10-Q

Table of Contents



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________
 Form 10-Q 
__________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015

Commission file number 001-33606
__________________________________________________
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
__________________________________________________
BERMUDA
 
98-0501001
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
29 Richmond Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
 (441) 278-9000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
As of November 4, 2015 there were 81,923,744 outstanding Common Shares, $0.175 par value per share, of the registrant.
 


Table of Contents



INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at September 30, 2015 (unaudited) and December 31, 2014
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets


 


Fixed maturities, at fair value (amortized cost: 2015—$5,581,846; 2014—$5,534,494)
$
5,578,856

 
$
5,532,731

Short-term investments, at fair value (amortized cost: 2015—$1,661,705; 2014—$1,051,222)
1,661,687

 
1,051,074

Other investments, at fair value (cost: 2015—$864,651; 2014—$879,176)
817,374

 
813,011

Cash and cash equivalents
408,485

 
577,240

Restricted cash
74,002

 
173,003

Total investments and cash
8,540,404

 
8,147,059

Investments in affiliates
347,962

 
261,483

Premiums receivable
1,062,654

 
707,647

Deferred acquisition costs
225,065

 
161,295

Prepaid reinsurance premiums
125,547

 
81,983

Securities lending collateral
6,461

 
470

Loss reserves recoverable
385,212

 
377,466

Paid losses recoverable
21,681

 
38,078

Income taxes recoverable
15,870

 
—

Deferred tax asset
22,352

 
23,821

Receivable for investments sold
15,055

 
18,318

Intangible assets
122,676

 
126,924

Goodwill
196,758

 
195,897

Accrued investment income
23,755

 
24,865

Other assets
124,511

 
164,633

Total assets
$
11,235,963

 
$
10,329,939

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
3,169,334

 
$
3,234,394

Unearned premiums
1,281,319

 
990,564

Reinsurance balances payable
90,838

 
127,128

Securities lending payable
6,927

 
936

Deferred tax liability
8,921

 
5,541

Payable for investments purchased
118,164

 
68,574

Accounts payable and accrued expenses
248,834

 
318,245

Notes payable to AlphaCat investors
1,443,198

 
671,465

Senior notes payable
247,387

 
247,306

Debentures payable
538,054

 
539,277

Total liabilities
$
7,152,976

 
$
6,203,430

 
 
 
 
Commitments and contingent liabilities


 


Redeemable noncontrolling interest
—

 
79,956

 
 
 
 
Shareholders’ equity
 
 
 
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2015—158,434,541; 2014—155,554,224; Outstanding: 2015—81,997,891; 2014—83,869,845)
$
27,726

 
$
27,222

Treasury shares (2015—76,436,650; 2014—71,684,379)
(13,376
)
 
(12,545
)
Additional paid-in-capital
1,048,917

 
1,207,493

Accumulated other comprehensive loss
(10,869
)
 
(8,556
)
Retained earnings
2,592,162

 
2,374,344

Total shareholders’ equity available to Validus
3,644,560

 
3,587,958

Noncontrolling interest
438,427

 
458,595

Total shareholders’ equity
$
4,082,987

 
$
4,046,553

 
 
 
 
Total liabilities, noncontrolling interests and shareholders’ equity
$
11,235,963

 
$
10,329,939

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

2

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Validus Holdings, Ltd.
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 
 
 
Gross premiums written
$
401,681

 
$
358,974

 
$
2,248,147

 
$
2,026,639

Reinsurance premiums ceded
(48,425
)
 
(30,137
)
 
(294,161
)
 
(275,610
)
Net premiums written
353,256

 
328,837

 
1,953,986

 
1,751,029

Change in unearned premiums
202,203

 
165,859

 
(247,191
)
 
(307,373
)
Net premiums earned
555,459

 
494,696

 
1,706,795

 
1,443,656

Net investment income
31,524

 
25,261

 
96,153

 
69,909

Net realized (losses) gains on investments
(41,906
)
 
4,595

 
(35,493
)
 
16,193

Change in net unrealized (losses) gains on investments
(34,908
)
 
(84,974
)
 
19,766

 
16,146

Income from investment affiliate
2,482

 
1,754

 
5,542

 
7,881

Other insurance related income and other (loss)
8,187

 
(4,080
)
 
15,559

 
14,985

Foreign exchange losses
(2,274
)
 
(11,441
)
 
(9,061
)
 
(14,761
)
Total revenues
518,564

 
425,811

 
1,799,261

 
1,554,009

 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Losses and loss expenses
258,258

 
224,125

 
765,333

 
545,541

Policy acquisition costs
105,091

 
86,404

 
308,152

 
251,006

General and administrative expenses
95,999

 
83,319

 
263,990

 
231,606

Share compensation expenses
9,983

 
8,764

 
28,279

 
24,252

Finance expenses
17,498

 
15,354

 
55,085

 
47,380

Transaction expenses
—

 
149

 
—

 
3,401

Total expenses
486,829

 
418,115

 
1,420,839

 
1,103,186

 
 
 
 
 
 
 
 
Income before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
31,735

 
7,696

 
378,422

 
450,823

Tax (expense) benefit
(2,018
)
 
953

 
(7,132
)
 
(398
)
Income from operating affiliates
5,526

 
3,761

 
12,083

 
13,580

(Income) attributable to AlphaCat investors
(40,256
)
 
(25,807
)
 
(94,341
)
 
(82,833
)
Net (loss) income
$
(5,013
)
 
$
(13,397
)
 
$
289,032

 
$
381,172

Net loss (income) attributable to noncontrolling interest
71,663

 
53,069

 
15,042

 
(25,745
)
Net income available to Validus
$
66,650

 
$
39,672

 
$
304,074

 
$
355,427

 
 
 
 
 
 
 
 
Other comprehensive loss
 

 
 

 
 
 
 
Change in foreign currency translation adjustments
(1,850
)
 
(5,198
)
 
(2,106
)
 
(2,121
)
Change in minimum pension liability, net of tax
(28
)
 
—

 
129

 
—

Change in fair value of cash flow hedge
75

 
—

 
(336
)
 
—

Other comprehensive loss
$
(1,803
)
 
$
(5,198
)
 
$
(2,313
)
 
$
(2,121
)
 
 
 
 
 
 
 
 
Comprehensive income available to Validus
$
64,847

 
$
34,474

 
$
301,761

 
$
353,306

 
 
 
 
 
 
 
 
Earnings per share
 

 
 

 
 
 
 
Weighted average number of common shares and common share equivalents outstanding
 

 
 

 
 
 
 
Basic
82,635,316

 
90,593,329

 
83,296,703

 
91,665,950

Diluted
85,629,494

 
91,939,610

 
86,841,927

 
95,937,641

 
 
 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.79

 
$
0.42

 
$
3.61

 
$
3.83

Earnings per diluted share available to common shareholders
$
0.78

 
$
0.41

 
$
3.50

 
$
3.70

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.32

 
$
0.30

 
$
0.96

 
$
0.90

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30,
2015
 
September 30,
2014
 
(unaudited)
 
(unaudited)
Common shares
 

 
 

Balance - Beginning of period
$
27,222

 
$
27,036

Common shares issued, net
504

 
133

Balance - End of period
$
27,726

 
$
27,169

 
 
 
 
Treasury shares
 

 
 

Balance - Beginning of period
$
(12,545
)
 
$
(10,228
)
Repurchase of common shares
(831
)
 
(1,347
)
Balance - End of period
$
(13,376
)
 
$
(11,575
)
 
 
 
 
Additional paid-in capital
 

 
 

Balance - Beginning of period
$
1,207,493

 
$
1,677,894

Common shares issued, net
16,231

 
(3,822
)
Repurchase of common shares
(203,086
)
 
(285,179
)
Share compensation expenses
28,279

 
24,252

Balance - End of period
$
1,048,917

 
$
1,413,145

 
 
 
 
Accumulated other comprehensive loss
 

 
 

Balance - Beginning of period
$
(8,556
)
 
$
(617
)
Other comprehensive loss
(2,313
)
 
(2,121
)
Balance - End of period
$
(10,869
)
 
$
(2,738
)
 
 
 
 
Retained earnings
 

 
 

Balance - Beginning of period
$
2,374,344

 
$
2,010,009

Dividends
(86,256
)
 
(89,027
)
Net income
289,032

 
381,172

Net loss (income) attributable to noncontrolling interest
15,042

 
(25,745
)
Balance - End of period
$
2,592,162

 
$
2,276,409

 
 
 
 
Total shareholders’ equity available to Validus
$
3,644,560

 
$
3,702,410

 
 
 
 
Noncontrolling interest
$
438,427

 
$
522,287

 
 
 
 
Total shareholders’ equity
$
4,082,987

 
$
4,224,697

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2015 and 2014 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
 
September 30, 2015
 
September 30, 2014
 
(unaudited)
 
(unaudited)
Cash flows provided by (used in) operating activities
 

 
 

Net income
$
289,032

 
$
381,172

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Share compensation expenses
28,279

 
24,252

Loss (gain) on deconsolidation/sale of subsidiary
1,777

 
(2,081
)
Amortization of discount on senior notes
81

 
81

Income from investment affiliate
(5,542
)
 
(7,881
)
Net realized losses (gains) on investments
35,493

 
(16,193
)
Change in net unrealized gains on investments
(19,766
)
 
(16,146
)
Amortization of intangible assets
4,248

 
3,120

Income from operating affiliates
(12,083
)
 
(13,580
)
Foreign exchange losses included in net income
16,549

 
10,841

Amortization of premium on fixed maturities
17,866

 
11,922

Change in:
 

 
 

Premiums receivable
(357,285
)
 
(241,175
)
Deferred acquisition costs
(63,770
)
 
(52,008
)
Prepaid reinsurance premiums
(43,564
)
 
(26,558
)
Loss reserves recoverable
(9,111
)
 
70,444

Paid losses recoverable
16,408

 
17,245

Income taxes recoverable
(16,088
)
 
—

Deferred tax asset
1,390

 
—

Accrued investment income
1,059

 
3,431

Other assets
38,400

 
30,125

Reserve for losses and loss expenses
(55,889
)
 
(271,063
)
Unearned premiums
290,755

 
333,933

Reinsurance balances payable
(35,457
)
 
(12,836
)
Deferred tax liability
3,323

 
(7,385
)
Accounts payable and accrued expenses
(74,227
)
 
(70,809
)
Net cash provided by operating activities
51,878

 
148,851

 
 
 
 
Cash flows provided by (used in) investing activities
 

 
 

Proceeds on sales of investments
2,888,919

 
3,585,728

Proceeds on maturities of investments
260,179

 
466,872

Purchases of fixed maturities
(3,164,787
)
 
(3,160,512
)
Purchases of short-term investments, net
(639,211
)
 
(933,148
)
Purchases of other investments, net
(26,648
)
 
(47,752
)
Increase in securities lending collateral
(5,991
)
 
(5,664
)
Investment in operating affiliates
(10,400
)
 
—

Redemption from operating affiliates
57,402

 
58,547

Investment in investment affiliates
(19,086
)
 
—

Decrease (increase) in restricted cash
99,001

 
(7,856
)
Proceeds on sale of subsidiary, net of cash
—

 
16,459

Net cash used in investing activities
(560,622
)
 
(27,326
)
 
 
 
 
Cash flows provided by (used in) financing activities
 

 
 

Proceeds on issuance of notes payable to AlphaCat investors
1,307,789

 
645,243

Repayments on notes payable to AlphaCat investors
(709,059
)
 
(602,068
)
Issuance (redemption) of common shares, net
16,735

 
(3,689
)
Purchases of common shares under share repurchase program
(203,917
)
 
(286,526
)
Dividends paid
(86,423
)
 
(89,719
)
Increase in securities lending payable
5,991

 
5,664

Third party investment in redeemable noncontrolling interest
55,700

 
61,200

Third party redemption of redeemable noncontrolling interest
(19,395
)
 
(10,496
)
Net cash provided by (used in) financing activities
367,421

 
(280,391
)
 
 
 
 
Effect of foreign currency rate changes on cash and cash equivalents
(27,432
)
 
(11,293
)
 
 
 
 
Net decrease in cash
(168,755
)
 
(170,159
)
 
 
 
 
Cash and cash equivalents - beginning of period
$
577,240

 
$
734,148

 
 
 
 
Cash and cash equivalents - end of period
$
408,485

 
$
563,989

 
 
 
 
Taxes paid during the period
$
14,959

 
$
7,286

 
 
 
 
Interest paid during the period
$
46,847

 
$
46,421

The accompanying notes are an integral part of these Consolidated Financial Statements (unaudited).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)



1. Basis of preparation and consolidation
These unaudited Consolidated Financial Statements (the "Consolidated Financial Statements") include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the "SEC").
In the opinion of management, these Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position and results of operations as at the end of and for the periods presented. The Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 includes a revision to decrease net cash used in investing activities by $42,440. There are no changes to the sub-totals of net cash used in operating activities, financing activities or the effect of foreign currency rate changes on cash and cash equivalents. This revision resulted in an increase in net cash of $42,440 for the nine months ended September 30, 2014.
The effect of this revision does not impact any per-share amounts or other components of equity or net assets in the statement of financial position in the prior period presented. The Company does not believe this revision is material to the prior period. The Company has revised these prior period amounts to provide comparability with current period cash flows. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ materially from those estimates. The Company’s principal estimates include:
•reserve for losses and loss expenses;
•premium estimates for business written on a line slip or proportional basis;
•the valuation of goodwill and intangible assets;
•reinsurance recoverable balances including the provision for uncollectible amounts; and
•investment valuation of financial assets.
The term “ASC” used in these notes refers to Accounting Standard Codification issued by the U.S. Financial Accounting Standards Board (“FASB”).

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


2. Recent accounting pronouncements
Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued Accounting Standard Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The original effective date for the amendments in this Update was for interim and annual reporting periods beginning after December 15, 2016; however, in August 2015, the FASB delayed the effective date by one year through the issuance of Accounting Standards Update 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" (ASU 2015-14). As such, the new effective date is for interim and annual reporting periods beginning after December 15, 2017. Entities may adopt the standard as of the original effective date, however, earlier adoption is not permitted. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
In February 2015, the FASB issued Accounting Standard Update 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis” (ASU 2015-02). The amendments in this Update modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. The amendment also eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The amendment also provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance and it may have a material impact on the Company’s Consolidated Financial Statements.
In April 2015, the FASB issued Accounting Standard Update 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in this Update simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.
In May 2015, the FASB issued Accounting Standard Update 2015-07, "Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" (ASU 2015-07). The amendments in this Update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. Earlier application is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.
In May 2015, the FASB issued Accounting Standard Update 2015-09, “Financial Services - Insurance (Topic 944) - Disclosures about Short-Duration Contracts” (ASU 2015-09). The amendments in this Update enhance annual disclosures relating to reserves for losses and loss expenses by requiring the following: (1) net incurred and paid claims development information by accident year; (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and loss expenses; (3) for each accident year presented, total IBNR plus expected development on case reserves included in the reserve for losses and loss expenses, accompanied by a description of reserving methodologies and any changes thereto; (4) for each accident year presented, quantitative information about claim frequency (unless impracticable) accompanied by a qualitative description of methodologies used for determining claim frequency information and any changes thereto; and (5) the average annual percentage payout of incurred claims by age for the same number of accident years presented. The amendments in this Update are effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early application is permitted. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements, but will require changes to disclosures.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


In September 2015, the FASB issued Accounting Standard Update 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16). The amendments in this Update simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2015. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company's Consolidated Financial Statements.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


3. Investments
(a)
Fixed maturity, short-term and other investments
The Company's investments in fixed maturities, short-term investments and other investments are classified as trading and carried at fair value, with related changes in net unrealized gains or losses included in earnings.
The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments as at September 30, 2015 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
868,750

 
$
3,787

 
$
(609
)
 
$
871,928

Non-U.S. government and government agency
224,288

 
1,205

 
(2,529
)
 
222,964

U.S. states, municipalities and political subdivisions
316,868

 
3,097

 
(439
)
 
319,526

Agency residential mortgage-backed securities
488,827

 
9,503

 
(1,060
)
 
497,270

Non-agency residential mortgage-backed securities
27,054

 
400

 
(400
)
 
27,054

U.S. corporate
1,530,344

 
4,387

 
(8,837
)
 
1,525,894

Non-U.S. corporate
472,736

 
1,628

 
(6,544
)
 
467,820

Bank loans
517,129

 
642

 
(8,298
)
 
509,473

Catastrophe bonds
160,835

 
908

 
(1,767
)
 
159,976

Asset-backed securities
624,444

 
2,038

 
(1,234
)
 
625,248

Commercial mortgage-backed securities
350,571

 
2,045

 
(913
)
 
351,703

Total fixed maturities
5,581,846

 
29,640

 
(32,630
)
 
5,578,856

Total short-term investments (a)
1,661,705

 
49

 
(67
)
 
1,661,687

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
2,378

 
—

 
(938
)
 
1,440

Hedge funds (b)
559,737

 
43,541

 
(99,653
)
 
503,625

Private equity investments
51,037

 
8,891

 
(2,305
)
 
57,623

Investment funds
247,104

 
577

 
—

 
247,681

Mutual funds
4,395

 
2,610

 
—

 
7,005

Total other investments
864,651

 
55,619

 
(102,896
)
 
817,374

Total investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
8,108,202

 
$
85,308

 
$
(135,593
)
 
$
8,057,917

Assets managed on behalf of AlphaCat investors (a)
(1,364,692
)
 
—

 
—

 
(1,364,692
)
Catastrophe bonds
(160,835
)
 
(908
)
 
1,767

 
(159,976
)
Noncontrolling interest (b)
(491,204
)
 
(32,920
)
 
89,688

 
(434,436
)
Total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
6,091,471

 
$
51,480

 
$
(44,138
)
 
$
6,098,813

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

9
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The amortized cost (or cost), gross unrealized gains and (losses) and estimated fair value of investments as at December 31, 2014 were as follows:
 
Amortized Cost (or Cost)
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
U.S. government and government agency
$
759,232

 
$
1,755

 
$
(901
)
 
$
760,086

Non-U.S. government and government agency
279,493

 
1,215

 
(1,980
)
 
278,728

U.S. states, municipalities and political subdivisions
448,668

 
1,780

 
(825
)
 
449,623

Agency residential mortgage-backed securities
520,685

 
9,697

 
(1,151
)
 
529,231

Non-agency residential mortgage-backed securities
37,954

 
369

 
(516
)
 
37,807

U.S. corporate
1,500,963

 
3,960

 
(5,217
)
 
1,499,706

Non-U.S. corporate
564,386

 
2,765

 
(3,989
)
 
563,162

Bank loans
457,537

 
200

 
(8,733
)
 
449,004

Catastrophe bonds
75,822

 
768

 
(926
)
 
75,664

Asset-backed securities
647,422

 
1,250

 
(1,190
)
 
647,482

Commercial mortgage-backed securities
242,332

 
598

 
(692
)
 
242,238

Total fixed maturities
5,534,494

 
24,357

 
(26,120
)
 
5,532,731

Total short-term investments (a)
1,051,222

 
13

 
(161
)
 
1,051,074

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
2,570

 
125

 
(920
)
 
1,775

Preferred stock
6,535

 
—

 
(201
)
 
6,334

Hedge funds (b)
570,371

 
60,792

 
(134,203
)
 
496,960

Private equity investments
48,995

 
4,987

 
(611
)
 
53,371

Investment funds
244,506

 
437

 
(111
)
 
244,832

Mutual funds
6,199

 
3,540

 
—

 
9,739

Total other investments
879,176

 
69,881

 
(136,046
)
 
813,011

Total investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
7,464,892

 
$
94,251

 
$
(162,327
)
 
$
7,396,816

Assets managed on behalf of AlphaCat investors (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
(75,822
)
 
(768
)
 
926

 
(75,664
)
Noncontrolling interest (b)
(502,830
)
 
(48,446
)
 
120,782

 
(430,494
)
Total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
6,189,316

 
$
45,037

 
$
(40,619
)
 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

10
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at September 30, 2015 and December 31, 2014.
 
September 30, 2015
 
December 31, 2014
 
Estimated Fair Value
 
% of Total
 
Estimated Fair Value
 
% of Total
AAA
$
2,454,181

 
44.0
 %
 
$
2,494,239

 
45.1
%
AA
530,473

 
9.5
 %
 
848,226

 
15.4
%
A
1,145,331

 
20.5
 %
 
1,086,091

 
19.6
%
BBB
674,489

 
12.1
 %
 
505,208

 
9.1
%
Total investment-grade fixed maturities
4,804,474

 
86.1
 %
 
4,933,764

 
89.2
%
 
 
 
 
 
 
 
 
BB
316,602

 
5.7
 %
 
362,972

 
6.6
%
B
216,544

 
4.0
 %
 
145,240

 
2.6
%
CCC
4,374

 
0.0
 %
 
12,733

 
0.2
%
CC
1,002

 
0.0
 %
 
3,926

 
0.1
%
C
—

 
0.0
 %
 
1,344

 
0.0
%
D/NR
235,860

 
4.2
 %
 
72,752

 
1.3
%
Total non-investment grade fixed maturities
774,382

 
13.9
 %
 
598,967

 
10.8
%
Total fixed maturities
$
5,578,856

 
100.0
 %
 
$
5,532,731

 
100.0
%
The amortized cost and estimated fair value amounts for fixed maturities held at September 30, 2015 and December 31, 2014 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
 
September 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
$
342,554

 
$
343,201

 
$
312,843

 
$
313,248

Due after one year through five years
2,996,003

 
2,991,774

 
3,163,225

 
3,159,200

Due after five years through ten years
566,908

 
560,971

 
497,175

 
491,870

Due after ten years
185,485

 
181,635

 
112,858

 
111,655

 
4,090,950

 
4,077,581

 
4,086,101

 
4,075,973

Asset-backed and mortgage-backed securities
1,490,896

 
1,501,275

 
1,448,393

 
1,456,758

Total fixed maturities
$
5,581,846

 
$
5,578,856

 
$
5,534,494

 
$
5,532,731

(b)
Net investment income
Net investment income was derived from the following sources:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Fixed maturities and short-term investments
$
28,117

 
$
22,544

 
$
88,519

 
$
68,048

Other investments
5,086

 
2,879

 
12,288

 
2,879

Restricted cash and cash and cash equivalents
373

 
1,581

 
1,259

 
4,534

Securities lending income
4

 
1

 
13

 
5

Total gross investment income
33,580

 
27,005

 
102,079

 
75,466

Investment expenses
(2,056
)
 
(1,744
)
 
(5,926
)
 
(5,557
)
Total net investment income
$
31,524

 
$
25,261

 
$
96,153

 
$
69,909

Net investment income from other investments includes distributed and undistributed net income from certain investment funds.

11
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(c)
Net realized (losses) gains and change in net unrealized (losses) gains on investments
The following represents an analysis of net realized gains and the change in net unrealized (losses) gains on investments:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Fixed maturities, short-term and other investments
 

 
 

 
 
 
 
Gross realized gains
$
1,872

 
$
8,075

 
$
14,450

 
$
23,184

Gross realized (losses)
(43,778
)
 
(3,480
)
 
(49,943
)
 
(6,991
)
Net realized (losses) gains on investments (a)
(41,906
)
 
4,595

 
(35,493
)
 
16,193

Change in net unrealized (losses) gains on investments (a)
(34,908
)
 
(84,974
)
 
19,766

 
16,146

Total net realized and change in net unrealized (losses) gains on investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
(76,814
)
 
(80,379
)
 
(15,727
)
 
32,339

Assets managed on behalf of AlphaCat investors
—

 
—

 
—

 
—

Catastrophe bonds
(2,208
)
 
(201
)
 
701

 
1,787

Noncontrolling interest (a)
71,589

 
52,595

 
21,078

 
(22,613
)
Total net realized and change in net unrealized (losses) gains on investments excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
(7,433
)
 
$
(27,985
)
 
$
6,052

 
$
11,513

(a)
Includes the net realized (losses) gains and change in net unrealized (losses) gains on investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and is included in the Consolidated Statements of Comprehensive Income as net loss (income) attributable to noncontrolling interest.
(d)
Pledged investments
The following tables outline investments and cash pledged as collateral under the Company's credit facilities. For further details on the credit facilities, please refer to Note 12: “Debt and financing arrangements.”
 
 
September 30, 2015
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
244,358

 
385,279

$30,000 secured bi-lateral letter of credit facility
 
30,000

 
10,172

 
47,471

Talbot FAL facility
 
25,000

 
25,000

 
31,318

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,134

IPC bi-lateral facility
 
25,000

 
10,782

 
—

$230,000 Flagstone bi-lateral facility
 
230,000

 
205,593

 
381,302

Total
 
$
1,265,000

 
$
525,905

 
$
875,504


12
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
December 31, 2014
Description
 
Commitment
 
Issued and Outstanding
 
Investments and cash pledged as collateral
$400,000 syndicated unsecured letter of credit facility
 
$
400,000

 
$
—

 
$
—

$525,000 syndicated secured letter of credit facility
 
525,000

 
276,455

 
395,750

$200,000 secured bi-lateral letter of credit facility
 
200,000

 
15,649

 
35,645

Talbot FAL facility
 
25,000

 
25,000

 
31,048

PaCRe senior secured letter of credit facility
 
10,000

 
294

 
—

AlphaCat Re secured letter of credit facility
 
30,000

 
30,000

 
30,078

IPC bi-lateral facility
 
40,000

 
15,897

 
99,437

$375,000 Flagstone bi-lateral facility
 
375,000

 
198,389

 
430,782

Total
 
$
1,605,000

 
$
561,684

 
$
1,022,740

In addition, $3,856,717 of cash and cash equivalents, restricted cash, short-term investments and fixed maturities were pledged during the normal course of business as at September 30, 2015 (December 31, 2014: $3,150,295). Of those, $3,809,087 were held in trust (December 31, 2014: $3,122,074). Pledged assets are generally for the benefit of the Company's cedants and policyholders, to support AlphaCat's fully collateralized reinsurance transactions and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators.
4. Fair value measurements
(a)
Classification within the fair value hierarchy
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of the fair value hierarchy are described below:
Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.
There have been no material changes in the Company's valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

13
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At September 30, 2015, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. government and government agency
$
—

 
$
871,928

 
$
—

 
$
871,928

Non-U.S. government and government agency
—

 
222,964

 
—

 
222,964

U.S. states, municipalities and political subdivisions
—

 
319,526

 
—

 
319,526

Agency residential mortgage-backed securities
—

 
497,270

 
—

 
497,270

Non-agency residential mortgage-backed securities
—

 
27,054

 
—

 
27,054

U.S. corporate
—

 
1,525,894

 
—

 
1,525,894

Non-U.S. corporate
—

 
467,820

 
—

 
467,820

Bank loans
—

 
347,637

 
161,836

 
509,473

Catastrophe bonds
—

 
158,976

 
1,000

 
159,976

Asset-backed securities
—

 
625,248

 
—

 
625,248

Commercial mortgage-backed securities
—

 
351,703

 
—

 
351,703

Total fixed maturities
—

 
5,416,020

 
162,836

 
5,578,856

Total short-term investments (a)
1,652,981

 
8,706

 
—

 
1,661,687

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,440

 
1,440

Hedge funds (b)
—

 
—

 
503,625

 
503,625

Private equity investments
—

 
—

 
57,623

 
57,623

Investment funds
—

 
80,470

 
167,211

 
247,681

Mutual funds
—

 
7,005

 
—

 
7,005

Total other investments
—

 
87,475

 
729,899

 
817,374

Total investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
1,652,981

 
$
5,512,201

 
$
892,735

 
$
8,057,917

Assets managed on behalf of AlphaCat investors (a)
(1,364,692
)
 
—

 
—

 
(1,364,692
)
Catastrophe bonds
—

 
(158,976
)
 
(1,000
)
 
(159,976
)
Noncontrolling interest (b)
—

 
—

 
(434,436
)
 
(434,436
)
Total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
288,289

 
$
5,353,225

 
$
457,299

 
$
6,098,813

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.


14
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


At December 31, 2014, the Company’s investments were allocated between Levels 1, 2 and 3 as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
U.S. government and government agency
$
—

 
$
760,086

 
$
—

 
$
760,086

Non-U.S. government and government agency
—

 
278,728

 
—

 
278,728

U.S. states, municipalities and political subdivisions
—

 
449,623

 
—

 
449,623

Agency residential mortgage-backed securities
—

 
529,231

 
—

 
529,231

Non-agency residential mortgage-backed securities
—

 
37,807

 
—

 
37,807

U.S. corporate
—

 
1,499,706

 
—

 
1,499,706

Non-U.S. corporate
—

 
563,162

 
—

 
563,162

Bank loans
—

 
416,256

 
32,748

 
449,004

Catastrophe bonds
—

 
70,664

 
5,000

 
75,664

Asset-backed securities
—

 
647,482

 
—

 
647,482

Commercial mortgage-backed securities
—

 
242,238

 
—

 
242,238

Total fixed maturities
—

 
5,494,983

 
37,748

 
5,532,731

Total short-term investments (a)
942,716

 
108,358

 
—

 
1,051,074

Other investments
 
 
 
 
 
 
 
Fund of hedge funds
—

 
—

 
1,775

 
1,775

Preferred stock
—

 
6,334

 
—

 
6,334

Hedge funds (b)
—

 
—

 
496,960

 
496,960

Private equity investments
—

 
—

 
53,371

 
53,371

Investment fund
—

 
140,045

 
104,787

 
244,832

Mutual funds
—

 
9,739

 
—

 
9,739

Total other investments
—

 
156,118

 
656,893

 
813,011

Total investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
942,716

 
$
5,759,459

 
$
694,641

 
$
7,396,816

Assets managed on behalf of AlphaCat investors (a)
(696,924
)
 
—

 
—

 
(696,924
)
Catastrophe bonds
—

 
(70,664
)
 
(5,000
)
 
(75,664
)
Noncontrolling interest (b)
—

 
—

 
(430,494
)
 
(430,494
)
Total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
245,792

 
$
5,688,795

 
$
259,147

 
$
6,193,734

(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the hedge funds balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.
At September 30, 2015, Level 3 investments excluding the catastrophe bonds and noncontrolling interests totaled $457,299 (December 31, 2014: $259,147), representing 7.5% (December 31, 2014: 4.2%) of total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interests, measured at fair value on a recurring basis.

15
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Level 1 assets measured at fair value
Short term investments
Short term investments categorized as Level 1 consist primarily of highly liquid securities, all with maturities less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments are generally determined using amortized cost which approximates fair value. The Company has determined that certain of its short-term investments, held in highly liquid money market-type funds, should be included in Level 1 as their fair values are based on quoted market prices in active markets.
(c)
Level 2 assets measured at fair value
Fixed maturity investments
Fixed maturity investments included in Level 2 include U.S. government and government agency, non-U.S. government and government agency, U.S. states, municipalities and political subdivisions, agency residential mortgage-backed securities, non-agency residential mortgage-backed securities, U.S. corporate, non-U.S. corporate, bank loans, catastrophe bonds, asset-backed securities and commercial mortgage-backed securities.
In general, valuation of the Company's fixed maturity investment portfolios is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.
In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets.
The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company's fixed maturity investments are detailed below by asset class.
U.S. government and government agency
U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data.
Non-U.S. government and government agency
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
U.S. states, municipalities and political subdivisions
The Company's U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above.

16
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Agency residential mortgage-backed securities
The Company's agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ("TBA") market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes.
Non-agency residential mortgage-backed securities
The Company's non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable.
U.S. corporate
Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company's corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate.
Non-U.S. corporate
Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company's non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Bank loans
The Company's bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company's bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
Catastrophe bonds
Catastrophe bonds are based on broker or underwriter bid indications. To the extent that these indications are based on significant unobservable inputs, the relevant bonds will be classified as a Level 3 asset.
Asset-backed securities
Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.

17
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Commercial mortgage-backed securities
Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector.
Short term investments
Short term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the Company's portfolio of short term investments is generally determined using amortized cost which approximates fair value. The Company has determined that, other than highly liquid money market-type funds, the majority of the remaining securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value. To the extent that these valuations are based on significant unobservable inputs, the relevant short term investments will be classified as a Level 3 asset.
Preferred stock
The Company's preferred stock portfolio contains preferred term securities typically sold by non-public financial services companies, through a collateralized debt obligation product and are classified as Level 2 assets. The fair value of these investments is determined based on quoted market prices in active markets.
Investment funds
Investment funds classified as Level 2 assets includes one pooled investment which is invested in fixed income securities with high credit ratings. The investment fund is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the net asset value of the fund as reported by Lloyd’s Treasury & Investment Management.
Also included within investment funds is the Company's share of a portfolio of Lloyd's overseas deposits, which is also classified as a Level 2 asset. The underlying deposits are managed centrally by Lloyd's and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd's.
Mutual funds
Mutual funds consist of two investment funds which are invested in various quoted investments. The fair value of units in the mutual funds is based on the net asset value of the fund as reported by the fund manager.
(d)
Level 3 assets measured at fair value
Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. The Company's hedge funds, a fund of hedge funds, private equity investments, certain bank loans, an investment fund and certain catastrophe bonds are the only financial instruments in this category as at September 30, 2015. For each respective hedge fund investment, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are following fair value principles consistent with U.S. GAAP in determining the net asset value (“NAV”).
Within the hedge fund industry, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager and regular evaluation of fund performance against applicable benchmarks.

18
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Bank loans
Included in the bank loans portfolio is a collection of loan participations held through an intermediary. These investments are classified as Level 3 assets. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary.
Fund of hedge funds
The fund of hedge funds includes a side pocket. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund's administrator provides a monthly reported NAV with a one month delay in its valuation which was used as a basis for fair value measurement in the Company's September 30, 2015 Consolidated Balance Sheet. The fund manager has provided an estimate of the fund NAV at September 30, 2015 based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compares the one month delayed fund administrator's NAV to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.
Hedge funds
The hedge funds were valued at $503,625 at September 30, 2015 (December 31, 2014: $496,960). The hedge funds consist of investments in five Paulson & Co. managed funds (the "Paulson hedge funds") and one hedge fund assumed in the acquisition of Flagstone Reinsurance Holdings, S.A. (the "Flagstone Acquisition") (the "Flagstone hedge fund").
The Paulson hedge funds' administrator provides monthly reported NAVs with a one month delay in its valuation which was used as a partial basis for fair value measurement in the Company's September 30, 2015 Consolidated Balance Sheet. The fund manager provides an estimate of the NAV as at September 30, 2015 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. Historically, the Company's valuation estimates have not materially differed from the subsequent NAVs.
The Flagstone hedge fund's administrator provides quarterly NAVs with a three-month delay in valuation which was used as a basis for fair value measurement in the Company's September 30, 2015 Consolidated Balance Sheet.
As these valuation techniques incorporate both observable and significant unobservable inputs, both the Paulson hedge funds and the Flagstone hedge fund are classified as Level 3 assets. The Paulson hedge funds are subject to quarterly liquidity.
Private equity investments
The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation in the Company's September 30, 2015 Consolidated Balance Sheet. These private equity investments vary in investment strategies and are not actively traded in any open markets. As this valuation technique can incorporate significant unobservable inputs, the private equity investments are classified as Level 3 assets.
Investment funds
Investment funds classified as Level 3 assets consists of one structured securities fund that invests across asset backed securities, residential mortgage backed securities and commercial mortgage backed securities. The fair value of units in the investment fund is based on the NAV of the fund as reported by the independent fund administrator. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation which was used as a basis for fair value measurement in the Company's September 30, 2015 Consolidated Balance Sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the investment fund investment is classified as a Level 3 asset.

19
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Level 3 investments - Beginning of period
$
931,649

 
$
746,396

 
$
694,641

 
$
576,871

Purchases
127,350

 
25,784

 
326,949

 
125,784

Sales
(73,105
)
 
(24,175
)
 
(86,143
)
 
(49,508
)
Settlements
(13,815
)
 
—

 
(22,013
)
 
(1,500
)
Net realized (losses) gains
(40,721
)
 
2,554

 
(40,732
)
 
8,198

Change in net unrealized (losses) gains
(38,623
)
 
(57,776
)
 
20,033

 
26,235

Transfers into Level 3
—

 
—

 
—

 
6,703

Level 3 investments - End of period
$
892,735

 
$
692,783

 
$
892,735

 
$
692,783

Catastrophe Bonds
(1,000
)
 
—

 
(1,000
)
 
—

Noncontrolling interest (a)
(434,436
)
 
(495,365
)
 
(434,436
)
 
(495,365
)
Level 3 investments - End of period excluding catastrophe bonds and noncontrolling interest
$
457,299

 
$
197,418

 
$
457,299

 
$
197,418

(a)
Includes Level 3 investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.
There have not been any transfers into or out of Level 3 during the three months ended September 30, 2015 and 2014 or the nine months ended September 30, 2015. During the nine months ended September 30, 2014 there was a transfer of investments from Level 2 into Level 3 of the fair value hierarchy. This transfer was due to a reassessment of the extent of unobservable inputs used in establishing the fair value of certain catastrophe bonds.
5. Investments in affiliates
The following table presents the Company's investments in affiliates as at September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
Investment affiliates
$
88,134

 
$
63,506

Operating affiliates
259,828

 
197,977

Investments in affiliates
$
347,962

 
$
261,483

(a)
Investment affiliate
Aquiline Financial Services Fund II L.P.    
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline II General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). The Transferred Interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement of the Fund dated January 9, 2013 (the "Aquiline II Limited Partnership Agreement").
On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is also governed by the terms of the Aquiline II Limited Partnership Agreement.
The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.

20
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Aquiline Financial Services Fund III L.P.
On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline III Partnership. The Limited Partnership Interests are governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of November 7, 2014 (the “Aquiline III Limited Partnership Agreement”).
The Partnership provides a quarterly capital account statement, with a three month delay in its valuation, which was used as the basis for calculating the Company's share of partnership income for the period.
The following table presents a reconciliation of the beginning and ending investment in the Company's investment affiliates balance for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Investment affiliates, beginning of period
$
89,681

 
$
40,627

 
$
63,506

 
$
34,500

Net capital (distributions) contributions
(4,029
)
 
—

 
19,086

 
—

Income from investment affiliate
2,482

 
1,754

 
5,542

 
7,881

Investment affiliates, end of period
$
88,134

 
$
42,381

 
$
88,134

 
$
42,381

The following table presents the Company's investment in the Partnerships as at September 30, 2015:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
55,098

 
—
%
 
8.1
%
 
$
74,341

Aquiline Financial Services Fund III L.P.
$
13,890

 
—
%
 
13.7
%
 
$
13,793

Total
$
68,988

 
 
 
 
 
$
88,134

The following table presents the Company's investment in the Partnership as at December 31, 2014:
 
Investment in investment affiliate
 
Investment at cost
 
Voting ownership %
 
Equity Ownership
 
Carrying Value
Aquiline Financial Services Fund II L.P.
$
51,001

 
—
%
 
8.1
%
 
$
63,506

(b)
Operating affiliates
AlphaCat Re 2011 Ltd.
On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011 Ltd. ("AlphaCat Re 2011"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. AlphaCat Re 2011 was a market facing entity and the Company's investment in AlphaCat Re 2011 has been treated as an equity method investment.
AlphaCat Re 2011 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2011.The Company's portion of the returns made during the three and nine months ended September 30, 2015 and 2014 are included in the tables below.

21
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


AlphaCat Re 2012 Ltd.
On May 29, 2012, the Company joined with other investors in capitalizing AlphaCat Re 2012 Ltd. ("AlphaCat Re 2012"), a special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies. AlphaCat Re 2012 was a market facing entity and the Company's investment in AlphaCat Re 2012 has been treated as an equity method investment.
AlphaCat Re 2012 is now considered "off-risk" as the risk periods for all reinsurance contracts written have expired. As a result, partial returns of investment have been made to the investors of AlphaCat Re 2012.The Company's portion of the returns made during the three and nine months ended September 30, 2015 and 2014 are included in the tables below.
AlphaCat 2013, Ltd.
On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, Ltd. ("AlphaCat 2013"), an entity formed for the purpose of investing in collateralized reinsurance and retrocession on a worldwide basis. AlphaCat 2013 deployed its capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”) and the Company's investment in AlphaCat 2013 has been treated as an equity method investment.
AlphaCat 2013 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2013. The Company's portion of the returns made during the three and nine months ended September 30, 2015 and 2014 are included in the tables below.
AlphaCat 2014, Ltd.
On December 20, 2013, the Company joined with other investors in capitalizing AlphaCat 2014, Ltd. (“AlphaCat 2014”), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2014 renewal season. AlphaCat 2014 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2014 has been treated as an equity method investment.
AlphaCat 2014 is now considered "off-risk" as the risk periods for all risk-linked instruments have expired. As a result, partial returns of investment have been made to the investors of AlphaCat 2014. The Company's portion of the returns made during the three and nine months ended September 30, 2015 and 2014 are included in the table below.
AlphaCat 2015, Ltd.
On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, Ltd. ("AlphaCat 2015"), an entity formed for the purpose of investing in collateralized reinsurance and retrocessional contracts for the January 1, 2015 renewal season. AlphaCat 2015 deploys its capital through transactions entered into by AlphaCat Re and the Company's investment in AlphaCat 2015 has been treated as an equity method investment.
AlphaCat ILS funds
The AlphaCat ILS funds invest in instruments with returns linked to property catastrophe reinsurance, retrocession and insurance linked securities ("ILS") contracts. AlphaCat ILS funds primarily deploy their capital through the AlphaCat Master Fund Ltd. (the "AlphaCat Master Fund") and AlphaCat Re. All of the funds are variable interest entities and are accounted for as equity method investments because the Company holds an equity interest of less than 50% and has significant influence. Two of these funds had been consolidated by the Company as the primary beneficiary from formation through to December 31, 2013 and May 31, 2015, respectively. However, on January 1, 2014 and June 1, 2015 the funds received $35,000 and $40,000 in additional third party subscriptions, respectively, resulting in a reduction of the Company’s equity interest below 50%. Therefore, these funds were deconsolidated and accounted for as an equity method investments from January 1, 2014 and June 1, 2015, respectively, since the Company retained significant influence. The fair value of the retained interest, based on the fair value of the underlying instruments in AlphaCat Master Fund and AlphaCat Re, amounted to $113,455 and $96,770 as at January 1, 2014 and June 1, 2015, respectively. The deconsolidations resulted in a gain of $1,372 and a loss of $1,777 which is included in the Consolidated Statements of Comprehensive Income as other insurance related income for the nine months ended September 30, 2014 and the nine months ended September 30, 2015, respectively. The Company's maximum exposure to any of the funds is the amount of capital invested at any given time.

22
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


AlphaCat Master Fund Ltd. and AlphaCat Reinsurance Ltd.
The Company utilizes AlphaCat Master Fund and AlphaCat Re for the purpose of investing in capital market products and writing collateralized reinsurance, respectively, on behalf of certain entities within the AlphaCat operating segment and other third party investors. AlphaCat Master Fund and AlphaCat Re are market facing entities which enter into transactions on behalf of AlphaCat 2014, AlphaCat 2015, the AlphaCat ILS funds and other third party investors ("AlphaCat direct"). The Company owns all of the voting equity interest in AlphaCat Master Fund and AlphaCat Re and, as a result, their financial statements are included in the Consolidated Financial Statements of the Company.
BetaCat ILS funds
The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk and issued under Rule 144A of the Securities Act of 1933, following a passive buy-and-hold investment strategy. One of the funds is a variable interest entity and is consolidated by the Company as the primary beneficiary. The remaining fund is consolidated by the Company as it owns all of the voting equity interest. The Company's maximum exposure to either of the funds is the amount of capital invested at any given time. As at September 30, 2015, no third party subscriptions had been received.
The following tables present a reconciliation of the beginning and ending investment in operating affiliates for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30, 2015
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at June 30, 2015
$
4,601

 
$
707

 
$
1,043

 
$
723

 
$
30,598

 
$
246,768

 
$
284,440

Gain on redemption of shares
—

 
—

 
—

 
—

 
—

 
(6,761
)
 
(6,761
)
Return of investment
—

 
—

 
—

 
—

 
—

 
(23,377
)
 
(23,377
)
Income (loss) from operating affiliates
396

 
(8
)
 
(8
)
 
(12
)
 
1,077

 
4,081

 
5,526

As at September 30, 2015
$
4,997

 
$
699

 
$
1,035

 
$
711

 
$
31,675

 
$
220,711

 
$
259,828

 
Three Months Ended September 30, 2014
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
 AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at June 30, 2014
$
4,172

 
$
2,204

 
$
2,580

 
$
25,014

 
$
139,022

 
$
172,992

Return of investment
—

 
(1,516
)
 
(6
)
 
—

 
—

 
(1,522
)
(Loss) income from operating affiliates
(5
)
 
(9
)
 
7

 
1,367

 
2,401

 
3,761

As at September 30, 2014
$
4,167

 
$
679

 
$
2,581

 
$
26,381

 
$
141,423

 
$
175,231


23
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2015
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
Total
As at December 31, 2014
$
4,606

 
$
735

 
$
1,068

 
$
28,085

 
$
25,600

 
$
137,883

 
$
197,977

Purchase of shares
—

 
—

 
—

 
—

 
2,400

 
8,000

 
10,400

Gain on redemption of shares
—

 
—

 
—

 
—

 
—

 
(6,761
)
 
(6,761
)
Return of investment
—

 
—

 
—

 
(27,264
)
 
—

 
(23,377
)
 
(50,641
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
—

 
96,770

 
96,770

Income (loss) from operating affiliates
391

 
(36
)
 
(33
)
 
(110
)
 
3,675

 
8,196

 
12,083

As at September 30, 2015
$
4,997

 
$
699

 
$
1,035

 
$
711

 
$
31,675

 
$
220,711

 
$
259,828

 
Nine Months Ended September 30, 2014
 
AlphaCat Re 2011
 
AlphaCat Re 2012
 
 AlphaCat 2013
 
 AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at December 31, 2013
$
9,809

 
$
1,313

 
$
51,744

 
$
21,982

 
$
21,895

 
$
106,743

Return of investment
(5,825
)
 
(1,516
)
 
(51,206
)
 
—

 
—

 
(58,547
)
Fair value of retained interest on deconsolidation of AlphaCat ILS fund
—

 
—

 
—

 
—

 
113,455

 
113,455

Income from operating affiliates
183

 
882

 
2,043

 
4,399

 
6,073

 
13,580

As at September 30, 2014
$
4,167

 
$
679

 
$
2,581

 
$
26,381

 
$
141,423

 
$
175,231

The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at September 30, 2015:
 
Investment in operating affiliates
 
Cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
4,997

 
43.7
%
 
22.3
%
 
$
4,997

AlphaCat Re 2012
699

 
49.0
%
 
37.9
%
 
699

AlphaCat 2013
1,035

 
40.9
%
 
19.7
%
 
1,035

AlphaCat 2014
711

 
42.3
%
 
19.6
%
 
711

AlphaCat 2015
28,000

 
40.0
%
 
20.0
%
 
31,675

AlphaCat ILS funds
214,484

 
n/a

 
(a)

 
220,711

Total
$
249,926

 
 
 
 
 
$
259,828

(a)
Equity ownership in the funds was 7.6%, 19.4%, 9.1% and 32.5% as at September 30, 2015.

24
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table presents the Company's investments in AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014, AlphaCat 2015 and the AlphaCat ILS funds in the Consolidated Financial Statements as at December 31, 2014:
 
Investment in operating affiliates
 
Cost
 
Voting ownership %
 
Equity ownership %
 
Carrying value
AlphaCat Re 2011
$
4,606

 
43.7
%
 
22.3
%
 
$
4,606

AlphaCat Re 2012
735

 
49.0
%
 
37.9
%
 
735

AlphaCat 2013
1,068

 
40.9
%
 
19.7
%
 
1,068

AlphaCat 2014
22,000

 
42.3
%
 
19.6
%
 
28,085

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
25,600

AlphaCat ILS funds
133,091

 
n/a

 
(a)

 
137,883

Total
$
187,100

 
 
 
 
 
$
197,977

(a)
Equity ownership in the funds was 7.9%, 39.7% and 9.1% as at December 31, 2014.
(c)
Notes payable and (income) attributable to AlphaCat investors
Notes are issued during the course of a year by AlphaCat Master Fund and AlphaCat Re to AlphaCat 2014, AlphaCat 2015, the AlphaCat ILS funds (collectively the "feeder funds") and AlphaCat direct in order to fund the purchase of capital market products and to write collateralized reinsurance on their behalf. The underlying capital market products and collateralized reinsurance typically have at least a twelve month duration; however, they do not have a stated maturity date. Since repayment is dependent on the settlement of the underlying transactions, the notes are subsequently redeemed as the underlying transactions are settled. The Company’s investments in the feeder funds, together with investments made by third parties in the feeder funds and on a direct basis, are provided as consideration for these notes to AlphaCat Master Fund and AlphaCat Re, which are consolidated in the Company’s Consolidated Financial Statements. The effective economic interest in AlphaCat Master Fund and AlphaCat Re that results from these transactions is represented on the Consolidated Balance Sheet as notes payable to AlphaCat investors. The subsequent income or loss generated by the relevant capital market products or collateralized reinsurance is transferred to the operating affiliates and other third party investors as (income) loss attributable to AlphaCat investors in the Company’s Consolidated Statements of Comprehensive Income. The notes do not have any principal amount, since the final amount payable is dependent on the income or loss. To the extent that the (income) loss attributable to AlphaCat investors has not been returned to investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.
The following tables present a reconciliation of the beginning and ending notes payable to AlphaCat investors for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30, 2015
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
AlphaCat direct
 
Total
As at June 30, 2015
$
—

 
$
145,985

 
$
1,235,328

 
$
—

 
$
1,381,313

Issuance of notes payable to AlphaCat investors
—

 
8,491

 
68,244

 
75,770

 
152,505

Redemption of notes payable to AlphaCat investors
—

 
—

 
(87,615
)
 
—

 
(87,615
)
Foreign exchange gain
—

 
(143
)
 
(2,698
)
 
(164
)
 
(3,005
)
As at September 30, 2015
$
—

 
$
154,333

 
$
1,213,259

 
$
75,606

 
$
1,443,198


25
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Three Months Ended September 30, 2014
 
AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at June 30, 2014
$
157,992

 
$
464,958

 
$
622,950

Issuance of notes payable to AlphaCat investors
—

 
53,498

 
53,498

Redemption of notes payable to AlphaCat investors
—

 
(13,990
)
 
(13,990
)
Foreign exchange gain
(410
)
 
(6,072
)
 
(6,482
)
As at September 30, 2014
$
157,582

 
$
498,394

 
$
655,976

 
Nine Months Ended September 30, 2015
 
AlphaCat 2014
 
AlphaCat 2015
 
AlphaCat ILS funds
 
AlphaCat direct
 
Total
As at December 31, 2014
$
157,384

 
$
—

 
$
514,081

 
$
—

 
$
671,465

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
—

 
—

 
179,316

 
—

 
179,316

Issuance of notes payable to AlphaCat investors
—

 
154,358

 
1,077,661

 
75,770

 
1,307,789

Redemption of notes payable to AlphaCat investors
(157,074
)
 
—

 
(551,985
)
 
—

 
(709,059
)
Foreign exchange gain
(310
)
 
(25
)
 
(5,814
)
 
(164
)
 
(6,313
)
As at September 30, 2015
$
—

 
$
154,333

 
$
1,213,259

 
$
75,606

 
$
1,443,198

 
Nine Months Ended September 30, 2014
 
AlphaCat 2013
 
AlphaCat 2014
 
AlphaCat ILS funds
 
Total
As at December 31, 2013
$
223,809

 
$
—

 
$
215,463

 
$
439,272

Notes payable to AlphaCat investors recognized on deconsolidation of AlphaCat ILS fund
—

 
—

 
178,837

 
178,837

Issuance of notes payable to AlphaCat investors
—

 
157,914

 
487,329

 
645,243

Redemption of notes payable to AlphaCat investors
(223,512
)
 
—

 
(378,556
)
 
(602,068
)
Foreign exchange gain
(297
)
 
(332
)
 
(4,679
)
 
(5,308
)
As at September 30, 2014
$
—

 
$
157,582

 
$
498,394

 
$
655,976

The portion of notes payable to AlphaCat investors that was due to the Company, as an investor in the operating affiliates, and third party investors as at September 30, 2015 amounted to $234,751 and $1,208,447, respectively (December 31, 2014: $148,264 and $523,201).

26
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following table presents the (income) attributable to AlphaCat investors for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015

September 30,
2014
AlphaCat 2013
$
—

 
$
(98
)
 
$
—

 
$
(14,218
)
AlphaCat 2014
—

 
(11,309
)
 
(255
)
 
(32,990
)
AlphaCat 2015
(8,862
)
 
—

 
(27,446
)
 
—

AlphaCat ILS funds
(29,956
)
 
(14,400
)
 
(65,202
)
 
(35,625
)
AlphaCat direct
(1,438
)
 
—

 
(1,438
)
 
—

(Income) attributable to AlphaCat investors
$
(40,256
)
 
$
(25,807
)
 
$
(94,341
)
 
$
(82,833
)
The portion of income attributable to AlphaCat investors that was due to the Company, as an investor in the operating affiliates, and third party investors for the three months ended September 30, 2015 amounted to $6,623 and $33,633, respectively (2014: $4,993 and $20,814). The portion of income attributable to AlphaCat investors that was due to the Company, as an investor in the operating affiliates, and third party investors for the nine months ended September 30, 2015 amounted to $15,031 and $79,310, respectively (2014: $16,552 and $66,281).

27
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


6. Noncontrolling interest
On April 2, 2012, the Company joined with other investors in capitalizing PaCRe Ltd. ("PaCRe"), a Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. The Company has an equity interest of 10% and the remaining 90% interest is held by third party investors. The Company has a majority voting equity interest in PaCRe and as a result, the financial statements of PaCRe are included in the Consolidated Financial Statements of the Company. The portion of PaCRe’s earnings attributable to third party investors is recorded in the Consolidated Statements of Comprehensive Income as net (income) attributable to noncontrolling interest. PaCRe's shareholder rights do not include redemption features within the control of the third party shareholders. The third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interest.
The AlphaCat ILS funds have rights that enable shareholders, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interest. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability. On June 1, 2015, the one remaining consolidated AlphaCat ILS fund was deconsolidated and accounted for as an equity method investment. Therefore, the portion of earnings attributable to third party investors from that fund is recorded in the Consolidated Statements of Comprehensive Income as net (income) attributable to noncontrolling interest through May 31, 2015.
The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interest and noncontrolling interest for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at June 30, 2015
$
—

 
$
510,090

 
$
510,090

Loss attributable to noncontrolling interest
—

 
(71,663
)
 
(71,663
)
As at September 30, 2015
$
—

 
$
438,427

 
$
438,427

 
Three Months Ended September 30, 2014
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at June 30, 2014
$
66,282

 
$
575,347

 
$
641,629

Issuance of shares
4,200

 
—

 
4,200

Loss attributable to noncontrolling interest
(9
)
 
(53,060
)
 
(53,069
)
As at September 30, 2014
$
70,473

 
$
522,287

 
$
592,760

 
Nine Months Ended September 30, 2015
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2014
$
79,956

 
$
458,595

 
$
538,551

Issuance of shares
55,700

 
—

 
55,700

Income (loss) attributable to noncontrolling interest
5,126

 
(20,168
)
 
(15,042
)
Adjustment to noncontrolling interest as a result of deconsolidation
(121,387
)
 
—

 
(121,387
)
Redemption of shares
(19,395
)
 
—

 
(19,395
)
As at September 30, 2015
$
—

 
$
438,427

 
$
438,427


28
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2014
 
Redeemable noncontrolling interest
 
Noncontrolling interest
 
Total
As at December 31, 2013
$
86,512

 
$
497,657

 
$
584,169

Issuance of shares
61,200

 
—

 
61,200

Income attributable to noncontrolling interest
1,115

 
24,630

 
25,745

Adjustment to noncontrolling interest as a result of deconsolidation
(78,354
)
 
—

 
(78,354
)
As at September 30, 2014
$
70,473

 
$
522,287

 
$
592,760

7. Derivative instruments
The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency exposures and interest rate exposures. As at September 30, 2015, the Company held foreign currency forward contracts to mitigate the risk of fluctuations in the U.S. dollar against a number of foreign currencies. As at September 30, 2015, the Company held two interest rate swaps to fix the payment of interest on the Company's 2006 and 2007 Junior Subordinated Deferrable Debentures, as well as three interest rate swaps and one cross-currency interest rate swap to fix the payment of interest and mitigate the foreign exchange rate impact on Flagstone's 2006 and 2007 Junior Subordinated Deferrable Debentures.
As at September 30, 2015, the Company held one foreign currency forward contract to mitigate the risk of fluctuations in the U.S. dollar against the Euro that was not designated as a hedging instrument.
The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments on the Consolidated Balance Sheets at September 30, 2015 and December 31, 2014:
 
 
As at September 30, 2015
 
As at December 31, 2014
Derivatives not designated as hedging instruments:
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
23,346

 
$
174

 
$
—

 
$
26,755

 
$
1,685

 
$
—

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses respectively on the Consolidated Balance Sheets. The net impact on earnings during the three and nine months ended September 30, 2015, recognized in income within other income, relating to the foreign currency forward contract that was not designated as a hedging instrument was ($184) and ($311), respectively (2014: $nil and $nil).
The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments on the Consolidated Balance Sheets at September 30, 2015 and December 31, 2014:
 
 
As at September 30, 2015
 
As at December 31, 2014
Derivatives designated as hedging instruments:
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
 
Net Notional Exposure
 
Asset Derivative at Fair Value (a)
 
Liability Derivative at Fair Value (a)
Foreign currency forward contracts
 
$
188,691

 
$
1,390

 
$
4,918

 
$
189,026

 
$
401

 
$
3,136

Interest rate swap contracts
 
$
552,263

 
$
21

 
$
1,444

 
$
552,263

 
$
25

 
$
1,169

(a)
Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively on the Consolidated Balance Sheets.
(a)
Classification within the fair value hierarchy
As described in Note 4: "Fair value measurements" under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The assumptions used within the valuation of the Company's derivative instruments are observable in the marketplace, can be derived from observable data or are supported by observable levels at which other similar transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.

29
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Derivative instruments designated as a fair value hedge
The Company designates certain foreign currency derivative instruments as fair value hedges and formally and contemporaneously documents all relationships between the derivative instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items.
The following table provides the total impact on earnings, recognized in income within foreign exchange gains (losses), relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended
 
Nine Months Ended
Foreign currency forward contracts
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Amount of loss recognized in income on derivative
 
$
(4,175
)
 
$
(14,817
)
 
$
(21,965
)
 
$
(9,979
)
Amount of gain on hedged item recognized in income attributable to risk being hedged
 
$
4,175

 
$
14,817

 
$
21,965

 
$
9,979

Amount of gain (loss) recognized in income on derivative (ineffective portion)
 
$
—

 
$
—

 
$
—

 
$
—

(c)
Derivative instruments designated as a cash flow hedge
The Company designates its interest rate derivative instruments as cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items. The Company currently applies the long haul method when assessing the hedge's effectiveness.
The following table provides the total impact on other comprehensive income (loss) and earnings relating to the derivative instruments formally designated as cash flow hedges along with the impact of the related hedged items for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended
 
Nine Months Ended
Interest rate swap contracts
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Amount of effective portion recognized in other comprehensive income
 
$
3,178

 
$
3,302

 
$
10,064

 
$
9,762

Amount of effective portion subsequently reclassified to earnings
 
$
(3,253
)
 
$
(3,302
)
 
$
(9,728
)
 
$
(9,762
)
Amount of ineffective portion excluded from effectiveness testing
 
$
75

 
$
—

 
$
(336
)
 
$
—

The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Comprehensive Income.
(d)
Balance sheet offsetting
There was no balance sheet offsetting activity as at September 30, 2015 or December 31, 2014.
The Company currently provides cash collateral as security for interest rate swap contracts. The Company does not provide cash collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.
The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.

30
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


8. Reserve for losses and loss expenses
Reserves for losses and loss expenses are based in part upon the estimation of case reserves from broker, insured and ceding company reported data. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses, from which incurred but not reported losses can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to the settlement of the Company's liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed and adjusted regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed this estimate.
The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Reserve for losses and loss expenses, beginning of period
$
3,187,177

 
$
2,867,307

 
$
3,234,394

 
$
3,030,399

Losses and loss expenses recoverable
(376,665
)
 
(338,734
)
 
(377,466
)
 
(370,154
)
Net reserves for losses and loss expenses, beginning of period
2,810,512

 
2,528,573

 
2,856,928

 
2,660,245

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
349,759

 
279,690

 
1,011,111

 
713,177

Prior years (a)
(91,501
)
 
(55,565
)
 
(245,778
)
 
(167,636
)
Total incurred losses and loss expenses (a)
258,258

 
224,125

 
765,333

 
545,541

Less net losses and loss expenses paid in respect of losses occurring in:
 
 
 
 
 
 
 
Current year
(63,151
)
 
(74,618
)
 
(105,216
)
 
(99,326
)
Prior years
(207,514
)
 
(183,697
)
 
(700,507
)
 
(633,048
)
Total net paid losses
(270,665
)
 
(258,315
)
 
(805,723
)
 
(732,374
)
Foreign exchange gain
(13,983
)
 
(40,717
)
 
(32,416
)
 
(19,746
)
Net reserve for losses and loss expenses, end of period
2,784,122

 
2,453,666

 
2,784,122

 
2,453,666

Losses and loss expenses recoverable
385,212

 
298,502

 
385,212

 
298,502

Reserve for losses and loss expenses, end of period
$
3,169,334

 
$
2,752,168

 
$
3,169,334

 
$
2,752,168

Incurred losses and loss expenses comprise:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Gross losses and loss expenses (a)
$
285,871

 
$
222,356

 
$
854,438

 
$
587,111

Reinsurance recoverable
(27,613
)
 
1,769

 
(89,105
)
 
(41,570
)
Net incurred losses and loss expenses (a)
$
258,258

 
$
224,125

 
$
765,333

 
$
545,541

(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,524 and $8,639 during the three and nine months ended September 30, 2015, respectively. The remaining fair value adjustment of $2,340 will be amortized during the remainder of 2015.


31
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The September 30, 2015 gross reserves balances comprise reserves for reported claims of $1,295,473 (December 31, 2014: $1,495,323) and reserves for claims incurred but not reported of $1,873,861 (December 31, 2014: $1,739,071). The net favorable development on prior years by segment and line of business for the three and nine months ended September 30, 2015 and 2014 is as follows:
 
Three Months Ended September 30, 2015
 
Property
 
Marine
 
Specialty
 
Liability
 
Total (a)
Validus Re
$
(27,613
)
 
$
(13,556
)
 
$
(9,306
)
 
$
—

 
$
(50,475
)
Talbot
(9,706
)
 
(14,854
)
 
(11,412
)
 
—

 
(35,972
)
Western World (b)
(1,054
)
 
—

 
—

 
(4,000
)
 
(5,054
)
Net favorable development (b)
$
(38,373
)
 
$
(28,410
)
 
$
(20,718
)
 
$
(4,000
)
 
$
(91,501
)
(a)
AlphaCat has not had any development on prior accident years.
(b)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,524 during the three months ended September 30, 2015. The remaining fair value adjustment of $2,340 will be amortized during the remainder of 2015.
The Validus Re segment experienced favorable development on prior years primarily due to favorable development on events, including Superstorm Sandy, Hurricane Ike and the 2010 Chilean earthquake, along with favorable development on attritional losses. The Talbot segment experienced favorable development on prior years primarily due to favorable development on attritional losses. The Western World segment experienced favorable development on prior years primarily due to the amortization of the fair value adjustment made at the acquisition date as well as favorable development on attritional losses.
 
Three Months Ended September 30, 2014
 
Property
 
Marine
 
Specialty
 
Total (a)
Validus Re
$
(16,384
)
 
$
(2,843
)
 
$
(913
)
 
$
(20,140
)
Talbot
(13,285
)
 
(11,922
)
 
(10,218
)
 
(35,425
)
Net favorable development
$
(29,669
)
 
$
(14,765
)
 
$
(11,131
)
 
$
(55,565
)
(a)
AlphaCat has not had any development on prior accident years.
The Validus Re and Talbot segments experienced favorable development on prior years primarily due to favorable development on attritional losses.
 
Nine Months Ended September 30, 2015
 
Property
 
Marine
 
Specialty
 
Liability
 
Total
Validus Re
$
(58,437
)
 
$
(29,225
)
 
$
(18,388
)
 
$
—

 
$
(106,050
)
AlphaCat
(844
)
 
—

 
—

 
—

 
(844
)
Talbot
(47,141
)
 
(51,178
)
 
(24,926
)
 
—

 
(123,245
)
Western World (a)
(4,648
)
 
—

 
—

 
(10,991
)
 
(15,639
)
Net favorable development (a)
$
(111,070
)
 
$
(80,403
)
 
$
(43,314
)
 
$
(10,991
)
 
$
(245,778
)
(a)
Upon closing the acquisition of Western World, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $8,639 during the nine months ended September 30, 2015. The remaining fair value adjustment of $2,340 will be amortized during the remainder of 2015.
The Validus Re segment experienced favorable development on prior years primarily due to favorable development on events and attritional losses. The Talbot segment experienced favorable development on prior years primarily due to favorable development on attritional losses and certain events, including the Thailand floods, which was a 2011 notable loss event. The Western World segment experienced favorable development on prior years primarily due to the amortization of the fair value adjustment made at the acquisition date as well as favorable development on attritional losses.

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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2014
 
Property
 
Marine
 
Specialty
 
Total
Validus Re
$
(50,598
)
 
$
(5,213
)
 
$
(1,025
)
 
$
(56,836
)
AlphaCat
(11,608
)
 
—

 
—

 
(11,608
)
Talbot
(43,905
)
 
(18,191
)
 
(37,096
)
 
(99,192
)
Net favorable development
$
(106,111
)
 
$
(23,404
)
 
$
(38,121
)
 
$
(167,636
)
The Validus Re segment experienced favorable development on prior years primarily due to favorable development on attritional losses, partially offset by an increase in the loss estimate on agriculture losses. The AlphaCat segment experienced favorable development on prior years primarily due to the partial release of a 2013 aggregate excess of loss contract. The Talbot segment experienced favorable development on prior years primarily due to a combination of favorable development on attritional losses and notable loss events, primarily the Tohoku earthquake.
9. Reinsurance
The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits and increase its aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocession agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.
Credit risk
The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better as rated by Standard & Poor's or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At September 30, 2015, 98.7% (December 31, 2014: 98.0%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses and $241,283 of total IBNR recoverable (December 31, 2014: $231,129)) were fully collateralized or from reinsurers rated A- or better.
Reinsurance recoverables by reinsurer as at September 30, 2015 and December 31, 2014 are as follows:
 
September 30, 2015
 
December 31, 2014
 
Reinsurance Recoverable
 
% of Total
 
Reinsurance Recoverable
 
% of Total
Top 10 reinsurers
$
330,550

 
81.2
%
 
$
312,205

 
75.1
%
Other reinsurers’ balances > $1 million
67,209

 
16.5
%
 
94,247

 
22.7
%
Other reinsurers’ balances < $1 million
9,134

 
2.3
%
 
9,092

 
2.2
%
Total
$
406,893

 
100.0
%
 
$
415,544

 
100.0
%

33
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
 
September 30, 2015
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
78,548

 
19.3
%
Lloyd's Syndicates
 
A+
 
71,085

 
17.5
%
Everest Re
 
A+
 
47,395

 
11.6
%
Hannover Re
 
AA-
 
42,706

 
10.5
%
Fully Collateralized
 
NR
 
27,604

 
6.8
%
Munich Re
 
AA-
 
19,063

 
4.7
%
Hamilton Re
 
A-
 
12,613

 
3.1
%
Transatlantic Re
 
A+
 
11,921

 
2.9
%
National Indemnity Company
 
AA+
 
10,293

 
2.5
%
XL Re
 
A+
 
9,322

 
2.3
%
Total
 
 
 
$
330,550

 
81.2
%
NR: Not rated
 
 
December 31, 2014
Top 10 Reinsurers
 
Rating
 
Reinsurance Recoverable
 
% of Total
Swiss Re
 
AA-
 
$
70,848

 
17.0
%
Lloyd's Syndicates
 
A+
 
62,318

 
15.0
%
Everest Re
 
A+
 
51,425

 
12.4
%
Hannover Re
 
AA-
 
40,927

 
9.8
%
Fully Collateralized
 
NR
 
23,315

 
5.6
%
Munich Re
 
AA-
 
19,384

 
4.7
%
Transatlantic Re
 
A+
 
12,418

 
3.0
%
XL Re
 
A+
 
11,114

 
2.7
%
Berkshire Hathaway Homestate
 
AA+
 
10,372

 
2.5
%
Merrimack Mutual Fire Insurance
 
A+
 
10,084

 
2.4
%
Total
 
 
 
$
312,205

 
75.1
%
NR: Not rated
At September 30, 2015 and December 31, 2014, the provision for uncollectible reinsurance relating to reinsurance recoverables was $5,069 and $4,755, respectively. To estimate the provision for uncollectible reinsurance, the reinsurance recoverable is first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied, especially in relation to ceded IBNR. The Company then uses default factors to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined in part using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

34
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


10. Share capital
(a)
Authorized and issued
The Company’s authorized share capital is 571,428,571 common shares with a par value of $0.175 per share. The holders of common shares are entitled to receive dividends. Holders of common shares are allocated one vote per share, provided that, if the controlled shares of any shareholder or group of related shareholders constitute more than 9.09 percent of the outstanding common shares of the Company, their voting power will be reduced to 9.09 percent.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company's common share purchase authorization to $750,000. This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company has repurchased 74,797,775 common shares for an aggregate purchase price of $2,435,218 from the inception of its share repurchase program to September 30, 2015. The Company had $589,183 remaining under its authorized share repurchase program as of September 30, 2015.
The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
The following table is a summary of the common shares issued and outstanding:
 
Common Shares
Common shares issued, December 31, 2014
155,554,224

Restricted share awards vested, net of shares withheld
610,714

Restricted share units vested, net of shares withheld
13,260

Options exercised
782,465

Warrants exercised
1,461,715

Direct issuance of common stock
639

Performance share awards vested, net of shares withheld
11,524

Common shares issued, September 30, 2015
158,434,541

Treasury shares, September 30, 2015
(76,436,650
)
Common shares outstanding, September 30, 2015
81,997,891

 
Common Shares
Common shares issued, December 31, 2013
154,488,497

Restricted share awards vested, net of shares withheld
594,582

Restricted share units vested, net of shares withheld
10,265

Options exercised
133,385

Direct issuance of common stock
1,060

Performance share awards vested, net of shares withheld
25,767

Common shares issued, September 30, 2014
155,253,556

Treasury shares, September 30, 2014
(66,141,285
)
Common shares outstanding, September 30, 2014
89,112,271


35
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Warrants
During the nine months ended September 30, 2015, 1,796,793 warrants were exercised, which resulted in the issuance of 1,461,715 common shares. During the nine months ended September 30, 2014, no warrants were exercised. Holders of the outstanding warrants are entitled to exercise the warrants in whole or in part at any time until the expiration date. All outstanding warrants are due to expire on December 12, 2015. The total outstanding warrants at September 30, 2015 were 3,377,320 (December 31, 2014: 5,174,114). No further warrants are anticipated to be issued.
(c)
Dividends
On August 5, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on September 30, 2015 to holders of record on September 15, 2015.
On May 7, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on June 30, 2015 to holders of record on June 15, 2015.
On February 3, 2015, the Company announced a quarterly cash dividend of $0.32 (2014: $0.30) per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on March 31, 2015 to holders of record on March 13, 2015.
11. Stock plans
(a)
Long Term Incentive Plan and Short Term Incentive Plan
The Company’s Amended and Restated 2005 Long Term Incentive Plan (“LTIP”) provides for grants to employees of options, stock appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, dividend equivalents or other share-based awards. In addition, the Company may issue restricted share awards or restricted share units in connection with awards issued under its annual Short Term Incentive Plan (“STIP”). The total number of shares reserved for issuance under the LTIP and STIP are 14,976,896 shares of which 1,988,523 shares remain available for issuance at September 30, 2015. The LTIP and STIP are administered by the Compensation Committee of the Board of Directors. No SARs have been granted to date. Grant prices are established at the fair market value of the Company’s common shares at the date of grant.
i.
Options
Options may be exercised for voting common shares upon vesting. Options have a life of 10 years and vest either pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.
Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.
The Company has not granted any stock options since September 4, 2009.
There were no share compensation expenses in respect of options recognized for the three and nine months ended September 30, 2015 and 2014.
Activity with respect to options for the nine months ended September 30, 2015 was as follows:
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2014
1,160,057

 
$
7.12

 
$
17.74

Options exercised
(1,094,656
)
 
7.09

 
17.60

Options outstanding, September 30, 2015
65,401

 
$
7.74

 
$
20.17


36
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to options for the nine months ended September 30, 2014 was as follows: 
 
Options
 
Weighted Average Grant Date Fair Value
 
Weighted Average Grant Date Exercise Price
Options outstanding, December 31, 2013
1,572,713

 
$
6.66

 
$
18.88

Options exercised
(133,385
)
 
3.81

 
25.10

Options outstanding, September 30, 2014
1,439,328

 
$
6.93

 
$
18.30

At September 30, 2015 and December 31, 2014, there were no unrecognized share compensation expenses in respect of options.
ii.
Restricted share awards
Restricted shares granted under the LTIP and STIP vest either pro rata or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three and nine months ended September 30, 2015 of $9,081 (2014: $8,180) and $26,213 (2014: $23,101), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
Activity with respect to unvested restricted share awards for the nine months ended September 30, 2015 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2014
2,858,711

 
$
35.81

Restricted share awards granted
706,341

 
43.58

Restricted share awards vested
(783,704
)
 
34.40

Restricted share awards forfeited
(52,642
)
 
38.03

Restricted share awards outstanding, September 30, 2015
2,728,706

 
$
38.19

Activity with respect to unvested restricted share awards for the nine months ended September 30, 2014 was as follows:
 
Restricted Share Awards
 
Weighted Average Grant Date Fair Value
Restricted share awards outstanding, December 31, 2013
2,684,745

 
$
33.74

Restricted share awards granted
925,610

 
37.33

Restricted share awards vested
(769,971
)
 
31.47

Restricted share awards forfeited
(69,117
)
 
36.28

Restricted share awards outstanding, September 30, 2014
2,771,267

 
$
35.50

At September 30, 2015, there were $77,222 (December 31, 2014: $74,670) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.6 years (December 31, 2014: 2.7 years).
iii.
Restricted share units
Restricted share units under the LTIP and STIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three and nine months ended September 30, 2015 of $310 (2014: $269) and $851 (2014: $602), respectively. The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

37
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to unvested restricted share units for the nine months ended September 30, 2015 was as follows:
 
Restricted Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2014
103,484

 
$
36.54

Restricted share units granted
28,057

 
42.91

Restricted share units vested
(19,455
)
 
34.58

Restricted share units issued in lieu of cash dividends
2,337

 
37.21

Restricted share units forfeited
(892
)
 
35.42

Restricted share units outstanding, September 30, 2015
113,531

 
$
38.47

Activity with respect to unvested restricted share units for the nine months ended September 30, 2014 was as follows:
 
Restricted
Share Units
 
Weighted Average Grant Date Fair Value
Restricted share units outstanding, December 31, 2013
66,518

 
$
33.74

Restricted share units granted
53,025

 
38.10

Restricted share units vested
(18,325
)
 
30.71

Restricted share units issued in lieu of cash dividends
1,479

 
34.19

Restricted share units outstanding, September 30, 2014
102,697

 
$
36.54

At September 30, 2015, there were $3,085 (December 31, 2014: $2,774) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.8 years (December 31, 2014: 3.1 years).
iv.
Performance share awards
The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share (“DBVPS”) over a three-year period relative to the Company's peer group. For performance share awards granted during the period, the grant date Diluted Book Value per Share is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the consolidated statements of comprehensive income in the period in which they are determined.
The Company recognized share compensation expenses during the three and nine months ended September 30, 2015 of $592 (2014: $315) and $1,215 (2014: $549), respectively.
Activity with respect to unvested performance share awards for the nine months ended September 30, 2015 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2014
106,369

 
$
36.03

Performance share awards granted
81,569

 
45.03

Performance share awards vested
(15,344
)
 
31.38

Performance share awards outstanding, September 30, 2015
172,594

 
$
40.70


38
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Activity with respect to unvested performance share awards for the nine months ended September 30, 2014 was as follows:
 
Performance Share Awards
 
Weighted Average Grant Date Fair Value
Performance share awards outstanding, December 31, 2013
101,820

 
$
33.56

Performance share awards granted
52,639

 
37.33

Performance share awards vested
(32,746
)
 
32.62

Performance share awards conversion adjustment
(15,344
)
 
$
31.38

Performance share awards outstanding, September 30, 2014
106,369

 
$
36.03

At September 30, 2015, there were $4,559 (December 31, 2014: $2,232) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 2.3 years (December 31, 2014: 2.1 years).
(b)
 Total share compensation expenses
The breakdown of share compensation expenses by award type for the periods indicated was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Restricted share awards
$
9,081

 
$
8,180

 
26,213

 
23,101

Restricted share units
310

 
269

 
851

 
602

Performance share awards
592

 
315

 
1,215

 
549

Total
$
9,983

 
$
8,764

 
$
28,279

 
$
24,252

 

39
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


12. Debt and financing arrangements
(a)
Financing structure
The financing structure at September 30, 2015 was:
 
Commitment
 
Issued and outstanding (a)
 
Drawn
2006 Junior Subordinated Deferrable Debentures
$
150,000

 
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
200,000

 
139,800

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
134,504

 
134,504

 
134,504

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
598,254

 
538,054

 
538,054

2010 Senior Notes due 2040
250,000

 
250,000

 
247,387

Total debentures and senior notes payable
848,254

 
788,054

 
785,441

$400,000 syndicated unsecured letter of credit facility
400,000

 
—

 
—

$525,000 syndicated secured letter of credit facility
525,000

 
244,358

 
—

$30,000 secured bi-lateral letter of credit facility
30,000

 
10,172

 
—

Talbot FAL facility
25,000

 
25,000

 
—

AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

IPC bi-lateral facility
25,000

 
10,782

 
—

$230,000 Flagstone bi-lateral facility
230,000

 
205,593

 
—

Total credit and other facilities
1,265,000

 
525,905

 
—

Total debt and financing arrangements
$
2,113,254

 
$
1,313,959

 
$
785,441

The financing structure at December 31, 2014 was:
 
Commitment
 
Issued and outstanding (a)
 
Drawn
2006 Junior Subordinated Deferrable Debentures
$
150,000

 
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
200,000

 
139,800

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
135,727

 
135,727

 
135,727

Flagstone 2007 Junior Subordinated Deferrable Debentures
113,750

 
113,750

 
113,750

Total debentures payable
599,477

 
539,277

 
539,277

2010 Senior Notes due 2040
250,000

 
250,000

 
247,306

Total debentures and senior notes payable
849,477

 
789,277

 
786,583

$400,000 syndicated unsecured letter of credit facility
400,000

 
—

 
—

$525,000 syndicated secured letter of credit facility
525,000

 
276,455

 
—

$200,000 secured bi-lateral letter of credit facility
200,000

 
15,649

 
—

Talbot FAL facility
25,000

 
25,000

 
—

PaCRe senior secured letter of credit facility
10,000

 
294

 
—

AlphaCat Re secured letter of credit facility
30,000

 
30,000

 
—

IPC bi-lateral facility
40,000

 
15,897

 
—

$375,000 Flagstone bi-lateral facility
375,000

 
198,389

 
—

Total credit and other facilities
1,605,000

 
561,684

 
—

Total debt and financing arrangements
$
2,454,477

 
$
1,350,961

 
$
786,583

(a)
Indicates utilization of commitment amount, not necessarily drawn borrowings.

40
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(b)
Senior notes and junior subordinated deferrable debentures
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at the issuance date for each placement.
Description
Issuance date
Commitment
Maturity date
Fixed/Spread
 
Interest payments due
2006 Junior Subordinated Deferrable Debentures
June 15, 2006
$
150,000

June 15, 2036
9.069
%
(a)
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
August 23, 2006
$
134,504

September 15, 2036
3.540
%
(b)
Quarterly
2007 Junior Subordinated Deferrable Debentures
June 21, 2007
$
200,000

June 15, 2037
8.480
%
(a)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
June 8, 2007
$
88,750

July 30, 2037
3.000
%
(b)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
September 20, 2007
$
25,000

September 15, 2037
3.100
%
(b)
Quarterly
2010 Senior Notes due 2040
January 26, 2010
$
250,000

January 26, 2040
8.875
%
(a)
Semi-annually in arrears
(a)
Fixed interest rate.
(b)
Variable interest rate is the three-month LIBOR, reset quarterly, plus spread as noted in the table.
The following table summarizes the key terms of the Company's senior notes and junior subordinated deferrable debentures as at September 30, 2015:
Description
Issuance date
Commitment
Maturity date
Fixed/Spread
 
Interest payments due
2006 Junior Subordinated Deferrable Debentures
June 15, 2006
$
150,000

June 15, 2036
5.831
%
(b)
Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures
August 23, 2006
$
134,482

September 15, 2036
6.463
%
(b)
Quarterly
2007 Junior Subordinated Deferrable Debentures
June 21, 2007
$
200,000

June 15, 2037
5.180
%
(b)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
June 8, 2007
$
88,750

July 30, 2037
5.900
%
(b)
Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures
September 20, 2007
$
25,000

September 15, 2037
5.983
%
(b)
Quarterly
2010 Senior Notes due 2040
January 26, 2010
$
250,000

January 26, 2040
8.875
%
(a)
Semi-annually in arrears
(a)
Fixed interest rate.
(b)
Interest rate has been fixed as a result of interest rate swap contracts entered into by the Company.

41
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Senior Notes
The Senior Notes due 2040 (the “2010 Senior Notes”) were part of a registered public offering. The 2010 Senior Notes mature on January 26, 2040.  The Company may redeem the notes, in whole at any time, or in part from time to time, at the Company's option on not less than 30 nor more than 60 days’ notice, at a make-whole redemption price as described in “Description of the Notes - Optional Redemption” in the 2010 Senior Notes prospectus supplement. In addition, the Company may redeem the notes, in whole, but not in part, at any time upon the occurrence of certain tax events as described in “Description of the Notes - Redemption for Tax Purposes” in the prospectus supplement.
Debt issuance costs were deferred as an asset and are amortized over the life of the 2010 Senior Notes. There were no redemptions made during the three and nine months ended September 30, 2015 and 2014.
The 2010 Senior Notes are unsecured and unsubordinated obligations of the Company and rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness. The 2010 Senior Notes will be effectively junior to all of the Company’s future secured debt, to the extent of the value of the collateral securing such debt, and will rank senior to all our existing and future subordinated debt. The 2010 Senior Notes are structurally subordinated to all obligations of the Company’s subsidiaries.
Future payments of principal of $250,000 on the 2010 Senior Notes are all expected to be after 2020.
Junior subordinated deferrable debentures
The Company participated in private placements of junior subordinated deferrable interest debentures due 2036 and 2037 (respectively, the “2006 Junior Subordinated Deferrable Debentures” and “2007 Junior Subordinated Deferrable Debentures”).
Debt issuance costs for the 2006 and 2007 Junior Subordinated Deferrable Debentures were deferred as an asset and were amortized to income over the five year optional redemption periods. They are redeemable at the Company's option at par. There were no redemptions made during the three and nine months ended September 30, 2015 and 2014.
As part of the acquisition of Flagstone, the Company assumed junior subordinated deferrable debentures due 2036 and 2037 (respectively, the “Flagstone 2006 Junior Subordinated Deferrable Debentures” and “Flagstone 2007 Junior Subordinated Deferrable Debentures”). These debentures are redeemable quarterly at par. There were no redemptions made during the three and nine months ended September 30, 2015 and 2014.
Future payments of principal of $538,054 on the debentures discussed above are all expected to be after 2020.
(c)
Credit facilities
i.
$400,000 syndicated unsecured letter of credit facility and $525,000 syndicated secured letter of credit facility
On March 9, 2012, the Company entered into a $400,000 four-year unsecured credit facility with various counter parties as co-documentation agents and the lenders party thereto, which provides for letter of credit and revolving credit availability for the Company (the “Four Year Unsecured Facility”) (the full $400,000 of which is available for letters of credit and/or revolving loans). The Four Year Unsecured Facility was provided by a syndicate of commercial banks. Letters of credit under the Four Year Unsecured Facility are available to support obligations in connection with the insurance business of the Company and its subsidiaries. Loans under the Four Year Unsecured Facility are available for the general corporate and working capital purposes of the Company. The Company may request that existing lenders under the Four Year Unsecured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Unsecured Facility do not exceed $500,000.
Also on March 9, 2012, the Company entered into a $525,000 four-year secured credit facility, with the same parties, which provides for letter of credit availability for the Company (the “Four Year Secured Facility” and together with the Four Year Unsecured Facility, the “Credit Facilities”). The Four Year Secured Facility was also provided by a syndicate of commercial banks. Letters of credit under the Four Year Secured Facility will be available to support obligations in connection with the insurance business of the Company. The Company may request that existing lenders under the Four Year Secured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Secured Facility do not exceed $700,000. The obligations of the Company under the Four Year Secured Facility are secured by cash and securities deposited into cash collateral accounts from time to time with The Bank of New York Mellon.

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Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


As of September 30, 2015, there were $244,358 in outstanding letters of credit under the Four Year Secured Facility (December 31, 2014: $276,455) and $nil (December 31, 2014: $nil) outstanding under the Four Year Unsecured Facility.
The Credit Facilities contain covenants that include, among other things (i) the requirement that the Company initially maintain a minimum level of consolidated net worth of at least $2,600,000 and, commencing with the end of the fiscal quarter ending March 31, 2012, to be increased quarterly by an amount equal to 50.0% of the Company’s consolidated net income (if positive) for such quarter plus 50.0% of the aggregate increases in the consolidated shareholders’ equity of the Company during such fiscal quarter by reason of the issuance and sale of common equity interests of the Company, including upon any conversion of debt securities of the Company into such equity interests, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capital ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Reinsurance, Ltd. and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair).  In addition, the Credit Facilities contain customary negative covenants applicable to the Company, including limitations on the ability to pay dividends and other payments in respect of equity interests at any time that the Company is otherwise in default with respect to certain provisions under the respective Credit Facilities, limitations on the ability to incur liens, sell assets, merge or consolidate with others, enter into transactions with affiliates, and limitations on the ability of its subsidiaries to incur indebtedness. The Credit Facilities also contain customary affirmative covenants, representations and warranties and events of default for credit facilities of its type. As of September 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.
ii.
$25,000 Talbot FAL facility
On November 19, 2013, Validus Holdings, Ltd. (“Validus Holdings”), as Guarantor, and its wholly-owned subsidiary, Talbot Holdings Ltd. (“Talbot Holdings”), as Borrower, entered into an Amendment and Restatement Agreement relating to its $25,000 Funds-at-Lloyd’s Standby Letter of Credit Facility (the “Facility”) which amends the Facility to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2015 and prior underwriting years of account (the “Restated Facility”). The Restated Facility was provided and arranged by Lloyds Bank plc and ING Bank N.V., London Branch. The Restated Facility provides for the issuance of up to $25,000 (denominated in US Dollars or Pound Sterling) of secured letters of credit to be issued for the benefit of Lloyd’s of London.
The Restated Facility contains affirmative covenants that include, among other things, (i) the requirement that Validus Holdings and its subsidiaries initially maintain a minimum level of consolidated net worth of at least $3,225,727, and commencing with the fiscal quarter ending September 30, 2013, to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of the aggregate increases in our consolidated shareholder’s equity interests by reason of issuance and sale of Validus Holdings’ common equity interests including upon any conversion of Validus Holdings’ debt securities into equity interests during such quarter and (ii) the requirement that Validus Holdings and its subsidiaries maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00. The Restated Facility defines net worth to include preferred and preference securities and “hybrid” securities (which includes Validus Holdings’ and its Flagstone subsidiaries’ Junior Subordinated Deferrable Debentures). The Restated Facility also requires that Talbot Holdings maintain at least $300,000 of its own Funds at Lloyd’s, and to obtain a letter of comfort from Lloyd’s of London confirming that Lloyd’s of London will take into account a requested order of drawdown to drawdown Talbot Holdings’ own Funds at Lloyd’s ahead of letters of credit issued under the Facility.
The Restated Facility also contains restrictions on Validus Holdings’ ability to pay dividends and other payments in respect of equity interests at any time that it is otherwise in default under the Facility (with certain exceptions for dividends in respect of preferred securities and hybrid securities, which are only limited during the continuance of certain specified defaults), incur debt at its subsidiaries level, transact with affiliates, incur liens, sell assets and merge or consolidate with others and other restrictions customary for transactions of this type, in each case subject to agreed exceptions.
Secured letter of credit availability under the Restated Facility is subject to a borrowing base limitation comprised of (a) the aggregate amount of cash and eligible securities owned by Validus Reinsurance, Ltd. and placed in a collateral account subject to a customary account control agreement in favor of the lenders and agents under the Restated Facility multiplied by (b) an agreed upon advance rate applicable for each category of cash and eligible securities. Obligations in respect of secured letters of credit under the Restated Facility are secured by a first-priority security interest on the cash and eligible securities comprising the borrowing base in favor of the trustee under the Restated Facility.

43
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The Restated Facility contains representations and warranties customary for facilities of this type. The Restated Facility also contains customary events of default including without limitation, with agreed grace periods and thresholds, failure to make payments due under the Restated Facility, material inaccuracy of representations and warranties, breach of covenants, cross defaults to material indebtedness, bankruptcy defaults, judgments defaults, and failure to maintain certain material insurance licenses.
As of September 30, 2015, the Company had $25,000 (December 31, 2014: $25,000) in outstanding letters of credit under the Talbot FAL facility.
As of September 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL facility.
iii.
$25,000 IPC bi-lateral facility
The Company assumed an existing evergreen letter of credit facility through the acquisition of IPC Holdings, Ltd. (the "IPC bi-lateral facility"). As of September 30, 2015, there were $10,782 outstanding letters of credit issued under the IPC bi-lateral facility (December 31, 2014: $15,897). As of September 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC bi-lateral facility.
iv.
$30,000 secured bi-lateral letter of credit facility
The Company is party to an evergreen secured bi-lateral letter of credit facility with Citibank Europe plc (the “Secured bi-lateral letter of credit facility”). As of September 30, 2015, $10,172 (December 31, 2014: $15,649) of letters of credit were outstanding under the Secured bi-lateral letter of credit facility. The Secured bi-lateral letter of credit facility has no fixed termination date and as of September 30, 2015, and throughout the reporting periods presented, the Company is in compliance with all terms and covenants thereof. During the period ended March 31, 2015 the size of the facility was decreased to $30,000 from $200,000.
v.
$10,000 PaCRe senior secured letter of credit facility
On May 11, 2012, PaCRe and its subsidiary, PaCRe Investments, Ltd. entered into a secured evergreen credit and letter of credit facility with JPMorgan Chase Bank, N.A. This facility provides for revolving borrowings by PaCRe and for letters of credit issued by PaCRe to be used to support its reinsurance obligations. This facility was terminated on May 29, 2015; therefore, as of September 30, 2015, $nil (December 31, 2014: $294) letters of credit were outstanding under this facility. PaCRe was in compliance with all covenants and restrictions thereof through the termination date.
vi.
$30,000 AlphaCat Re secured letter of credit facility
In 2013, AlphaCat Re entered into a secured evergreen letter of credit facility with Comerica Bank. This facility provided for letters of credit issued by AlphaCat Re to be used to support its reinsurance obligations in the aggregate amount of $24,800. During the period ended March 31, 2014 the size of the facility was increased to $30,000 from $24,800. As of September 30, 2015, $30,000 (December 31, 2014: $30,000) of letters of credit were outstanding under this facility. As of September 30, 2015, and throughout the reporting periods presented, AlphaCat Re was in compliance with all covenants and restrictions thereof.
vii.
$230,000 Flagstone bi-lateral facility
As part of the Flagstone Acquisition, the Company assumed an evergreen Letters of Credit Master Agreement between Citibank Europe Plc and Flagstone Reassurance Suisse, S.A. (the “Flagstone Bi-Lateral Facility”). At September 30, 2015, the Flagstone Bi-Lateral Facility had $205,593 (December 31, 2014: $198,389) letters of credit issued and outstanding. As of September 30, 2015, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Flagstone Bi-Lateral Facility. During the period ended March 31, 2015 the size of the facility was decreased to $230,000 from $375,000.

44
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


(d)
Finance expenses
Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facilities fees, bank charges, AlphaCat financing fees and Talbot FAL costs as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
2006 Junior Subordinated Deferrable Debentures
$
2,235

 
$
2,235

 
$
6,633

 
$
6,633

2007 Junior Subordinated Deferrable Debentures
1,848

 
1,848

 
5,492

 
5,492

Flagstone 2006 Junior Subordinated Deferrable Debentures
2,274

 
2,269

 
6,735

 
6,736

Flagstone 2007 Junior Subordinated Deferrable Debentures
1,807

 
1,807

 
5,335

 
5,335

2010 Senior Notes due 2040
5,597

 
5,597

 
16,791

 
16,791

Credit facilities
1,293

 
1,295

 
4,193

 
4,225

Bank charges
76

 
88

 
337

 
303

AlphaCat fees (a)
2,348

 
384

 
9,456

 
2,030

Talbot FAL Facility
20

 
(169
)
 
113

 
(165
)
Total finance expenses
$
17,498

 
$
15,354

 
$
55,085

 
$
47,380

(a)
Includes finance expenses incurred by AlphaCat Managers, Ltd. in relation to fund raising for AlphaCat direct, the AlphaCat ILS funds, AlphaCat 2015 and AlphaCat 2014.

45
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


13. Accumulated other comprehensive loss
The changes in accumulated other comprehensive loss, by component for the three and nine months ended September 30, 2015 and 2014 is as follows:
Three Months Ended September 30, 2015
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(8,374
)
 
$
(53
)
 
$
(639
)
 
$
(9,066
)
Net current period other comprehensive (loss) income, net of tax
(1,850
)
 
(28
)
 
75

 
(1,803
)
Balance end of period, net of tax
$
(10,224
)
 
$
(81
)
 
$
(564
)
 
$
(10,869
)
Three Months Ended September 30, 2014
Foreign currency translation adjustment
 
Total
Balance beginning of period, net of tax
$
2,460

 
$
2,460

Net current period other comprehensive loss, net of tax
(5,198
)
 
(5,198
)
Balance end of period, net of tax
$
(2,738
)
 
$
(2,738
)
Nine Months Ended September 30, 2015
Foreign currency translation adjustment
 
Minimum pension liability
 
Cash flow hedge
 
Total
Balance beginning of period, net of tax
$
(8,118
)
 
$
(210
)
 
$
(228
)
 
$
(8,556
)
Net current period other comprehensive (loss) income, net of tax
(2,106
)
 
129

 
(336
)
 
(2,313
)
Balance end of period, net of tax
$
(10,224
)
 
$
(81
)
 
$
(564
)
 
$
(10,869
)
Nine Months Ended September 30, 2014
Foreign currency translation adjustment
 
Total
Balance beginning of period, net of tax
$
(617
)
 
$
(617
)
Net current period other comprehensive loss, net of tax
(2,121
)
 
(2,121
)
Balance end of period, net of tax
$
(2,738
)
 
$
(2,738
)


46
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


14. Commitments and contingencies
(a)
Concentrations of credit risk
The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets,” such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.75% or less of total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's non-investment grade bank loan portfolio, which represents 7.7% of total managed cash and investments as at September 30, 2015, and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. Managed cash and investments consist of total cash and investments less restricted cash, assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interests. In total, investments in below investment grade securities are limited to no more than 15% of the Company's managed cash and investment portfolio. As at September 30, 2015, 9.5% of the Company's total managed cash and investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.7% of total cash and investments, other than with respect to government and agency securities as at September 30, 2015.
(b)
Funds at Lloyd's
The amounts provided under the Talbot FAL Facility would become a liability of the Company in the event of Syndicate 1183 declaring a loss at a level which would call on this arrangement.
Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises: cash, investments and undrawn letters of credit provided by various banks.
The amounts of cash, investments and letters of credit provided for each year of account as follows:
 
2015 Underwriting Year
 
2014 Underwriting Year
Talbot FAL facility
$
25,000

 
$
25,000

Group funds
570,100

 
450,000

Total
$
595,100

 
$
475,000

The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends. See Note 3 (d) for investments pledged as collateral.
(c)
Lloyd's Central Fund
Whenever a member of Lloyd's is unable to pay its debts to policyholders, such debts may be payable by the Lloyd's Central Fund. If Lloyd's determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd's members up to 3% of a member's underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company's 2015 estimated premium income at Lloyd's of £625,000, at the September 30, 2015 exchange rate of £1 equals $1.51 and assuming the maximum 3% assessment, the Company would be assessed approximately $28,313.
(d)
Investment in affiliate commitments
As discussed in Note 5 "Investments in affiliates," on December 20, 2011 the Company entered into an Assignment and Assumption Agreement with Aquiline Capital Partners LLC, pursuant to which it assumed total capital commitments of $50,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company’s remaining commitment at September 30, 2015 was $4,085 (December 31, 2014: $7,500).

47
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


On October 2, 2014, the Company assumed an additional investment in Aquiline Capital Partners II GP (Offshore) Ltd. as part of the Western World acquisition representing a total capital commitment of $10,000. This interest is governed by the terms of an Amended and Restated Exempted Limited Partnership Agreement dated as of January 9, 2013. The Company's remaining capital commitment at September 30, 2015 was $817 (December 31, 2014: $1,499).
On November 7, 2014, the Company entered into a Subscription Agreement with Aquiline Capital Partners III GP (Offshore) Ltd., pursuant to which it assumed total capital commitments of $100,000 in respect of Limited Partnership Interests in Aquiline Financial Services Fund III L.P. (the "Fund"). The Limited Partnership Interests are governed by the terms of the Aquiline III Limited Partnership Agreement dated November 7, 2014. The Company’s remaining commitment at September 30, 2015 was $86,110 (December 31, 2014: $100,000).
On December 29, 2014, the Company entered into an agreement with AlphaCat 2015 pursuant to which it assumed total capital commitments of $28,000. The Company’s remaining commitment at September 30, 2015 was $nil (December 31, 2014: $2,400).
On December 29, 2014, the Company entered into an agreement with an AlphaCat ILS fund pursuant to which it assumed total capital commitments of $20,000. The Company’s remaining commitment at September 30, 2015 was $nil (December 31, 2014: $8,000).
(e)
Fixed maturity commitment
As at September 30, 2015, the Company had an outstanding commitment to participate in certain secured loan facilities through participation agreements with an established loan originator. The undrawn amount under the revolver facility participations as at September 30, 2015 was $28,831 (December 31, 2014: $7,539).
(f)
Other investment commitments
As at September 30, 2015, the Company had capital commitments in private equity investments of $153,000 (December 31, 2014: $153,000). The Company's remaining commitment to these investments at September 30, 2015 was $76,519 (December 31, 2014: $83,712).
(g)
Multi-Beneficiary Reinsurance Trust ("MBRT")
In December 2014, the Company established an MBRT to collateralize its (re)insurance liabilities associated with and for the benefit of U.S. domiciled cedants, and was approved as a trusteed reinsurer in the State of New Jersey. As at September 30, 2015, the Company was approved in a total of 46 jurisdictions. As a result, cedants domiciled in those jurisdictions will receive automatic credit in their regulatory filings for reinsurance provided by the Company.
(h)
Income tax examinations
The Company has open examinations by the U.K. HM Revenue and Customs for the tax years 2011 to 2013 and the Company believes that these examinations will be concluded within the next 12 months.

48
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


15. Related party transactions
The transactions listed below are classified as related party transactions as principals and/or directors of each counter party are members of the Company's board of directors.
Aquiline Capital Partners, LLC and its related companies ("Aquiline"), which hold warrants to purchase 2,756,088 shares, and have two employees on the Company's Board of Directors who do not receive compensation from the Company, are shareholders of Group Ark Insurance Holdings Ltd. ("Group Ark"). Christopher E. Watson, a director of the Company, serves as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written during the three and nine months ended September 30, 2015 of $322 (2014: $246) and $2,718 (2014: $2,190), respectively with $1,484 included in premiums receivable at September 30, 2015 (December 31, 2014: $335). The Company also recognized reinsurance premiums ceded during the three and nine months ended September 30, 2015 of $23 (2014: $127) and $24 (2014: $127) and had reinsurance balances payable of $4 at September 30, 2015 (December 31, 2014: $4). The Company recorded $815 of loss reserves recoverable at September 30, 2015 (December 31, 2014: $1,063). Earned premium adjustments of $870 (2014: $694) and $2,187 (2014: $1,653) were recorded during the three and nine months ended September 30, 2015.
On November 24, 2009, the Company entered into an Investment Management Agreement with Conning, Inc. ("Conning") to manage a portion of the Company's investment portfolio. Aquiline acquired Conning on June 16, 2009. Jeffrey W. Greenberg, a director of the Company, serves as a director of Conning Holdings Corp., the parent company of Conning. During the three months ended September 30, 2015, Aquiline disposed of its investment in Conning. Therefore, effective September 30, 2015, Conning was no longer a related party. Investment management fees earned by Conning for the three and nine months ended September 30, 2015 were $436 and $841, respectively. Investment management fees earned by Conning for the three and nine months ended September 30, 2014 were ($7) and $219 respectively, with $515 included in accounts payable and accrued expenses at December 31, 2014.
On December 20, 2011, the Company entered into an Assignment and Assumption Agreement (the "Agreement") with Aquiline Capital Partners LLC, a Delaware limited liability company (the "Assignor") and Aquiline Capital Partners II GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "General Partner") pursuant to which the Company has assumed 100% of the Assignor's interest in Aquiline Financial Services Fund II L.P. (the "Aquiline II Partnership") representing a total capital commitment of $50,000 (the "Aquiline II Commitment"), as a limited partner in the Partnership (the "Transferred Interest"). On October 2, 2014, the Company assumed an additional investment in the Aquiline II Partnership as part of the Western World acquisition representing a total capital commitment of $10,000. Messrs. Greenberg and Watson, directors of the Company, serve as managing principal and senior principal, respectively, of Aquiline Capital Partners LLC. For the three and nine months ended September 30, 2015, the Company incurred $155 (2014: $nil) and $1,092 (2014: $nil) in partnership fees and made net capital (distributions) contributions of ($3,684) (2014: $nil) and $5,293 (2014: $nil), with $nil included in accounts payable and accrued expenses at September 30, 2015 (December 31, 2014: $nil).
On November 7, 2014, the Company, entered into a Subscription Agreement (the "Subscription Agreement") with Aquiline Capital Partners III GP (Offshore) Ltd., a Cayman Islands company limited by shares (the "Aquiline III General Partner") pursuant to which the Company is committing and agreeing to purchase limited partnership or other comparable limited liability equity interests (the "Limited Partnership Interests") in Aquiline Financial Services Fund III L.P., a Cayman Islands exempted limited partnership (the "Aquiline III Partnership"), and/or one or more Alternative Investment Vehicles and Intermediate Entities (together with the Aquiline III Partnership, the "Fund" or the "Entities") with a capital commitment (the "Aquiline III Commitment") in an amount equal to $100,000, as a limited partner in the Aquiline Financial Services III Partnership. For the three months ended September 30, 2015, the Company incurred partnership fees of $nil and made net capital distributions of ($345). For the nine months ended September 30, 2015, the Company incurred partnership fees of $nil and made net capital contributions of $13,793, with $nil included in accounts payable and accrued expenses at September 30, 2015 (December 31, 2014: $nil).
Certain shareholders of the Company and their affiliates, as well as employers of entities associated with directors or officers have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company believes these transactions were settled for arm's length consideration.


49
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


16. Earnings per share
The following table sets forth the computation of basic and earnings per diluted share for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Basic earnings per share
 
 
 
 
 

 
 

Net (loss) income
$
(5,013
)

$
(13,397
)

$
289,032


$
381,172

Loss (income) attributable to noncontrolling interest
71,663


53,069


15,042


(25,745
)
Net income available to Validus
66,650


39,672


304,074


355,427

Less: Dividends and distributions declared on outstanding warrants
(1,080
)
 
(1,552
)
 
(3,566
)
 
(4,656
)
Income available to common shareholders
$
65,570

 
$
38,120

 
$
300,508

 
$
350,771

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
82,635,316

 
90,593,329

 
83,296,703

 
91,665,950

 
 
 
 
 
 
 
 
Basic earnings per share available to common shareholders
$
0.79

 
$
0.42

 
$
3.61

 
$
3.83

 
 
 
 
 
 
 
 
Earnings per diluted share
 
 
 
 
 

 
 

Net (loss) income
$
(5,013
)
 
$
(13,397
)
 
$
289,032

 
$
381,172

Loss (income) attributable to noncontrolling interest
71,663

 
53,069

 
15,042

 
(25,745
)
Net income available to Validus
66,650

 
39,672

 
304,074

 
355,427

Less: Dividends and distributions declared on outstanding warrants
—

 
(1,552
)
 
—

 
—

Income available to common shareholders
$
66,650

 
$
38,120

 
$
304,074

 
$
355,427

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
82,635,316

 
90,593,329

 
83,296,703

 
91,665,950

Share equivalents:
 
 
 
 
 
 
 
Warrants
2,054,378

 
—

 
2,290,892

 
2,747,399

Stock options
47,702

 
760,267

 
190,429

 
752,145

Unvested restricted shares
892,098

 
586,014

 
1,063,903

 
772,147

Weighted average number of diluted common shares outstanding
85,629,494

 
91,939,610

 
86,841,927

 
95,937,641

 
 
 
 
 
 
 
 
Earnings per diluted share available to common shareholders
$
0.78

 
$
0.41

 
$
3.50

 
$
3.70

Share equivalents that would result in the issuance of 25,237 common shares (2014: 4,712) were outstanding for the nine months ended September 30, 2015, but were not included in the computation of earnings per diluted share because the effect would be antidilutive.

50
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


17. Segment information
The Company conducts its operations worldwide through four operating segments, which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment requires different strategies.
Validus Re Segment
The Validus Re segment is focused on short-tail lines of reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers’ compensation, crisis management, contingency, motor, technical lines, composite and trade credit.
AlphaCat Segment
The AlphaCat segment manages strategic relationships that leverage the Company’s underwriting and investment expertise and earns management, performance and underwriting fees primarily from the Company’s operating affiliates and other third party investors, AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013, AlphaCat 2014 and AlphaCat 2015, as well as PaCRe, the AlphaCat ILS funds, the BetaCat ILS funds and AlphaCat direct.
Talbot Segment
The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial lines, contingency, accident & health and aviation classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.
Western World Segment
The Western World segment is focused on providing commercial insurance products on a surplus lines and specialty admitted basis. Western World specializes in underwriting classes of business that are not easily placed in the standard insurance market due to their complexity, high hazard, or unusual nature; including general liability, property and professional liability classes of business.
Corporate and eliminations
The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group. Corporate includes ‘non-core’ underwriting expenses, predominantly general and administrative and stock compensation expenses. Corporate also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, corporate is reflected separately, however corporate is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of inter segment revenues and expenses and unusual items that are not allocated to segments.

51
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The following tables summarize the results of our operating segments and "Corporate":
Three Months Ended September 30, 2015
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Corporate & Eliminations
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

 
 

Gross premiums written
 
$
102,913

 
$
9,448

 
$
226,025

 
$
70,871

 
$
(7,576
)
 
$
401,681

Reinsurance premiums ceded
 
(15,462
)
 
—

 
(35,823
)
 
(4,716
)
 
7,576

 
(48,425
)
Net premiums written
 
87,451

 
9,448

 
190,202

 
66,155

 
—

 
353,256

Change in unearned premiums
 
153,210

 
35,276

 
15,942

 
(2,225
)
 
—

 
202,203

Net premiums earned
 
240,661

 
44,724

 
206,144

 
63,930

 
—

 
555,459

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
120,958

 
2,076

 
94,414

 
40,810

 
—

 
258,258

Policy acquisition costs
 
42,989

 
4,658

 
44,575

 
13,214

 
(345
)
 
105,091

General and administrative expenses
 
19,964

 
4,674

 
43,292

 
9,587

 
18,482

 
95,999

Share compensation expenses
 
2,691

 
141

 
3,214

 
554

 
3,383

 
9,983

Total underwriting deductions
 
186,602

 
11,549

 
185,495

 
64,165

 
21,520

 
469,331

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
54,059

 
$
33,175

 
$
20,649

 
$
(235
)
 
$
(21,520
)
 
$
86,128

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
18,362

 
1,533

 
6,457

 
5,634

 
(462
)
 
31,524

Other insurance related income (loss)
 
2,569

 
7,522

 
470

 
248

 
(652
)
 
10,157

Finance expenses
 
(3,624
)
 
(2,355
)
 
(57
)
 
—

 
(11,462
)
 
(17,498
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
 
71,366

 
39,875

 
27,519

 
5,647

 
(34,096
)
 
110,311

Tax benefit (expense)
 
851

 
—

 
(1,141
)
 
(2,431
)
 
703

 
(2,018
)
Income from operating affiliates
 
—

 
5,526

 
—

 
—

 
—

 
5,526

(Income) attributable to AlphaCat investors
 
—

 
(40,256
)
 
—

 
—

 
—

 
(40,256
)
Net operating income (loss)
 
$
72,217

 
$
5,145

 
$
26,378

 
$
3,216

 
$
(33,393
)
 
$
73,563

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (losses) gains on investments
 
(1,512
)
 
(40,673
)
 
199

 
80

 
—

 
(41,906
)
Change in net unrealized (losses) gains on investments
 
(6,257
)
 
(36,673
)
 
1,263

 
6,406

 
353

 
(34,908
)
Income from investment affiliate
 
1,842

 
—

 
—

 
640

 
—

 
2,482

Foreign exchange (losses) gains
 
(441
)
 
57

 
(3,682
)
 
—

 
1,792

 
(2,274
)
Other loss
 
(1,970
)
 
—

 
—

 
—

 
—

 
(1,970
)
Net income (loss)
 
$
63,879

 
$
(72,144
)
 
$
24,158

 
$
10,342

 
$
(31,248
)
 
$
(5,013
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
 
—

 
71,663

 
—

 
—

 
—

 
71,663

Net income (loss) available (attributable) to Validus
 
$
63,879

 
$
(481
)
 
$
24,158

 
$
10,342

 
$
(31,248
)
 
$
66,650

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
85.0
%
 
100.0
%
 
84.2
%
 
93.3
%
 
 
 
87.9
%
Losses and loss expenses
 
50.3
%
 
4.6
%
 
45.8
%
 
63.8
%
 
 
 
46.5
%
Policy acquisition costs
 
17.9
%
 
10.4
%
 
21.6
%
 
20.7
%
 
 
 
18.9
%
General and administrative expenses (b)
 
9.4
%
 
10.8
%
 
22.6
%
 
15.9
%
 
 
 
19.1
%
Expense ratio
 
27.3
%
 
21.2
%
 
44.2
%
 
36.6
%
 
 
 
38.0
%
Combined ratio
 
77.6
%
 
25.8
%
 
90.0
%
 
100.4
%
 
 
 
84.5
%
Total assets
 
$
4,441,212

 
$
2,313,667

 
$
2,923,237

 
$
1,475,881

 
$
81,966

 
$
11,235,963

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.

52
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Three Months Ended September 30, 2014
 
Validus Re Segment (c)
 
AlphaCat Segment
 
Talbot Segment
 
Corporate & Eliminations (c)
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

Gross premiums written
 
$
114,380

 
$
6,936

 
$
245,685

 
$
(8,027
)
 
$
358,974

Reinsurance premiums ceded
 
(10,382
)
 
(648
)
 
(27,134
)
 
8,027

 
(30,137
)
Net premiums written
 
103,998

 
6,288

 
218,551

 
—

 
328,837

Change in unearned premiums
 
122,712

 
28,850

 
14,297

 
—

 
165,859

Net premiums earned
 
226,710

 
35,138

 
232,848

 
—

 
494,696

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
102,005

 
3,738

 
118,382

 
—

 
224,125

Policy acquisition costs
 
36,177

 
3,378

 
47,862

 
(1,013
)
 
86,404

General and administrative expenses
 
18,522

 
7,719

 
37,709

 
19,369

 
83,319

Share compensation expenses
 
2,582

 
179

 
2,990

 
3,013

 
8,764

Total underwriting deductions
 
159,286

 
15,014

 
206,943

 
21,369

 
402,612

 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
67,424

 
$
20,124

 
$
25,905

 
$
(21,369
)
 
$
92,084

 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
20,270

 
837

 
4,965

 
(811
)
 
25,261

Other insurance related income (loss)
 
863

 
5,980

 
109

 
(3,342
)
 
3,610

Finance expenses
 
(3,622
)
 
(385
)
 
162

 
(11,509
)
 
(15,354
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
 
84,935

 
26,556

 
31,141

 
(37,031
)
 
105,601

Tax benefit (expense)
 
1,058

 
—

 
332

 
(437
)
 
953

Income from operating affiliates
 
—

 
3,761

 
—

 
—

 
3,761

(Income) attributable to AlphaCat investors
 
—

 
(25,807
)
 
—

 
—

 
(25,807
)
Net operating income (loss)
 
$
85,993

 
$
4,510

 
$
31,473

 
$
(37,468
)
 
$
84,508

 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
1,641

 
2,563

 
391

 
—

 
4,595

Change in net unrealized losses on investments
 
(21,624
)
 
(60,253
)
 
(3,097
)
 
—

 
(84,974
)
Income from investment affiliate
 
1,754

 
—

 
—

 
—

 
1,754

Foreign exchange (losses) gains
 
(6,056
)
 
(51
)
 
(7,114
)
 
1,780

 
(11,441
)
Other loss
 
(7,690
)
 
—

 
—

 
—

 
(7,690
)
Transaction expenses (d)
 
—

 
—

 
—

 
(149
)
 
(149
)
Net income (loss)
 
$
54,018

 
$
(53,231
)
 
$
21,653

 
$
(35,837
)
 
$
(13,397
)
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
 
—

 
53,069

 
—

 
—

 
53,069

Net income (loss) available (attributable) to Validus
 
$
54,018

 
$
(162
)
 
$
21,653

 
$
(35,837
)
 
$
39,672

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
90.9
%
 
90.7
%
 
89.0
%
 
 
 
91.6
%
Losses and loss expenses
 
45.0
%
 
10.6
%
 
50.8
%
 
 
 
45.3
%
Policy acquisition costs
 
16.0
%
 
9.6
%
 
20.6
%
 
 
 
17.5
%
General and administrative expenses (b)
 
9.3
%
 
22.5
%
 
17.5
%
 
 
 
18.6
%
Expense ratio
 
25.3
%
 
32.1
%
 
38.1
%
 
 
 
36.1
%
Combined ratio
 
70.3
%
 
42.7
%
 
88.9
%
 
 
 
81.4
%
Total assets
 
$
4,740,003

 
$
1,688,191

 
$
2,901,264

 
$
749,678

 
$
10,079,136

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.
(c)
Beginning in the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written and reinsurance premiums ceded for the Validus Re segment and Corporate & Eliminations were reduced by $517 for the three months ended September 30, 2014 for comparative purposes. There was no impact to total gross premiums written and reinsurance premiums ceded on a consolidated basis.
(d)
The transaction expenses relate to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. Western World results have not been included in the Company's consolidated results for the three months ended September 30, 2014. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

53
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Nine Months Ended September 30, 2015
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Corporate & Eliminations
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

 
 

Gross premiums written
 
$
1,111,020

 
$
176,129

 
$
789,148

 
$
207,372

 
$
(35,522
)
 
$
2,248,147

Reinsurance premiums ceded
 
(147,611
)
 
(4,538
)
 
(164,144
)
 
(13,390
)
 
35,522

 
(294,161
)
Net premiums written
 
963,409

 
171,591

 
625,004

 
193,982

 
—

 
1,953,986

Change in unearned premiums
 
(205,110
)
 
(54,196
)
 
9,167

 
2,948

 
—

 
(247,191
)
Net premiums earned
 
758,299

 
117,395

 
634,171

 
196,930

 
—

 
1,706,795

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
357,491

 
1,232

 
268,512

 
138,098

 
—

 
765,333

Policy acquisition costs
 
128,909

 
12,162

 
141,338

 
27,110

 
(1,367
)
 
308,152

General and administrative expenses
 
58,254

 
12,202

 
115,341

 
29,137

 
49,056

 
263,990

Share compensation expenses
 
7,665

 
440

 
9,195

 
1,525

 
9,454

 
28,279

Total underwriting deductions
 
552,319

 
26,036

 
534,386

 
195,870

 
57,143

 
1,365,754

 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
205,980

 
$
91,359

 
$
99,785

 
$
1,060

 
$
(57,143
)
 
$
341,041

 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
56,694

 
4,872

 
19,168

 
16,660

 
(1,241
)
 
96,153

Other insurance related income (loss)
 
3,318

 
17,048

 
564

 
787

 
(3,580
)
 
18,137

Finance expenses
 
(11,068
)
 
(9,462
)
 
(231
)
 
—

 
(34,324
)
 
(55,085
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
 
254,924

 
103,817

 
119,286

 
18,507

 
(96,288
)
 
400,246

Tax expense
 
(14
)
 
—

 
(4,286
)
 
(2,420
)
 
(412
)
 
(7,132
)
Income from operating affiliates
 
—

 
12,083

 
—

 
—

 
—

 
12,083

(Income) attributable to AlphaCat investors
 
—

 
(94,341
)
 
—

 
—

 
—

 
(94,341
)
Net operating income (loss)
 
$
254,910

 
$
21,559

 
$
115,000

 
$
16,087

 
$
(96,700
)
 
$
310,856

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on investments
 
717

 
(40,544
)
 
2,140

 
2,194

 
—

 
(35,493
)
Change in net unrealized gains (losses) on investments
 
76

 
17,258

 
163

 
2,340

 
(71
)
 
19,766

Income from investment affiliate
 
4,204

 
—

 
—

 
1,338

 
—

 
5,542

Foreign exchange (losses) gains
 
(6,571
)
 
(37
)
 
(4,949
)
 
—

 
2,496

 
(9,061
)
Other loss
 
(2,578
)
 
—

 
—

 
—

 
—

 
(2,578
)
Net income (loss)
 
$
250,758

 
$
(1,764
)
 
$
112,354

 
$
21,959

 
$
(94,275
)
 
$
289,032

 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interest
 
—

 
15,042

 
—

 
—

 
—

 
15,042

Net income (loss) available (attributable) to Validus
 
$
250,758

 
$
13,278

 
$
112,354

 
$
21,959

 
$
(94,275
)
 
$
304,074

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
86.7
%
 
97.4
%
 
79.2
%
 
93.5
%
 
 
 
86.9
%
Losses and loss expenses
 
47.1
%
 
1.0
%
 
42.4
%
 
70.1
%
 
 
 
44.8
%
Policy acquisition costs
 
17.0
%
 
10.4
%
 
22.3
%
 
13.8
%
 
 
 
18.1
%
General and administrative expenses (b)
 
8.7
%
 
10.8
%
 
19.6
%
 
15.6
%
 
 
 
17.1
%
Expense ratio
 
25.7
%
 
21.2
%
 
41.9
%
 
29.4
%
 
 
 
35.2
%
Combined ratio
 
72.8
%
 
22.2
%
 
84.3
%
 
99.5
%
 
 
 
80.0
%
Total assets
 
$
4,441,212

 
$
2,313,667

 
$
2,923,237

 
$
1,475,881

 
$
81,966

 
$
11,235,963

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.

54
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Nine Months Ended September 30, 2014
 
Validus Re Segment (c)
 
AlphaCat Segment
 
Talbot Segment
 
Corporate & Eliminations (c)
 
Total
Underwriting income
 
 

 
 
 
 

 
 

 
 

Gross premiums written
 
$
1,081,816

 
$
135,073

 
$
854,324

 
$
(44,574
)
 
$
2,026,639

Reinsurance premiums ceded
 
(161,721
)
 
(4,348
)
 
(154,115
)
 
44,574

 
(275,610
)
Net premiums written
 
920,095

 
130,725

 
700,209

 
—

 
1,751,029

Change in unearned premiums
 
(233,271
)
 
(32,444
)
 
(41,658
)
 
—

 
(307,373
)
Net premiums earned
 
686,824

 
98,281

 
658,551

 
—

 
1,443,656

Underwriting deductions
 
 
 
 
 
 
 
 
 
 
Losses and loss expenses
 
247,848

 
(7,155
)
 
304,848

 
—

 
545,541

Policy acquisition costs
 
106,547

 
9,414

 
138,383

 
(3,338
)
 
251,006

General and administrative expenses
 
53,757

 
15,627

 
107,031

 
55,191

 
231,606

Share compensation expenses
 
7,126

 
330

 
8,434

 
8,362

 
24,252

Total underwriting deductions
 
415,278

 
18,216

 
558,696

 
60,215

 
1,052,405

 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
$
271,546

 
$
80,065

 
$
99,855

 
$
(60,215
)
 
$
391,251

 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
54,810

 
2,546

 
14,322

 
(1,769
)
 
69,909

Other insurance related income (loss)
 
2,385

 
21,482

 
384

 
(7,793
)
 
16,458

Finance expenses
 
(11,131
)
 
(2,039
)
 
68

 
(34,278
)
 
(47,380
)
Operating income (loss) before taxes, income from operating affiliates and (income) attributable to AlphaCat investors
 
317,610

 
102,054

 
114,629

 
(104,055
)
 
430,238

Tax benefit (expense)
 
1,176

 
—

 
(902
)
 
(672
)
 
(398
)
Income from operating affiliates
 
—

 
13,580

 
—

 
—

 
13,580

(Income) attributable to AlphaCat investors
 
—

 
(82,833
)
 
—

 
—

 
(82,833
)
Net operating income (loss)
 
$
318,786

 
$
32,801

 
$
113,727

 
$
(104,727
)
 
$
360,587

 
 
 
 
 
 
 
 
 
 
 
Net realized gains on investments
 
5,411

 
10,230

 
552

 
—

 
16,193

Change in net unrealized (losses) gains on investments
 
(1,719
)
 
15,706

 
2,159

 
—

 
16,146

Income from investment affiliate
 
7,881

 
—

 
—

 
—

 
7,881

Foreign exchange (losses) gains
 
(9,384
)
 
(204
)
 
(5,897
)
 
724

 
(14,761
)
Other loss
 
(1,473
)
 
—

 
—

 
—

 
(1,473
)
Transaction expenses (d)
 
—

 
—

 
—

 
(3,401
)
 
(3,401
)
Net income (loss)
 
$
319,502

 
$
58,533

 
$
110,541

 
$
(107,404
)
 
$
381,172

 
 
 
 
 
 
 
 
 
 
 
Net (income) attributable to noncontrolling interest
 
—

 
(25,745
)
 
—

 
—

 
(25,745
)
Net income (loss) available (attributable) to Validus
 
$
319,502

 
$
32,788

 
$
110,541

 
$
(107,404
)
 
$
355,427

Selected ratios (a):
 
 
 
 
 
 
 
 
 
 
Net premiums written / Gross premiums written
 
85.1
%
 
96.8
 %
 
82.0
%
 
 
 
86.4
%
Losses and loss expenses
 
36.1
%
 
(7.3
)%
 
46.3
%
 
 
 
37.8
%
Policy acquisition costs
 
15.5
%
 
9.6
 %
 
21.0
%
 
 
 
17.4
%
General and administrative expenses (b)
 
8.9
%
 
16.2
 %
 
17.5
%
 
 
 
17.7
%
Expense ratio
 
24.4
%
 
25.8
 %
 
38.5
%
 
 
 
35.1
%
Combined ratio
 
60.5
%
 
18.5
 %
 
84.8
%
 
 
 
72.9
%
Total assets
 
$
4,740,003

 
$
1,688,191

 
$
2,901,264

 
$
749,678

 
$
10,079,136

(a)
Ratios are based on net premiums earned.
(b)
The general and administrative expense ratio includes share compensation expenses.
(c)
Beginning in the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written and reinsurance premiums ceded for the Validus Re segment and Corporate & Eliminations were reduced by $22,353 for the nine months ended September 30, 2014 for comparative purposes. There was no impact to total gross premiums written and reinsurance premiums ceded on a consolidated basis.
(d)
The transaction expenses relate to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. Western World results have not been included in the Company's consolidated results for the nine months ended September 30, 2014. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.


55
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


The Company’s exposures are generally diversified across geographic zones. The following tables set forth the gross premiums written allocated to the territory of coverage exposure for the periods indicated:
 
Three Months Ended September 30, 2015
 
Gross Premiums Written
 
Validus Re
 
AlphaCat
 
Talbot
 
Western World
 
Eliminations
 
Total
 
%
United States
$
34,578

 
$
3,615

 
$
21,886

 
$
70,871

 
$
(296
)
 
$
130,654

 
32.5
%
Worldwide excluding
United States (a)
5,409

 
100

 
30,721

 
—

 
(139
)
 
36,091

 
9.0
%
Australia and New Zealand
480

 
—

 
3,520

 
—

 
(92
)
 
3,908

 
1.0
%
Europe
6,142

 
22

 
7,839

 
—

 
(78
)
 
13,925

 
3.5
%
Latin America and Caribbean
18,771

 
—

 
27,249

 
—

 
(3,717
)
 
42,303

 
10.5
%
Japan
—

 
—

 
1,149

 
—

 
(94
)
 
1,055

 
0.3
%
Canada
319

 
(30
)
 
1,455

 
—

 
(76
)
 
1,668

 
0.4
%
Rest of the world (b)
2,621

 
—

 
28,380

 
—

 
(499
)
 
30,502

 
7.6
%
Sub-total, non United States
33,742

 
92

 
100,313

 
—

 
(4,695
)
 
129,452

 
32.3
%
Worldwide including
United States (a)
8,057

 
4,949

 
20,296

 
—

 
(2,593
)
 
30,709

 
7.6
%
Other location non-specific (c)
26,536

 
792

 
83,530

 
—

 
8

 
110,866

 
27.6
%
Total
$
102,913

 
$
9,448

 
$
226,025

 
$
70,871

 
$
(7,576
)
 
$
401,681

 
100.0
%
 
Three Months Ended September 30, 2014
 
Gross Premiums Written
 
Validus Re
(d)
 
AlphaCat
 
Talbot
 
Eliminations (d)
 
Total
 
%
United States
$
27,394

 
$
2,206

 
$
17,003

 
$
363

 
$
46,966

 
13.1
%
Worldwide excluding
United States (a)
9,167

 
(81
)
 
29,781

 
498

 
39,365

 
10.9
%
Australia and New Zealand
494

 
—

 
3,312

 
(23
)
 
3,783

 
1.1
%
Europe
7,540

 
312

 
9,821

 
708

 
18,381

 
5.1
%
Latin America and Caribbean
15,394

 
—

 
24,740

 
(3,268
)
 
36,866

 
10.3
%
Japan
1,635

 
22

 
1,274

 
(45
)
 
2,886

 
0.8
%
Canada
179

 
—

 
2,430

 
(71
)
 
2,538

 
0.7
%
Rest of the world (b)
(138
)
 
—

 
27,145

 
592

 
27,599

 
7.7
%
Sub-total, non United States
34,271

 
253

 
98,503

 
(1,609
)
 
131,418

 
36.6
%
Worldwide including
United States (a)
22,647

 
4,477

 
18,611

 
5,540

 
51,275

 
14.3
%
Other location non-specific (c)
30,068

 
—

 
111,568

 
(12,321
)
 
129,315

 
36.0
%
Total
$
114,380

 
$
6,936

 
$
245,685

 
$
(8,027
)
 
$
358,974

 
100.0
%


56
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


 
Nine Months Ended September 30, 2015
 
Gross Premiums Written
 
Validus Re
 
AlphaCat
 
Talbot
 
Western World
 
Eliminations
 
Total
 
%
United States
$
544,239

 
$
42,200

 
$
89,980

 
$
207,372

 
$
(2,417
)
 
$
881,374

 
39.2
%
Worldwide excluding
United States (a)
52,808

 
8,057

 
95,894

 
—

 
(1,183
)
 
155,576

 
6.9
%
Australia and New Zealand
12,002

 
624

 
6,569

 
—

 
(233
)
 
18,962

 
0.8
%
Europe
47,018

 
2,863

 
31,637

 
—

 
(1,093
)
 
80,425

 
3.6
%
Latin America and Caribbean
34,086

 
—

 
78,634

 
—

 
(9,913
)
 
102,807

 
4.6
%
Japan
39,191

 
1,671

 
4,746

 
—

 
(159
)
 
45,449

 
2.0
%
Canada
3,117

 
458

 
5,452

 
—

 
(216
)
 
8,811

 
0.4
%
Rest of the world (b)
24,615

 
—

 
76,368

 
—

 
(3,355
)
 
97,628

 
4.3
%
Sub-total, non United States
212,837

 
13,673

 
299,300

 
—

 
(16,152
)
 
509,658

 
22.6
%
Worldwide including
United States (a)
131,405

 
115,414

 
74,794

 
—

 
(16,946
)
 
304,667

 
13.6
%
Other location non-specific (c)
222,539

 
4,842

 
325,074

 
—

 
(7
)
 
552,448

 
24.6
%
Total
$
1,111,020

 
$
176,129

 
$
789,148

 
$
207,372

 
$
(35,522
)
 
$
2,248,147

 
100.0
%
 
Nine Months Ended September 30, 2014
 
Gross Premiums Written
 
Validus Re
(d)
 
AlphaCat
 
Talbot
 
Eliminations (d)
 
Total
 
%
United States
$
444,325

 
$
31,160

 
$
85,465

 
$
(2,554
)
 
$
558,396

 
27.5
%
Worldwide excluding
United States (a)
74,516

 
7,331

 
105,397

 
(586
)
 
186,658

 
9.2
%
Australia and New Zealand
19,879

 
1,019

 
7,615

 
(245
)
 
28,268

 
1.4
%
Europe
54,263

 
3,005

 
36,110

 
(536
)
 
92,842

 
4.6
%
Latin America and Caribbean
35,965

 
—

 
86,111

 
(18,216
)
 
103,860

 
5.1
%
Japan
40,456

 
608

 
3,404

 
(103
)
 
44,365

 
2.2
%
Canada
3,174

 
215

 
8,325

 
(307
)
 
11,407

 
0.6
%
Rest of the world (b)
22,541

 
—

 
70,702

 
(2,298
)
 
90,945

 
4.5
%
Sub-total, non United States
250,794

 
12,178

 
317,664

 
(22,291
)
 
558,345

 
27.6
%
Worldwide including
United States (a)
161,366

 
91,735

 
71,147

 
(4,394
)
 
319,854

 
15.8
%
Other location non-specific (c)
225,331

 
—

 
380,048

 
(15,335
)
 
590,044

 
29.1
%
Total
$
1,081,816

 
$
135,073

 
$
854,324

 
$
(44,574
)
 
$
2,026,639

 
100.0
%
(a)
Represents risks in two or more geographic zones.
(b)
Represents risks in one geographic zone.
(c)
The Other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable, such as marine and aerospace risks, since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.
(d)
During the first quarter of 2015, certain intercompany reinsurance transactions were presented on a net basis for segmental reporting purposes. As a result, gross premiums written for the Validus Re segment and Corporate & Eliminations were reduced by $517 and $22,353 for the three and nine months ended September 30, 2014, respectively, for comparative purposes. There was no impact to total gross premiums written on a consolidated basis.


57
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


18. Condensed consolidating financial information
The following tables present condensed consolidating balance sheets as at September 30, 2015 and December 31, 2014, condensed consolidating statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014, and condensed consolidating statements of cash flows for the nine months ended September 30, 2015 and 2014, for Validus Holdings, Ltd. (the “Parent Guarantor”), Validus Holdings (UK) plc (the “Subsidiary Issuer”) and the non-guarantor subsidiaries of Validus Holdings, Ltd. The Subsidiary Issuer is a 100%-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for under the equity method for purposes of the supplemental consolidating presentation and earnings of subsidiaries are reflected in the investment accounts and earnings. The Subsidiary Issuer is only allowed to issue senior notes that are fully and unconditionally guaranteed by the Parent Guarantor.

58
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Balance Sheet As at September 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
28,757

 
$
—

 
$
5,610,299

 
$
(60,200
)
 
$
5,578,856

Short-term investments, at fair value
—

 
—

 
1,661,687

 
—

 
1,661,687

Other investments, at fair value
—

 
—

 
891,238

 
(73,864
)
 
817,374

Cash and cash equivalents
10,789

 
20

 
397,676

 
—

 
408,485

Restricted cash
—

 
—

 
74,002

 
—

 
74,002

Total investments and cash
39,546

 
20

 
8,634,902

 
(134,064
)
 
8,540,404

Investment in affiliates
—

 
—

 
347,962

 
—

 
347,962

Investment in subsidiaries on an equity basis
4,173,423

 
697,014

 
—

 
(4,870,437
)
 
—

Premiums receivable
—

 
—

 
1,062,654

 
—

 
1,062,654

Deferred acquisition costs
—

 
—

 
225,065

 
—

 
225,065

Prepaid reinsurance premiums
—

 
—

 
125,547

 
—

 
125,547

Securities lending collateral
—

 
—

 
6,461

 
—

 
6,461

Loss reserves recoverable
—

 
—

 
385,212

 
—

 
385,212

Paid losses recoverable
—

 
—

 
21,681

 
—

 
21,681

Income taxes recoverable
—

 
—

 
15,870

 
—

 
15,870

Deferred tax asset
—

 
—

 
22,352

 
—

 
22,352

Receivable for investments sold
—

 
—

 
15,055

 
—

 
15,055

Intangible assets
—

 
—

 
122,676

 
—

 
122,676

Goodwill
—

 
—

 
196,758

 
—

 
196,758

Accrued investment income
115

 
—

 
23,640

 
—

 
23,755

Intercompany receivable
45,270

 
—

 
158

 
(45,428
)
 
—

Other assets
3,294

 
—

 
121,217

 
—

 
124,511

Total assets
$
4,261,648

 
$
697,034

 
$
11,327,210

 
$
(5,049,929
)
 
$
11,235,963

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,169,334

 
$
—

 
$
3,169,334

Unearned premiums
—

 
—

 
1,281,319

 
—

 
1,281,319

Reinsurance balances payable
—

 
—

 
90,838

 
—

 
90,838

Securities lending payable
—

 
—

 
6,927

 
—

 
6,927

Deferred tax liability
—

 
—

 
8,921

 
—

 
8,921

Payable for investments purchased
—

 
—

 
118,164

 
—

 
118,164

Accounts payable and accrued expenses
19,701

 
—

 
229,133

 
—

 
248,834

Intercompany payable
—

 
158

 
45,270

 
(45,428
)
 
—

Notes payable to AlphaCat investors
—

 
—

 
1,443,198

 
—

 
1,443,198

Senior notes payable
247,387

 
—

 
—

 
—

 
247,387

Debentures payable
350,000

 
—

 
248,254

 
(60,200
)
 
538,054

Total liabilities
$
617,088

 
$
158

 
$
6,641,358

 
$
(105,628
)
 
$
7,152,976

Total shareholders' equity available to Validus
3,644,560

 
696,876

 
4,247,425

 
(4,944,301
)
 
3,644,560

Noncontrolling interest
—

 
—

 
438,427

 
—

 
438,427

Total liabilities, noncontrolling interests and shareholders' equity
$
4,261,648

 
$
697,034

 
$
11,327,210

 
$
(5,049,929
)
 
$
11,235,963

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

59
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Balance Sheet As at December 31, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Fixed maturities, at fair value
$
—

 
$
—

 
$
5,592,931

 
$
(60,200
)
 
$
5,532,731

Short-term investments, at fair value
—

 
—

 
1,051,074

 
—

 
$
1,051,074

Other investments, at fair value
—

 
—

 
881,123

 
(68,112
)
 
$
813,011

Cash and cash equivalents
29,798

 
81

 
547,361

 
—

 
$
577,240

Restricted cash
—

 
—

 
173,003

 
—

 
173,003

Total investments and cash
29,798

 
81

 
8,245,492

 
(128,312
)
 
8,147,059

Investment in affiliates
—

 
—

 
261,483

 
—

 
261,483

Investment in subsidiaries on an equity basis
4,140,770

 
656,738

 
—

 
(4,797,508
)
 
—

Premiums receivable
—

 
—

 
707,647

 
—

 
707,647

Deferred acquisition costs
—

 
—

 
161,295

 
—

 
161,295

Prepaid reinsurance premiums
—

 
—

 
81,983

 
—

 
81,983

Securities lending collateral
—

 
—

 
470

 
—

 
470

Loss reserves recoverable
—

 
—

 
377,466

 
—

 
377,466

Paid losses recoverable
—

 
—

 
38,078

 
—

 
38,078

Deferred tax asset
—

 
—

 
23,821

 
—

 
23,821

Receivable for investments sold
—

 
—

 
18,318

 
—

 
18,318

Intangible assets
—

 
—

 
126,924

 
—

 
126,924

Goodwill
—

 
—

 
195,897

 
—

 
195,897

Accrued investment income
—

 
—

 
24,865

 
—

 
24,865

Intercompany receivable
41,078

 
—

 
20

 
(41,098
)
 
—

Other assets
3,239

 
—

 
161,394

 
—

 
164,633

Total assets
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

Liabilities
 
 
 
 
 
 
 
 
 
Reserve for losses and loss expenses
$
—

 
$
—

 
$
3,234,394

 
$
—

 
$
3,234,394

Unearned premiums
—

 
—

 
990,564

 
—

 
990,564

Reinsurance balances payable
—

 
—

 
127,128

 
—

 
127,128

Securities lending payable
—

 
—

 
936

 
—

 
936

Deferred tax liability
—

 
—

 
5,541

 
—

 
5,541

Payable for investments purchased
—

 
—

 
68,574

 
—

 
68,574

Accounts payable and accrued expenses
29,621

 
96

 
288,528

 
—

 
318,245

Intercompany payable
—

 
20

 
41,078

 
(41,098
)
 
—

Notes payable to AlphaCat investors
—

 
—

 
671,465

 
—

 
671,465

Senior notes payable
247,306

 
—

 
—

 
—

 
247,306

Debentures payable
350,000

 
—

 
249,477

 
(60,200
)
 
539,277

Total liabilities
$
626,927

 
$
116

 
$
5,677,685

 
$
(101,298
)
 
$
6,203,430

Redeemable noncontrolling interest
—

 
—

 
79,956

 
—

 
79,956

Total shareholders' equity available to Validus
3,587,958

 
656,703

 
4,208,917

 
(4,865,620
)
 
3,587,958

Noncontrolling interest
—

 
—

 
458,595

 
—

 
458,595

Total liabilities, noncontrolling interests and shareholders' equity
$
4,214,885

 
$
656,819

 
$
10,425,153

 
$
(4,966,918
)
 
$
10,329,939

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

60
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Comprehensive Income For the Three Months Ended September 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
555,459

 
$
—

 
$
555,459

Net investment income
86

 
—

 
32,462

 
(1,024
)
 
31,524

Net realized (losses) on investments
—

 
—

 
(41,906
)
 
—

 
(41,906
)
Change in net unrealized gains (losses) on investments
353

 
—

 
(33,491
)
 
(1,770
)
 
(34,908
)
Income from investment affiliate
—

 
—

 
2,482

 
—

 
2,482

Other insurance related income and other (loss)
—

 
—

 
22,319

 
(14,132
)
 
8,187

Foreign exchange gains (losses)
562

 
—

 
(2,836
)
 
—

 
(2,274
)
Total revenues
$
1,001

 
$
—

 
$
534,489

 
$
(16,926
)
 
$
518,564

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
258,258

 
—

 
258,258

Policy acquisition costs
—

 
—

 
105,091

 
—

 
105,091

General and administrative expenses
19,526

 
—

 
90,605

 
(14,132
)
 
95,999

Share compensation expenses
1,834

 
—

 
8,149

 
—

 
9,983

Finance expenses
11,985

 
—

 
6,013

 
(500
)
 
17,498

Total expenses
$
33,345

 
$
—

 
$
468,116

 
$
(14,632
)
 
$
486,829

(Loss) income before taxes, income from operating affiliates, (income) attributable to AlphaCat investors and equity in net earnings (losses) of subsidiaries
(32,344
)
 
—

 
66,373

 
(2,294
)
 
31,735

Tax expense
—

 
—

 
(2,018
)
 
—

 
(2,018
)
Income from operating affiliates
—

 
—

 
5,526

 
—

 
5,526

(Income) attributable to AlphaCat investors
—

 
—

 
(40,256
)
 
—

 
(40,256
)
Equity in net earnings (losses) of subsidiaries
98,994

 
14,139

 
(170,000
)
 
56,867

 
—

Net income (loss)
$
66,650

 
$
14,139

 
$
(140,375
)
 
$
54,573

 
$
(5,013
)
Net loss attributable to noncontrolling interest
—

 
—

 
71,663

 
—

 
71,663

Net income (loss) available (attributable) to Validus
$
66,650

 
$
14,139

 
$
(68,712
)
 
$
54,573

 
$
66,650

Other comprehensive (loss) income
(1,803
)
 
—

 
(1,878
)
 
1,878

 
(1,803
)
Comprehensive income (loss) available (attributable) to Validus
$
64,847

 
$
14,139

 
$
(70,590
)
 
$
56,451

 
$
64,847

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

61
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Comprehensive Income For the Three Months Ended September 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
494,696

 
$
—

 
$
494,696

Net investment income
4

 
—

 
26,238

 
(981
)
 
25,261

Net realized gains on investments
—

 
—

 
4,595

 
—

 
4,595

Change in net unrealized losses on investments
—

 
—

 
(83,499
)
 
(1,475
)
 
(84,974
)
Income from investment affiliate
—

 
—

 
1,754

 
—

 
1,754

Other insurance related income and other (loss)
—

 
—

 
13,161

 
(17,241
)
 
(4,080
)
Foreign exchange gains (losses)
819

 
1

 
(12,261
)
 
—

 
(11,441
)
Total revenues
$
823

 
$
1

 
$
444,684

 
$
(19,697
)
 
$
425,811

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
224,125

 
—

 
224,125

Policy acquisition costs
—

 
—

 
86,404

 
—

 
86,404

General and administrative expenses
22,347

 
—

 
78,213

 
(17,241
)
 
83,319

Share compensation expenses
1,650

 
—

 
7,114

 
—

 
8,764

Finance expenses
11,979

 
—

 
3,864

 
(489
)
 
15,354

Transaction expenses
—

 
—

 
149

 
—

 
149

Total expenses
$
35,976

 
$
—

 
$
399,869

 
$
(17,730
)
 
$
418,115

(Loss) income before taxes, income from operating affiliates, (income) attributable to AlphaCat investors and equity in net earnings (losses) of subsidiaries
(35,153
)
 
1

 
44,815

 
(1,967
)
 
7,696

Tax benefit
—

 
—

 
953

 
—

 
953

Income from operating affiliates
—

 
—

 
3,761

 
—

 
3,761

(Income) attributable to AlphaCat investors
—

 
—

 
(25,807
)
 
—

 
(25,807
)
Equity in net earnings (losses) of subsidiaries
74,825

 
(951
)
 
—

 
(73,874
)
 
—

Net income (loss)
$
39,672

 
$
(950
)
 
$
23,722

 
$
(75,841
)
 
$
(13,397
)
Net loss attributable to noncontrolling interest
—

 
—

 
53,069

 
—

 
53,069

Net income (loss) available (attributable) to Validus
$
39,672

 
$
(950
)
 
$
76,791

 
$
(75,841
)
 
$
39,672

Other comprehensive (loss) income
(5,198
)
 
—

 
(5,198
)
 
5,198

 
(5,198
)
Comprehensive income (loss) available (attributable) to Validus
$
34,474

 
$
(950
)
 
$
71,593

 
$
(70,643
)
 
$
34,474

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

62
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Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Comprehensive Income For the Nine Months Ended September 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
1,706,795

 
$
—

 
$
1,706,795

Net investment income
230

 
—

 
98,967

 
(3,044
)
 
96,153

Net realized (losses) on investments
—

 
—

 
(35,493
)
 
—

 
(35,493
)
Change in net unrealized (losses) gains on investments
(71
)
 
—

 
25,589

 
(5,752
)
 
19,766

Income from investment affiliate
—

 
—

 
5,542

 
—

 
5,542

Other insurance related income and other (loss)
—

 
—

 
61,428

 
(45,869
)
 
15,559

Foreign exchange gains (losses)
325

 
(1
)
 
(9,385
)
 
—

 
(9,061
)
Total revenues
$
484

 
$
(1
)
 
$
1,853,443

 
$
(54,665
)
 
$
1,799,261

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
765,333

 
—

 
765,333

Policy acquisition costs
—

 
—

 
308,152

 
—

 
308,152

General and administrative expenses
55,933

 
2

 
253,924

 
(45,869
)
 
263,990

Share compensation expenses
5,385

 
—

 
22,894

 
—

 
28,279

Finance expenses
35,757

 
—

 
20,799

 
(1,471
)
 
55,085

Total expenses
$
97,075

 
$
2

 
$
1,371,102

 
$
(47,340
)
 
$
1,420,839

(Loss) income before taxes, income from operating affiliates, (income) attributable to AlphaCat investors and equity in net earnings (losses) of subsidiaries
(96,591
)
 
(3
)
 
482,341

 
(7,325
)
 
378,422

Tax expense
—

 
—

 
(7,132
)
 
—

 
(7,132
)
Income from operating affiliates
—

 
—

 
12,083

 
—

 
12,083

(Income) attributable to AlphaCat investors
—

 
—

 
(94,341
)
 
—

 
(94,341
)
Equity in net earnings (losses) of subsidiaries
400,665

 
36,248

 
(170,000
)
 
(266,913
)
 
—

Net income (loss)
$
304,074

 
$
36,245

 
$
222,951

 
$
(274,238
)
 
$
289,032

Net loss attributable to noncontrolling interest
—

 
—

 
15,042

 
—

 
15,042

Net income (loss) available (attributable) to Validus
$
304,074

 
$
36,245

 
$
237,993

 
$
(274,238
)
 
$
304,074

Other comprehensive (loss) income
(2,313
)
 
—

 
(1,977
)
 
1,977

 
(2,313
)
Comprehensive income (loss) available (attributable) to Validus
$
301,761

 
$
36,245

 
$
236,016

 
$
(272,261
)
 
$
301,761

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

63
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Comprehensive Income For the Nine Months Ended September 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
$
—

 
$
—

 
$
1,443,656

 
$
—

 
$
1,443,656

Net investment income
11

 
—

 
72,827

 
(2,929
)
 
69,909

Net realized gains on investments
—

 
—

 
16,193

 
—

 
16,193

Change in net unrealized gains on investments
—

 
—

 
14,261

 
1,885

 
16,146

Income from investment affiliate
—

 
—

 
7,881

 
—

 
7,881

Other insurance related income and other (loss)
—

 
—

 
66,630

 
(51,645
)
 
14,985

Foreign exchange gains (losses)
106

 
1

 
(14,868
)
 
—

 
(14,761
)
Total revenues
$
117

 
$
1

 
$
1,606,580

 
$
(52,689
)
 
$
1,554,009

Expenses
 
 
 
 
 
 
 
 
 
Losses and loss expenses
—

 
—

 
545,541

 
—

 
545,541

Policy acquisition costs
—

 
—

 
251,006

 
—

 
251,006

General and administrative expenses
66,425

 
21

 
216,805

 
(51,645
)
 
231,606

Share compensation expenses
4,769

 
—

 
19,483

 
—

 
24,252

Finance expenses
35,697

 
—

 
13,137

 
(1,454
)
 
47,380

Transaction expenses
—

 
—

 
3,401

 
—

 
3,401

Total expenses
$
106,891

 
$
21

 
$
1,049,373

 
$
(53,099
)
 
$
1,103,186

(Loss) income before taxes, income from operating affiliates, (income) attributable to AlphaCat investors and equity in net earnings (losses) of subsidiaries
(106,774
)
 
(20
)
 
557,207

 
410

 
450,823

Tax expense
—

 
—

 
(398
)
 
—

 
(398
)
Income from operating affiliates
—

 
—

 
13,580

 
—

 
13,580

(Income) attributable to AlphaCat investors
—

 
—

 
(82,833
)
 
—

 
(82,833
)
Equity in net earnings (losses) of subsidiaries
462,201

 
(2,617
)
 
—

 
(459,584
)
 
—

Net income (loss)
$
355,427

 
$
(2,637
)
 
$
487,556

 
$
(459,174
)
 
$
381,172

Net (income) attributable to noncontrolling interest
—

 
—

 
(25,745
)
 
—

 
(25,745
)
Net income (loss) available (attributable) to Validus
$
355,427

 
$
(2,637
)
 
$
461,811

 
$
(459,174
)
 
$
355,427

Other comprehensive (loss) income
(2,121
)
 
—

 
(2,121
)
 
2,121

 
(2,121
)
Comprehensive income (loss) available (attributable) to Validus
$
353,306

 
$
(2,637
)
 
$
459,690

 
$
(457,053
)
 
$
353,306

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

64
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Cash Flows For The Nine Months Ended September 30, 2015
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash (used in) provided by operating activities
$
(21,503
)
 
$
(61
)
 
$
158,442

 
$
(85,000
)
 
$
51,878

Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
2,888,919

 
—

 
2,888,919

Proceeds on maturities of investments
—

 
—

 
260,179

 
—

 
260,179

Purchases of fixed maturities
(28,901
)
 
—

 
(3,135,886
)
 
—

 
(3,164,787
)
Purchases of short-term investments, net
—

 
—

 
(639,211
)
 
—

 
(639,211
)
Purchases of other investments, net
—

 
—

 
(26,648
)
 
—

 
(26,648
)
Increase in securities lending collateral
—

 
—

 
(5,991
)
 
—

 
(5,991
)
Investment in operating affiliates
—

 
—

 
(10,400
)
 
—

 
(10,400
)
Redemption from operating affiliates
—

 
—

 
57,402

 
—

 
57,402

Investment in investment affiliates
—

 
—

 
(19,086
)
 
—

 
(19,086
)
Decrease in restricted cash
—

 
—

 
99,001

 
—

 
99,001

Return of capital from subsidiaries
305,000

 
—

 
—

 
(305,000
)
 
—

Net cash provided by (used in) investing activities
276,099

 
—

 
(531,721
)
 
(305,000
)
 
(560,622
)
Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to AlphaCat investors
—

 
—

 
1,307,789

 
—

 
1,307,789

Repayments on notes payable to AlphaCat investors
—

 
—

 
(709,059
)
 
—

 
(709,059
)
Issuance of common shares, net
16,735

 
—

 
—

 
—

 
16,735

Purchases of common shares under share repurchase program
(203,917
)
 
—

 
—

 
—

 
(203,917
)
Dividends paid
(86,423
)
 
—

 
(85,000
)
 
85,000

 
(86,423
)
Increase in securities lending payable
—

 
—

 
5,991

 
—

 
5,991

Third party investment in redeemable noncontrolling interest
—

 
—

 
55,700

 
—

 
55,700

Third party redemption of redeemable noncontrolling interest
—

 
—

 
(19,395
)
 
—

 
(19,395
)
Return of capital to parent
—

 
—

 
(305,000
)
 
305,000

 
—

Net cash (used in) provided by financing activities
(273,605
)
 
—

 
251,026

 
390,000

 
367,421

Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
(27,432
)
 
—

 
(27,432
)
Net decrease in cash
(19,009
)
 
(61
)
 
(149,685
)
 
—

 
(168,755
)
Cash and cash equivalents, beginning of period
29,798

 
81

 
547,361

 
—

 
577,240

Cash and cash equivalents, end of period
$
10,789

 
$
20

 
$
397,676

 
$
—

 
$
408,485

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.

65
Table of Contents

Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)


Condensed Consolidating Statement of Cash Flows For The Nine Months Ended September 30, 2014
Validus Holdings, Ltd.
(Parent Guarantor)
 
Validus Holdings
(UK) plc
(Subsidiary Issuer)
 
Other
Validus Holdings, Ltd.
Subsidiaries
(Non-guarantor Subsidiaries) (a)
 
Consolidating Adjustments (b)
 
Validus Holdings, Ltd.
Consolidated
Net cash provided by (used in) operating activities
$
12,557

 
$
—

 
$
236,294

 
$
(100,000
)
 
$
148,851

Cash flows provided by (used in) investing activities
 
 
 
 
 
 
 
 
 
Proceeds on sales of investments
—

 
—

 
3,585,728

 
—

 
3,585,728

Proceeds on maturities of investments
—

 
—

 
466,872

 
—

 
466,872

Purchases of fixed maturities
—

 
—

 
(3,160,512
)
 
—

 
(3,160,512
)
Purchases of short-term investments, net
—

 
—

 
(933,148
)
 
—

 
(933,148
)
Purchases of other investments, net
—

 
—

 
(47,752
)
 
—

 
(47,752
)
Increase in securities lending collateral
—

 
—

 
(5,664
)
 
—

 
(5,664
)
Redemption from operating affiliates
—

 
—

 
58,547

 
—

 
58,547

Increase in restricted cash
—

 
—

 
(7,856
)
 
—

 
(7,856
)
Proceeds on sale of subsidiary, net of cash
—

 
—

 
16,459

 
—

 
16,459

Return of capital from subsidiaries
373,966

 
—

 
—

 
(373,966
)
 
—

Net cash provided by (used in) investing activities
373,966

 
—

 
(27,326
)
 
(373,966
)
 
(27,326
)
Cash flows provided by (used in) financing activities
 
 
 
 
 
 
 
 
 
Proceeds on issuance of notes payable to AlphaCat investors
—

 
—

 
645,243

 
—

 
645,243

Repayments on notes payable to AlphaCat investors
—

 
—

 
(602,068
)
 
—

 
(602,068
)
Redemption of common shares, net
(3,689
)
 
—

 
—

 
—

 
(3,689
)
Purchases of common shares under share repurchase program
(286,526
)
 
—

 
—

 
—

 
(286,526
)
Dividends paid
(89,719
)
 
—

 
(100,000
)
 
100,000

 
(89,719
)
Increase in securities lending payable
—

 
—

 
5,664

 
—

 
5,664

Return of capital to parent
—

 
—

 
(373,966
)
 
373,966

 
—

Third party investment in redeemable noncontrolling interest
—

 
—

 
61,200

 
—

 
61,200

Third party redemption of redeemable noncontrolling interest
—

 
—

 
(10,496
)
 
—

 
(10,496
)
Net cash (used in) provided by financing activities
(379,934
)
 
—

 
(374,423
)
 
473,966

 
(280,391
)
Effect of foreign currency rate changes on cash and cash equivalents
—

 
—

 
(11,293
)
 
—

 
(11,293
)
Net increase (decrease) in cash
6,589

 
—

 
(176,748
)
 
—

 
(170,159
)
Cash and cash equivalents, beginning of period
20,385

 
—

 
713,763

 
—

 
734,148

Cash and cash equivalents, end of period
$
26,974

 
$
—

 
$
537,015

 
$
—

 
$
563,989

(a)
Amounts include an aggregation of the non-guarantor subsidiaries and include consolidating adjustments between these subsidiaries.
(b)
Amounts include consolidating adjustments between the Parent Guarantor, the Subsidiary Issuer and the non-guarantor subsidiaries.
19. Subsequent events
Quarterly Dividend
On November 4, 2015, the Company announced a quarterly cash dividend of $0.32 per each common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on December 31, 2015 to holders of record on December 15, 2015.

66

Table of Contents



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's consolidated results of operations for the three and nine months ended September 30, 2015 and 2014 and the Company's consolidated financial condition, liquidity and capital resources as at September 30, 2015 and December 31, 2014. This discussion and analysis should be read in conjunction with the Company's unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company's audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2014, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
For a variety of reasons, the Company's historical financial results may not accurately indicate future performance. See "Cautionary Note Regarding Forward-Looking Statements." The Risk Factors set forth in Part I Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
Executive Overview
The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, AlphaCat, Talbot and Western World. Validus Re is a Bermuda-based reinsurance segment focused on short-tail lines of reinsurance. AlphaCat is a Bermuda-based investment adviser, managing capital from third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. Talbot is a specialty insurance segment, primarily operating within the Lloyd's insurance market through Syndicate 1183. Western World is a U.S. based specialty excess and surplus lines insurance segment operating within the U.S. commercial market.
The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
On October 2, 2014, the Company acquired all of the outstanding shares of Western World. The acquisition provided the Company with enhanced access to the specialty U.S. commercial insurance market, the world's largest short-tail market, complementing the Company's existing market positions in both Bermuda reinsurance and the Lloyd's marketplace and increasing the Company's ability to leverage operational strengths in short-tail classes of business. In addition, the acquisition improves the Company's ability to manage (re)insurance cycles.
On December 29, 2014, the Company joined with other investors in capitalizing AlphaCat 2015, a special purpose vehicle formed for the purpose of investing in collateralized reinsurance and retrocessional contracts. The Company has an equity interest and voting rights in AlphaCat 2015 which are below 50%, therefore the investment in AlphaCat 2015 is included as an equity method investment in the Consolidated Financial Statements of the Company.

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Business Outlook and Trends
We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. accounting principles do not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. At the same time, management believes that there is a heightened awareness of exposure to natural catastrophes on the part of cedants, rating agencies and catastrophe modeling firms, resulting in an increase in the demand for reinsurance protection. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates on most lines. During 2010 and 2011, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, Tohoku and New Zealand earthquake events, but the Company continues to see increased competition and decreased premium rates in most classes of business.
During the January 2014 renewal season, the Validus Re and AlphaCat segments underwrote $575.2 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 3.2% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. property catastrophe business, which experienced a reduction in rates of approximately 12.5%. During the mid-year 2014 renewal period, the Validus Re segment experienced rate softening across U.S. and international property lines. In particular, although limits placed from the Florida market increased, the availability of capacity resulted in overall pricing reductions for Florida property catastrophe business. The Talbot segment experienced a whole account rate decrease of 3.8% through December 31, 2014.
During the January 2015 renewal season, the Validus Re and AlphaCat segments underwrote $540.9 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), a decrease of 6.0% from the prior period. This decrease was primarily driven by a challenging rate environment in the Company's U.S. and European property catastrophe business, which experienced a reduction in rates of approximately 10-15%. During the mid-year 2015 renewal period, the Validus Re segment experienced a meaningful increase in demand for U.S. wind capacity which resulted in the moderation of U.S. property market rate declines to mid-single digits. However, the rate environment in the international property market proved to be more challenging with rate declines closer to 10%. The Talbot segment experienced a whole account rate decrease of approximately 6.4% driven primarily by rate decreases from the high-single digits to the mid-teens in the energy, aviation and property classes. The Western World segment experienced a whole account rate increase of approximately 3.5% through September 30, 2015.
Financial Measures
The Company believes that the primary financial indicator for evaluating performance and measuring the overall growth in value generated for shareholders is book value per diluted common share. Book value per diluted common share plus accumulated dividends, together with other important financial indicators, is shown below:
 
As at, or for the
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Year Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
2014
Book value per diluted common share plus accumulated dividends
$51.73
 
$47.28
 
$51.73
 
$47.28
 
$48.54
Book value per diluted common share
41.89
 
38.70
 
41.89
 
38.70
 
39.66
Underwriting income
86,128
 
92,084
 
341,041
 
391,251
 
526,934
Net operating income available to Validus
73,626
 
84,946
 
304,809
 
357,427
 
486,464
Annualized return on average equity
7.3%
 
4.2%
 
11.1%
 
12.8%
 
13.1%
Book value per diluted common share plus accumulated dividends is considered by management to be the primary indicator of financial performance, as we believe growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends increased by $3.19, or 6.6%, from $48.54 at December 31, 2014 to $51.73 at September 30, 2015. Cash dividends per common share are an

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integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.32 per common share and common share equivalent during the three and nine months ended September 30, 2015. On November 4, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, payable on December 31, 2015 to holders of record on December 15, 2015. Book value per diluted common share plus accumulated dividends is calculated based on total shareholders’ equity available to Validus plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise), plus accumulated dividends. Book value per diluted common share plus accumulated dividends is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Book value per diluted common share is considered by management to be a measure of returns to common shareholders, as we believe growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid, increased by $2.23, or 5.6%, from $39.66 at December 31, 2014 to $41.89 at September 30, 2015. Growth in book value per diluted common share inclusive of dividends was 1.9% and 1.2% for the three months ended September 30, 2015 and 2014, respectively, and for the nine months ended September 30, 2015 and 2014 was 8.0% and 9.3%, respectively. Book value per diluted common share is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income, other insurance related income, finance expenses, tax (expense) benefit, income from operating affiliates, (income) attributable to AlphaCat investors, net realized and change in net unrealized gains (losses) on investments, income from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and net (income) loss attributable to noncontrolling interest. The Company believes the reporting of underwriting income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the three months ended September 30, 2015 and 2014 was $86.1 million and $92.1 million, respectively, a decrease of $6.0 million or 6.5%. Underwriting income for the nine months ended September 30, 2015 and 2014 was $341.0 million and $391.3 million, respectively, a decrease of $50.2 million or 12.8%. Underwriting income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures."
Net operating income available to Validus is defined as net income excluding net realized and change in net unrealized gains (losses) on investments, income from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and net (income) loss attributable to noncontrolling interest. This measure focuses on the underlying fundamentals of the Company's operations without the influence of gains (losses) from the sale of investments, translation of non-U.S. dollar currencies and non-recurring items. Net operating income available to Validus for the three months ended September 30, 2015 and 2014 was $73.6 million and $84.9 million, respectively, and for the nine months ended September 30, 2015 and 2014 was $304.8 million and $357.4 million, respectively. Net operating income is a non-GAAP financial measure, as described in more detail in the section entitled “Non-GAAP Financial Measures.”
Annualized return on average equity represents the return generated on common shareholders’ capital during the period. Return on average equity is calculated by dividing the net income available to Validus for the period by the average shareholders’ equity available to Validus during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. The Company’s objective is to generate superior returns on capital that appropriately rewards shareholders for the risks assumed. The annualized return on average equity for the three months ended September 30, 2015 and 2014 was 7.3% and 4.2%, respectively, and for the nine months ended September 30, 2015 and 2014 was 11.1% and 12.8%, respectively.

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Third Quarter 2015 Summarized Consolidated Results of Operations
•
Gross premiums written for the three months ended September 30, 2015 were $401.7 million compared to $359.0 million for the three months ended September 30, 2014, an increase of $42.7 million, or 11.9%.
•
Net premiums earned for the three months ended September 30, 2015 were $555.5 million compared to $494.7 million for the three months ended September 30, 2014, an increase of $60.8 million, or 12.3%.
•
Underwriting income for the three months ended September 30, 2015 was $86.1 million compared to $92.1 million for the three months ended September 30, 2014, a decrease of $6.0 million, or 6.5%.
•
Combined ratio for the three months ended September 30, 2015 of 84.5% which included $91.5 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 16.5 percentage points compared to a combined ratio for the three months ended September 30, 2014 of 81.4% which included $55.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.2 percentage points. The favorable development of $91.5 million for the three months ended September 30, 2015 was primarily from non-event reserves in the amount of $60.8 million. Favorable development on prior years from event specific reserves was $30.7 million.
•
Loss ratio for the three months ended September 30, 2015 was 46.5% compared to 45.3% for the three months ended September 30, 2014, an increase of 1.2 percentage points. Incurred losses for the three months ended September 30, 2015 were $258.3 million, compared to $224.1 million for the three months ended September 30, 2014, an increase of $34.1 million or 15.2%.
•
Loss ratios by line of business are as follows:
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Property (a)
35.4
%
 
19.0
%
 
16.4

Marine
53.8
%
 
36.2
%
 
17.6

Specialty
49.7
%
 
86.8
%
 
(37.1
)
Liability (a)
66.6
%
 
0.0
%
 
66.6

All lines
46.5
%
 
45.3
%
 
1.2

(a)    The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.
•
Losses and loss expenses from notable loss events, including development on these events, for the three months ended September 30, 2015 were $49.0 million compared to $28.1 million for the three months ended September 30, 2014. Notable loss events are defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $30.0 million. The notable loss event for the three months ended September 30, 2015 was the August 12th port explosion in Tianjin, China which resulted in an estimated loss to the Company of $47.8 million or 8.6 percentage points of the loss ratio. Net of $3.9 million of reinstatement premiums, the net loss was $43.9 million. During the three months ended September 30, 2014, the Company incurred a loss of $28.1 million or 5.7 percentage points of the loss ratio, related to Tripoli airport which subsequently developed into a notable loss event during the three months ended December 31, 2014.
•
Losses and loss expenses from non-notable loss events, including development on these events, for the three months ended September 30, 2015 were $22.2 million compared to $3.2 million for the three months ended September 30, 2014. Non-notable loss events are defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million. The non-notable loss event for the three months ended September 30, 2015 was the Chilean earthquake, which resulted in an estimated loss to the Company of $22.2 million or 4.0 percentage points of the loss ratio. Net of $2.2 million of reinstatement premiums, the net loss was $20.0 million.
•
Net investment income for the three months ended September 30, 2015 was $31.5 million compared to $25.3 million for the three months ended September 30, 2014, an increase of $6.3 million, or 24.8%.
•
Investment yield for the three months ended September 30, 2015 was 1.92% compared to 1.53% for the three months ended September 30, 2014.
•
Net operating income available to Validus for the three months ended September 30, 2015 was $73.6 million compared to $84.9 million for the three months ended September 30, 2014, a decrease of $11.3 million, or 13.3%.
•
Net income available to Validus for the three months ended September 30, 2015 was $66.7 million, or $0.78 per diluted common share compared to $39.7 million or $0.41 per diluted common share for the three months ended September 30, 2014.
•
Annualized return on average equity and annualized net operating return on average equity for the three months ended September 30, 2015 were 7.3% and 8.1%, respectively, compared to 4.2% and 9.1% for the three months ended September 30, 2014.

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Overview of the Results of Operations for the Three Months Ended September 30, 2015 compared to the Three Months Ended September 30, 2014.
The change in net operating income available to Validus for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus
over the three months ended September 30,
 
 
2015 compared to 2014
(Dollars in thousands)
 
Validus Holdings, Ltd. Consolidated
Western World Segment
Validus Holdings, Ltd. Consolidated excluding the Western World Segment
Net premiums earned
 
$
60,763

$
63,930

$
(3,167
)
Notable loss events (a)
 
(20,842
)
—

(20,842
)
Non-notable loss events (b)
 
(18,999
)
—

(18,999
)
Incurred current year losses, excluding notable and non-notable loss events
 
(30,228
)
(45,864
)
15,636

Prior period loss development
 
35,936

5,054

30,882

Other underwriting deductions (c)
 
(32,586
)
(23,355
)
(9,231
)
Underwriting income (d)
 
(5,956
)
(235
)
(5,721
)
(Income) attributable to AlphaCat investors
 
(14,449
)
—

(14,449
)
Other operating expenses and income, net (e)
 
9,460

3,451

6,009

Net operating income (d)
 
(10,945
)
3,216

(14,161
)
Net operating (income) attributable to noncontrolling interest
 
(375
)
—

(375
)
Net operating income available to Validus (d)
 
$
(11,320
)
$
3,216

$
(14,536
)
(a)
Losses and loss expenses from notable loss events for the three months ended September 30, 2015 were $49.0 million compared to $28.1 million for the three months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended September 30, 2015 were $22.2 million compared to $3.2 million for the three months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(e)
Other operating expenses and income, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Net operating income available to Validus for the three months ended September 30, 2015 was $73.6 million compared to $84.9 million for the three months ended September 30, 2014, a decrease of $11.3 million or 13.3%.
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition. As a result, there are no comparatives for the third quarter of 2014. Net operating income available to Validus excluding the Western World segment for the three months ended September 30, 2015 was $70.4 million compared to $84.9 million for the three months ended September 30, 2014, a decrease of $14.5 million or 17.1%.
The primary factors driving the decrease in net operating income available to Validus excluding the Western World segment were:
•
An increase in (income) attributable to AlphaCat investors of $14.4 million; and
•
An increase in other underwriting deductions of $9.2 million; offset by,
•
A decrease in losses and loss expenses of $6.7 million, comprised of:
◦
an increase in favorable prior period development of $30.9 million: and
◦
a decrease in incurred current year losses, excluding notable and non-notable losses of $15.6 million; offset by,
◦
an increase in losses and loss expenses from notable and non-notable loss events of $20.8 million and $19.0 million, respectively.

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Segment Reporting
Management has determined that the Company operates in four reportable segments Validus Re, AlphaCat, Talbot and Western World.
Third Quarter 2015 Results of Operations - Validus Re Segment
The following table presents results of operations for the three months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
102,913

 
$
114,380

 
$
(11,467
)
Reinsurance premiums ceded
 
(15,462
)
 
(10,382
)
 
(5,080
)
Net premiums written
 
87,451

 
103,998

 
(16,547
)
Change in unearned premiums
 
153,210

 
122,712

 
30,498

Net premiums earned
 
240,661

 
226,710

 
13,951

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
120,958

 
102,005

 
18,953

Policy acquisition costs
 
42,989

 
36,177

 
6,812

General and administrative expenses
 
19,964

 
18,522

 
1,442

Share compensation expenses
 
2,691

 
2,582

 
109

Total underwriting deductions
 
186,602

 
159,286

 
27,316

 
 
 
 
 
 
 
Underwriting income (a)
 
54,059

 
67,424

 
(13,365
)
 
 
 
 
 
 
 
Net investment income
 
18,362

 
20,270

 
(1,908
)
Other insurance related income
 
2,569

 
863

 
1,706

Finance expenses
 
(3,624
)
 
(3,622
)
 
(2
)
 
 
 
 
 
 
 
Operating income before taxes
 
71,366

 
84,935

 
(13,569
)
Tax benefit
 
851

 
1,058

 
(207
)
Net operating income (a)
 
$
72,217

 
$
85,993

 
$
(13,776
)
 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
85.0
%
 
90.9
%
 
(5.9
)
 
 
 
 
 
 
 
Losses and loss expenses
 
50.3
%
 
45.0
%
 
5.3

 
 
 
 
 
 
 
Policy acquisition costs
 
17.9
%
 
16.0
%
 
1.9

General and administrative expenses (b)
 
9.4
%
 
9.3
%
 
0.1

Expense ratio
 
27.3
%
 
25.3
%
 
2.0

Combined ratio
 
77.6
%
 
70.3
%
 
7.3

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
13,951

Notable loss events (a)
 
(21,334
)
Non-notable loss events (b)
 
(14,324
)
Incurred current year losses, excluding notable and non-notable loss events
 
(13,630
)
Prior period loss development
 
30,335

Other underwriting deductions (c)
 
(8,363
)
Underwriting income (d)
 
(13,365
)
Other operating income and expenses, net (e)
 
(411
)
Net operating income (d)
 
$
(13,776
)
(a)
Losses and loss expenses from notable loss events for the three months ended September 30, 2015 were $37.0 million compared to $15.7 million for the three months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended September 30, 2015 were $17.5 million compared to $3.2 million for the three months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written

 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
65,010

 
63.2
%
 
$
70,078

 
61.2
%
 
$
(5,068
)
 
2.0

Marine
 
13,406

 
13.0
%
 
22,960

 
20.1
%
 
(9,554
)
 
(7.1
)
Specialty
 
24,497

 
23.8
%
 
21,342

 
18.7
%
 
3,155

 
5.1

Total
 
$
102,913

 
100.0
%
 
$
114,380

 
100.0
%
 
$
(11,467
)
 
0.0


The decrease in gross premiums written in the property lines of $5.1 million was primarily due to reduced property catastrophe excess of loss business of $6.7 million, driven by adjustments to premiums on existing business as well as non-renewals of various programs during the current quarter. The decrease in gross premiums written in the marine lines of $9.6 million was primarily due to the reduction in proportional business following the renewal of a significant program in the first quarter of 2015 compared to the third quarter of 2014.

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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
5,730

 
$
2,988

 
$
2,742

Marine
 
10,431

 
7,070

 
3,361

Specialty
 
(699
)
 
324

 
(1,023
)
Total
 
$
15,462

 
$
10,382

 
$
5,080

Reinsurance premiums ceded in the property lines increased by $2.7 million primarily as a result of a new multi-pillared aggregate excess of loss cover purchased during the current quarter. The increase in reinsurance premiums ceded in the marine lines of $3.4 million was primarily due to the reclassification of composite business previously reported in the specialty lines.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
59,280

 
91.2
%
 
$
67,090

 
95.7
%
 
$
(7,810
)
 
(4.5
)
Marine
 
2,975

 
22.2
%
 
15,890

 
69.2
%
 
(12,915
)
 
(47.0
)
Specialty
 
25,196

 
102.9
%
 
21,018

 
98.5
%
 
4,178

 
4.4

Total
 
$
87,451

 
85.0
%
 
$
103,998

 
90.9
%
 
$
(16,547
)
 
(5.9
)
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
106,086

 
$
114,414

 
$
(8,328
)
Marine
 
30,592

 
35,826

 
(5,234
)
Specialty
 
103,983

 
76,470

 
27,513

Total
 
$
240,661

 
$
226,710

 
$
13,951

The decrease in property lines net premiums earned of $8.3 million was as a result of lower gross premiums written during the year. This was offset by the earned impact of the reduction in the reinsurance premiums ceded. The decrease in marine lines net premiums earned of $5.2 million was due to lower gross premiums written during the year, offset by the earned impact of the reduction in the reinsurance premiums ceded. The increase in specialty lines net premiums earned of $27.5 million was primarily due to the increase in gross premiums written in the first quarter of 2015.

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Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
All lines—current period excluding items below
48.6
 %
 
45.6
 %
 
3.0

All lines—current period—notable loss events
15.4
 %
 
6.9
 %
 
8.5

All lines—current period—non-notable loss events
7.3
 %
 
1.4
 %
 
5.9

All lines—change in prior accident years
(21.0
)%
 
(8.9
)%
 
(12.1
)
All lines—loss ratio
50.3
 %
 
45.0
 %
 
5.3

 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
116,940

 
$
103,310

 
$
13,630

All lines—current period—notable loss events
 
36,993

 
15,659

 
21,334

All lines—current period—non-notable loss events
 
17,500

 
3,176

 
14,324

All lines—change in prior accident years
 
(50,475
)
 
(20,140
)
 
(30,335
)
All lines—losses and loss expenses
 
$
120,958

 
$
102,005

 
$
18,953

Notable Loss Events
Losses and loss expenses from notable loss events were $37.0 million for the three months ended September 30, 2015, which represented 15.4 percentage points of the loss ratio. Losses and loss expenses from Tianjin, a current quarter notable loss event, were $35.8 million. Net of $3.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $32.7 million. Losses and loss expenses from Pemex, a second quarter notable loss event, were $1.2 million for the three months ended September 30, 2015. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $15.7 million for the three months ended September 30, 2014, which represented 6.9 percentage points of the loss ratio. Net of $2.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $13.5 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended September 30, 2015 were $17.5 million, compared to $3.2 million for the three months ended September 30, 2014. The non-notable loss event for the three months ended September 30, 2015 was the Chilean earthquake.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
22.9
 %
 
23.4
 %
 
(0.5
)
Property—current period—notable loss events
22.0
 %
 
0.0
 %
 
22.0

Property—current period—non-notable loss events
16.4
 %
 
2.8
 %
 
13.6

Property—change in prior accident years
(26.0)
 %
 
(14.3)
 %
 
(11.7
)
Property—loss ratio
35.3
 %
 
11.9
 %
 
23.4


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Losses and Loss Expenses - Property Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
24,398

 
$
26,758

 
$
(2,360
)
Property—current period—notable loss events
 
23,298

 
—

 
23,298

Property—current period—non-notable loss events
 
17,384

 
3,176

 
14,208

Property—change in prior accident years
 
(27,613
)
 
(16,384
)
 
(11,229
)
Property—losses and loss expenses
 
$
37,467

 
$
13,550

 
$
23,917

During the three months ended September 30, 2015, the property lines incurred $23.3 million of losses and loss expenses from Tianjin, a notable loss event, which represented 22.0 percentage points of the property lines loss ratio. Net of $1.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $21.5 million. The property lines incurred no losses and loss expenses from notable loss events during the three months ended September 30, 2014.
During the three months ended September 30, 2015, the property lines incurred $17.4 million of losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 16.4 percentage points of the property lines loss ratio. During the three months ended September 30, 2014, the property lines incurred $3.2 million of losses and loss expenses from non-notable loss events, which represented 2.8 percentage points of the property lines loss ratio.
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 0.5 percentage points, representing a decreased level of attritional losses in the current quarter. The favorable development on prior accident years for the three months ended September 30, 2015 of $27.6 million, included favorable development on prior years from event specific reserves of $6.0 million on Hurricane Ike, $5.0 million on Superstorm Sandy and $4.9 million on the 2010 Chilean earthquake. The remainder was primarily due to favorable development on attritional losses. The favorable development on prior accident years for the three months ended September 30, 2014 of $16.4 million was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Marine Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Marine—current period excluding items below
51.5
 %
 
48.1
 %
 
3.4

Marine—current period—notable loss events
44.8
 %
 
1.1
 %
 
43.7

Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Marine—change in prior accident years
(44.3
)%
 
(7.9
)%
 
(36.4
)
Marine—loss ratio
52.0
 %
 
41.3
 %
 
10.7

 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
15,768

 
$
17,237

 
$
(1,469
)
Marine—current period—notable loss events
 
13,695

 
400

 
13,295

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(13,556
)
 
(2,843
)
 
(10,713
)
Marine—losses and loss expenses
 
$
15,907

 
$
14,794

 
$
1,113

During the three months ended September 30, 2015, the marine lines incurred $12.5 million of losses and loss expenses from Tianjin, a notable loss event, which represented 40.9 percentage points of the marine lines loss ratio. Net of $1.3 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.2 million. In addition, losses and loss expenses from Pemex, a second quarter notable loss event, were $1.2 million for the three months ended September 30, 2015.

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The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 3.4 percentage points representing an increased level of attritional losses in the current quarter. The favorable development of $13.6 million on prior accident years for the three months ended September 30, 2015 included favorable development on prior years from event specific reserves of $7.0 million on Superstorm Sandy. The remainder was primarily due to favorable development on attritional losses. The favorable development of $2.8 million on prior accident years for the three months ended September 30, 2014 was primarily due to lower favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Specialty—current period excluding items below
73.8
 %
 
77.5
 %
 
(3.7
)
Specialty—current period—notable loss events
0.0
 %
 
20.0
 %
 
(20.0
)
Specialty—current period—non-notable loss events
0.1
 %
 
0.0
 %
 
0.1

Specialty—change in prior accident years
(8.9
)%
 
(1.2
)%
 
(7.7
)
Specialty—loss ratio
65.0
 %
 
96.3
 %
 
(31.3
)
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
76,774

 
$
59,315

 
$
17,459

Specialty—current period—notable loss events
 
—

 
15,259

 
(15,259
)
Specialty—current period—non-notable loss events
 
116

 
—

 
116

Specialty—change in prior accident years
 
(9,306
)
 
(913
)
 
(8,393
)
Specialty—losses and loss expenses
 
$
67,584

 
$
73,661

 
$
(6,077
)
During the three months ended September 30, 2015, the specialty lines incurred no losses and loss expenses from notable loss events. During the three months ended September 30, 2014, the specialty lines incurred $15.3 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 20.0 percentage points of the specialty lines loss ratio. Net of $2.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $13.1 million.
The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 3.7 percentage points, representing a lower level of attritional losses in the current quarter. The favorable loss reserve development on prior accident years for the three months ended September 30, 2015 and 2014 of $9.3 million and $0.9 million, respectively, was due primarily to favorable development on attritional losses.
Policy Acquisition Costs
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
21,378

 
20.2
%
 
$
19,868

 
17.4
%
 
$
1,510

 
2.8

Marine
 
7,652

 
25.0
%
 
5,966

 
16.7
%
 
1,686

 
8.3

Specialty
 
13,959

 
13.4
%
 
10,343

 
13.5
%
 
3,616

 
(0.1
)
Total
 
$
42,989

 
17.9
%
 
$
36,177

 
16.0
%
 
$
6,812

 
1.9

The acquisition cost ratio for the property lines increased by 2.8 percentage points primarily due to the impact of adjustments to run-off business and profit commissions. The acquisition cost ratio for the marine lines increased by 8.3 percentage points due to the impact of retrocession business which carries lower costs along with adjustments to existing business.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
19,964

 
8.3
%
 
$
18,522

 
8.2
%
 
$
1,442

 
0.1
Share compensation expenses
 
2,691

 
1.1
%
 
2,582

 
1.1
%
 
109

 
—
Total
 
$
22,655

 
9.4
%
 
$
21,104

 
9.3
%
 
$
1,551

 
0.1
General and administrative and share compensation expenses were comparable for the three months ended September 30, 2015 and 2014.
Selected Underwriting Ratios
The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expense ratio and the expense ratio. The losses and loss expense ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended September 30, 2015 and 2014.
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
50.3
%
 
45.0
%
 
5.3
Policy acquisition cost ratio
17.9
%
 
16.0
%
 
1.9
General and administrative expense ratio (a)
9.4
%
 
9.3
%
 
0.1
Expense ratio
27.3
%
 
25.3
%
 
2.0
Combined ratio
77.6
%
 
70.3
%
 
7.3
(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the three months ended September 30, 2015 of 7.3 percentage points compared to the three months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
15,579

 
$
17,538

 
$
(1,959
)
Other investments
 
4,082

 
2,879

 
1,203

Restricted cash and cash and cash equivalents
 
(60
)
 
1,202

 
(1,262
)
Securities lending income
 
4

 
1

 
3

Total gross investment income
 
19,605

 
21,620

 
(2,015
)
Investment expenses
 
(1,243
)
 
(1,350
)
 
107

Total net investment income
 
$
18,362

 
$
20,270

 
$
(1,908
)
The decrease in net investment income for the three months ended September 30, 2015 was $1.9 million or 9.4% primarily due to a reduction in yield on certain debt funds held. Net investment income from other investments includes distributed and undistributed net income from certain investments.

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Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
2,569

 
$
863

 
$
1,706

Other insurance related income for the three months ended September 30, 2015 includes a recoverable for federal excise taxes of $2.3 million.
Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
3,624

 
$
3,622

 
$
2

Finance expenses for the three months ended September 30, 2015 and 2014 were comparable.

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Third Quarter 2015 Results of Operations - AlphaCat Segment
The following table presents results of operations for the three months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
9,448

 
$
6,936

 
$
2,512

Reinsurance premiums ceded
 
—

 
(648
)
 
648

Net premiums written
 
9,448

 
6,288

 
3,160

Change in unearned premiums
 
35,276

 
28,850

 
6,426

Net premiums earned
 
44,724

 
35,138

 
9,586

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
2,076

 
3,738

 
(1,662
)
Policy acquisition costs
 
4,658

 
3,378

 
1,280

General and administrative expenses
 
4,674

 
7,719

 
(3,045
)
Share compensation expenses
 
141

 
179

 
(38
)
Total underwriting deductions
 
11,549

 
15,014

 
(3,465
)
 
 
 
 
 
 
 
Underwriting income (a)
 
33,175

 
20,124

 
13,051

 
 
 
 
 
 
 
Net investment income
 
1,533

 
837

 
696

Other insurance related income
 
7,522

 
5,980

 
1,542

Finance expenses
 
(2,355
)
 
(385
)
 
(1,970
)
 
 
 
 
 
 
 
Operating income before income from operating affiliates and (income) attributable to AlphaCat investors
 
39,875

 
26,556

 
13,319

Income from operating affiliates
 
5,526

 
3,761

 
1,765

(Income) attributable to AlphaCat investors
 
(40,256
)
 
(25,807
)
 
(14,449
)
Net operating income (a)
 
5,145

 
4,510

 
635

Net operating loss attributable to noncontrolling interest
 
63

 
438

 
(375
)
Net operating income available to Validus (a)
 
$
5,208

 
$
4,948

 
$
260

 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
100.0
%
 
90.7
%
 
9.3

 
 
 
 
 
 
 
Losses and loss expenses
 
4.6
%
 
10.6
%
 
(6.0
)
 
 
 
 
 
 
 
Policy acquisition costs
 
10.4
%
 
9.6
%
 
0.8

General and administrative expenses (b)
 
10.8
%
 
22.5
%
 
(11.7
)
Expense ratio
 
21.2
%
 
32.1
%
 
(10.9
)
Combined ratio
 
25.8
%
 
42.7
%
 
(16.9
)
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income available to Validus for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus
over the three months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
9,586

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
1,662

Prior period loss development
 
—

Other underwriting deductions (b)
 
1,803

Underwriting income (c)
 
13,051

(Income) attributable to AlphaCat investors
 
(14,449
)
Other operating income and expenses, net (d)
 
2,033

Net operating income (c)
 
635

Net operating (income) attributable to noncontrolling interest
 
(375
)
Net operating income available to Validus (c)
 
$
260

(a)
There were no losses and loss expenses from notable or non-notable loss events for either of the three months ended September 30, 2015 and 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses, and income from operating affiliates.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
9,448

 
$
6,936

 
$
2,512

The increase in gross premiums written in the property lines was primarily due to an increase in assets under management.
Reinsurance Premiums Ceded
Reinsurance premiums ceded for the three months ended September 30, 2015 were $nil compared to $0.6 million for the three months ended September 30, 2014.
Net Premiums Written
 
 
Net Premiums Written
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
9,448

 
$
6,288

 
$
3,160

The increase in net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 100.0% and 90.7% for the three months ended September 30, 2015 and 2014, respectively.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
44,724

 
$
35,138

 
$
9,586

The increase in net premiums earned in the property lines was primarily due to the increase in gross premiums written.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - Property Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
4.6
%
 
10.6
%
 
(6.0
)
Property—current period—notable loss events
0.0
%
 
0.0
%
 
0.0

Property—current period—non-notable loss events
0.0
%
 
0.0
%
 
0.0

Property—change in prior accident years
0.0
%
 
0.0
%
 
0.0

Property—loss ratio
4.6
%
 
10.6
%
 
(6.0
)
 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
2,076

 
$
3,738

 
$
(1,662
)
Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
—

 
—

 
—

Property—losses and loss expenses
 
$
2,076

 
$
3,738

 
$
(1,662
)
The property lines current quarter loss ratio decreased by 6.0 percentage points, representing a decreased level of attritional losses in the current quarter.
Notable and Non-notable Loss Events
There were no losses and loss expenses from notable or non-notable loss events for either of the three months ended September 30, 2015 and 2014.

Policy Acquisition Costs
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
4,658

 
10.4
%
 
$
3,378

 
9.6
%
 
$
1,280

 
0.8
The policy acquisition cost ratios for the three months ended September 30, 2015 and 2014 were comparable.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
4,674

 
10.5
%
 
$
7,719

 
22.0
%
 
$
(3,045
)
 
(11.5
)
Share compensation expenses
 
141

 
0.3
%
 
179

 
0.5
%
 
(38
)
 
(0.2
)
Total
 
$
4,815

 
10.8
%
 
$
7,898

 
22.5
%
 
$
(3,083
)
 
(11.7
)
The decrease in general and administrative expenses of $3.0 million or 39.4% was primarily due to the deconsolidation of one of the AlphaCat ILS funds on June 1, 2015 and a decrease in professional fees relating to PaCRe. The share compensation expenses for the three months ended September 30, 2015 and 2014 were comparable.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended September 30, 2015 and 2014.
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
4.6
%
 
10.6
%
 
(6.0
)
Policy acquisition cost ratio
10.4
%
 
9.6
%
 
0.8

General and administrative expense ratio (a)
10.8
%
 
22.5
%
 
(11.7
)
Expense ratio
21.2
%
 
32.1
%
 
(10.9
)
Combined ratio
25.8
%
 
42.7
%
 
(16.9
)
(a)
The general and administrative expense ratio includes share compensation expenses.
The decrease in the combined ratio for the three months ended September 30, 2015 of 16.9 percentage points compared to the three months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
1,496

 
$
818

 
$
678

Restricted cash and cash and cash equivalents
 
37

 
19

 
18

Total net investment income
 
$
1,533

 
$
837

 
$
696

The increase in net investment income of $0.7 million for the three months ended September 30, 2015 compared to 2014 was primarily due to an increase in the size of the catastrophe bond portfolio.

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Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
7,522

 
$
5,980

 
$
1,542

Other insurance related income for the AlphaCat segment primarily includes third party and related party management and performance fee income. The increase in other insurance related income of $1.5 million, or 25.8%, was primarily due to an increase in assets under management.
Finance Expenses
 
 
Finance Expenses
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
2,355

 
$
385

 
$
1,970

The increase in finance expenses of $2.0 million was due to fees incurred in relation to raising new capital.
Income From Operating Affiliates
 
 
Income from Operating Affiliates
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
AlphaCat Re 2011
 
$
396

 
$
(5
)
 
$
401

AlphaCat Re 2012
 
(8
)
 
(9
)
 
1

AlphaCat 2013
 
(8
)
 
7

 
(15
)
AlphaCat 2014
 
(12
)
 
1,367

 
(1,379
)
AlphaCat 2015
 
1,077

 
—

 
1,077

AlphaCat ILS funds
 
4,081

 
2,401

 
1,680

Total
 
$
5,526

 
$
3,761

 
$
1,765

For details of voting and equity ownership interests of the above entities, refer to Note 5 to the Consolidated Financial Statements in Part I. The increase in income from operating affiliates of $1.8 million for the three months ended September 30, 2015 was primarily due to the increase in income from the AlphaCat ILS funds due to the deconsolidation of one of the funds on June 1, 2015.
(Income) Attributable To AlphaCat Investors
 
 
(Income) Attributable to AlphaCat Investors
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
(Income) attributable to AlphaCat investors
 
$
(40,256
)
 
$
(25,807
)
 
$
(14,449
)
The increase in (income) attributable to AlphaCat investors of $14.4 million for the three months ended September 30, 2015, was due primarily to the deconsolidation of one of the AlphaCat ILS funds on June 1, 2015 and the increase in assets under management compared to the prior year quarter.

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Net Operating Loss Attributable to Noncontrolling Interest
 
 
Net Operating Loss Attributable to Noncontrolling Interest
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net operating loss attributable to noncontrolling interest
 
$
63

 
$
438

 
$
(375
)
For the three months ended September 30, 2015, net operating loss attributable to noncontrolling interest was $0.1 million, which was comprised of 90% of the net operating income in PaCRe for the quarter.

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Third Quarter 2015 Results of Operations - Talbot Segment
The following table presents results of operations for the three months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
226,025

 
$
245,685

 
$
(19,660
)
Reinsurance premiums ceded
 
(35,823
)
 
(27,134
)
 
(8,689
)
Net premiums written
 
190,202

 
218,551

 
(28,349
)
Change in unearned premiums
 
15,942

 
14,297

 
1,645

Net premiums earned
 
206,144

 
232,848

 
(26,704
)
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
94,414

 
118,382

 
(23,968
)
Policy acquisition costs
 
44,575

 
47,862

 
(3,287
)
General and administrative expenses
 
43,292

 
37,709

 
5,583

Share compensation expenses
 
3,214

 
2,990

 
224

Total underwriting deductions
 
185,495

 
206,943

 
(21,448
)
 
 
 
 
 
 
 
Underwriting income (a)
 
20,649

 
25,905

 
(5,256
)
 
 
 
 
 
 
 
Net investment income
 
6,457

 
4,965

 
1,492

Other insurance related income
 
470

 
109

 
361

Finance expenses
 
(57
)
 
162

 
(219
)
 
 
 
 
 
 
 
Operating income before taxes
 
27,519

 
31,141

 
(3,622
)
Tax (expense) benefit
 
(1,141
)
 
332

 
(1,473
)
Net operating income (a)
 
$
26,378

 
$
31,473

 
$
(5,095
)
 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
84.2
%
 
89.0
%
 
(4.8
)
 
 
 
 
 
 
 
Losses and loss expenses
 
45.8
%
 
50.8
%
 
(5.0
)
 
 
 
 
 
 
 
Policy acquisition costs
 
21.6
%
 
20.6
%
 
1.0

General and administrative expenses (b)
 
22.6
%
 
17.5
%
 
5.1

Expense ratio
 
44.2
%
 
38.1
%
 
6.1

Combined ratio
 
90.0
%
 
88.9
%
 
1.1

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income over the three months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
(26,704
)
Notable loss events (a)
 
492

Non-notable loss events (b)
 
(4,675
)
Incurred current year losses, excluding notable and non-notable loss events
 
27,604

Prior period loss development
 
547

Other underwriting deductions (c)
 
(2,520
)
Underwriting income (d)
 
(5,256
)
Other operating income and expenses, net (e)
 
161

Net operating income (d)
 
$
(5,095
)
(a)
Losses and loss expenses from notable loss events for the three months ended September 30, 2015 were $12.0 million compared to $12.5 million for the three months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the three months ended September 30, 2015 were $4.7 million compared to $nil for the three months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
72,717

 
32.1
%
 
$
67,043

 
27.2
%
 
$
5,674

 
4.9

Marine
 
66,813

 
29.6
%
 
90,794

 
37.0
%
 
(23,981
)
 
(7.4
)
Specialty
 
86,495

 
38.3
%
 
87,848

 
35.8
%
 
(1,353
)
 
2.5

Total
 
$
226,025

 
100.0
%
 
$
245,685

 
100.0
%
 
$
(19,660
)
 
0.0

Talbot gross premiums written for the three months ended September 30, 2015 translated at 2014 exchange rates would have been $228.6 million, a decrease of $17.1 million.
The increase in gross premiums written in the property lines of $5.7 million was primarily due to increases in the property treaty and construction lines due to the timing of renewed business, new projects and amendments to existing contracts. These increases were partially offset by a decrease in the downstream energy and power lines due to unfavorable market conditions. The decrease in gross premiums written in the marine lines of $24.0 million was driven by decreases in a number of classes, but primarily the upstream energy and cargo lines of $9.7 million and $7.2 million, respectively, due to ongoing market conditions and economic factors which have reduced business and renewals.

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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
19,143

 
$
17,235

 
$
1,908

Marine
 
3,488

 
(1,355
)
 
4,843

Specialty
 
13,192

 
11,254

 
1,938

Total
 
$
35,823

 
$
27,134

 
$
8,689

The increase in reinsurance premiums ceded in the marine lines of $4.8 million was primarily due to reinstatement premiums across a number of classes.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
53,574

 
73.7
%
 
$
49,808

 
74.3
%
 
$
3,766

 
(0.6
)
Marine
 
63,325

 
94.8
%
 
92,149

 
101.5
%
 
(28,824
)
 
(6.7
)
Specialty
 
73,303

 
84.7
%
 
76,594

 
87.2
%
 
(3,291
)
 
(2.5
)
Total
 
$
190,202

 
84.2
%
 
$
218,551

 
89.0
%
 
$
(28,349
)
 
(4.8
)
The changes in net premiums written and net retention ratios are driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
55,357

 
$
52,130

 
$
3,227

Marine
 
75,986

 
99,774

 
(23,788
)
Specialty
 
74,801

 
80,944

 
(6,143
)
Total
 
$
206,144

 
$
232,848

 
$
(26,704
)
The changes in net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

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Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
All lines—current period excluding items below
55.1
 %
 
60.6
 %
 
(5.5
)
All lines—current period—notable loss events
5.8
 %
 
5.4
 %
 
0.4

All lines—current period—non-notable loss events
2.3
 %
 
0.0
 %
 
2.3

All lines—change in prior accident years
(17.4)
 %
 
(15.2)
 %
 
(2.2
)
All lines—loss ratio
45.8
 %
 
50.8
 %
 
(5.0
)
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
113,728

 
$
141,332

 
$
(27,604
)
All lines—current period—notable loss events
 
11,983

 
12,475

 
(492
)
All lines—current period—non-notable loss events
 
4,675

 
—

 
4,675

All lines—change in prior accident years
 
(35,972
)
 
(35,425
)
 
(547
)
All lines - losses and loss expenses
 
$
94,414

 
$
118,382

 
$
(23,968
)
Notable Loss Events
Losses and loss expenses from a single notable loss event, Tianjin, were $12.0 million for the three months ended September 30, 2015, which represented 5.8 percentage points of the loss ratio. Net of reinstatement premiums of $0.8 million, the effect of this event on net operating income was a reduction of $11.2 million. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $12.5 million for the three months ended September 30, 2014, which represented 5.4 percentage points of the loss ratio. Net of reinstatement premiums of $0.8 million, the effect of this event on net operating income was a reduction of $11.7 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the three months ended September 30, 2015 were $4.7 million, compared to $nil for the three months ended September 30, 2014. The non-notable loss event for the three months ended September 30, 2015 was the Chilean earthquake.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
61.6
 %
 
65.9
 %
 
(4.3
)
Property—current period—notable loss events
5.7
 %
 
0.0
 %
 
5.7

Property—current period—non-notable loss events
7.5
 %
 
0.0
 %
 
7.5

Property—change in prior accident years
(17.5)
 %
 
(25.5)
 %
 
8.0

Property—loss ratio
57.3
 %
 
40.4
 %
 
16.9


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Table of Contents



 
 
Losses and Loss Expenses - Property Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
34,090

 
$
34,340

 
$
(250
)
Property—current period—notable loss events
 
3,166

 
—

 
3,166

Property—current period—non-notable loss events
 
4,175

 
—

 
4,175

Property—change in prior accident years
 
(9,706
)
 
(13,285
)
 
3,579

Property—losses and loss expenses
 
$
31,725

 
$
21,055

 
$
10,670

During the three months ended September 30, 2015, the property lines incurred $3.2 million of losses and loss expenses from a single notable loss event, Tianjin, which represented 5.7 percentage points of the property lines loss ratio. The property lines incurred no losses and loss expenses from notable loss events during the three months ended September 30, 2014.
During the three months ended September 30, 2015, the property lines incurred $4.2 million of losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 7.5 percentage points of the property lines loss ratio. The property lines incurred no losses and loss expenses from non-notable loss events during the three months ended September 30, 2014.
The property lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 4.3 percentage points as a result of lower attritional losses in the current quarter. The favorable development of $9.7 million and $13.3 million on prior accident years for the three months ended September 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Marine Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Marine—current period excluding items below
61.8
 %
 
46.2
 %
 
15.6

Marine—current period—notable loss events
11.6
 %
 
0.2
 %
 
11.4

Marine—current period—non-notable loss events
0.7
 %
 
0.0
 %
 
0.7

Marine—change in prior accident years
(19.5
)%
 
(12.0
)%
 
(7.5
)
Marine—loss ratio
54.6
 %
 
34.4
 %
 
20.2

 
 
Losses and Loss Expenses - Marine Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
46,995

 
$
46,087

 
$
908

Marine—current period—notable loss events
 
$
8,817

 
$
191

 
$
8,626

Marine—current period—non-notable loss events
 
500

 
—

 
500

Marine—change in prior accident years
 
(14,854
)
 
(11,922
)
 
(2,932
)
Marine—losses and loss expenses
 
$
41,458

 
$
34,356

 
$
7,102

During the three months ended September 30, 2015, the marine lines incurred $8.8 million of losses and loss expenses from a single notable loss event, Tianjin, which represented 11.6 percentage points of the marine lines loss ratio.
The marine lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, increased by 15.6 percentage points primarily due to higher attritional losses in the current quarter. The favorable development of $14.9 million and $11.9 million on prior accident years for the three months ended September 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.

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Losses and Loss Expense Ratio - Specialty Lines
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Specialty—current period excluding items below
43.7
 %
 
75.2
 %
 
(31.5
)
Specialty—current period—notable loss events
0.0
 %
 
15.2
 %
 
(15.2
)
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Specialty—change in prior accident years
(15.3
)%
 
(12.6)
 %
 
(2.7
)
Specialty—loss ratio
28.4
 %
 
77.8
 %
 
(49.4
)
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
32,643

 
$
60,905

 
$
(28,262
)
Specialty—current period—notable loss events
 
—

 
12,284

 
(12,284
)
Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(11,412
)
 
(10,218
)
 
(1,194
)
Specialty—losses and loss expenses
 
$
21,231

 
$
62,971

 
$
(41,740
)
The specialty lines incurred no losses and loss expenses from notable loss events during the three months ended September 30, 2015. During the three months ended September 30, 2014, the specialty lines incurred $12.3 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 15.2 percentage points of the specialty lines loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.5 million.
The specialty lines current quarter loss ratio, excluding the impact of notable and non-notable loss events, decreased by 31.5 percentage points primarily due to lower attritional losses in the current quarter. The favorable development of $11.4 million and $10.2 million on prior accident years for the three months ended September 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.
Policy Acquisition Costs
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
8,205

 
14.8
%
 
$
6,930

 
13.3
%
 
$
1,275

 
1.5
Marine
 
18,712

 
24.6
%
 
22,846

 
22.9
%
 
(4,134
)
 
1.7
Specialty
 
17,658

 
23.6
%
 
18,086

 
22.3
%
 
(428
)
 
1.3
Total
 
$
44,575

 
21.6
%
 
$
47,862

 
20.6
%
 
$
(3,287
)
 
1.0
The marine acquisition cost ratio increased by 1.7 percentage points primarily due to the earned impact of the increase in reinsurance premiums ceded arising from reinstatement premiums.

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General and Administrative and Share Compensation Expenses
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
43,292

 
21.0
%
 
37,709

 
16.2
%
 
5,583

 
4.8
Share compensation expenses
 
3,214

 
1.6
%
 
2,990

 
1.3
%
 
224

 
0.3
Total
 
$
46,506

 
22.6
%
 
$
40,699

 
17.5
%
 
$
5,807

 
5.1
General and administrative expenses for the three months ended September 30, 2015 translated at 2014 exchange rates would have been $45.3 million, an increase of $7.5 million. This increase was primarily due to an increase in Lloyd's related charges, a greater retention of costs within the segment and an increase in the performance bonus accrual. Share compensation expense ratios were comparable for the three months ended September 30, 2015 and 2014.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended September 30, 2015 and 2014.
 
Three Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
45.8
%
 
50.8
%
 
(5.0
)
Policy acquisition cost ratio
21.6
%
 
20.6
%
 
1.0

General and administrative expense ratio (a)
22.6
%
 
17.5
%
 
5.1

Expense ratio
44.2
%
 
38.1
%
 
6.1

Combined ratio
90.0
%
 
88.9
%
 
1.1

(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the three months ended September 30, 2015 of 1.1 percentage points compared to the three months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
6,507

 
$
4,999

 
$
1,508

Restricted cash and cash and cash equivalents
 
388

 
360

 
28

Total gross investment income
 
6,895

 
5,359

 
1,536

Investment expenses
 
(438
)
 
(394
)
 
(44
)
Total net investment income
 
$
6,457

 
$
4,965

 
$
1,492

The increase in net investment income of $1.5 million for the three months ended September 30, 2015 compared to 2014 was primarily due to a change in asset allocation intended to improve yield.

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Third Quarter 2015 Results of Operations - Western World Segment
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition. As a result, there are no comparatives for the third quarter of 2014.
The following table presents results of operations for the three months ended September 30, 2015:
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Underwriting income
 
 
Gross premiums written
 
$
70,871

Reinsurance premiums ceded
 
(4,716
)
Net premiums written
 
66,155

Change in unearned premiums
 
(2,225
)
Net premiums earned
 
63,930

 
 
 
Underwriting deductions
 
 
Losses and loss expenses
 
40,810

Policy acquisition costs
 
13,214

General and administrative expenses
 
9,587

Share compensation expenses
 
554

Total underwriting deductions
 
64,165

 
 
 
Underwriting income (a)
 
(235
)
 
 
 
Net investment income
 
5,634

Other insurance related income
 
248

Operating income before taxes
 
5,647

Tax expense
 
(2,431
)
Net operating income (a)
 
$
3,216

 
 
 
Selected ratios:
 
 
Net premiums written / Gross premiums written
 
93.3
%
 
 
 
Losses and loss expenses
 
63.8
%
 
 
 
Policy acquisition costs
 
20.7
%
General and administrative expense (b)
 
15.9
%
Expense ratio
 
36.6
%
Combined ratio
 
100.4
%

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Table of Contents



Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
Property
 
$
13,862

 
19.6
%
Liability
 
57,009

 
80.4
%
Total
 
$
70,871

 
100.0
%
The property lines consist largely of commercial package property and program business. During the three months ended March 31, 2015, Western World began writing brokerage property business. Gross premiums written in the brokerage property class totaled $2.7 million for the three months ended September 30, 2015. The liability lines consist largely of commercial package liability, program and other liability business.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Property
 
$
1,243

Liability
 
3,473

Total
 
$
4,716

The Western World reinsurance program includes various treaties: a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Three Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
12,619

 
91.0
%
Liability
 
53,536

 
93.9
%
Total
 
$
66,155

 
93.3
%
Net premiums written and the net retention ratio were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Property
 
$
11,083

Liability
 
52,847

Total
 
$
63,930


Net premiums earned were driven by the earnings pattern of net premiums written.

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Losses and Loss Expenses
 
 
Losses and Loss Expense Ratio -
All Lines
 
 
Three Months Ended September 30,
 
 
2015
All lines—current period excluding items below
 
71.7
 %
All lines—current period—notable loss events
 
0.0
 %
All lines—current period—non-notable loss events
 
0.0
 %
All lines—change in prior accident years (a)
 
(7.9
)%
All lines—loss ratio (a)
 
63.8
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
All lines—current period excluding items below
 
$
45,864

All lines—current period—notable loss events
 
—

All lines—current period—non-notable loss events
 
—

All lines—change in prior accident years (a)
 
(5,054
)
All lines—losses and loss expenses (a)
 
$
40,810

(a)
Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,524 during the three months ended September 30, 2015, benefiting the loss ratio by 3.9 percentage points. The remaining fair value adjustment of $2,340 will be amortized during the remainder of 2015.
Notable and Non-notable Loss Events
There were no losses and loss expenses from notable or non-notable loss events for the three months ended September 30, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expense Ratio - Property Lines
 
 
Three Months Ended September 30,
 
 
2015
Property—current period excluding items below
 
60.0
 %
Property—current period—notable loss events
 
0.0
 %
Property—current period—non-notable loss events
 
0.0
 %
Property—change in prior accident years (a)
 
(9.5
)%
Property—loss ratio (a)
 
50.5
 %

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Losses and Loss Expenses - Property Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Property—current period excluding items below
 
$
6,652

Property—current period—notable loss events
 
—

Property—current period—non-notable loss events
 
—

Property—change in prior accident years (a)
 
(1,054
)
Property—losses and loss expenses (a)
 
$
5,598

(a)
Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $66 during the three months ended September 30, 2015, increasing the loss ratio by 0.6 percentage points. The remaining fair value adjustment of $61 will be amortized during the remainder of 2015.
The property lines current quarter loss ratio was 60.0 percentage points, representing attritional claims experienced during the current quarter. The favorable development of $1.1 million on prior accident years for the three months ended September 30, 2015 primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expense Ratio - Liability Lines
 
 
Three Months Ended September 30,
 
 
2015
Liability—current period excluding items below
 
74.2
 %
Liability—current period—notable loss events
 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
Liability—change in prior accident years (a)
 
(7.6
)%
Liability—loss ratio (a)
 
66.6
 %
 
 
Losses and Loss Expenses - Liability Lines
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Liability—current period excluding items below
 
$
39,212

Liability—current period—notable loss events
 
—

Liability—current period—non-notable loss events
 
—

Liability—change in prior accident years (a)
 
(4,000
)
Liability—losses and loss expenses (a)
 
$
35,212

(a)
Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $2,590 during the three months ended September 30, 2015, benefiting the loss ratio by 4.9 percentage points. The remaining fair value adjustment of $2,401 will be amortized during the remainder of 2015.
The liability lines current quarter loss ratio was 74.2 percentage points, representing attritional claims experienced during the quarter. The liability lines experienced favorable loss reserve development of $4.0 million during the three months ended September 30, 2015 due to the amortization of the fair value adjustment noted above and favorable development on attritional losses.

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Policy Acquisition Costs
 
 
Three Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
2,513

 
22.7
%
Liability
 
10,701

 
20.2
%
Total (a)
 
$
13,214

 
20.7
%
(a)
Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $2,925 during the three months ended September 30, 2015, benefiting the policy acquisition cost ratio by 4.6 percentage points.
The property acquisition cost ratio for the three months ended September 30, 2015 was 22.7% and the liability acquisition cost ratio for the three months ended September 30, 2015 was 20.2%. The impact of the acquisition fair value adjustments on the policy acquisition cost ratio is noted above.
General and Administrative and Share Compensation Expenses
 
 
Three Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
9,587

 
15.0
%
Share compensation expenses
 
554

 
0.9
%
Total
 
$
10,141

 
15.9
%
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended September 30, 2015.
 
Three Months Ended September 30,
 
2015
Losses and loss expense ratio
63.8
%
Policy acquisition cost ratio
20.7
%
General and administrative expense ratio (a)
15.9
%
Expense ratio
36.6
%
Combined ratio
100.4
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The combined ratio for the three months ended September 30, 2015 reflects the underlying ratios highlighted above.
Net Investment Income
 
 
Net Investment Income
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
Fixed maturities and short-term investments
 
$
4,997

Other investments
 
1,004

Restricted cash and cash and cash equivalents
 
8

Total gross investment income
 
6,009

Investment expenses
 
(375
)
Total net investment income
 
$
5,634


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Third Quarter 2015 Non-Segment Discussion
Corporate Expenses
Corporate general and administrative expenses for the three months ended September 30, 2015, net of eliminations related to the operating segments, were $18.5 million compared to $19.4 million for the three months ended September 30, 2014, a decrease of $0.9 million or 4.6%. This decrease was due primarily to the retention of certain costs within the operating segments and a decrease in professional fees compared to the prior year quarter. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.
Corporate share compensation expenses for the three months ended September 30, 2015 were $3.4 million compared to $3.0 million for the three months ended September 30, 2014, an increase of $0.4 million or 12.3%.
Corporate finance expenses for the three months ended September 30, 2015 and 2014, net of eliminations related to the operating segments, were $11.5 million.
Transaction expenses for the three months ended September 30, 2015 were $nil compared to $0.1 million for the three months ended September 30, 2014. The transaction expenses related to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. The Company incurred an additional $4.7 million of transaction expenses which were recognized in the fourth quarter of 2014. Western World results have been included in the Company's consolidated results from the date of acquisition. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
Third Quarter 2015 Non-Operating Income and Expenses
The following non-operating income and expense items are discussed on a consolidated basis, since the Company does not include these items when assessing the results of its operating segments.
Net Realized and Change in Net Unrealized Losses on Investments
 
 
Net Realized and Change in Net Unrealized Losses on Investments
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net realized (losses) gains on investments
 
$
(41,906
)
 
$
4,595

 
$
(46,501
)
Change in net unrealized losses on investments
 
(34,908
)
 
(84,974
)
 
50,066

Net realized and change in net unrealized losses on investments
 
$
(76,814
)
 
$
(80,379
)
 
$
3,565

Net realized losses on investments for the three months ended September 30, 2015 were $41.9 million compared to gains of $4.6 million for the three months ended September 30, 2014, an unfavorable movement of $46.5 million. The net realized losses for the three months ended September 30, 2015, included $40.7 million in realized losses relating to PaCRe. The amount of PaCRe's realized losses attributable to noncontrolling interest was $36.6 million for the three months ended September 30, 2015, leaving a net loss to the Company of $4.1 million. The net realized gains on investments for the three months ended September 30, 2014 was driven by $2.6 million in realized gains relating to PaCRe. The amount of PaCRe's realized gains attributable to noncontrolling interest was $2.3 million for the three months ended September 30, 2014, leaving a net gain to the Company of $0.3 million.
The change in net unrealized losses on investments for the three months ended September 30, 2015 was $34.9 million compared to $85.0 million for the three months ended September 30, 2014, a favorable movement of $50.1 million, or 58.9%. The change in net unrealized losses on investments for the three months ended September 30, 2015 included $38.8 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $34.9 million for the three months ended September 30, 2015, leaving a net loss to the Company of $3.9 million. The change in net unrealized losses on investments for the three months ended September 30, 2014 was driven by $61.0 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $54.9 million for the three months ended September 30, 2014, leaving a net loss to the Company of $6.1 million.
The change in net unrealized gains excluding PaCRe for the three months ended September 30, 2015 were $3.9 million compared to a change in net unrealized losses of $24.0 million for the three months ended September 30, 2014, a favorable movement of $27.9 million. The favorable movement was primarily due to a downward shift in the yield curve during the current quarter compared to an upward shift in the yield curve during the three months ended September 30, 2014.

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Income From Investment Affiliate
 
 
Income From Investment Affiliate
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Income from investment affiliate
 
$
2,482

 
$
1,754

 
$
728

The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the previous quarter.
Foreign Exchange Losses
The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect period-to-period comparisons. The Company's largest foreign currency fluctuation exposures are to the following currencies, with the movement in the U.S. dollar against each currency shown in the table below:
 
Three Months Ended September 30,
U.S. dollar strengthened (weakened) against:
2015
 
2014
British Pound sterling
3.7
 %
 
5.6
%
Euro
(0.2
)%
 
8.5
%
Canadian dollar
6.4
 %
 
5.1
%
Swiss franc
4.4
 %
 
7.8
%
Australian dollar
9.5
 %
 
8.5
%
New Zealand dollar
5.9
 %
 
12.7
%
Singapore dollar
5.6
 %
 
2.5
%
Japanese yen
(2.0
)%
 
8.3
%
South African rand
13.7
 %
 
6.4
%
 
 
Foreign Exchange Losses
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Foreign exchange losses
 
$
(2,274
)
 
$
(11,441
)
 
$
9,167

Foreign exchange losses for the three months ended September 30, 2015 were $2.3 million compared to losses of $11.4 million for the three months ended September 30, 2014, a favorable movement of $9.2 million, or 80.1%, due primarily to the U.S. dollar strengthening against the Canadian dollar and South African rand in the current quarter.
The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company attempts to limit its exposure to foreign exchange fluctuations.
Other Loss
 
 
Other Loss
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other loss
 
$
(1,970
)
 
$
(7,690
)
 
$
5,720

Other loss for the three months ended September 30, 2015 and 2014 was due primarily to adjustments related to assets acquired with the purchase of Flagstone.

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Net Loss Attributable to Noncontrolling Interest
 
 
Net Loss Attributable to Noncontrolling Interest
 
 
Three Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net loss attributable to noncontrolling interest
 
$
71,663

 
$
53,069

 
$
18,594

For the three months ended September 30, 2015, the net loss attributable to noncontrolling interest was $71.7 million, which was comprised of an operating loss of $0.1 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating loss of $71.6 million, primarily on the investment portfolio within PaCRe.
For the three months ended September 30, 2014, net loss attributable to noncontrolling interest was $53.1 million, which was comprised of an operating loss of $0.4 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating loss of $52.6 million, primarily on the investment portfolio within PaCRe.

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Year to Date 2015 Summarized Consolidated Results of Operations
•
Gross premiums written for the nine months ended September 30, 2015 were $2,248.1 million compared to $2,026.6 million for the nine months ended September 30, 2014, an increase of $221.5 million, or 10.9%.
•
Net premiums earned for the nine months ended September 30, 2015 were $1,706.8 million compared to $1,443.7 million for the nine months ended September 30, 2014, an increase of $263.1 million, or 18.2%.
•
Underwriting income for the nine months ended September 30, 2015 was $341.0 million compared to $391.3 million for the nine months ended September 30, 2014, a decrease of $50.2 million, or 12.8%.
•
Combined ratio for the nine months ended September 30, 2015 of 80.0% which included $245.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 14.4 percentage points compared to a combined ratio for the nine months ended September 30, 2014 of 72.9% which included $167.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.6 percentage points. The favorable loss reserve development was primarily due to lower than expected development on attritional losses.
•
Loss ratio for the nine months ended September 30, 2015 of 44.8% compared to 37.8% for the nine months ended September 30, 2014, an increase of 7.0 percentage points. Incurred losses for the nine months ended September 30, 2015 were $765.3 million, compared to $545.5 million for the nine months ended September 30, 2014, an increase of $219.8 million or 40.3%.
•
Loss ratios by line of business are as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Property (a)
22.3
%
 
14.4
%
 
7.9

Marine
51.4
%
 
44.8
%
 
6.6

Specialty
59.0
%
 
63.5
%
 
(4.5
)
Liability (a)
71.6
%
 
0.0
%
 
71.6

All lines
44.8
%
 
37.8
%
 
7.0

(a)
The results of Western World have been included in the Company's consolidated results from the October 2, 2014 date of acquisition.
•
Losses and loss expenses from notable loss events, including development on these events, for the nine months ended September 30, 2015 were $97.1 million compared to $28.1 million for the nine months ended September 30, 2014. Notable loss events are defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $30.0 million. Notable loss events for the nine months ended September 30, 2015 were the August 12th port explosion in Tianjin, China and Pemex, an offshore rig explosion. The port explosion in Tianjin resulted in estimated loss to the Company of $47.8 million or 2.8 percentage points of the loss ratio. Net of $3.9 million of reinstatement premiums, the net loss was $43.9 million. The offshore rig explosion, Pemex resulted in estimated loss to the Company of $49.3 million or 2.9 percentage points of the loss ratio. Including reinstatement premiums payable, the net loss was $51.4 million. During the nine months ended September 30, 2014, the Company incurred a loss of $28.1 million or 1.9 percentage points of the loss ratio, related to Tripoli Airport which subsequently developed into a notable loss event during the three months ended December 31, 2014.
•
Losses and loss expenses from non-notable loss events, including development on these events, for the nine months ended September 30, 2015 were $22.2 million compared to $25.1 million for the nine months ended September 30, 2014. Non-notable loss events are defined as consolidated losses from a single event which aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million. The non-notable loss event for the nine months ended September 30, 2015 was the Chilean earthquake, which resulted in an estimated loss to the Company of $22.2 million or 1.3 percentage points of the loss ratio. Net of $2.2 million of reinstatement premiums, the net loss was $20.0 million.
•
Net investment income for the nine months ended September 30, 2015 was $96.2 million compared to $69.9 million for the nine months ended September 30, 2014, an increase of $26.2 million, or 37.5%.
•
Investment yield for the nine months ended September 30, 2015 was 1.92% compared to 1.41% for the nine months ended September 30, 2014.
•
Net operating income available to Validus for the nine months ended September 30, 2015 was $304.8 million compared to $357.4 million for the nine months ended September 30, 2014, a decrease of $52.6 million, or 14.7%.

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•
Net income available to Validus for the nine months ended September 30, 2015 was $304.1 million, or $3.50 per diluted common share compared to $355.4 million or $3.70 per diluted common share for the nine months ended September 30, 2014.
•
Annualized return on average equity and annualized net operating return on average equity for the nine months ended September 30, 2015 were 11.1% and 11.2%, respectively, compared to 12.8% and 12.9% for the nine months ended September 30, 2014.
•
Total investments and cash as at September 30, 2015 was $8.5 billion compared to $8.1 billion as at December 31, 2014.
•
AlphaCat's assets under management as at October 1, 2015 was $2.2 billion compared to $1.9 billion as at January 1, 2015.

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Overview of the Results of Operations for the Nine Months Ended September 30, 2015 compared to the Nine Months Ended September 30, 2014.
The change in net operating income available to Validus for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus
over the nine months ended September 30,
 
 
2015 compared to 2014
(Dollars in thousands)
 
Validus Holdings, Ltd. Consolidated
Western World Segment
Validus Holdings, Ltd. Consolidated excluding the Western World Segment
Net premiums earned
 
$
263,139

$
196,930

$
66,209

Notable loss events (a)
 
(68,916
)
—

(68,916
)
Non-notable loss events (b)
 
2,947

—

2,947

Incurred current year losses, excluding notable and non-notable loss events
 
(231,965
)
(153,737
)
(78,228
)
Prior period loss development
 
78,142

15,639

62,503

Other underwriting deductions (c)
 
(93,557
)
(57,772
)
(35,785
)
Underwriting income (d)
 
(50,210
)
1,060

(51,270
)
(Income) attributable to AlphaCat investors
 
(11,508
)
—

(11,508
)
Other operating expenses and income, net (e)
 
11,987

15,027

(3,040
)
Net operating income (d)
 
(49,731
)
16,087

(65,818
)
Net operating (income) loss attributable to noncontrolling interest
 
(2,887
)
—

(2,887
)
Net operating income available to Validus (d)
 
$
(52,618
)
$
16,087

$
(68,705
)
(a)
Loss and loss expenses from notable loss events for the nine months ended September 30, 2015 were $97.1 million compared to $28.1 million nine months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the nine months ended September 30, 2015 were $22.2 million compared to $25.1 million for the nine months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that is 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(e)
Other operating expenses and income, net, consists of net investment income, other insurance related income, finance expenses, taxes and income (loss) from operating affiliates.
Net operating income available to Validus for the nine months ended September 30, 2015 was $304.8 million compared to $357.4 million for the nine months ended September 30, 2014, a decrease of $52.6 million or 14.7%.
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition. As a result, there are no comparatives for the nine months ended September 30, 2014. Net operating income available to Validus excluding the Western World segment for the nine months ended September 30, 2015 was $288.7 million compared to $357.4 million for the nine months ended September 30, 2014, a decrease of $68.7 million or 19.2%.
The primary factors driving the decrease in net operating income available to Validus excluding the Western World segment were:
•
An increase in losses and loss expenses of $81.7 million, comprised of:
◦
an increase in incurred current year losses, excluding notable and non-notable losses of $78.2 million; and
◦
an increase in notable loss events of $68.9 million; offset by,
◦
an increase in favorable prior period development of $62.5 million; and
◦
a decrease in non-notable loss events of $2.9 million;
•
An increase in policy acquisition costs of $30.0 million primarily due to new agricultural business written in the Validus Re segment; and
•
An increase in (income) attributable to AlphaCat investors of $11.5 million; offset by,
•
An increase in net premiums earned of $66.2 million, primarily due to new agriculture business written in the Validus Re segment.

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Year to Date 2015 Results of Operations - Validus Re Segment
The following table presents results of operations for the nine months ended September 30, 2015 and 2014:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
1,111,020

 
$
1,081,816

 
$
29,204

Reinsurance premiums ceded
 
(147,611
)
 
(161,721
)
 
14,110

Net premiums written
 
963,409

 
920,095

 
43,314

Change in unearned premiums
 
(205,110
)
 
(233,271
)
 
28,161

Net premiums earned
 
758,299

 
686,824

 
71,475

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
357,491

 
247,848

 
109,643

Policy acquisition costs
 
128,909

 
106,547

 
22,362

General and administrative expenses
 
58,254

 
53,757

 
4,497

Share compensation expenses
 
7,665

 
7,126

 
539

Total underwriting deductions
 
552,319

 
415,278

 
137,041

 
 
 
 
 
 
 
Underwriting income (a)
 
205,980

 
271,546

 
(65,566
)
 
 
 
 
 
 
 
Net investment income
 
56,694

 
54,810

 
1,884

Other insurance related income
 
3,318

 
2,385

 
933

Finance expenses
 
(11,068
)
 
(11,131
)
 
63

 
 
 
 
 
 
 
Operating income before taxes
 
254,924

 
317,610

 
(62,686
)
Tax (expense) benefit
 
(14
)
 
1,176

 
(1,190
)
Net operating income (a)
 
$
254,910

 
$
318,786

 
$
(63,876
)
 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
86.7
%
 
85.1
%
 
1.6

 
 
 
 
 
 
 
Losses and loss expenses
 
47.1
%
 
36.1
%
 
11.0

 
 
 
 
 
 
 
Policy acquisition costs
 
17.0
%
 
15.5
%
 
1.5

General and administrative expenses (b)
 
8.7
%
 
8.9
%
 
(0.2
)
Expense ratio
 
25.7
%
 
24.4
%
 
1.3

Combined ratio
 
72.8
%
 
60.5
%
 
12.3

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income over the nine months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
71,475

Notable loss events (a)
 
(56,523
)
Non-notable loss events (b)
 
2,837

Incurred current year losses, excluding notable and non-notable loss events
 
(105,171
)
Prior period loss development
 
49,214

Other underwriting deductions (c)
 
(27,398
)
Underwriting income (d)
 
(65,566
)
Other operating income and expenses, net (e)
 
1,690

Net operating income (d)
 
$
(63,876
)
(a)
Losses and loss expenses from notable loss events for the nine months ended September 30, 2015 were $72.2 million compared to $15.7 million for the nine months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the nine months ended September 30, 2015 were $17.5 million compared to $20.3 million for the nine months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
530,456

 
47.7
%
 
$
598,570

 
55.4
%
 
$
(68,114
)
 
(7.7
)
Marine
 
153,351

 
13.8
%
 
175,706

 
16.2
%
 
(22,355
)
 
(2.4
)
Specialty
 
427,213

 
38.5
%
 
307,540

 
28.4
%
 
119,673

 
10.1

Total
 
$
1,111,020

 
100.0
%
 
$
1,081,816

 
100.0
%
 
$
29,204

 
0.0

The decrease in gross premiums written in the property lines of $68.1 million was primarily due to a reduction in business written in the catastrophe excess of loss lines of $74.5 million. This decrease was driven by reductions in our participation on various programs due to current market conditions. The decrease in gross premiums written in the marine lines of $22.4 million was due to non-renewals as a result of current market conditions and business historically written in marine lines being renewed in specialty lines. The increase in gross premiums written in the specialty lines of $119.7 million was primarily due to a significant new agriculture deal as well as a significant increase in an existing agriculture deal, offset by various non-renewals.

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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
119,823

 
$
135,443

 
$
(15,620
)
Marine
 
17,196

 
21,002

 
(3,806
)
Specialty
 
10,592

 
5,276

 
5,316

Total
 
$
147,611

 
$
161,721

 
$
(14,110
)
Reinsurance premiums ceded in the property lines decreased by $15.6 million primarily as a result of renewing the Company's main retro program at reduced rates. The increase in reinsurance premiums ceded in the specialty lines of $5.3 million was primarily due to a composite marine program being renewed in the specialty lines.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
410,633

 
77.4
%
 
$
463,127

 
77.4
%
 
$
(52,494
)
 
0.0

Marine
 
136,155

 
88.8
%
 
154,704

 
88.0
%
 
(18,549
)
 
0.8

Specialty
 
416,621

 
97.5
%
 
302,264

 
98.3
%
 
114,357

 
(0.8
)
Total
 
$
963,409

 
86.7
%
 
$
920,095

 
85.1
%
 
$
43,314

 
1.6

The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
323,616

 
$
354,061

 
$
(30,445
)
Marine
 
113,239

 
117,521

 
(4,282
)
Specialty
 
321,444

 
215,242

 
106,202

Total
 
$
758,299

 
$
686,824

 
$
71,475

The decrease in property and marine lines net premiums earned of $30.4 million and $4.3 million, respectively was as a result of lower gross premiums written during the nine months ended September 30, 2015, offset by the earned impact of the reduction in reinsurance premiums ceded. The increase in net premiums earned in the specialty lines of $106.2 million was primarily due to an increase in gross premiums written during the nine months ended September 30, 2015.

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Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
All lines—current period excluding items below
49.3
 %
 
39.1
 %
 
10.2

All lines—current period—notable loss events
9.5
 %
 
2.3
 %
 
7.2

All lines—current period—non-notable loss events
2.3
 %
 
3.0
 %
 
(0.7
)
All lines—change in prior accident years
(14.0
)%
 
(8.3
)%
 
(5.7
)
All lines—loss ratio
47.1
 %
 
36.1
 %
 
11.0

 
 
Losses and Loss Expenses - All Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
373,859

 
$
268,688

 
$
105,171

All lines—current period—notable loss events
 
72,182

 
15,659

 
56,523

All lines—current period—non-notable loss events
 
17,500

 
20,337

 
(2,837
)
All lines—change in prior accident years
 
(106,050
)
 
(56,836
)
 
(49,214
)
All lines—losses and loss expenses
 
$
357,491

 
$
247,848

 
$
109,643

Notable Loss Events
Losses and loss expenses from notable loss events were $72.2 million for the nine months ended September 30, 2015, which represented 9.5 percentage points of the loss ratio. Losses and loss expenses from Tianjin, a current quarter notable loss event, were $35.8 million. Net of $3.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $32.7 million. Losses and loss expenses from Pemex, a second quarter notable loss event, were $36.4 million for the nine months ended September 30, 2015. Net of $8.9 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $27.4 million. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $15.7 million for the nine months ended September 30, 2014, which represented 2.3 percentage points of the loss ratio. Net of $2.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $13.5 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the nine months ended September 30, 2015 were $17.5 million compared to $20.3 million for the nine months ended September 30, 2014. The non-notable loss event for the nine months ended September 30, 2015 was the Chilean earthquake.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
22.8
 %
 
18.1
 %
 
4.7

Property—current period—notable loss events
7.2
 %
 
0.0
 %
 
7.2

Property—current period—non-notable loss events
5.4
 %
 
5.7
 %
 
(0.3
)
Property—change in prior accident years
(18.0
)%
 
(14.3
)%
 
(3.7
)
Property—loss ratio
17.4
 %
 
9.5
 %
 
7.9


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Losses and Loss Expenses - Property Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
73,926

 
$
63,924

 
$
10,002

Property—current period—notable loss events
 
23,298

 
—

 
23,298

Property—current period—non-notable loss events
 
17,384

 
20,337

 
(2,953
)
Property—change in prior accident years
 
(58,437
)
 
(50,598
)
 
(7,839
)
Property—losses and loss expenses
 
$
56,171

 
$
33,663

 
$
22,508

During the nine months ended September 30, 2015, the property lines incurred $23.3 million of losses and loss expenses from a single notable loss event, Tianjin, which represented 7.2 percentage points of the property lines loss ratio. Net of $1.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $21.5 million. The property lines incurred no losses and loss expenses from notable loss events during the nine months ended September 30, 2014.
During the nine months ended September 30, 2015, the property lines incurred $17.4 million of losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 5.4 percentage points of the property lines loss ratio. During the nine months ended September 30, 2014, the property lines incurred $20.3 million of losses and loss expenses from non-notable loss events, which represented 5.7 percentage points of the property lines loss ratio.
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 4.7 percentage points as a result of higher attritional losses in the period, including $10.0 million of losses and loss expenses from flooding in Texas during the second quarter. The favorable development on prior accident years for the nine months ended September 30, 2015 of $58.4 million, included favorable development on prior years from event specific reserves of $27.8 million. The remainder was primarily due to favorable development on attritional losses. The favorable development on prior accident years for the nine months ended September 30, 2014 of $50.6 million was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Marine Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Marine—current period excluding items below
54.8
 %
 
46.6
 %
 
8.2

Marine—current period—notable loss events
41.7
 %
 
0.3
 %
 
41.4

Marine—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Marine—change in prior accident years
(25.8
)%
 
(4.4
)%
 
(21.4
)
Marine—loss ratio
70.7
 %
 
42.5
 %
 
28.2

 
 
Losses and Loss Expenses - Marine Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
62,040

 
$
54,731

 
$
7,309

Marine—current period—notable loss events
 
47,219

 
400

 
46,819

Marine—current period—non-notable loss events
 
—

 
—

 
—

Marine—change in prior accident years
 
(29,225
)
 
(5,213
)
 
(24,012
)
Marine—losses and loss expenses
 
$
80,034

 
$
49,918

 
$
30,116

During the nine months ended September 30, 2015, the marine lines incurred $12.5 million of losses and loss expenses from a current quarter notable loss event, Tianjin, which represented 11.0 percentage points of the marine lines loss ratio. Net of $1.3 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.2 million. In addition, losses and loss expenses from Pemex, a second quarter notable loss event, were $34.7 million which represented 30.7 percentage points of the marine lines loss ratio. Net of $8.4 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $26.3 million.

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The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 8.2 percentage points as a result of higher attritional losses in the current period. The favorable development of $29.2 million on prior accident years for the nine months ended September 30, 2015 was primarily due to favorable development on attritional losses; whereas, the lower favorable development of $5.2 million on prior accident years for the nine months ended September 30, 2014 was primarily due to favorable development on the Gryphon Alpha mooring failure, partially offset by adverse development on Costa Concordia.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Specialty—current period excluding items below
74.1
 %
 
69.7
 %
 
4.4

Specialty—current period—notable loss events
0.5
 %
 
7.1
 %
 
(6.6
)
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Specialty—change in prior accident years
(5.7
)%
 
(0.5
)%
 
(5.2
)
Specialty—loss ratio
68.9
 %
 
76.3
 %
 
(7.4
)
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
237,893

 
$
150,033

 
$
87,860

Specialty—current period—notable loss events
 
1,665

 
15,259

 
(13,594
)
Specialty—current period—non-notable loss events
 
116

 
—

 
116

Specialty—change in prior accident years
 
(18,388
)
 
(1,025
)
 
(17,363
)
Specialty—losses and loss expenses
 
$
221,286

 
$
164,267

 
$
57,019

During the nine months ended September 30, 2015, the specialty lines incurred $1.7 million of losses and loss expenses from a second quarter notable loss event, Pemex, which represented 0.5 percentage points of the specialty lines loss ratio. During the nine months ended September 30, 2014, the specialty lines incurred $15.3 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 7.1 percentage points of the specialty lines loss ratio. Net of $2.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $13.1 million.

The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 4.4 percentage points, primarily due to a change in business mix to include more agriculture business and higher attritional losses in the current period. The favorable loss reserve development on prior accident years of $18.4 million during the nine months ended September 30, 2015 was due primarily to favorable development on attritional losses. The lower favorable development of $1.0 million on prior accident years in the nine months ended September 30, 2014 was primarily due to an increase in the loss estimate on agriculture losses.
Policy Acquisition Costs
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
58,054

 
17.9
%
 
$
59,665

 
16.9
%
 
$
(1,611
)
 
1.0
Marine
 
23,258

 
20.5
%
 
19,825

 
16.9
%
 
3,433

 
3.6
Specialty
 
47,597

 
14.8
%
 
27,057

 
12.6
%
 
20,540

 
2.2
Total
 
$
128,909

 
17.0
%
 
$
106,547

 
15.5
%
 
$
22,362

 
1.5
The acquisition cost ratio for the marine lines increased by 3.6 percentage points primarily due to adjustments to existing business. The 2.2 percentage point increase in the acquisition cost ratio for the specialty lines was driven by profit commissions and a large proportional contract that carries higher acquisition costs.

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General and Administrative and Share Compensation Expenses
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
58,254

 
7.7
%
 
$
53,757

 
7.8
%
 
$
4,497

 
(0.1
)
Share compensation expenses
 
7,665

 
1.0
%
 
7,126

 
1.1
%
 
539

 
(0.1
)
Total
 
$
65,919

 
8.7
%
 
$
60,883

 
8.9
%
 
$
5,036

 
(0.2
)
The increase in general and administrative expenses of $4.5 million or 8.4% was due primarily to a greater retention of costs within the segment and an increase in staff costs related to overseas underwriting operations during the nine months ended September 30, 2015. This increase was partially offset by a reduction in office and infrastructure costs in the current period related to entities that are no longer in use as a result of efficiencies achieved through rationalization of historical Flagstone entities. Share compensation expenses were comparable for the nine months ended September 30, 2015 and 2014.
Selected Underwriting Ratios
The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expense ratio and the expense ratio. The losses and loss expense ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the nine months ended September 30, 2015 and 2014.
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
47.1
%
 
36.1
%
 
11.0

Policy acquisition cost ratio
17.0
%
 
15.5
%
 
1.5

General and administrative expense ratio (a)
8.7
%
 
8.9
%
 
(0.2
)
Expense ratio
25.7
%
 
24.4
%
 
1.3

Combined ratio
72.8
%
 
60.5
%
 
12.3

(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the nine months ended September 30, 2015 of 12.3 percentage points compared to the nine months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
51,486

 
$
52,871

 
$
(1,385
)
Other investments
 
8,668

 
2,879

 
5,789

Restricted cash and cash and cash equivalents
 
51

 
3,465

 
(3,414
)
Securities lending income
 
13

 
5

 
8

Total gross investment income
 
60,218

 
59,220

 
998

Investment expenses
 
(3,524
)
 
(4,410
)
 
886

Total net investment income
 
$
56,694

 
$
54,810

 
$
1,884


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The increase in net investment income for the nine months ended September 30, 2015 was $1.9 million or 3.4% primarily due to a change in asset allocation intended to improve yield. Net investment income from other investments includes distributed and undistributed net income from certain investments.
Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
3,318

 
$
2,385

 
$
933

Other insurance related income for the nine months ended September 30, 2015 includes a recoverable for federal excise taxes of $2.3 million.
Finance Expenses
 
 
Finance Expenses
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
11,068

 
$
11,131

 
$
(63
)
Finance expenses for the nine months ended September 30, 2015 and 2014 were comparable.

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Year to Date 2015 Results of Operations - AlphaCat Segment
The following table presents results of operations for the nine months ended September 30, 2015 and 2014:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
176,129

 
$
135,073

 
$
41,056

Reinsurance premiums ceded
 
(4,538
)
 
(4,348
)
 
(190
)
Net premiums written
 
171,591

 
130,725

 
40,866

Change in unearned premiums
 
(54,196
)
 
(32,444
)
 
(21,752
)
Net premiums earned
 
117,395

 
98,281

 
19,114

 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
1,232

 
(7,155
)
 
8,387

Policy acquisition costs
 
12,162

 
9,414

 
2,748

General and administrative expenses
 
12,202

 
15,627

 
(3,425
)
Share compensation expenses
 
440

 
330

 
110

Total underwriting deductions
 
26,036

 
18,216

 
7,820

 
 
 
 
 
 
 
Underwriting income (a)
 
91,359

 
80,065

 
11,294

 
 
 
 
 
 
 
Net investment income
 
4,872

 
2,546

 
2,326

Other insurance related income
 
17,048

 
21,482

 
(4,434
)
Finance expenses
 
(9,462
)
 
(2,039
)
 
(7,423
)
 
 
 
 
 
 
 
Operating income before income from operating affiliates and (income) attributable to AlphaCat investors
 
103,817

 
102,054

 
1,763

Income from operating affiliates
 
12,083

 
13,580

 
(1,497
)
(Income) attributable to AlphaCat investors
 
(94,341
)
 
(82,833
)
 
(11,508
)
Net operating income (a)
 
21,559

 
32,801

 
(11,242
)
Net operating (income) attributable to noncontrolling interest
 
(6,047
)
 
(3,160
)
 
(2,887
)
Net operating income available to Validus (a)
 
$
15,512

 
$
29,641

 
$
(14,129
)
 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
97.4
%
 
96.8
 %
 
0.6

 
 
 
 
 
 
 
Losses and loss expenses
 
1.0
%
 
(7.3
)%
 
8.3

 
 
 
 
 
 
 
Policy acquisition costs
 
10.4
%
 
9.6
 %
 
0.8

General and administrative expenses (b)
 
10.8
%
 
16.2
 %
 
(5.4
)
Expense ratio
 
21.2
%
 
25.8
 %
 
(4.6
)
Combined ratio
 
22.2
%
 
18.5
 %
 
3.7

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income available to Validus for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income available to Validus
over the nine months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
19,114

Notable and non-notable loss events (a)
 
—

Incurred current year losses, excluding notable and non-notable loss events
 
2,377

Prior period loss development
 
(10,764
)
Other underwriting deductions (b)
 
567

Underwriting income (c)
 
11,294

(Income) attributable to AlphaCat investors
 
(11,508
)
Other operating income and expenses, net (d)
 
(11,028
)
Net operating income (c)
 
(11,242
)
Net operating income attributable to noncontrolling interest
 
(2,887
)
Net operating income available to Validus (c)
 
$
(14,129
)
(a)
There were no losses and loss expenses from notable or non-notable loss events for either of the nine months ended September 30, 2015 or 2014.
(b)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(c)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(d)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and income (loss) from operating affiliates.
Gross Premiums Written
 
 
Gross Premiums Written
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
176,129

 
$
135,073

 
$
41,056

The increase in gross premiums written in the property lines was primarily due to an increase in assets under management.
Reinsurance Premiums Ceded
Reinsurance premiums ceded for the nine months ended September 30, 2015 were $4.5 million compared to $4.3 million for the nine months ended September 30, 2014.
Net Premiums Written
 
 
Net Premiums Written
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
171,591

 
$
130,725

 
$
40,866

The increase in net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 97.4% and 96.8% for the nine months ended September 30, 2015 and 2014, respectively.

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Net Premiums Earned
 
 
Net Premiums Earned
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
117,395

 
$
98,281

 
$
19,114

The increase in net premiums earned in the property lines was primarily due to the increase in gross premiums written.
Losses and Loss Expenses
 
Losses and Loss Expense Ratio - Property Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
1.7
 %
 
4.5
 %
 
(2.8
)
Property—current period—notable loss events
0.0
 %
 
0.0
 %
 
0.0

Property—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Property—change in prior accident years
(0.7
)%
 
(11.8
)%
 
11.1

Property—loss ratio
1.0
 %
 
(7.3
)%
 
8.3

 
 
Losses and Loss Expenses - Property Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
2,076

 
$
4,453

 
$
(2,377
)
Property—current period—notable loss events
 
—

 
—

 
—

Property—current period—non-notable loss events
 
—

 
—

 
—

Property—change in prior accident years
 
(844
)
 
(11,608
)
 
10,764

Property - losses and loss expenses
 
$
1,232

 
$
(7,155
)
 
$
8,387

The property lines current period loss ratio decreased by 2.8 percentage points as a result of lower attritional losses in the period. The favorable development on prior accident years for the nine months ended September 30, 2014 was $11.6 million, primarily due to the partial release of a 2013 aggregate excess of loss contract.
Notable and Non-notable Loss Events
There were no losses and loss expenses from notable or non-notable loss events for either of the nine months ended September 30, 2015 and 2014.
Policy Acquisition Costs
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
12,162

 
10.4
%
 
$
9,414

 
9.6
%
 
$
2,748

 
0.8
The acquisition cost ratios for the nine months ended September 30, 2015 and 2014 were comparable.

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General and Administrative and Share Compensation Expenses
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
12,202

 
10.4
%
 
$
15,627

 
15.9
%
 
$
(3,425
)
 
(5.5
)
Share compensation expenses
 
440

 
0.4
%
 
330

 
0.3
%
 
110

 
0.1

Total
 
$
12,642

 
10.8
%
 
$
15,957

 
16.2
%
 
$
(3,315
)
 
(5.4
)
The decrease in general and administrative expenses of $3.4 million or 21.9% was primarily due to the deconsolidation of one of the AlphaCat ILS funds on June 1, 2015 and a decrease in professional fees relating to PaCRe. The share compensation expenses for the nine months ended September 30, 2015 and 2014 were comparable.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the nine months ended September 30, 2015 and 2014.
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
1.0
%
 
(7.3)
 %
 
8.3

Policy acquisition cost ratio
10.4
%
 
9.6
 %
 
0.8

General and administrative expense ratio (a)
10.8
%
 
16.2
 %
 
(5.4
)
Expense ratio
21.2
%
 
25.8
 %
 
(4.6
)
Combined ratio
22.2
%
 
18.5
 %
 
3.7

(a)
The general and administrative expense ratio includes share compensation expenses.
The increase in the combined ratio for the nine months ended September 30, 2015 of 3.7 percentage points compared to the nine months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.
Net Investment Income
 
 
Net Investment Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
4,792

 
$
2,493

 
$
2,299

Restricted cash and cash and cash equivalents
 
80

 
53

 
27

Total net investment income
 
$
4,872

 
$
2,546

 
$
2,326

The increase in net investment income for the nine months ended September 30, 2015 was $2.3 million or 91.4% and was due to an increase in the size of the catastrophe bond portfolio.

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Other Insurance Related Income
 
 
Other Insurance Related Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other insurance related income
 
$
17,048

 
$
21,482

 
$
(4,434
)
Other insurance related income for the AlphaCat segment primarily includes third party and related party management and performance fee income. The decrease in other insurance related income of $4.4 million or 20.6% was primarily due to a reduction in performance fees and a loss of $1.8 million on the deconsolidation of one of the AlphaCat ILS Funds during the nine months ended September 30, 2015 and a gain of $1.4 million on the deconsolidation of one of the AlphaCat ILS Funds during the nine months ended September 30, 2014.
Finance Expenses
 
 
Finance Expenses
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Finance expenses
 
$
9,462

 
$
2,039

 
$
7,423

The increase in finance expenses of $7.4 million was due to fees incurred in relation to raising new capital.
Income From Operating Affiliates
 
 
Income from Operating Affiliates
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
AlphaCat Re 2011
 
$
391

 
$
183

 
$
208

AlphaCat Re 2012
 
(36
)
 
882

 
(918
)
AlphaCat 2013
 
(33
)
 
2,043

 
(2,076
)
AlphaCat 2014
 
(110
)
 
4,399

 
(4,509
)
AlphaCat 2015
 
3,675

 
—

 
3,675

AlphaCat ILS funds
 
8,196

 
6,073

 
2,123

Total
 
$
12,083

 
$
13,580

 
$
(1,497
)
For details of voting and equity ownership interests of the above entities, refer to Note 5 to the Consolidated Financial Statements in Part I. The decrease in income from operating affiliates for the nine months ended September 30, 2015 was primarily due to the timing of capital deployment. Capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013. Also contributing to the decrease was a decrease in income from AlphaCat 2012 due to a reserve release during the nine months ended September 30, 2014 and a decrease in the capital base of AlphaCat 2015 as compared to the capital base of AlphaCat 2014. These decreases were partially offset by an increase in income from the AlphaCat ILS funds due to the deconsolidation of one of the funds on June 1, 2015.

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(Income) Attributable To AlphaCat Investors
 
 
(Income) Attributable to AlphaCat Investors
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
(Income) attributable to AlphaCat investors
 
$
(94,341
)
 
$
(82,833
)
 
$
(11,508
)
The increase in (income) attributable to AlphaCat investors of $11.5 million for the nine months ended September 30, 2015 was primarily due the deconsolidation of one of the AlphaCat ILS funds on June 1, 2015 and an increase in assets under management. These increases were offset by a decrease relating to the timing of capital deployment. As noted above, capital from AlphaCat 2014 was fully deployed during the first quarter of 2014; whereas, capital from AlphaCat 2013 was only fully deployed in the second quarter of 2013 and thus had a larger effect on the nine months ended September 30, 2014.
Net Operating (Income) Attributable to Noncontrolling Interest
 
 
Net Operating (Income) Attributable to Noncontrolling Interest
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net operating (income) attributable to noncontrolling interest
 
$
(6,047
)
 
$
(3,160
)
 
$
(2,887
)
For the nine months ended September 30, 2015, the net operating income attributable to noncontrolling interest was $6.0 million, which was comprised of $0.9 million relating to 90% of the net operating income in PaCRe for the period and $5.1 million of net operating income relating to the one AlphaCat ILS fund consolidated through May 31, 2015.
Assets Under Management
 
 
Assets Under Management
(Dollars in thousands)
 
As at October 1, 2015
 
As at January 1, 2015
Related party
 
$
361,216

 
$
346,907

Third party
 
1,877,422

 
1,533,840

Total
 
$
2,238,638

 
$
1,880,747

Assets under management were $2.2 billion as at October 1, 2015, compared to $1.9 billion as at January 1, 2015. During the nine months ended October 1, 2015, a total of $509.0 million of capital was raised, of which $468.7 million was raised from third parties. During the nine months ended October 1, 2015, $221.9 million was returned to investors, of which $164.7 million was returned to third party investors.

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Year to Date 2015 Results of Operations - Talbot Segment
The following table presents results of operations for the nine months ended September 30, 2015 and 2014:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Underwriting income
 
 
 
 
 
 
Gross premiums written
 
$
789,148

 
$
854,324

 
$
(65,176
)
Reinsurance premiums ceded
 
(164,144
)
 
(154,115
)
 
(10,029
)
Net premiums written
 
625,004

 
700,209

 
(75,205
)
Change in unearned premiums
 
9,167

 
(41,658
)
 
50,825

Net premiums earned
 
634,171

 
658,551

 
(24,380
)
 
 
 
 
 
 
 
Underwriting deductions
 
 
 
 
 
 
Losses and loss expenses
 
268,512

 
304,848

 
(36,336
)
Policy acquisition costs
 
141,338

 
138,383

 
2,955

General and administrative expenses
 
115,341

 
107,031

 
8,310

Share compensation expenses
 
9,195

 
8,434

 
761

Total underwriting deductions
 
534,386

 
558,696

 
(24,310
)
 
 
 
 
 
 
 
Underwriting income (a)
 
99,785

 
99,855

 
(70
)
 
 
 
 
 
 
 
Net investment income
 
19,168

 
14,322

 
4,846

Other insurance related income
 
564

 
384

 
180

Finance expenses
 
(231
)
 
68

 
(299
)
 
 
 
 
 
 
 
Operating income before taxes
 
119,286

 
114,629

 
4,657

Tax expense
 
(4,286
)
 
(902
)
 
(3,384
)
Net operating income (a)
 
$
115,000

 
$
113,727

 
$
1,273

 
 
 
 
 
 
 
Selected ratios:
 
 

 
 

 
 

Net premiums written / Gross premiums written
 
79.2
%
 
82.0
%
 
(2.8
)
 
 
 
 
 
 
 
Losses and loss expenses
 
42.4
%
 
46.3
%
 
(3.9
)
 
 
 
 
 
 
 
Policy acquisition costs
 
22.3
%
 
21.0
%
 
1.3

General and administrative expenses (b)
 
19.6
%
 
17.5
%
 
2.1

Expense ratio
 
41.9
%
 
38.5
%
 
3.4

Combined ratio
 
84.3
%
 
84.8
%
 
(0.5
)
(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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The change in net operating income for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 is described in the following table:
 
 
Increase (decrease) to net operating income over the nine months ended September 30,
(Dollars in thousands)
 
2015 compared to 2014
Net premiums earned
 
$
(24,380
)
Notable loss events (a)
 
(12,393
)
Non-notable loss events (b)
 
110

Incurred current year losses, excluding notable and non-notable loss events
 
24,566

Prior period loss development
 
24,053

Other underwriting deductions (c)
 
(12,026
)
Underwriting income (d)
 
(70
)
Other operating income and expenses, net (e)
 
1,343

Net operating income (d)
 
$
1,273

(a)
Losses and loss expenses from notable loss events for the nine months ended September 30, 2015 were $24.9 million compared to $12.5 million for the nine months ended September 30, 2014.
(b)
Losses and loss expenses from non-notable loss events for the nine months ended September 30, 2015 were $4.7 million compared to $4.8 million for the nine months ended September 30, 2014.
(c)
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
(d)
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting and operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.
(e)
Other operating income and expenses, net, consists of net investment income, other insurance related income, finance expenses and taxes.
Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
 
Gross Premiums Written
 
% of Total
Property
 
$
253,196

 
32.1
%
 
$
261,100

 
30.6
%
 
$
(7,904
)
 
1.5

Marine
 
266,891

 
33.8
%
 
319,805

 
37.4
%
 
(52,914
)
 
(3.6
)
Specialty
 
269,061

 
34.1
%
 
273,419

 
32.0
%
 
(4,358
)
 
2.1

Total
 
$
789,148

 
100.0
%
 
$
854,324

 
100.0
%
 
$
(65,176
)
 
0.0

Talbot gross premiums written for the nine months ended September 30, 2015 translated at 2014 exchange rates would have been $801.9 million, a decrease of $52.4 million on the prior year period.
The decrease in gross premiums written in the property lines of $7.9 million was primarily due to a decrease in the property treaty lines of $9.6 million, of which $8.5 million related to the Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. In addition, renewed business in both the property treaty and downstream energy and power international lines have decreased due to unfavorable market conditions. These decreases were partially offset by an increase in the construction lines as a result of new projects and amendments to existing contracts. The decrease in gross premiums written in the marine lines of $52.9 million was primarily driven by a decrease in the upstream energy, cargo and marine hull lines due to ongoing market conditions and economic factors which have reduced new business and renewals.


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Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
81,720

 
$
91,332

 
$
(9,612
)
Marine
 
32,166

 
20,621

 
11,545

Specialty
 
50,258

 
42,162

 
8,096

Total
 
$
164,144

 
$
154,115

 
$
10,029

The decrease in reinsurance premiums ceded in the property lines of $9.6 million was due primarily to a decrease in the property treaty lines of $5.9 million due to lower quota share premiums as a result of underlying Latin American business now being written directly through Validus Re Swiss. This business was previously written by Talbot and ceded to Validus Re through the second quarter of 2014. Also contributing to the decrease was a reduction in quota share premium across other classes and a decrease in reinstatement premiums. The increase in the marine lines of $11.5 million was primarily due to the reinstatement premium impact of the second quarter notable loss event, Pemex. The increase in the specialty lines of $8.1 million was primarily due to reinstatement premiums across a number of classes.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
171,476

 
67.7
%
 
$
169,768

 
65.0
%
 
$
1,708

 
2.7

Marine
 
234,725

 
87.9
%
 
299,184

 
93.6
%
 
(64,459
)
 
(5.7
)
Specialty
 
218,803

 
81.3
%
 
231,257

 
84.6
%
 
(12,454
)
 
(3.3
)
Total
 
$
625,004

 
79.2
%
 
$
700,209

 
82.0
%
 
$
(75,205
)
 
(2.8
)
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property
 
$
166,500

 
$
153,766

 
$
12,734

Marine
 
246,039

 
275,793

 
(29,754
)
Specialty
 
221,632

 
228,992

 
(7,360
)
Total
 
$
634,171

 
$
658,551

 
$
(24,380
)
The changes in the net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

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Losses and Loss Expenses
 
Losses and Loss Expense Ratio - All Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
All lines—current period excluding items below
57.2
 %
 
58.8
 %
 
(1.6
)
All lines—current period—notable loss events
3.9
 %
 
1.9
 %
 
2.0

All lines—current period—non-notable loss events
0.7
 %
 
0.7
 %
 
0.0

All lines—change in prior accident years
(19.4
)%
 
(15.1
)%
 
(4.3
)
All lines—loss ratio
42.4
 %
 
46.3
 %
 
(3.9
)
 
 
Losses and Loss Expenses - All Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
All lines—current period excluding items below
 
$
362,214

 
$
386,780

 
$
(24,566
)
All lines—current period—notable loss events
 
24,868

 
12,475

 
12,393

All lines—current period—non-notable loss events
 
4,675

 
4,785

 
(110
)
All lines—change in prior accident years
 
(123,245
)
 
(99,192
)
 
(24,053
)
All lines - losses and loss expenses
 
$
268,512

 
$
304,848

 
$
(36,336
)
Notable Loss Events
Losses and loss expenses from notable loss events were $24.9 million for the nine months ended September 30, 2015, which represented 3.9 percentage points of the loss ratio. Losses and loss expenses from Tianjin, a current quarter notable loss event, were $12.0 million. Net of reinstatement premiums of $0.8 million, the effect of this event on net operating income was a reduction of $11.2 million. Losses and loss expenses from Pemex, a second quarter notable loss event, were $12.9 million for the nine months ended September 30, 2015. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $24.0 million. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $12.5 million for the nine months ended September 30, 2014, which represented 1.9 percentage points of the loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.7 million.
Non-notable Loss Events
Losses and loss expenses from non-notable loss events for the nine months ended September 30, 2015 were $4.7 million compared to $4.8 million for the nine months ended September 30, 2014. The non-notable loss event for the nine months ended September 30, 2015 was the Chilean earthquake.
Losses and Loss Expenses by Line of Business
 
Losses and Loss Expense Ratio - Property Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Property—current period excluding items below
62.6
 %
 
64.9
 %
 
(2.3
)
Property—current period—notable loss events
2.2
 %
 
0.0
 %
 
2.2

Property—current period—non-notable loss events
2.5
 %
 
3.1
 %
 
(0.6
)
Property—change in prior accident years
(28.3
)%
 
(28.6
)%
 
0.3

Property—loss ratio
39.0
 %
 
39.4
 %
 
(0.4
)

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Losses and Loss Expenses - Property Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Property—current period excluding items below
 
$
104,270

 
$
99,740

 
$
4,530

Property—current period—notable loss events
 
3,592

 
—

 
3,592

Property—current period—non-notable loss events
 
4,175

 
4,785

 
(610
)
Property—change in prior accident years
 
(47,141
)
 
(43,905
)
 
(3,236
)
Property - losses and loss expenses
 
$
64,896

 
$
60,620

 
$
4,276

During the nine months ended September 30, 2015, the property lines incurred $3.2 million of losses and loss expenses from a current quarter notable loss event, Tianjin, which represented 1.9 percentage points of the property lines loss ratio. Net of $0.2 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $2.9 million. In addition, losses and loss expenses from Pemex, a second quarter notable loss event, were $0.4 million which represented 0.3 percentage points of the property lines loss ratio. Net of $0.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $0.3 million. The property lines incurred no losses and loss expenses from notable loss events during the nine months ended September 30, 2014.
During the nine months ended September 30, 2015, the property lines incurred $4.2 million in losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 2.5 percentage points of the property lines loss ratio. During the nine months ended September 30, 2014, the property lines incurred $4.8 million in losses and loss expenses from non-notable loss events which represented 3.1 percentage points of the property lines loss ratio.
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, decreased by 2.3 percentage points as a result of lower attritional losses in the current period and a construction fire loss of $8.3 million included in the nine months ended September 30, 2014. The favorable development of $47.1 million on prior accident years for the nine months ended September 30, 2015 primarily relates to favorable development on attritional losses and certain events, including the Thailand floods, which was a 2011 notable loss event. The favorable development of $43.9 million on prior accident years for the nine months ended September 30, 2014 primarily relates to a combination of favorable development on attritional losses and notable loss events, primarily the Tohoku earthquake.
 
Losses and Loss Expense Ratio - Marine Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Marine—current period excluding items below
54.5
 %
 
52.3
 %
 
2.2

Marine—current period—notable loss events
8.6
 %
 
0.1
 %
 
8.5

Marine—current period—non-notable loss events
0.2
 %
 
0.0
 %
 
0.2

Marine—change in prior accident years
(20.8
)%
 
(6.6
)%
 
(14.2
)
Marine—loss ratio
42.5
 %
 
45.8
 %
 
(3.3
)
 
 
Losses and Loss Expenses - Marine Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Marine—current period excluding items below
 
$
133,982

 
$
144,348

 
$
(10,366
)
Marine—current period—notable loss events
 
21,276

 
191

 
21,085

Marine—current period—non-notable loss events
 
500

 
—

 
500

Marine—change in prior accident years
 
(51,178
)
 
(18,191
)
 
(32,987
)
Marine - losses and loss expenses
 
$
104,580

 
$
126,348

 
$
(21,768
)

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During the nine months ended September 30, 2015, the marine lines incurred $8.8 million of losses and loss expenses from a current quarter notable loss event, Tianjin, which represented 3.6 percentage points of the marine lines loss ratio. Net of $0.5 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $8.3 million. In addition, losses and loss expenses from a second quarter notable loss event, Pemex were $12.5 million which represented 5.0 percentage points of the marine lines loss ratio. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $23.6 million.
The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 2.2 percentage points primarily due to higher attritional losses in the current period. The favorable development of $51.2 million and $18.2 million on prior accident years for the nine months ended September 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.
 
Losses and Loss Expense Ratio - Specialty Lines
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Specialty—current period excluding items below
55.9
 %
 
62.3
 %
 
(6.4
)
Specialty—current period—notable loss events
0.0
 %
 
5.4
 %
 
(5.4
)
Specialty—current period—non-notable loss events
0.0
 %
 
0.0
 %
 
0.0

Specialty—change in prior accident years
(11.2
)%
 
(16.2
)%
 
5.0

Specialty—loss ratio
44.7
 %
 
51.5
 %
 
(6.8
)
 
 
Losses and Loss Expenses - Specialty Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Specialty—current period excluding items below
 
$
123,962

 
$
142,692

 
$
(18,730
)
Specialty—current period—notable loss events
 
—

 
12,284

 
(12,284
)
Specialty—current period—non-notable loss events
 
—

 
—

 
—

Specialty—change in prior accident years
 
(24,926
)
 
(37,096
)
 
12,170

Specialty - losses and loss expenses
 
$
99,036

 
$
117,880

 
$
(18,844
)
The specialty lines incurred no losses and loss expenses from notable loss events during the nine months ended September 30, 2015. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $12.3 million for the nine months ended September 30, 2014, which represented 5.4 percentage points of the loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.5 million.
The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, decreased by 6.4 percentage points primarily due to lower attritional losses in the current period. The favorable development of $24.9 million and $37.1 million on prior accident years for the nine months ended September 30, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.

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Policy Acquisition Costs
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
24,294

 
14.6
%
 
$
20,028

 
13.0
%
 
$
4,266

 
1.6
Marine
 
64,201

 
26.1
%
 
65,568

 
23.8
%
 
(1,367
)
 
2.3
Specialty
 
52,843

 
23.8
%
 
52,787

 
23.1
%
 
56

 
0.7
Total
 
$
141,338

 
22.3
%
 
$
138,383

 
21.0
%
 
$
2,955

 
1.3
The property acquisition cost ratio increased by 1.6 percentage points due to lower ceded acquisition costs on quota share premiums as a result of the Latin American business being written directly through Validus Re Swiss. This business was previously written through Talbot and ceded to Validus Re through the second quarter of 2014. The marine acquisition cost ratio increased by 2.3 percentage points primarily due to the reinstatement premium impact of the second quarter notable loss event, Pemex, and profit commission adjustments to certain cargo and yachts policies during the nine months ended September 30, 2014.
General and Administrative and Share Compensation Expenses
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
Change
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
115,341

 
18.2
%
 
$
107,031

 
16.2
%
 
$
8,310

 
2.0
Share compensation expenses
 
9,195

 
1.4
%
 
8,434

 
1.3
%
 
761

 
0.1
Total
 
$
124,536

 
19.6
%
 
$
115,465

 
17.5
%
 
$
9,071

 
2.1
General and administrative expenses translated at 2014 exchange rates would have been $121.6 million, an increase of $14.5 million. This increase was primarily due to a greater retention of costs within the segment together with an increase in the performance bonus accrual. Share compensation expense ratios were comparable for the nine months ended September 30, 2015 and 2014.
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the nine months ended September 30, 2015 and 2014.
 
Nine Months Ended September 30,
 
2015
 
2014
 
Change
Losses and loss expense ratio
42.4
%
 
46.3
%
 
(3.9
)
Policy acquisition cost ratio
22.3
%
 
21.0
%
 
1.3

General and administrative expense ratio (a)
19.6
%
 
17.5
%
 
2.1

Expense ratio
41.9
%
 
38.5
%
 
3.4

Combined ratio
84.3
%
 
84.8
%
 
(0.5
)
(a)
The general and administrative expense ratio includes share compensation expenses.
The decrease in the combined ratio for the nine months ended September 30, 2015 of 0.5 percentage points compared to the nine months ended September 30, 2014 was due to the movement in the underlying ratios as discussed above.

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Net Investment Income
 
 
Net Investment Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Fixed maturities and short-term investments
 
$
19,330

 
$
14,453

 
$
4,877

Restricted cash and cash and cash equivalents
 
1,115

 
1,016

 
99

Total gross investment income
 
20,445

 
15,469

 
4,976

Investment expenses
 
(1,277
)
 
(1,147
)
 
(130
)
Total net investment income
 
$
19,168

 
$
14,322

 
$
4,846

The increase in net investment income for the nine months ended September 30, 2015 was $4.8 million or 33.8% primarily due to a change in asset allocation intended to improve yield.

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Year to Date 2015 Results of Operations - Western World Segment
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition. As a result, there are no comparatives for the nine months ended September 30, 2014.
The following table presents results of operations for the nine months ended September 30, 2015:
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Underwriting income
 
 
Gross premiums written
 
$
207,372

Reinsurance premiums ceded
 
(13,390
)
Net premiums written
 
193,982

Change in unearned premiums
 
2,948

Net premiums earned
 
196,930

 
 
 
Underwriting deductions
 
 
Losses and loss expenses
 
138,098

Policy acquisition costs
 
27,110

General and administrative expenses
 
29,137

Share compensation expenses
 
1,525

Total underwriting deductions
 
195,870

 
 
 
Underwriting income (a)
 
1,060

 
 
 
Net investment income
 
16,660

Other insurance related income
 
787

Operating income before taxes
 
18,507

Tax expense
 
(2,420
)
Net operating income (a)
 
$
16,087

 
 
 
Selected ratios:
 
 
Net premiums written / Gross premiums written
 
93.5
%
 
 
 
Losses and loss expenses
 
70.1
%
 
 
 
Policy acquisition costs
 
13.8
%
General and administrative expense (b)
 
15.6
%
Expense ratio
 
29.4
%
Combined ratio
 
99.5
%

(a)
Non-GAAP Financial Measures: In presenting the Company's results, management has included and discussed underwriting income and net operating income 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. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
(b)
The general and administrative expense ratio includes share compensation expenses.

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Gross Premiums Written
 
 
Business Mix - Ratio of Gross Premiums Written by Line of Business to Total Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Gross Premiums Written
 
% of Total
Property
 
$
39,134

 
18.9
%
Liability
 
168,238

 
81.1
%
Total
 
$
207,372

 
100.0
%
The property lines consist largely of commercial package property and program business. During the three months ended March 31, 2015, Western World began writing brokerage property business. Gross premiums written in the brokerage property class totaled $8.7 million for the nine months ended September 30, 2015. During the three months ended December 31, 2014, Western World discontinued writing binding authority commercial auto business and a large bar and tavern program. The liability lines consist largely of commercial package liability, program and other liability business.
Reinsurance Premiums Ceded
 
 
Reinsurance Premiums Ceded
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Property
 
$
3,180

Liability
 
10,210

Total
 
$
13,390

The Western World reinsurance program includes various treaties: a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.
Net Premiums Written
 
 
Net Retention - Ratio of Net Premiums Written to Gross Premiums Written
 
 
Nine Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Net Premiums
Written
 
% of Gross Premiums Written
Property
 
$
35,954

 
91.9
%
Liability
 
158,028

 
93.9
%
Total
 
$
193,982

 
93.5
%
Net premiums written and the net retention ratio were driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Net Premiums Earned
 
 
Net Premiums Earned
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Property
 
$
32,505

Liability
 
164,425

Total
 
$
196,930


Net premiums earned were driven by the earnings pattern of net premiums written.

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Losses and Loss Expenses
 
 
Losses and Loss Expense Ratio -
All Lines
 
 
Nine Months Ended September 30,
 
 
2015
All lines—current period excluding items below
 
78.1
 %
All lines—current period—notable loss events
 
0.0
 %
All lines—current period—non-notable loss events
 
0.0
 %
All lines—change in prior accident years (a)
 
(8.0
)%
All lines—loss ratio (a)
 
70.1
 %
 
 
Losses and Loss Expenses - All Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
All lines—current period excluding items below
 
$
153,737

All lines—current period—notable loss events
 
—

All lines—current period—non-notable loss events
 
—

All lines—change in prior accident years (a)
 
(15,639
)
All lines—losses and loss expenses (a)
 
$
138,098

(a)
Upon closing the acquisition, an adjustment of $15,586 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $8,639 during the nine months ended September 30, 2015, benefiting the loss ratio by 4.4% percentage points. The remaining fair value adjustment of $2,340 will be amortized during the remainder of 2015.
Notable and Non-notable Loss Events
There were no losses and loss expenses from notable or non-notable loss events for the nine months ended September 30, 2015.
Losses and Loss Expenses by Line of Business
 
 
Losses and Loss Expense Ratio - Property Lines
 
 
Nine Months Ended September 30,
 
 
2015
Property—current period excluding items below
 
76.8
 %
Property—current period—notable loss events
 
0.0
 %
Property—current period—non-notable loss events
 
0.0
 %
Property—change in prior accident years (a)
 
(14.3
)%
Property—loss ratio (a)
 
62.5
 %

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Losses and Loss Expenses - Property Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Property—current period excluding items below
 
$
24,965

Property—current period—notable loss events
 
—

Property—current period—non-notable loss events
 
—

Property—change in prior accident years (a)
 
(4,648
)
Property—losses and loss expenses (a)
 
$
20,317

(a)
Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was amortized to income through an increase in losses and loss expenses of $227 during the nine months ended September 30, 2015, increasing the loss ratio by 0.7% percentage points. The remaining fair value adjustment of $61 will be amortized during the remainder of 2015.
The property lines current period loss ratio was 76.8% percentage points, representing attritional claims experienced during the period. The favorable development of $4.6 million on prior accident years for the nine months ended September 30, 2015 primarily relates to favorable development on attritional losses.
 
 
Losses and Loss Expense Ratio - Liability Lines
 
 
Nine Months Ended September 30,
 
 
2015
Liability—current period excluding items below
 
78.3
 %
Liability—current period—notable loss events
 
0.0
 %
Liability—current period—non-notable loss events
 
0.0
 %
Liability—change in prior accident years (a)
 
(6.7
)%
Liability—loss ratio (a)
 
71.6
 %
 
 
Losses and Loss Expenses - Liability Lines
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Liability—current period excluding items below
 
$
128,772

Liability—current period—notable loss events
 
—

Liability—current period—non-notable loss events
 
—

Liability—change in prior accident years (a)
 
(10,991
)
Liability—losses and loss expenses (a)
 
$
117,781

(a)
Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was amortized to income through a reduction in losses and loss expenses of $8,866 during the nine months ended September 30, 2015, benefiting the loss ratio by 5.4% percentage points. The remaining fair value adjustment of $2,401 will be amortized during the remainder of 2015.
The liability lines current period loss ratio was 78.3% percentage points, representing attritional claims experienced during the period. The liability lines experienced favorable loss reserve development of $11.0 million during the nine months ended September 30, 2015 due to the amortization of the fair value adjustment noted above and favorable development on attritional losses.

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Policy Acquisition Costs
 
 
Nine Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Policy Acquisition Costs
 
% of Net Premiums Earned
Property
 
$
4,062

 
12.5
%
Liability
 
23,048

 
14.0
%
Total (a)
 
$
27,110

 
13.8
%
(a)
Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $19,917 during the nine months ended September 30, 2015, benefiting the policy acquisition cost ratio by 10.1% percentage points.
The property acquisition cost ratio for the nine months ended September 30, 2015 was 12.5% and the liability acquisition cost ratio for the nine months ended September 30, 2015 was 14.0%. The impact of the acquisition fair value adjustments on the policy acquisition cost ratio is noted above.
General and Administrative and Share Compensation Expenses
 
 
Nine Months Ended September 30,
 
 
2015
(Dollars in thousands)
 
Expenses
 
% of Net Premiums Earned
General and administrative expenses
 
$
29,137

 
14.8
%
Share compensation expenses
 
1,525

 
0.8
%
Total
 
$
30,662

 
15.6
%
Selected Underwriting Ratios
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the nine months ended September 30, 2015.
 
Nine Months Ended September 30,
 
2015
Losses and loss expense ratio
70.1
%
Policy acquisition cost ratio
13.8
%
General and administrative expense ratio (a)
15.6
%
Expense ratio
29.4
%
Combined ratio
99.5
%
(a)
The general and administrative expense ratio includes share compensation expenses.
The combined ratio for the nine months ended September 30, 2015 reflects the underlying ratios highlighted above.
Net Investment Income
 
 
Net Investment Income
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
Fixed maturities and short-term investments
 
$
14,152

Other investments
 
3,620

Restricted cash and cash and cash equivalents
 
13

Total gross investment income
 
17,785

Investment expenses
 
(1,125
)
Total net investment income
 
$
16,660


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Year to Date 2015 Non-Segment Discussion
Corporate Expenses
Corporate general and administrative expenses for the nine months ended September 30, 2015, net of eliminations related to the operating segments, were $49.1 million compared to $55.2 million for the nine months ended September 30, 2014, a decrease of $6.1 million or 11.1%. This decrease was due primarily to the retention of certain costs within the operating segments. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.
Corporate share compensation expenses for the nine months ended September 30, 2015 were $9.5 million compared to $8.4 million for the nine months ended September 30, 2014, an increase of $1.1 million or 13.1%.
Corporate finance expenses for the nine months ended September 30, 2015 and 2014, net of eliminations related to the operating segments, were $34.3 million.
Transaction expenses for the nine months ended September 30, 2015 were $nil compared to $3.4 million for the nine months ended September 30, 2014. The transaction expenses related to costs incurred in connection with the acquisition of Western World, which was completed on October 2, 2014. The Company incurred an additional $4.7 million of transaction expenses which were recognized in the fourth quarter of 2014. Western World results have been included in the Company's consolidated results from the date of acquisition. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
Year to Date 2015 Non-Operating Income and Expenses
The following non-operating income and expense items are discussed on a consolidated basis, since the Company does not include these items when assessing the results of its operating segments.
Net Realized and Change in Net Unrealized (Losses) Gains on Investments
 
 
Net Realized and Change in Net Unrealized (Losses) Gains on Investments
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net realized (losses) gains on investments
 
$
(35,493
)
 
$
16,193

 
$
(51,686
)
Change in net unrealized gains on investments
 
19,766

 
16,146

 
3,620

Net realized and change in net unrealized (losses) gains on investments
 
$
(15,727
)
 
$
32,339

 
$
(48,066
)

Net realized losses on investments for the nine months ended September 30, 2015 were $35.5 million compared to gains of $16.2 million for the nine months ended September 30, 2014, an unfavorable movement of $51.7 million. The net realized losses for the nine months ended September 30, 2015, included $40.7 million in realized losses relating to PaCRe. The amount of PaCRe's realized losses attributable to noncontrolling interest was $36.6 million for the nine months ended September 30, 2015, leaving a net loss to the Company of $4.1 million. The net realized gains on investments for the nine months ended September 30, 2014 was driven by $8.2 million in realized gains relating to PaCRe. The amount of PaCRe's realized gains attributable to noncontrolling interest was $7.4 million for the nine months ended September 30, 2014, leaving a net gain to the Company of $0.8 million.
The change in net unrealized gains on investments for the nine months ended September 30, 2015 was $19.8 million compared to $16.1 million for the nine months ended September 30, 2014, a favorable movement of $3.6 million, or 22.4%. The change in net unrealized gains on investments for the nine months ended September 30, 2015 was driven by $17.3 million in unrealized gains relating to PaCRe. The amount of PaCRe's net unrealized gains attributable to noncontrolling interest was $15.6 million for the nine months ended September 30, 2015, leaving a net gain to the Company of $1.7 million. The change in net unrealized gains on investments for the nine months ended September 30, 2014 was driven by $16.9 million in unrealized gains relating to PaCRe. The amount of PaCRe's net unrealized gains attributable to noncontrolling interest was $15.3 million for the nine months ended September 30, 2014, leaving a net gain to the Company of $1.7 million.

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Income From Investment Affiliate
 
 
Income From Investment Affiliate
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Income from investment affiliate
 
$
5,542

 
$
7,881

 
$
(2,339
)
The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the nine months ended June 30, 2015 and 2014.
Foreign Exchange Losses
The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect period-to-period comparisons. The Company's largest foreign currency fluctuation exposures are to the following currencies, with the movement in each currency against the U.S. dollar shown in the table below:
 
 
Nine Months Ended September 30,
U.S. dollar strengthened (weakened) against:
 
2015
 
2014
British Pound sterling
 
2.9
 %
 
2.3
%
Euro
 
8.4
 %
 
8.9
%
Canadian dollar
 
14.5
 %
 
5.5
%
Swiss franc
 
(1.9
)%
 
7.0
%
Australian dollar
 
15.9
 %
 
2.5
%
New Zealand dollar
 
21.6
 %
 
5.7
%
Singapore dollar
 
7.3
 %
 
1.1
%
Japanese yen
 
0.3
 %
 
4.3
%
South African rand
 
19.6
 %
 
8.0
%
 
 
Foreign Exchange Losses
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Foreign exchange losses
 
$
(9,061
)
 
$
(14,761
)
 
$
5,700

Foreign exchange losses for the nine months ended September 30, 2015 were $9.1 million compared to $14.8 million for the nine months ended September 30, 2014, a favorable movement of $5.7 million, or 38.6%, due primarily to the U.S. dollar strengthening against the Euro, Canadian and Australian dollars in the current period.
The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company attempts to limit its exposure to foreign exchange fluctuations.
Other Loss
 
 
Other Loss
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Other loss
 
$
(2,578
)
 
$
(1,473
)
 
$
(1,105
)
Other loss for the nine months ended September 30, 2015 and 2014 was due primarily to adjustments related to assets acquired with the purchase of Flagstone.

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Net Loss (Income) Attributable to Noncontrolling Interest
 
 
Net Loss (Income) Attributable to Noncontrolling Interest
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net loss (income) attributable to noncontrolling interest
 
$
15,042

 
$
(25,745
)
 
$
40,787

For the nine months ended September 30, 2015, net loss attributable to noncontrolling interest was $15.0 million, which was comprised of operating income of $6.0 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating loss of $21.1 million, primarily on the investment portfolio within PaCRe.
For the nine months ended September 30, 2014, net income attributable to noncontrolling interest was $25.7 million, which was comprised of operating income of $3.2 million, as discussed in the AlphaCat Segment Results of Operations, and a non-operating gain of $22.6 million, primarily on the investment portfolio within PaCRe.
Other Non-GAAP Financial Measures
The operating results of an insurance or reinsurance company are also often measured by reference to its net operating income, which is a non-GAAP financial measure. Net operating income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income line items, as illustrated below.
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Net operating income
 
$
73,563

 
$
84,508

 
$
310,856

 
$
360,587

Net realized (losses) gains on investments
 
(41,906
)
 
4,595

 
(35,493
)
 
16,193

Change in net unrealized (losses) gains on investments
 
(34,908
)
 
(84,974
)
 
19,766

 
16,146

Income from investment affiliate
 
2,482

 
1,754

 
5,542

 
7,881

Foreign exchange losses
 
(2,274
)
 
(11,441
)
 
(9,061
)
 
(14,761
)
Other loss
 
(1,970
)
 
(7,690
)
 
(2,578
)
 
(1,473
)
Transaction expenses
 
—

 
(149
)
 
—

 
(3,401
)
Net (loss) income
 
$
(5,013
)
 
$
(13,397
)
 
$
289,032

 
$
381,172

Operating income indicates the performance of the Company’s core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of operating income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and 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.
The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of operating income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing operating income 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 of operations in a manner similar to how management analyzes the Company’s underlying business performance.

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Operating income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of operating income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of operating income with other companies, particularly as operating income may be defined or calculated differently by other companies. Therefore, the Company provides prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of operating income to net income.
The Company also uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the total annual incentive compensation.
In presenting the Company's results, management has also included and discussed certain schedules containing book value per diluted common share and book value per diluted 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 and 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.
The following tables present reconciliations of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, at September 30, 2015 and December 31, 2014.
(Dollars in thousands, except share and per share amounts)
As at September 30, 2015
Equity Amount
 
Shares
 
Exercise Price
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
$
3,644,560

 
81,997,891

 
 
 
$
44.45

 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
3,644,560

 
81,997,891

 
 
 
 
Assumed exercise of outstanding warrants
59,506

 
3,377,320

 
$
17.62

 
 
Assumed exercise of outstanding stock options
1,319

 
65,401

 
$
20.17

 
 
Unvested restricted shares
—

 
3,014,830

 
 
 
 
Book value per diluted common share
$
3,705,385

 
88,455,442

 
 
 
$
41.89

Adjustment for accumulated dividends
 
 
 
 
 
 
$
9.84

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
$
51.73

(Dollars in thousands, except share and per share amounts)
As at December 31, 2014
Equity Amount
 
Shares
 
Exercise Price
 
Book Value Per
Share
Book value per common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
$
3,587,958

 
83,869,845

 
 
 
$
42.78

 
 
 
 
 
 
 
 
Book value per diluted common share
 
 
 
 
 
 
 
Total shareholders' equity available to Validus
3,587,958

 
83,869,845

 
 
 
 
Assumed exercise of outstanding warrants
90,950

 
5,174,114

 
$
17.58

 
 
Assumed exercise of outstanding stock options
20,581

 
1,160,057

 
$
17.74

 
 
Unvested restricted shares
—

 
3,068,564

 
 
 
 
Book value per diluted common share
$
3,699,489

 
93,272,580

 
 
 
$
39.66

Adjustment for accumulated dividends
 
 
 
 
 
 
$
8.88

Book value per diluted common share plus accumulated dividends
 
 
 
 
 
 
$
48.54


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Liquidity and Capital Resources
Investments
At September 30, 2015, the Company held investments totaling $8.1 billion, compared to $7.4 billion at December 31, 2014, an increase of $0.7 billion, or 8.9%, primarily as a result of an increase in short-term investments. A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s investment policies specifically require certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures to provide necessary liquidity in a wide range of reasonable scenarios. At September 30, 2015, the average duration of the Company’s fixed maturity investment portfolio was 2.44 years (December 31, 2014: 2.16 years). This duration is reviewed regularly based on changes in the duration of the Company's liabilities and in general market conditions.
The Company’s investment portfolio is also structured to preserve capital. The Company’s investment policies require certain minimum credit quality standards, including a minimum weighted average portfolio rating of A+. Further limits on securities rated BBB and below are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall enterprise-risk framework. At September 30, 2015, the Company’s total investment portfolio had an average credit quality rating of AA- (December 31, 2014: AA-) and an effective yield of 1.92% for the nine months then ended (2014: 1.41%). The estimated fair value of investment grade fixed maturities, as at September 30, 2015 was $4.8 billion, or 86.1% of the fixed maturity portfolio, compared to $4.9 billion as at December 31, 2014, or 89.2%, a decrease of $0.1 billion, or 2.6%. The estimated fair value of managed non-investment grade fixed maturities as at September 30, 2015 was $615.2 million or 9.5% of total managed cash and investments compared to $523.3 million or 7.7% of total managed cash and investments as at December 31, 2014, an increase of $91.9 million, or 17.6%. Managed non-investment grade securities consist primarily of bank loans and corporate bonds.
The Company also has an allocation to other investments, primarily investment funds and hedge funds. At September 30, 2015, these other investments, excluding noncontrolling interests, totaled $382.9 million, or 5.0%, of total investments, excluding noncontrolling interest (December 31, 2014: $382.5 million or 5.5%). For further details related to the investment portfolio, including the extent of investments with fair values measured using unobservable inputs, see Notes 3 and 4 to the Consolidated Financial Statements in Part I, Item 1.
The value of the Company’s fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, and prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans.

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The estimated fair value of investments at September 30, 2015 and December 31, 2014 was as follows:
 
September 30, 2015
 
December 31, 2014
(Dollars in thousands)
Estimated Fair Value
 
% of Total Investments
 
Estimated Fair Value
 
% of Total Investments
U.S. government and government agency
$
871,928

 
14.2
 %
 
$
760,086

 
12.3
 %
Non-U.S. government and government agency
222,964

 
3.7
 %
 
278,728

 
4.5
 %
U.S. states, municipalities and political subdivisions
319,526

 
5.2
 %
 
449,623

 
7.3
 %
Agency residential mortgage-backed securities
497,270

 
8.2
 %
 
529,231

 
8.5
 %
Non-agency residential mortgage-backed securities
27,054

 
0.4
 %
 
37,807

 
0.6
 %
U.S. corporate
1,525,894

 
25.0
 %
 
1,499,706

 
24.2
 %
Non-U.S. corporate
467,820

 
7.7
 %
 
563,162

 
9.1
 %
Bank loans
509,473

 
8.4
 %
 
449,004

 
7.2
 %
Catastrophe bonds
159,976

 
2.6
 %
 
75,664

 
1.2
 %
Asset-backed securities
625,248

 
10.3
 %
 
647,482

 
10.5
 %
Commercial mortgage-backed securities
351,703

 
5.8
 %
 
242,238

 
3.9
 %
Total fixed maturities
5,578,856

 
91.5
 %
 
5,532,731

 
89.3
 %
Total short-term investments (a)
1,661,687

 
27.2
 %
 
1,051,074

 
17.1
 %
Total other investments (b)
817,374

 
13.4
 %
 
813,011

 
13.1
 %
Total investments including assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
8,057,917

 
132.1
 %
 
7,396,816

 
119.5
 %
Assets managed on behalf of AlphaCat investors (a)
(1,364,692
)
 
(22.4
)%
 
(696,924
)
 
(11.3
)%
Catastrophe bonds
(159,976
)
 
(2.6
)%
 
(75,664
)
 
(1.2
)%
Noncontrolling interest (b)
(434,436
)
 
(7.1
)%
 
(430,494
)
 
(7.0
)%
Total investments, excluding assets managed on behalf of AlphaCat investors, catastrophe bonds and noncontrolling interest
$
6,098,813

 
100.0
 %
 
$
6,193,734

 
100.0
 %
(a)
Included in the short-term investments balance are assets managed in support of AlphaCat's fully collateralized reinsurance transactions. Also, included in the short-term investments balance are investments held by one AlphaCat ILS fund which was consolidated by the Company through May 31, 2015, but in which the Company had an equity interest of less than 100%. The remaining interests are held by third party investors and included in the Consolidated Balance Sheets as redeemable noncontrolling interest.
(b)
Included in the other investments balance are investments held by PaCRe in which the Company has an equity interest of 10%. The remaining 90% interest is held by third party investors and included in the Consolidated Balance Sheets as noncontrolling interest.

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As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s fixed maturity portfolio:
 
September 30, 2015
(Dollars in thousands)
Fair Value
 
% of Total
Germany
$
47,659

 
7.0
%
United Kingdom
34,316

 
5.0
%
Supranational
32,334

 
4.8
%
France
18,244

 
2.7
%
Province of Ontario
16,069

 
2.4
%
Norway
15,964

 
2.3
%
Jordan
10,163

 
1.5
%
Province of Manitoba
10,068

 
1.5
%
Denmark
10,033

 
1.5
%
Other (individual jurisdictions below $10,000)
28,114

 
4.1
%
Total Non-U.S. Government Securities
222,964

 
32.8
%
European Corporate Securities
187,551

 
27.5
%
United Kingdom Corporate Securities
143,665

 
21.1
%
Other Non-U.S. Corporate Securities
126,604

 
18.6
%
Total Non-U.S. Fixed Income Portfolio
$
680,784

 
100.0
%
The Company limits its exposure to any single issuer to 3.75% or less of total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. At September 30, 2015, the Company did not have an aggregate exposure to any single issuer of more than 0.7%, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at September 30, 2015 are as follows:
(Dollars in thousands)
 
September 30, 2015
Issuer (a)
 
Fair Value (b)
 
S&P Rating (c)
 
% of Total Cash and Investments
HSBC Holdings Plc
 
$
58,174

 
 A
 
0.7
%
JPMorgan Chase & Co
 
56,053

 
 A-
 
0.7
%
Morgan Stanley
 
55,170

 
 BBB+
 
0.6
%
Citigroup Inc
 
49,109

 
 BBB+
 
0.6
%
Bank of America Corp
 
45,996

 
 BBB+
 
0.5
%
Goldman Sachs Group
 
45,803

 
 BBB+
 
0.5
%
Wells Fargo & Company
 
41,375

 
 A-
 
0.5
%
Bank of New York Mellon Corp
 
34,666

 
 A
 
0.4
%
US Bancorp
 
34,427

 
 AA-
 
0.4
%
Apple Inc
 
32,015

 
 AA+
 
0.4
%
Total
 
$
452,788

 
 
 
5.3
%
(a)
Issuers exclude government-backed, government-sponsored enterprises and cash and cash equivalents.
(b)
Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.
(c)
Investment ratings are the median of Moody's, Standard & Poor's and Fitch, presented in Standard & Poor's equivalent rating. For investments where three ratings are unavailable, the lower of the ratings shall apply, presented in Standard & Poor's equivalent rating.

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The tables below show the Company’s investments in affiliates, accounted for under the equity method:
 
September 30, 2015
(Dollars in thousands)
Investment at cost
 
Voting ownership
 
Equity ownership
 
Carrying value
AlphaCat Re 2011
$
4,997

 
43.7
%
 
22.3
%
 
$
4,997

AlphaCat Re 2012
699

 
49.0
%
 
37.9
%
 
699

AlphaCat 2013
1,035

 
40.9
%
 
19.7
%
 
1,035

AlphaCat 2014
711

 
42.3
%
 
19.6
%
 
711

AlphaCat 2015
28,000

 
40.0
%
 
20.0
%
 
31,675

AlphaCat ILS funds
214,484

 
n/a

 
(a)

 
220,711

Aquiline Financial Services Fund II L.P.
55,098

 
n/a

 
8.1
%
 
74,341

Aquiline Financial Services Fund III L.P.
13,890

 
n/a

 
13.7
%
 
13,793

Total
$
318,914

 
 
 
 
 
$
347,962

(a)
Equity ownership in the AlphaCat ILS funds was 7.6%, 19.4%, 9.1% and 32.5% as at September 30, 2015.
 
December 31, 2014
(Dollars in thousands)
Investment at cost
 
Voting ownership
 
Equity ownership
 
Carrying value
AlphaCat Re 2011
$
4,606

 
43.7
%
 
22.3
%
 
$
4,606

AlphaCat Re 2012
735

 
49.0
%
 
37.9
%
 
735

AlphaCat 2013
1,068

 
40.9
%
 
19.7
%
 
1,068

AlphaCat 2014
22,000

 
42.3
%
 
19.6
%
 
28,085

AlphaCat 2015
25,600

 
40.0
%
 
20.0
%
 
25,600

AlphaCat ILS funds
133,091

 
n/a

 
(a)

 
137,883

Aquiline Financial Services Fund II L.P.
51,001

 
n/a

 
8.1
%
 
63,506

Total
$
238,101

 
 
 
 
 
$
261,483

(a)
Equity ownership in the AlphaCat ILS funds was 7.9%, 39.7% and 9.1% as at December 31, 2014.
During the nine months ended September 30, 2015, the Company received partial returns of investment from AlphaCat 2014 and the AlphaCat ILS funds of $27.3 million and $23.4 million, respectively. Offsetting these returns were contributions of capital to AlphaCat 2015 and the AlphaCat ILS funds of $2.4 million and $8.0 million, respectively. The Company expects to receive further returns of investment during the year from AlphaCat Re 2011, AlphaCat Re 2012, AlphaCat 2013 and AlphaCat 2014. Net capital contributions to Aquiline Financial Services Fund II L.P. and Aquiline Financial Services Fund III L.P. for the nine months ended September 30, 2015 were $5.3 million and $13.8 million, respectively.

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Reserves for Losses and Loss Expenses
At September 30, 2015, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates section. The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.
 
 
As at September 30, 2015
(Dollars in thousands)
 
Gross Case Reserves
 
Gross IBNR
 
Total Gross Reserve for Losses and Loss Expenses
Property
 
$
448,881

 
$
441,252

 
$
890,133

Marine
 
379,373

 
442,181

 
821,554

Specialty
 
281,084

 
574,477

 
855,561

Liability
 
186,135

 
415,951

 
602,086

Total
 
$
1,295,473

 
$
1,873,861

 
$
3,169,334

 
 
As at September 30, 2015
(Dollars in thousands)
 
Net Case Reserves
 
Net IBNR
 
Total Net Reserve for Losses and Loss Expenses
Property
 
$
390,731

 
$
376,503

 
$
767,234

Marine
 
344,051

 
393,174

 
737,225

Specialty
 
241,820

 
521,197

 
763,017

Liability
 
174,942

 
341,704

 
516,646

Total
 
$
1,151,544

 
$
1,632,578

 
$
2,784,122


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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended September 30, 2015.
 
 
Three Months Ended September 30, 2015
(Dollars in thousands)
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,295,816

 
$
4,869

 
$
1,330,810

 
$
621,108

 
$
(65,426
)
 
$
3,187,177

Losses and loss expenses recoverable
 
(58,904
)
 
—

 
(293,578
)
 
(89,609
)
 
65,426

 
(376,665
)
Net reserves for losses and loss expenses, beginning of period
 
1,236,912

 
4,869

 
1,037,232

 
531,499

 
—

 
2,810,512

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
171,433

 
2,076

 
130,386

 
45,864

 
—

 
349,759

Prior years
 
(50,475
)
 
—

 
(35,972
)
 
(5,054
)
 
—

 
(91,501
)
Total incurred losses and loss expenses
 
120,958

 
2,076

 
94,414

 
40,810

 
—

 
258,258

 
 
 
 
 
 
 
 
 
 
 
 
 
Net paid losses
 
(123,594
)
 
(238
)
 
(105,223
)
 
(41,610
)
 
—

 
(270,665
)
Foreign exchange gain
 
(6,265
)
 
—

 
(7,718
)
 
—

 
—

 
(13,983
)
Net reserve for losses and loss expenses, end of period
 
1,228,011

 
6,707

 
1,018,705

 
530,699

 
—

 
2,784,122

Losses and loss expenses recoverable
 
60,785

 
—

 
298,836

 
85,823

 
(60,232
)
 
385,212

Reserve for losses and loss expenses, end of period
 
$
1,288,796

 
$
6,707

 
$
1,317,541

 
$
616,522

 
$
(60,232
)
 
$
3,169,334

The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the three months ended September 30, 2015, favorable loss reserve development on prior accident years was $91.5 million of which $50.5 million related to the Validus Re segment, $nil related to the AlphaCat segment, $36.0 million related to the Talbot segment and $5.1 million related to the Western World segment.

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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the nine months ended September 30, 2015.
 
 
Nine Months Ended September 30, 2015
(Dollars in thousands)
 
Validus Re Segment
 
AlphaCat Segment
 
Talbot Segment
 
Western World Segment
 
Eliminations
 
Total
Reserve for losses and loss expenses, beginning of period
 
$
1,333,878

 
$
6,525

 
$
1,352,056

 
$
613,551

 
$
(71,616
)
 
$
3,234,394

Losses and loss expenses recoverable
 
(70,279
)
 
—

 
(290,581
)
 
(88,222
)
 
71,616

 
(377,466
)
Net reserves for losses and loss expenses, beginning of period
 
1,263,599

 
6,525

 
1,061,475

 
525,329

 
—

 
2,856,928

Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
 
 
 
 
 
 
 
 
 
 
 
 
Current year
 
463,541

 
2,076

 
391,757

 
153,737

 
—

 
1,011,111

Prior years
 
(106,050
)
 
(844
)
 
(123,245
)
 
(15,639
)
 
—

 
(245,778
)
Total incurred losses and loss expenses
 
357,491

 
1,232

 
268,512

 
138,098

 
—

 
765,333

 
 
 
 
 
 
 
 
 
 
 
 
 
Net paid losses
 
(368,493
)
 
(1,025
)
 
(303,477
)
 
(132,728
)
 
—

 
(805,723
)
Foreign exchange gain
 
(24,586
)
 
(25
)
 
(7,805
)
 
—

 
—

 
(32,416
)
Net reserve for losses and loss expenses, end of period
 
1,228,011

 
6,707

 
1,018,705

 
530,699

 
—

 
2,784,122

Losses and loss expenses recoverable
 
60,785

 
—

 
298,836

 
85,823

 
(60,232
)
 
385,212

Reserve for losses and loss expenses, end of period
 
$
1,288,796

 
$
6,707

 
$
1,317,541

 
$
616,522

 
$
(60,232
)
 
$
3,169,334

The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the nine months ended September 30, 2015, favorable loss reserve development on prior accident years was $245.8 million of which $106.1 million related to the Validus Re segment, $0.8 million related to the AlphaCat segment, $123.2 million related to the Talbot segment and $15.6 million related to the Western World segment.
The management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company's actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events. Any reserve for potential development on notable loss events (or “RDE”) is included as part of the Company's overall reserve as defined and disclosed in the Critical Accounting Policies and Estimates section.
For disclosure purposes, only those notable loss events which have an ultimate loss estimate at or above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year. The Company increased the threshold for disclosure for notable loss events effective January 1, 2011, from $5.0 million to $15.0 million and further increased the threshold effective January 1, 2013 from $15.0 million to $30.0 million. Non-notable loss events which aggregate to $15.0 million or more but less than $30.0 million on a consolidated basis have been disclosed from January 1, 2013.

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The reserves for notable loss events table below does not disclose 2010, 2011 or 2012 notable loss events. Deepwater Horizon, a 2010 event, had closing reserves of $25.4 million as at September 30, 2015. The New Zealand earthquakes of 2010 and 2011, had total closing reserves of $129.2 million as at September 30, 2015. Hurricane Sandy, a 2012 event, had total closing reserves of $72.6 million as at September 30, 2015 and Costa Concordia, also a 2012 event, had total closing reserves of $30.5 million as at September 30, 2015.
Reserves for Notable Loss Events (Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Notable Loss Event
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Nine Months Ended September 30, 2015
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
Unfavorable (b)
 
of RDE
 
December 31, 2013
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
September 30, 2015
European Floods
 
$
77,587

 
$
(16,762
)
 
—

 
$
60,825

 
$
(25,938
)
 
—

 
$
34,887

 
(4,591
)
 
—

 
$
30,296

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2013
 
Year Ended December 31, 2014
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
December 31, 2013
 
 
 
 
December 31, 2014
 
 
 
 
September 30, 2015
European Floods
 
 
 
 
 
$
8,006

 
$
52,819

 
 
 
$
11,864

 
$
15,017

 
 
 
$
3,634

 
$
6,792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 Notable Loss Event
 
 
 
Year Ended December 31, 2014
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Event
 
Estimate (a)
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
December 31, 2014
 
Unfavorable (b)
 
of RDE
 
September 30, 2015
Tripoli Airport (e)
 
$
28,134

 
 
 
 
 
 
 
$
6,810

 
—

 
$
34,944

 
$
2,050

 
—

 
$
36,994

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2014
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Event
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
September 30, 2015
Tripoli Airport (e)
 
 
 
 
 
 
 
 
 
 
 
$
—

 
$
34,944

 
 
 
$
21,598

 
$
15,396

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Notable Loss Events
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Development
 
 
 
Closing
 
 
Initial
 
 
 
 
 
 
 
 
 
 
 
 
 
(Favorable) /
 
Allocations
 
Estimate (c)
Notable Loss Events
 
Estimate (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unfavorable (b)
 
of RDE
 
September 30, 2015
Pemex
 
$
48,074

 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,187

 
—

 
$
49,261

Tianjin
 
47,789

 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
—

 
47,789

Total 2015 Notable Loss Events
 
$
95,863

 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,187

 
$
—

 
$
97,050

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid Loss (Recovery)
 
Reserve (d)
Notable Loss Events
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
Pemex
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
44

 
$
49,217

Tianjin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
47,789

Total 2015 Notable Loss Events
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
44

 
$
97,006

(a)
Includes paid losses, case reserves and IBNR reserves.
(b)
Development other than allocation of RDE.
(c)
Excludes impact of movements in foreign exchange rates.
(d)
Closing Reserve for the period equals Closing Estimate for the period less cumulative Paid Losses (Recovery).
(e)
As at September 30, 2014, the initial estimate for Tripoli Airport was below the $30.0 million notable loss event threshold; however, during the fourth quarter of 2014 adverse development caused this event to exceed the notable loss event threshold.

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Sources of Liquidity
Holding Company Liquidity
Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Validus Re, AlphaCat, Talbot and Western World segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet short and long-term objectives.
The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis.
 
 
Capital at
(Dollars in thousands)
 
September 30, 2015
Western World Insurance Group, Inc. (consolidated)
 
$
672,217

Validus Reinsurance, Ltd.
 
2,896,718

Validus Reinsurance, Ltd. (consolidated)
 
3,568,935

Noncontrolling interest in PaCRe, Ltd.
 
438,427

Talbot Holdings, Ltd. (consolidated)
 
852,698

Other, net
 
8,368

Total consolidated capitalization
 
4,868,428

Senior notes payable
 
(247,387
)
Debentures payable
 
(538,054
)
Total shareholders’ equity
 
$
4,082,987

Sources and Uses of Cash
The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.
In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

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There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the nine months ended September 30, 2015 and 2014 is provided in the following table.
 
 
Nine Months Ended September 30,
(Dollars in thousands)
 
2015
 
2014
 
Change
Net cash provided by operating activities
 
$
51,878

 
$
148,851

 
$
(96,973
)
Net cash used in investing activities
 
(560,622
)
 
(27,326
)
 
(533,296
)
Net cash provided by (used in) financing activities
 
367,421

 
(280,391
)
 
647,812

Effect of foreign currency rate changes on cash and cash equivalents
 
(27,432
)
 
(11,293
)
 
(16,139
)
Net decrease in cash
 
$
(168,755
)
 
$
(170,159
)
 
$
1,404

Operating Activities
Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.
Net cash provided by operating activities during the nine months ended September 30, 2015 was $51.9 million compared to $148.9 million for nine months ended September 30, 2014, an unfavorable movement of $97.0 million. This decrease was due to the timing of cash receipts, notably with regard to premiums receivable as well as the timing of claims payments. In addition, the timing of cash payments in relation to third party investors in operating affiliates impacted the operating cash flow.
We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.
Investing Activities
Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s investment portfolio. As at September 30, 2015, the Company’s portfolio was composed of fixed income investments, short-term and other investments amounting to $8.1 billion or 94.3% of total cash and investments. For further details related to investments pledged as collateral, see Note 3 (d) to the Consolidated Financial Statements in Part I, Item 1.
Net cash used in investing activities during the nine months ended September 30, 2015 was $560.6 million compared to $27.3 million for the nine months ended September 30, 2014, an unfavorable movement of $533.3 million. This unfavorable movement was due to a decrease in the sales and maturities of investments of $903.5 million, offset by a decrease in the purchases of short-term investments of $293.9 million and a decrease in restricted cash of $106.9 million.
Financing Activities
Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, and the issuance and repayment of notes payable to AlphaCat investors.
Net cash provided by (used in) financing activities during the nine months ended September 30, 2015 was $367.4 million compared to ($280.4) million during the nine months ended September 30, 2014, a favorable movement of $647.8 million. This favorable movement was driven primarily by an increase in the issuance of notes payable to AlphaCat investors of $662.5 million due to an increase in assets under management, a decrease in the repurchase of common shares under the share repurchase program of $82.6 million; offset by, an increase in the repayment of notes payable to AlphaCat investors of $107.0 million.

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Capital Resources
The following table details the Company's capital position as at September 30, 2015 and December 31, 2014.
Capitalization (Dollars in thousands)
September 30, 2015
 
December 31, 2014
Senior Notes (a)
$
247,387

 
$
247,306

Junior Subordinated Deferrable Debentures (JSDs) (b)
289,800

 
289,800

Flagstone Junior Subordinated Deferrable Debentures (JSDs) (c)
248,254

 
249,477

Total debt
785,441

 
786,583

 
 
 
 
Redeemable noncontrolling interest
—

 
79,956

 
 
 
 
Ordinary shares, capital and surplus available to Validus
3,655,429

 
3,596,514

Accumulated other comprehensive loss
(10,869
)
 
(8,556
)
Noncontrolling interest
438,427

 
458,595

Total shareholders' equity (d)
4,082,987

 
4,046,553

 
 
 
 
Total capitalization (d) (f)
4,868,428

 
4,913,092

Total capitalization available to Validus (e) (f)
$
4,430,001

 
$
4,374,541

 
 
 
 
Debt to total capitalization
16.1
%
 
16.0
%
Debt (excluding JSDs) to total capitalization
5.1
%
 
5.0
%
Notes
(a)
On January 21, 2010, the Company offered and sold $250.0 million of Senior Notes due 2040 (the “2010 Senior Notes”) in a registered public offering. The 2010 Senior Notes mature on January 26, 2040, and are redeemable at the Company’s option in whole any time or in part from time to time at a make-whole redemption price. The net proceeds of $244.0 million from the sale of the 2010 Senior Notes, after the deduction of commissions paid to the underwriters in the transaction and other expenses, was used by the Company for general corporate purposes, which included the repurchase of our outstanding capital stock and dividends to our shareholders.
(b)
$150.0 million of Junior Subordinated Deferrable Debentures (the "2006 Junior Subordinated Deferrable Debentures") were issued on June 15, 2006, mature on June 15, 2036 and have been redeemable at the Company's option at par since June 15, 2011. $200.0 million of Junior Subordinated Deferrable Debentures ("2007 Junior Subordinated Deferrable Debentures") were issued on June 21, 2007, mature on June 15, 2037 and have been redeemable at the Company's option at par since June 15, 2012. During 2008 and 2009, the Company repurchased $60.2 million principal amount of its 2007 Junior Subordinated Deferrable Debentures due 2037 from an unaffiliated financial institution.
(c)
As part of the acquisition of Flagstone Reinsurance Holdings, S.A., the Company assumed $134.5 million of junior subordinated deferrable interest debentures due 2036 (the “Flagstone 2006 Junior Subordinated Deferrable Debentures”). The Flagstone 2006 Junior Subordinated Deferrable Debentures mature on September 15, 2036 and have been redeemable at the Company's option at par since September 15, 2011. In addition, the Company assumed $113.8 million of junior subordinated deferrable interest debentures due 2037 (the “Flagstone 2007 Junior Subordinated Deferrable Debentures”). $88.8 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on July 30, 2037 and have been redeemable at the Company's option at par since July 30, 2012. $25.0 million of the Flagstone 2007 Junior Subordinated Deferrable Debentures mature on September 15, 2037 and have been redeemable at the Company's option at par since September 15, 2012.
(d)
Total capitalization equals total shareholders' equity plus redeemable noncontrolling interest, Senior Notes and Junior Subordinated Deferrable Debentures.
(e)
Total capitalization available to Validus equals total shareholder's equity less noncontrolling interest plus Senior Notes and Junior Subordinated Deferrable Debentures.
(f)
The Company does not include notes payable to AlphaCat investors within total capitalization, since these are issued to some of the Company's operating affiliates specifically for the purpose of purchasing capital market products and writing collateralized reinsurance.

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Shareholders' Equity
Shareholders' equity available to Validus at September 30, 2015 was $3.6 billion.
On November 4, 2015, the Company announced a quarterly cash dividend of $0.32 per common share and $0.32 per common share equivalent for which each outstanding warrant is exercisable, which is payable on December 31, 2015 to shareholders and warrant holders of record on December 15, 2015. The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash flows, the Company's financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.
The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 3, 2015, the Board of Directors of the Company approved a further increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company's capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.
Debt and Financing Arrangements
The following table details the Company's borrowings and credit facilities as at September 30, 2015.
(Dollars in thousands)
Maturity Date /
Term (a)
Commitments
 
Issued and Outstanding (b)
2006 Junior Subordinated Deferrable Debentures
June 15, 2036
$
150,000

 
$
150,000

2007 Junior Subordinated Deferrable Debentures
June 15, 2037
200,000

 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
134,504

 
134,504

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
113,750

 
113,750

Total debentures payable
 
598,254

 
538,054

2010 Senior Notes due 2040
January 26, 2040
250,000

 
250,000

Total debentures and senior notes payable
 
848,254

 
788,054

$400,000 syndicated unsecured letter of credit facility
March 9, 2016
400,000

 
—

$525,000 syndicated secured letter of credit facility
March 9, 2016
525,000

 
244,358

$30,000 secured bi-lateral letter of credit facility
Evergreen
30,000

 
10,172

Talbot FAL facility
December 31, 2017
25,000

 
25,000

AlphaCat Re secured letter of credit facility
Evergreen
30,000

 
30,000

IPC bi-lateral facility
Evergreen
25,000

 
10,782

$230,000 Flagstone bi-lateral facility
Evergreen
230,000

 
205,593

Total credit and other facilities
 
1,265,000

 
525,905

Total debt and financing arrangements
 
$
2,113,254

 
$
1,313,959

(a)
The arrangement is indicated as evergreen if, unless written notice to the contrary is given, it automatically renews on a regular basis.
(b)
Indicates utilization of commitment amount, not necessarily drawn borrowings.
For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, please refer to Note 12 "Debt and financing arrangements" to the Consolidated Financial Statements in Part I, Item 1.

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Ratings
The following table summarizes the financial strength ratings of the Company and its principal reinsurance and insurance subsidiaries from internationally recognized rating agencies as of November 6, 2015:
 
A.M. Best (a)
 
S&P (b)
 
Moody’s (c)
 
Fitch (d)
Validus Holdings, Ltd.
 
 
 
 
 
 
 
Issuer credit rating
bbb
 
BBB+
 
Baa2
 
A-
Senior debt
bbb
 
BBB+
 
Baa2
 
BBB+
Subordinated debt
bbb-
 
—
 
Baa3
 
BBB
Preferred stock
bb+
 
BBB-
 
Ba1
 
—
Outlook on ratings
Stable
 
Stable
 
Positive
 
Stable
 
 
 
 
 
 
 
 
Validus Reinsurance, Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
A3
 
A
Outlook on ratings
Stable
 
Stable
 
Positive
 
Stable
 
 
 
 
 
 
 
 
Lloyd's of London
 
 
 
 
 
 
 
Financial strength rating applicable to all Lloyd's syndicates
A
 
A+
 
—
 
AA-
Outlook on ratings
Positive
 
Stable
 
—
 
Stable
 
 
 
 
 
 
 
 
Talbot Syndicate 1183
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Positive
 
—
 
—
 
—
 
 
 
 
 
 
 
 
Validus Reinsurance (Switzerland), Ltd.
 
 
 
 
 
 
 
Financial strength rating
A
 
A
 
—
 
—
Outlook on ratings
Stable
 
Stable
 
—
 
—
 
 
 
 
 
 
 
 
Western World Insurance Company
 
 
 
 
 
 
 
Financial strength rating
A
 
—
 
—
 
—
Outlook on ratings
Stable
 
—
 
—
 
—
(a)
The A.M. Best ratings were most recently affirmed on March 12, 2015 for Validus Holdings, Ltd, Validus Reinsurance, Ltd and Validus Reinsurance (Switzerland) Ltd. The A.M. Best rating for Lloyd's was most recently affirmed on July 22, 2015. The A.M. Best rating for Talbot Syndicate 1183 was most recently affirmed on June 12, 2015. The A.M. Best rating for Western World Insurance Company was downgraded from A+ to A on November 6, 2014.
(b)
On October 29, 2015, the S&P rating for Validus Reinsurance (Switzerland), Ltd. was upgraded from A- to A and the ratings for Validus Reinsurance, Ltd. and Validus Holdings, Ltd. were affirmed. On October 13, 2014, the S&P rating for Lloyd's was affirmed and the outlook was revised from positive to stable.
(c)
The Moody’s ratings were most recently affirmed on June 25, 2014 for Validus Holdings, Ltd and Validus Reinsurance, Ltd.
(d)
The Fitch ratings were most recently affirmed on August 17, 2015 for Validus Holdings, Ltd. and Validus Reinsurance, Ltd. On August 17, 2015, Fitch upgraded the Company's subordinated debt to BBB from BBB- due to the application of updated notching criteria for hybrid ratings. The Fitch rating for Lloyd's was most recently affirmed on June 30, 2015.

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Recent accounting pronouncements
Please refer to Note 2 to the Consolidated Financial Statements (Part I, Item 1) for discussion of relevant recent accounting pronouncements.
Critical Accounting Policies and Estimates
There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of the Company's Consolidated Financial Statements:
•
Reserve for losses and loss expenses;
•
Premium estimates for business written on a line slip or proportional basis;
•
The valuation of goodwill and intangible assets;
•
Reinsurance premiums ceded and reinsurance recoverable balances including the provision for uncollectible amounts; and
•
Investment valuation of financial assets.
Critical accounting policies and estimates are discussed further in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. 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 for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. 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 statement.
We believe that these factors include, but are not limited to, the following:
•
unpredictability and severity of catastrophic events;
•
our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein;
•
adequacy of the Company’s risk management and loss limitation methods;
•
cyclicality of demand and pricing in the insurance and reinsurance markets;
•
the Company’s ability to implement its business strategy during “soft” as well as “hard” markets;
•
adequacy of the Company’s loss reserves;
•
continued availability of capital and financing;
•
the Company’s ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff;
•
acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds;
•
competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors;
•
potential loss of business from one or more major insurance or reinsurance brokers;

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•
the Company’s 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;
•
general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate;
•
the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures;
•
accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;
•
the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;
•
acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;
•
availability and cost of reinsurance and retrocession coverage;
•
the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;
•
the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;
•
changes in domestic or foreign laws or regulations, or their interpretations;
•
changes in accounting principles or the application of such principles by regulators;
•
statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers; and
•
the other factors set forth under Part I Item 1A "Risk Factors" and under Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as well as the risk and other factors set forth in the Company's other filings with the SEC, as well as management's response to any of the aforementioned factors.
In addition, other general factors could affect our results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.
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 or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are principally exposed to five types of market risk:
•
interest rate risk;
•
foreign currency risk;
•
credit risk;
•
liquidity risk; and
•
inflation risk.
Interest Rate Risk:    The Company’s fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these investments. As interest rates rise and credit spreads widen, the market value of the Company’s fixed maturity portfolio falls and the Company has the risk that cash outflows will have to be funded by selling assets, which will be trading at depreciated values. As interest rates decline and credit spreads tighten, the market value of the Company’s fixed income portfolio increases and the Company has reinvestment risk, as funds reinvested may earn less than is necessary to match anticipated liabilities. We manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of the insurance and reinsurance liabilities the Company assumes.
As at September 30, 2015 and December 31, 2014, the impact on the Company’s fixed maturity and short-term investments from an immediate 100 basis point increase in market interest rates (based on U.S. treasury yield) would have resulted in an estimated decrease in market value of 2.2% and 2.1%, or approximately $131.6 million and $127.2 million, respectively. As at September 30, 2015 and December 31, 2014, the impact on the Company’s fixed maturity portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in market value of 2.4% and 2.0% or approximately $138.1 million and $123.0 million, respectively.
As at September 30, 2015, the Company held $1.5 billion (December 31, 2014: $1.5 billion), or 26.9% (December 31, 2014: 26.3%), of the Company's fixed maturity portfolio in asset-backed and mortgage-backed securities. Some of these assets are exposed to prepayment risk, which occurs when the frequency with which holders of the underlying loans prepay the outstanding principal before the maturity date changes. The adverse impact of prepayment is more evident in a declining interest rate environment. As a result, the Company will be exposed to reinvestment risk, as cash flows received by the Company will be accelerated and will be reinvested at the prevailing interest rates.
Foreign Currency Risk:    Certain of the Company’s reinsurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. Foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. Therefore, we manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash, receivables and investments that are denominated in such currencies. As at September 30, 2015, approximately $595.9 million, or 5.3% of our total assets and $731.5 million, or 10.2% of our total liabilities were held in foreign currencies. As at September 30, 2015, approximately $87.2 million, or 1.2% of our total liabilities held in foreign currencies were non-monetary items which do not require revaluation at each reporting date. As of December 31, 2014, $606.3 million, or 5.9% of our total assets and $738.5 million, or 11.9% of our total liabilities were held in foreign currencies. As of December 31, 2014, $92.4 million, or 1.3% of our total liabilities denominated in foreign currencies were non-monetary items which do not require revaluation at each reporting date. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts. For further information on the accounting treatment of our foreign currency derivatives, refer to Note 7 of Part I, Item 1 - Consolidated Financial Statements. To the extent foreign currency exposure is not hedged or otherwise matched, the Company may experience exchange losses, which in turn would adversely affect the results of operations and financial condition.

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Credit Risk: The Company is exposed to credit risk from the possibility that counterparties may default on their obligations. The Company’s primary credit risks reside in investment in U.S. and non-U.S. corporate bonds and amounts recoverable from reinsurers. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain a minimum weighted-average portfolio credit rating of A+. In addition, the portfolio limits the amount of “risk assets”, such as non-investment grade debt and equity securities, to a maximum of 35% of shareholders’ equity. The Company also limits its exposure to any single issuer to 3.75% or less of its total cash and investments, excluding government and agency securities, depending on the credit rating of the issuer. With the exception of the Company's bank loan portfolio and certain capital securities issued by investment grade corporations, the minimum credit rating of any security purchased is Baa3/BBB-. In total, investments in below investment grade securities are limited to no more than 15% of the Company’s managed cash and investment portfolio. As at September 30, 2015, 9.5% (December 31, 2014; 7.7%) of the Company's total managed cash and investment portfolio was below investment grade. The Company did not have an aggregate exposure to any single issuer of more than 0.7% (December 31, 2014; 1.0%)of total cash and investments, other than with respect to government and agency securities as at September 30, 2015.
The amount of the maximum exposure to credit risk is indicated by the carrying value of the Company's financial assets. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better rated by S & P or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. At September 30, 2015, 98.7% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or above, (December 31, 2014: 98.0%, rated A-) or from reinsurers posting full collateral.
Liquidity risk: Certain of the Company's investments may become illiquid. Disruptions in the credit markets may materially affect the liquidity of the Company's investments, including non-agency residential mortgage-backed securities and bank loans which represent 6.3% (December 31, 2014: 6.0%) of total cash and investments at September 30, 2015. If the Company requires significant amounts of cash on short notice in excess of normal cash requirements (which could include the payment of claims on a major catastrophic event) in a period of market illiquidity, the investments may be difficult to sell in a timely manner and may have to be disposed of for less than what may otherwise have been possible under other conditions. At September 30, 2015, the Company had $783.9 million (December 31, 2014: $999.8 million) of unrestricted, liquid assets, defined as unpledged cash and cash equivalents, short term investments and government and government agency securities. Details of the Company's debt and financing arrangements at September 30, 2015 are provided below.
(Dollars in thousands)
Maturity Date / Term
 
In Use / Outstanding
2006 Junior Subordinated Deferrable Debentures
June 15, 2036
 
$
150,000

2007 Junior Subordinated Deferrable Debentures
June 15, 2037
 
139,800

Flagstone 2006 Junior Subordinated Deferrable Debentures
September 15, 2036
 
134,504

Flagstone 2007 Junior Subordinated Deferrable Debentures
September 15, 2037
 
113,750

Total debentures payable
 
 
538,054

2010 Senior Notes due 2040
January 26, 2040
 
250,000

Total debentures and senior notes payable
 
 
788,054

$400,000 syndicated unsecured letter of credit facility
March 9, 2016
 
—

$525,000 syndicated secured letter of credit facility
March 9, 2016
 
244,358

$30,000 secured bi-lateral letter of credit facility
Evergreen
 
10,172

Talbot FAL facility
December 31, 2017
 
25,000

AlphaCat Re secured letter of credit facility
Evergreen
 
30,000

IPC bi-lateral facility
Evergreen
 
10,782

$230,000 Flagstone bi-lateral facility
Evergreen
 
205,593

Total credit and other facilities
 
 
525,905

Total debt and financing arrangements
 
 
$
1,313,959

Inflation Risk: We do not believe that inflation has had or will have a material effect on the Company's combined results of operations, except insofar as (a) inflation may affect interest rates, and (b) losses and loss expenses may be affected by inflation.

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ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.
Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.
As at September 30, 2015, the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
ITEM 1A. RISK FACTORS
Please refer to the discussion of Risk Factors in Part 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has repurchased approximately 74.9 million common shares for an aggregate purchase price of $2.4 billion from the inception of the share repurchase program to November 4, 2015.
The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company’s capital position relative to internal and rating agency targets, legal requirements and other factors.
On February 3, 2015, the Board of Directors of the Company approved a further increase to the Company's common share repurchase authorization to $750.0 million. This amount is in addition to the $2.3 billion of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.
The repurchase program may be modified, extended or terminated by the Board of Directors at any time. The remaining amount available under the current share repurchase authorization was $585.7 million as of November 4, 2015.
Share repurchases include repurchases by the Company of shares, from time to time, from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. We repurchase these shares at their fair market value, as determined by reference to the closing price of our common shares on the day the restricted shares vested.
For the three months ended September 30, 2015, the number of shares repurchased by the Company was 1.4 million. The share repurchases made during the three months ended September 30, 2015 resulted in a dilutive impact on book value per diluted common share of $0.04 for the quarter.
 
 
Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
 
 
As at June 30, 2015
 
 
 
 
 
 
 
Quarter ended
Effect of share repurchases:
 
(cumulative)
 
July
 
August
 
September
 
September 30, 2015
Aggregate purchase price (a)
 
$
2,374,524

 
$
22,741

 
$
15,328

 
$
22,625

 
$
60,694

Shares repurchased
 
73,444,835

 
503,600

 
340,771

 
508,569

 
1,352,940

Average price (a)
 
$
32.33

 
$
45.16

 
$
44.98

 
$
44.49

 
$
44.86

 
 
 
 
 
 
 
 
 
 
 
 
 
Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
Effect of share repurchases:
 
As at September 30, 2015 (cumulative)
 
October
 
November
 
As at November 4, 2015
 
Cumulative to Date Effect
Aggregate purchase price (a)
 
$
2,435,218

 
$
—

 
$
3,446

 
$
3,446

 
$
2,438,664

Shares repurchased
 
74,797,775

 
—

 
77,177

 
77,177

 
74,874,952

Average price (a)
 
$
32.56

 
$
—

 
$
44.65

 
$
44.65

 
$
32.57

(a)
Share transactions are on a trade date basis through November 4, 2015 and are inclusive of commissions.  Average share price is rounded to two decimal places.
(b)
As the average price per share repurchased during the periods from 2009 at the inception of the share repurchase program through to 2013 was lower than the book value per common share, the repurchase of shares increased the ending book value per share.
(c)
The estimated impact on earnings per diluted 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 earnings per diluted share.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.


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ITEM 6. EXHIBITS
Exhibit
Description
 
 
Exhibit 10.1*
Amended and Restated Validus Holdings, Ltd. 2005 Long Term Incentive Plan (As Amended and Restated Effective May 7, 2015)
 
 
Exhibit 31.1*
Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 31.2*
Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 32*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
Exhibit 101.1 INS*
XBRL Instance Document
 
 
Exhibit 101.SCH*
XBRL Taxonomy Extension Schema Document
 
 
Exhibit 101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
Exhibit 101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
 
 
Exhibit 101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
Exhibit 101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
*Filed herewith

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VALIDUS HOLDINGS, LTD.
 
 
(Registrant)
 
 
 
Date:
November 6, 2015
/s/ Edward J. Noonan
 
 
Edward J. Noonan
 
 
Chief Executive Officer
 
 
 
Date:
November 6, 2015
/s/ Jeffrey D. Sangster
 
 
Jeffrey D. Sangster
 
 
Executive Vice President and Chief Financial Officer

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