30, 2013 included $124.2 million of property premiums, $105.5 million of marine premiums and $85.8 million of specialty premiums compared to $96.8 million of property premiums, $103.8 million of marine premiums and $82.9 million of specialty premiums for the three months ended June 30, 2012.

Net premiums earned for the three months ended June 30, 2013 were $207.7 million compared to $201.4 million for the three months ended June 30, 2012, an increase of $6.4 million, or 3.2%.

The combined ratio for the three months ended June 30, 2013 was 75.3% compared to 87.0% for the three months ended June 30, 2012, a decrease of 11.7 percentage points.

The loss ratio for the three months ended June 30, 2013 was 38.6% compared to 49.9% for the three months ended June 30, 2012, a decrease of 11.3 percentage points. The loss ratio for the three months ended June 30, 2013 included favorable loss reserve development on prior accident years of $38.0 million, benefiting the loss ratio by 18.3 percentage points.

Gross premiums written for the six months ended June 30, 2013 were $609.0 million compared to $576.8 million for the six months ended June 30, 2012, an increase of $32.3 million, or 5.6%. Gross premiums written for the six months ended June 30, 2013 included $202.2 million of property premiums, $230.3 million of marine premiums and $176.6 million of specialty premiums compared to $178.3 million of property premiums, $213.8 million of marine premiums and $184.6 million of specialty premiums for the six months ended June 30, 2012.

Net premiums earned for the six months ended June 30, 2013 were $408.0 million compared to $396.9 million for the six months ended June 30, 2012, an increase of $11.1 million, or 2.8%.

The combined ratio for the six months ended June 30, 2013 was 73.6% compared to 89.8% for the six months ended June 30, 2012, a decrease of 16.2 percentage points.

The loss ratio for the six months ended June 30, 2013 was 37.1% compared to 52.5% for the six months ended June 30, 2012, a decrease of 15.4 percentage points. The loss ratio for the six months ended June 30, 2013 included favorable loss reserve development on prior accident years of $75.0 million, benefiting the loss ratio by 18.4 percentage points.

Corporate Results

Corporate 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 June 30, 2013 were $14.4 million compared to $14.1 million for the three months ended June 30, 2012, an increase of $0.2 million, or 1.6%. Share compensation expenses for the three months ended June 30, 2013 were $2.7 million compared to $3.0 million for the three months ended June 30, 2012, a decrease of $0.3 million, or 10.4%.

General and administrative expenses for the six months ended June 30, 2013 were $30.2 million compared to $28.9 million for the six months ended June 30, 2012, an increase of $1.4 million, or 4.8%. Share compensation expenses for the six months ended June 30, 2013 were $2.1 million compared to $5.1 million for the six months ended June 30, 2012, a decrease of $3.1 million, or 59.4%.

Investments

Net investment income for the three months ended June 30, 2013 was $26.2 million compared to $25.9 million for the three months ended June 30, 2012, an increase of $0.3 million, or 1.3%. Net investment income for the six months ended June 30, 2013 was $51.9 million compared to $53.6 million for the six months ended June 30, 2012, a decrease of $1.8 million, or 3.3%.

Net realized gains on investments for the three months ended June 30, 2013 were $3.4 million compared to $6.2 million for the three months ended June 30, 2012, a decrease of $2.7 million, or 44.6%. Net realized gains on investments for the six months ended June 30, 2013 were $5.1 million compared to $13.7 million for the six months ended June 30, 2012, a decrease of $8.6 million, or 62.5%.

Net unrealized losses on investments for the three months ended June 30, 2013 were $141.3 million compared to $53.6 million for the three months ended June 30, 2012, an unfavorable movement of $87.8 million, or 163.8%. Net unrealized losses on other investments for the three months ended June 30, 2013 were primarily driven by $70.8 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $63.7 million for the three months ended June 30, 2013, leaving a net impact to the Company of $7.1 million.

Net unrealized losses on investments for the six months ended June 30, 2013 were $148.6 million compared to $32.9 million for the six months ended June 30, 2012, an unfavorable movement of $115.7 million. Net unrealized losses on other investments for the six months ended June 30, 2013 were primarily driven by $75.9 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $68.3 million for the six months ended June 30, 2013, leaving a net impact to the Company of $7.6 million.

Finance Expenses

Finance expenses for the three months ended June 30, 2013 were $37.8 million compared to $13.7 million for the three months ended June 30, 2012, an increase of $24.1 million, or 176.0%. Finance expenses for the six months ended June 30, 2013 were $62.3 million compared to $30.0 million for the six months ended June 30, 2012, an increase of $32.3 million, or 107.7%. The increase in finance expenses is primarily related to the expense on the variable funding notes which were $21.0 million and $32.2 million for the three and six months ended June 30, 2013, respectively.

Shareholders' Equity and Capitalization

As at June 30, 2013, total shareholders' equity was $4.1 billion including $498.4 million of noncontrolling interest. Shareholders' equity available to Validus was $3.6 billion as at June 30, 2013. Diluted book value per common share was $34.19 at June 30, 2013, compared to $34.79 at March 31, 2013. 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 June 30, 2013 was $4.9 billion, including $540.5 million of junior subordinated deferrable debentures and $247.1 million of senior notes. Total capitalization available to Validus at June 30, 2013 was $4.4 billion, excluding $498.4 million of noncontrolling interest.

Share Repurchases

A summary of the share repurchases made to date under the Company's previously announced share repurchase program is as follows:

    Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
As at March 31, 2013       Quarter ended
Effect of share repurchases: (cumulative) April May June June 30, 2013
Aggregate purchase price (a) $ 1,276,536 $ 71,058 $ 112,291 $ 104,144 $ 287,493
Shares repurchased

 

45,042,446

 

1,883,310

 

3,048,599

 

2,875,090

 

7,806,999

Average price (a) $ 28.34   $ 37.73   $ 36.83   $ 36.22   $ 36.83
 

Estimated cumulative net accretive
(dilutive) impact on:

Diluted BV per common share (b)

 

1.49

Diluted EPS - Quarter (c)

 

0.08

Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)

Effect of share repurchases: As at June 30, 2013   July   As at July 23, 2013

Cumulative to Date Effect

Aggregate purchase price (a) $ 1,564,029 $ $ $

1,564,029

Shares repurchased

 

52,849,445

 

52,849,445

Average price (a) $ 29.59 $ $ $ 29.59
(a)   Share transactions are on a trade date basis through July 23, 2013 and are inclusive of commissions. Average share price is rounded to two decimal places.
 
(b) As the average price per share repurchased during certain periods between 2009 and 2013 was lower than the book value per common share, the repurchase of shares increased the Company's period ending book value per share.
 
(c) The estimated impact on diluted earnings per share was calculated by comparing reported results versus i) net income per share plus an estimate of lost net investment income on the cumulative share repurchases divided by ii) weighted average diluted shares outstanding excluding the weighted average impact of cumulative share repurchases. The impact of cumulative share repurchases was accretive to diluted earnings per share.

Conference Call

The Company will host a conference call for analysts and investors on July 26, 2013 at 10:00 AM (Eastern) to discuss the second quarter 2013 financial results and related matters. The conference call may be accessed by dialing 1-877-299-4454 (toll-free U.S.) or 1-617-597-5447 (international) and entering the passcode 89488453. 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 August 9, 2013, by dialing 1-888-286-8010 (toll-free U.S.) or 1-617-801-6888 (international) and entering the passcode 89565519.

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 August 9, 2013. In addition, a financial supplement relating to the Company's financial results for the three and six months ended June 30, 2013 is available in the Investor Relations section of the Company's website.

About Validus Holdings, Ltd.

Validus Holdings, Ltd. is a provider of reinsurance, insurance, and insurance linked securities management operating through three primary segments, Validus Reinsurance, Ltd., Talbot Holdings Ltd. and AlphaCat Managers, Ltd. Validus Reinsurance, Ltd. (“Validus Re”) is a Bermuda based reinsurer focused on short tail lines of reinsurance. Talbot Holdings Ltd. (“Talbot”) is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd's insurance market through Syndicate 1183. AlphaCat Managers, Ltd. (“AlphaCat”) is a Bermuda based investment adviser managing capital for third parties and the Group in insurance linked securities and other property catastrophe reinsurance investments.

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at June 30, 2013 and December 31, 2012

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

   
June 30, 2013 December 31, 2012
 
Assets
Fixed maturities, at fair value (amortized cost: 2013—$5,322,882; 2012—$5,008,514) $ 5,318,993 $ 5,085,334
Short-term investments, at fair value (amortized cost: 2013—$611,708; 2012—$1,112,929) 609,778 1,114,250
Other investments, at fair value (amortized cost: 2013—$604,092; 2012—$583,068) 514,385 564,448
Cash and cash equivalents   1,317,061     1,219,379  
Total investments and cash 7,760,217 7,983,411
Investments in affiliates 110,472 172,329
Premiums receivable 1,374,486 802,159
Deferred acquisition costs 206,623 146,588
Prepaid reinsurance premiums 224,886 99,593
Securities lending collateral 1,900 225
Loss reserves recoverable 418,693 439,967
Paid losses recoverable 22,356 46,435
Income taxes recoverable 1,725
Intangible assets 108,489 110,569
Goodwill 20,393 20,393
Accrued investment income 19,334 21,321
Other assets   318,805     177,274  
Total assets $ 10,588,379   $ 10,020,264  
 
Liabilities
Reserve for losses and loss expenses $ 3,283,450 $ 3,517,573
Unearned premiums 1,439,597 894,362
Reinsurance balances payable 344,418 138,550
Securities lending payable 2,366 691
Deferred income taxes 22,600 20,259
Net payable for investments purchased 29,031 38,346
Accounts payable and accrued expenses 131,903 167,577
Variable funding notes 431,093
Senior notes payable 247,144 247,090
Debentures payable   540,476     540,709  
Total liabilities   6,472,078     5,565,157  
 
Commitments and contingent liabilities
 
Shareholders' equity

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2013—154,225,781;
2012—152,698,191; Outstanding: 2013—99,737,461; 2012—107,921,259)

26,989 26,722
Treasury shares (2013—54,488,320; 2012—44,776,932) (9,535 ) (7,836 )
Additional paid-in-capital 1,813,461 2,160,478
Accumulated other comprehensive (loss) (8,262 ) (2,953 )
Retained earnings   1,795,203     1,844,416  
Total shareholders' equity available to Validus   3,617,856     4,020,827  
 
Noncontrolling interest 498,445 434,280
       
Total shareholders' equity   4,116,301     4,455,107  
 
Total liabilities and shareholders' equity $ 10,588,379   $ 10,020,264  

Validus Holdings, Ltd.

Consolidated Statements of Operations

For the three and six months ended June 30, 2013 and 2012

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

   
Three Months Ended June 30,

Six Months Ended June 30,

2013   2012 2013   2012
Underwriting income
Gross premiums written $ 702,313 $ 627,089 $ 1,807,073 $ 1,464,378
Reinsurance premiums ceded   (121,396 )   (119,052 )   (308,612 )   (226,104 )
Net premiums written 580,917 508,037 1,498,461 1,238,274
Change in unearned premiums   (33,459 )   (60,410 )   (419,942 )   (339,448 )
Net premiums earned   547,458     447,627     1,078,519     898,826  
 
Underwriting deductions
Losses and loss expenses 265,044 153,692 409,815 385,681
Policy acquisition costs 87,152 76,129 180,763 154,261
General and administrative expenses 70,967 61,635 151,246 128,010
Share compensation expenses   6,638     6,800     8,956     12,238  
Total underwriting deductions   429,801     298,256     750,780     680,190  
 
Underwriting income $ 117,657 $ 149,371 $ 327,739 $ 218,636
 
Net investment income 26,210 25,885 51,859 53,645
Other income 4,418 5,994 7,103 14,885
Finance expenses (a)   (37,830 )   (13,706 )   (62,276 )   (29,985 )
Operating income before taxes and income from operating affiliates $ 110,455 $ 167,544 $ 324,425 $ 257,181
Tax (expense) benefit (93 ) (404 ) 225 (543 )
Income from operating affiliates   3,793     3,592     7,316     6,959  
Net operating income $ 114,155 $ 170,732 $ 331,966 $ 263,597
 
Net realized gains on investments 3,409 6,154 5,130 13,686
Net unrealized (losses) on investments (141,348 ) (53,574 ) (148,585 ) (32,903 )
Income (loss) from investment affiliate 1,753 (398 ) 3,230 (398 )
Foreign exchange (losses) gains   (8,223 )   (652 )   (1,301 )   2,514  
Net (loss) income $ (30,254 ) $ 122,262 $ 190,440 $ 246,496
 
Net loss attributable to noncontrolling interest 60,976 45,360 63,525 45,360
               
Net income available to Validus $ 30,722   $ 167,622   $ 253,965   $ 291,856  
 
Selected ratios:
Net premiums written / Gross premiums written 82.7 % 81.0 % 82.9 % 84.6 %
 
Losses and loss expenses 48.4 % 34.3 % 38.0 % 42.9 %
Policy acquisition costs 15.9 % 17.0 % 16.8 % 17.2 %
General and administrative expenses (b)   14.2 %   15.3 %   14.9 %   15.6 %
Expense ratio   30.1 %   32.3 %   31.7 %   32.8 %
 
Combined ratio   78.5 %   66.6 %   69.7 %   75.7 %
(a)   Finance expenses increased during the quarter and year to date due to the AlphaCat companies.
(b) The general and administrative expense ratio includes share compensation expenses.

Validus Holdings, Ltd.

Consolidated Segment Underwriting Income (Loss)

For the three and six months ended June 30, 2013 and 2012

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

   
Three Months Ended June 30, Six Months Ended June 30,
2013   2012 2013   2012

Validus Re

Gross premiums written $ 353,384 $ 340,850 $ 1,101,347 $ 907,716
Reinsurance premiums ceded   (87,558 )   (97,077 )   (213,286 )   (127,078 )
Net premiums written 265,826 243,773 888,061 780,638
Change in unearned premiums   38,925     (1,087 )   (280,176 )   (284,943 )
Net premiums earned   304,751     242,686     607,885     495,695  
Underwriting deductions
Losses and loss expenses 183,646 53,190 257,048 177,396
Policy acquisition costs 42,789 37,084 94,533 75,874
General and administrative expenses 20,423 14,142 49,864 31,394
Share compensation expenses   1,529     1,966     2,942     3,838  
Total underwriting deductions   248,387     106,382     404,387     288,502  
 
Underwriting income   56,364     136,304     203,498     207,193  
 

AlphaCat

Gross premiums written $ 46,760 $ 15,155 $ 143,276 $ 18,673
Reinsurance premiums ceded                
Net premiums written 46,760 15,155 143,276 18,673
Change in unearned premiums   (11,770 )   (11,568 )   (80,669 )   (12,423 )
Net premiums earned   34,990     3,587     62,607     6,250  
Underwriting deductions
Losses and loss expenses 1,313 1,313
Policy acquisition costs 3,586 382 6,224 638
General and administrative expenses 3,992 2,402 8,029 3,434
Share compensation expenses   85     59     162     111  
Total underwriting deductions   8,976     2,843     15,728     4,183  
 
Underwriting income (a)   26,014     744     46,879     2,067  
 

Talbot

Gross premiums written $ 315,518 $ 283,528 $ 609,048 $ 576,781
Reinsurance premiums ceded   (47,187 )   (34,419 )   (141,924 )   (137,818 )
Net premiums written 268,331 249,109 467,124 438,963
Change in unearned premiums   (60,614 )   (47,755 )   (59,097 )   (42,082 )
Net premiums earned   207,717     201,354     408,027     396,881  
Underwriting deductions
Losses and loss expenses 80,085 100,502 151,454 208,285
Policy acquisition costs 41,667 41,803 82,193 80,541
General and administrative expenses 32,192 30,957 63,104 64,305
Share compensation expenses   2,357     1,799     3,762     3,147  
Total underwriting deductions   156,301     175,061     300,513     356,278  
 
Underwriting income   51,416     26,293     107,514     40,603  

Validus Holdings, Ltd.

Consolidated Segment Underwriting Income (Loss) - Continued

For the three and six months ended June 30, 2013 and 2012

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

   
Three Months Ended June 30, Six Months Ended June 30,
2013   2012 2013   2012

Corporate & Eliminations

Gross premiums written $ (13,349 ) $ (12,444 ) $ (46,598 ) $ (38,792 )
Reinsurance premiums ceded   13,349     12,444     46,598     38,792  
Net premiums written
Change in unearned premiums                
Net premiums earned                
Underwriting deductions
Losses and loss expenses
Policy acquisition costs (890 ) (3,140 ) (2,187 ) (2,792 )
General and administrative expenses 14,360 14,134 30,249 28,877
Share compensation expenses   2,667     2,976     2,090     5,142  
Total underwriting deductions   16,137     13,970     30,152     31,227  
 
Underwriting (loss)   (16,137 )   (13,970 )   (30,152 )   (31,227 )
               
Total underwriting income (a) $ 117,657   $ 149,371   $ 327,739   $ 218,636  
(a)   Underwriting income for the AlphaCat segment includes noncontrolling interest.

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Managed Gross Premiums Written

For the three and six months ended June 30, 2013 and 2012

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

 

Consolidated

   
Three Months Ended June 30, Six Months Ended June 30,
2013   2012 2013   2012
 
Total gross premiums written $ 702,313 $ 627,089 $ 1,807,073 $ 1,464,378
Adjustments for:
Gross premiums written on behalf of AlphaCat Re 2011, Ltd. (403 ) 12,830 (513 ) 86,705
Gross premiums written on behalf of AlphaCat Re 2012, Ltd.   (67 )   30,558     (465 )   30,558
Total managed gross premiums written $ 701,843   $ 670,477   $ 1,806,095   $ 1,581,641
 

AlphaCat segment

 

 

Three Months Ended June 30, Six Months Ended June 30,
2013 2012 2013 2012
 
Total gross premiums written $ 46,760 $ 15,155 $ 143,276 $ 18,673
Adjustments for:
Gross premiums written on behalf of AlphaCat Re 2011, Ltd. (403 ) 12,830 (513 ) 86,705
Gross premiums written on behalf of AlphaCat Re 2012, Ltd.   (67 )   30,558     (465 )   30,558
Total managed gross premiums written $ 46,290   $ 58,543   $ 142,298   $ 135,936

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Net Operating Income available to Validus, Net Operating Income per share available to Validus and Annualized Net Operating
Return on Average Equity

For the three and six months ended June 30, 2013 and 2012

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

   
Three Months Ended Six Months Ended
June 30,   June 30, June 30,   June 30,
  2013   2012   2013   2012
 
Net income available to Validus $ 30,722 $ 167,622 $ 253,965 $ 291,856
Adjustments for:
Net realized (gains) on investments (3,409 ) (6,154 ) (5,130 ) (13,686 )
Net unrealized losses on investments 141,348 53,574 148,585 32,903
(Income) loss from investment affiliate (1,753 ) 398 (3,230 ) 398
Foreign exchange losses (gains) 8,223 652 1,301 (2,514 )
Net (loss) attributable to noncontrolling interest (63,683 ) (44,881 ) (68,425 ) (44,881 )
Net operating income available to Validus 111,448 171,211 327,066 264,076
Less: Dividends and distributions declared on outstanding warrants   (1,646 )   (1,729 )   (16,110 )   (3,458 )
Net operating income available to Validus, adjusted $ 109,802   $ 169,482   $ 310,956   $ 260,618  
 
Net income per share available to Validus - diluted $ 0.28 $ 1.62 $ 2.21 $ 2.80
Adjustments for:
Net realized (gains) on investments (0.03 ) (0.06 ) (0.04 ) (0.13 )
Net unrealized losses on investments 1.31 0.52 1.38 0.32
(Income) loss from investment affiliate (0.02 ) (0.03 )
Foreign exchange losses (gains) 0.08 0.01 0.01 (0.02 )
Net (loss) attributable to noncontrolling interest   (0.59 )   (0.44 )   (0.63 )   (0.44 )
Net operating income per share available to Validus - diluted $ 1.03   $ 1.65   $ 2.90   $ 2.53  
 

Weighted average number of common shares and common
share equivalents

107,776,292 103,667,967 107,393,822 104,382,030
 
Average shareholders' equity available to Validus $ 3,760,873 $ 3,508,673 $ 3,847,524 $ 3,488,590
 
Annualized net operating return on average equity   11.9 %   19.5 %   17.0 %   15.1 %

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Book Value per Common Share, Diluted Book Value per Common Share and Diluted Book Value per Common Share plus
Accumulated Dividends

As at June 30, 2013 and December 31, 2012

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

 
As at June 30, 2013

Equity
Amount

  Shares  

Exercise
Price

 

Book Value
Per Share

Book value per common share  
Total shareholders' equity available to Validus $ 3,617,856 99,737,461 $ 36.27
 
Diluted book value per common share
Total shareholders' equity available to Validus 3,617,856 99,737,461
Assumed exercise of outstanding warrants 101,379 5,459,829 $ 18.57
Assumed exercise of outstanding stock options 31,914 1,689,131 $ 18.89
Unvested restricted shares       2,831,952  
Diluted book value per common share $ 3,751,149     109,718,373   $ 34.19
Adjustment for accumulated dividends 7.08

Diluted book value per common share plus
accumulated dividends

$ 41.27
 
As at December 31, 2012

Equity
Amount

Shares

Exercise
Price

Book Value
Per Share

Book value per common share
Total shareholders' equity available to Validus $ 4,020,827 107,921,259 $ 37.26
 
Diluted book value per common share
Total shareholders' equity available to Validus 4,020,827 107,921,259
Assumed exercise of outstanding warrants 118,015 6,410,472 $ 18.41
Assumed exercise of outstanding stock options 37,745 1,823,947 $ 20.69
Unvested restricted shares       2,443,631  
Diluted book value per common share $ 4,176,587     118,599,309   $ 35.22
Adjustment for accumulated dividends 4.48

Diluted book value per common share plus
accumulated dividends

$ 39.70

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/A and Form 10-Q and other documents of the Company on file with or furnished to the U.S. 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), managed gross premiums written, annualized net operating return on average equity, diluted book value per common share and diluted book value per common share plus accumulated dividends 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) to net income (loss), the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Net Operating Income (Loss), Net Operating Income (Loss) per share 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. A reconciliation of managed gross premiums written to gross premiums written, the most comparable U.S. GAAP financial measure, is presented in the section above entitled "Managed Gross Premiums Written".

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, gain on bargain purchase, net of expenses, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses) and transaction expenses. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company's core insurance and reinsurance 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.

Managed gross premiums written represents gross premiums written by the Company and its operating affiliates. Managed gross premiums written differs from total gross premiums written, which the Company believes is the most directly comparable GAAP measure, due to the inclusion of premiums written on behalf of the Company's operating affiliates, AlphaCat Re 2011, Ltd. and AlphaCat Re 2012, Ltd., which are accounted for under the equity method of accounting.

Annualized net operating return on average equity is presented in the section above entitled “Net Operating Income (Loss), Net Operating Income (Loss) per share and Annualized Net Operating Return on Average Equity.” A reconciliation of diluted book value per common share and diluted book value per common share plus accumulated dividends to book value per common share, the most comparable U.S. GAAP financial measure, is presented in the section above entitled “Book Value 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, foreign exchange gains (losses), income (loss) from investment affiliates 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 net operating income (loss) as defined above, but excluding income (loss) available (attributable) to noncontrolling interest.

Investors:
Validus Holdings, Ltd.
Jon Levenson, Executive Vice President
+1-441-278-9000
Jon.Levenson@validusholdings.com
or
Media:
Brunswick Group
Radina Russell / Beau Allen
+1-212-333-3810

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