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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 March 31, 2011
Commission file number 001-33606
 
VALIDUS HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
 
     
BERMUDA
(State or other jurisdiction of
incorporation or organization)
  98-0501001
(I.R.S. Employer
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 þ      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 þ      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 þ   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
     As of May 3, 2011 there were 98,288,667 outstanding Common Shares, $0.175 par value per share, of the registrant.
 
 

 


 

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 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at March 31, 2011 (unaudited) and December 31, 2010
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    March 31,     December 31,  
    2011     2010  
    (unaudited)          
Assets
               
Fixed maturities, at fair value (amortized cost: 2011 - $4,544,110; 2010 - $4,772,037)
  $ 4,589,849     $ 4,823,867  
Short-term investments, at fair value (amortized cost: 2011 - $565,600; 2010 - $273,444)
    565,620       273,514  
Other investments, at fair value (amortized cost: 2011 - $16,089; 2010 - $18,392)
    19,772       21,478  
Cash and cash equivalents
    717,444       620,740  
 
           
Total investments and cash
    5,892,685       5,739,599  
Premiums receivable
    916,012       568,761  
Deferred acquisition costs
    174,361       123,897  
Prepaid reinsurance premiums
    115,522       71,417  
Securities lending collateral
    33,143       22,328  
Loss reserves recoverable
    453,701       283,134  
Paid losses recoverable
    26,483       27,996  
Income taxes recoverable
    876       1,142  
Intangible assets
    117,853       118,893  
Goodwill
    20,393       20,393  
Accrued investment income
    33,282       33,726  
Other assets
    41,379       49,592  
 
           
Total assets
  $ 7,825,690     $ 7,060,878  
 
           
 
               
Liabilities
               
Reserve for losses and loss expenses
  $ 2,534,415     $ 2,035,973  
Unearned premiums
    1,083,164       728,516  
Reinsurance balances payable
    157,645       63,667  
Securities lending payable
    33,878       23,093  
Deferred income taxes
    22,705       24,908  
Net payable for investments purchased
    59,671       43,896  
Accounts payable and accrued expenses
    82,190       99,320  
Senior notes payable
    246,901       246,874  
Debentures payable
    289,800       289,800  
 
           
Total liabilities
    4,510,369       3,556,047  
 
           
 
               
Commitments and contingent liabilities
               
 
               
Shareholders’ equity
               
Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2011 - 133,320,162; 2010 - 132,838,111; Outstanding: 2011 - 98,288,177; 2010 - 98,001,226)
    23,331       23,247  
Treasury shares (2011 - 35,031,985; 2010 - 34,836,885)
    (6,131 )     (6,096 )
Additional paid-in-capital
    1,870,104       1,860,960  
Accumulated other comprehensive (loss)
    (4,498 )     (5,455 )
Retained earnings
    1,432,515       1,632,175  
 
           
Total shareholders’ equity
    3,315,321       3,504,831  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 7,825,690     $ 7,060,878  
 
           
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

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Validus Holdings, Ltd.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
    (unaudited)     (unaudited)  
Revenues
               
Gross premiums written
  $ 849,896     $ 870,934  
Reinsurance premiums ceded
    (109,820 )     (90,739 )
 
           
Net premiums written
    740,076       780,195  
Change in unearned premiums
    (310,543 )     (322,501 )
 
           
Net premiums earned
    429,533       457,694  
Net investment income
    29,975       34,299  
Net realized gains on investments
    6,379       11,398  
Net unrealized (losses) gains on investments
    (12,828 )     15,413  
Other income
    1,606       888  
Foreign exchange (losses)
    (467 )     (8,764 )
 
           
Total revenues
    454,198       510,928  
 
           
 
               
Expenses
               
Losses and loss expenses
    476,198       478,531  
Policy acquisition costs
    77,296       76,176  
General and administrative expenses
    48,477       53,569  
Share compensation expenses
    12,049       6,576  
Finance expenses
    14,001       15,151  
 
           
Total expenses
    628,021       630,003  
 
           
 
               
Net (loss) before taxes
    (173,823 )     (119,075 )
Tax benefit
    1,459       697  
 
           
Net (loss)
  $ (172,364 )   $ (118,378 )
 
           
 
               
Comprehensive income (loss)
               
Foreign currency translation adjustments
    957       (1,807 )
 
           
Comprehensive (loss)
  $ (171,407 )   $ (120,185 )
 
           
 
               
Earnings per share
               
Weighted average number of common shares and common share equivalents outstanding
               
Basic
    97,944,340       126,633,277  
Diluted
    97,944,340       126,633,277  
 
               
Basic (loss) per share
  $ (1.78 )   $ (0.95 )
 
           
Diluted (loss) per share
  $ (1.78 )   $ (0.95 )
 
           
 
               
Cash dividends declared per share
  $ 0.25     $ 0.22  
 
           
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 Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    March 31, 2011     March 31, 2010  
    (unaudited)     (unaudited)  
Common shares
               
Balance — Beginning of period
  $ 23,247     $ 23,033  
Common shares issued, net
    84       48  
 
           
Balance — End of period
  $ 23,331     $ 23,081  
 
           
 
               
Treasury shares
               
Balance — Beginning of period
  $ (6,096 )   $ (553 )
Repurchase of common shares
    (35 )     (844 )
 
           
Balance — End of period
  $ (6,131 )   $ (1,397 )
 
           
 
               
Additional paid-in capital
               
Balance — Beginning of period
  $ 1,860,960     $ 2,675,680  
Common shares issued, net
    3,055       300  
Repurchase of common shares
    (5,960 )     (127,313 )
Share compensation expenses
    12,049       6,576  
 
           
Balance — End of period
  $ 1,870,104     $ 2,555,243  
 
           
 
               
Accumulated other comprehensive (loss)
               
Balance — Beginning of period
  $ (5,455 )   $ (4,851 )
Foreign currency translation adjustments
    957       (1,807 )
 
           
Balance — End of period
  $ (4,498 )   $ (6,658 )
 
           
 
               
Retained earnings
               
Balance — Beginning of period
  $ 1,632,175     $ 1,337,811  
Dividends
    (27,296 )     (30,137 )
Net (loss)
    (172,364 )     (118,378 )
 
           
Balance — End of period
  $ 1,432,515     $ 1,189,296  
 
           
 
               
Total shareholders’ equity
  $ 3,315,321     $ 3,759,565  
 
           
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 Three Months Ended March 31, 2011 and 2010 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
                 
    March 31,     March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Cash flows provided by (used in) operating activities
               
Net (loss)
  $ (172,364 )   $ (118,378 )
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Share compensation expenses
    12,049       6,576  
Amortization of discount on senior notes
    27        
Net realized (gains) on investments
    (6,379 )     (11,398 )
Net unrealized losses (gains) on investments
    12,828       (15,413 )
Amortization of intangible assets
    1,040       1,040  
Foreign exchange (gains) losses on cash and cash equivalents included in net income
    (4,694 )     4,538  
Amortization of premium on fixed maturities
    8,542       3,713  
Change in:
               
Premiums receivable
    (345,025 )     (255,394 )
Deferred acquisition costs
    (50,464 )     (52,829 )
Prepaid reinsurance premiums
    (44,105 )     (30,786 )
Loss reserves recoverable
    (168,836 )     (18,871 )
Paid losses recoverable
    1,546       (3,509 )
Income taxes recoverable
    306       (41 )
Accrued investment income
    444       (4,875 )
Other assets
    5,409       (6,557 )
Reserve for losses and loss expenses
    489,356       366,176  
Unearned premiums
    354,648       359,487  
Reinsurance balances payable
    92,655       (19,203 )
Deferred income taxes
    (3,891 )     (624 )
Accounts payable and accrued expenses
    (14,535 )     (19,686 )
 
           
Net cash provided by operating activities
    168,557       183,966  
 
           
 
               
Cash flows provided by (used in) investing activities
               
Proceeds on sales of investments
    1,581,206       1,226,380  
Proceeds on maturities of investments
    108,629       113,341  
Purchases of fixed maturities
    (1,449,698 )     (1,693,657 )
(Purchases) sales of short-term investments, net
    (292,131 )     173,233  
Sales of other investments
          4,383  
(Increase) in securities lending collateral
    (10,785 )     (9,894 )
 
           
Net cash (used in) investing activities
    (62,779 )     (186,214 )
 
           
 
               
Cash flows provided by (used in) financing activities
               
Net proceeds on issuance of senior notes
          246,793  
Issuance of common shares, net
    3,139       348  
Purchases of common shares under share repurchase program
    (5,995 )     (128,157 )
Dividends paid
    (27,196 )     (29,944 )
Increase in securities lending payable
    10,785       9,894  
 
           
Net cash (used in) provided by financing activities
    (19,267 )     98,934  
 
           
 
               
Effect of foreign currency rate changes on cash and cash equivalents
    10,193       (5,795 )
 
               
Net increase in cash
    96,704       90,891  
Cash and cash equivalents — beginning of period
    620,740       387,585  
 
           
Cash and cash equivalents — end of period
  $ 717,444     $ 478,476  
 
           
 
               
Taxes paid during the period
  $ 26     $ 198  
 
           
 
               
Interest paid during the period
  $ 17,458     $ 6,365  
 
           
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 include Validus Holdings, Ltd. and its wholly and majority owned subsidiaries (together, the “Company”) and have been prepared in accordance with generally accepted accounting principles 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 should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
     In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) 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. Certain amounts in prior periods have been reclassified to conform to current period presentation. All significant intercompany accounts and transactions have been eliminated. The preparation of 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. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the 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 unrecoverable reinsurance recoverable balances and investment valuation. Actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results for a full year. The term “ASC” used in these notes refers to Accounting Standard Codifications issued by the United States Financial Accounting Standards Board (“FASB”).
2. Recent accounting pronouncements
In January 2010, the FASB issued authoritative guidance on “Fair Value Measurements and Disclosures” (ASC 820). This update requires additional disclosures regarding the activity within Level 3 fair value measurements, including information on a gross basis for purchases, sales, issuances, and settlements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued authoritative guidance which clarifies the “Stock Compensation” guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance is effective for accounting periods beginning after December 15, 2010. The adoption of this update did not impact the Company’s consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). The objective of ASU 2010-20 is to

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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)
provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. ASU 2010-20 was effective for interim and annual periods ending on or after December 15, 2010. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”). The objective of ASU 2010-26 is to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. ASU 2010-26 is effective for interim and annual periods beginning after December 15, 2011 and may be applied prospectively or retrospectively. The Company early adopted this update effective January 1, 2011 and the adoption did not have an impact on the Company’s consolidated financial statements.
3. Investments
     The Company’s investments in fixed maturities are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.
(a) Classification within the fair value hierarchy
     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 quoted prices (unadjusted) 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.
     Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3 inputs are unobservable inputs for the asset or liability.
     Level 1 primarily consists of financial instruments whose value is based on quoted market prices or alternative indices including overnight repos and commercial paper. Level 2 includes financial instruments that are valued through independent external sources using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The Company performs internal procedures on the valuations received from independent external sources. Financial instruments in this category include U.S. and U.K. Treasuries, sovereign debt, corporate debt, catastrophe bonds, U.S. agency and non-agency mortgage and asset-backed securities and bank loans. Level 3 includes financial instruments that are valued using market approach and income approach valuation techniques. These models incorporate both observable and unobservable inputs. A hedge fund is the only financial instrument in this category as at March 31, 2011.
     The Company’s management and external investment advisors had noted illiquidity and dislocation in the non-Agency RMBS market for the period September 30, 2008 through to June 30, 2010. During this period, the Company identified certain non-Agency RMBS securities in its portfolio trading in inactive markets (“identified RMBS securities”). In order to gauge market activity for the identified RMBS securities, the Company, with

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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)
assistance from external investment advisors, reviewed the pricing sources for each security in the portfolio. The Company utilized various pricing vendors to obtain market pricing information for investment securities.
     Consistent with U.S. GAAP, market approach fair value measurements for securities trading in inactive markets are not determinative. In weighing the fair value measurements resulting from market approach and income approach valuation techniques, the Company previously placed less reliance on the market approach fair value measurements. The income approach valuation technique determines the fair value of each security on the basis of contractual cash flows, discounted using a risk-adjusted discount rate. As the income approach valuation technique incorporates both observable and significant unobservable inputs, the securities were included as Level 3 assets with respect to the fair value hierarchy. The foundation for the income approach was the amount and timing of future cash flows.
     During the three month period ended September 30, 2010, the Company, with assistance from external investment advisors, determined that market activity had increased for the identified RMBS securities. Therefore, a market approach valuation technique was adopted for the identified RMBS securities. Because the market approach incorporates observable inputs, the identified RMBS securities are classified as Level 2 with respect to the fair value hierarchy at September 30, 2010. During the three months ended December 31, 2010, the Company liquidated substantially all of the identified RMBS securities which had previously been classified as Level 3 securities.
     Other investments consist of an investment in a fund of hedge funds and a deferred compensation trust held in mutual funds. The fund of hedge funds is a side pocket valued at $10,713 at March 31, 2011. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund investment manager provides monthly reported net asset values (“NAV”) with a one-month delay in its valuation. As a result, the fund investment manager’s February 28, 2011 NAV was used as a partial basis for fair value measurement in the Company’s March 31, 2011 balance sheet. The fund investment manager’s NAV relies on an estimate of the performance of the fund based on the month end positions from the underlying third-party funds. The Company utilizes the fund investment manager’s primary market approach estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the estimated NAV and the one-month delayed fund investment manager’s NAV. Immaterial variances are recorded in the following reporting period.
     At March 31, 2011, 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
  $     $ 1,050,342     $     $ 1,050,342  
Non-U.S. Government and Government Agency
          501,722             501,722  
States, municipalities, political subdivision
          30,991             30,991  
Agency residential mortgage-backed securities
          483,479             483,479  
Non-Agency residential mortgage-backed securities
          53,369             53,369  
U.S. corporate
          1,375,281             1,375,281  
Non-U.S. corporate
          640,177             640,177  
Bank Loans
          205,196               205,196  
Catastrophe bonds
          58,071             58,071  
Asset-backed securities
          180,069             180,069  
Commercial mortgage-backed securities
          11,152             11,152  
 
                       
Total fixed maturities
          4,589,849             4,589,849  
Short-term investments
    534,426       31,194             565,620  
Hedge fund
                10,713       10,713  
Mutual funds
          9,059             9,059  
 
                       
Total
  $ 534,426     $ 4,630,102     $ 10,713     $ 5,175,241  
 
                       

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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)
     At December 31, 2010, 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
  $     $ 1,677,166     $     $ 1,677,166  
Non-U.S. Government and Government Agency
          554,199             554,199  
States, municipalities, political subdivision
          26,285             26,285  
Agency residential mortgage-backed securities
          445,859             445,859  
Non-Agency residential mortgage-backed securities
          56,470             56,470  
U.S. corporate
          1,308,406             1,308,406  
Non-U.S. corporate
          502,067             502,067  
Bank loans
            52,566             52,566  
Catastrophe bonds
          58,737             58,737  
Asset-backed securities
          123,569             123,569  
Commercial mortgage-backed securities
          18,543             18,543  
                         
Total fixed maturities
          4,823,867             4,823,867  
Short-term investments
    259,261       14,253             273,514  
Hedge fund
                12,892       12,892  
Mutual funds
          8,586             8,586  
                         
Total
  $ 259,261     $ 4,846,706     $ 12,892     $ 5,118,859  
                         
     At March 31, 2011, Level 3 investments totaled $10,713, representing 0.2% of total investments measured at fair value on a recurring basis. At December 31, 2010, Level 3 investments totaled $12,892 representing 0.3% of total investments measured at fair value on a recurring basis.
     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 as at March 31, 2011 and December 31, 2010:
                         
    Three Months Ended March 31, 2011  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments — Beginning of period
  $     $ 12,892     $ 12,892  
Purchases
                 
Sales
          (2,562 )     (2,562 )
Issuances
                 
Settlements
                 
Realized gains
          260       260  
Unrealized gains
          123       123  
Amortization
                 
Transfers
                 
 
                 
Level 3 investments — End of period
  $     $ 10,713     $ 10,713  
 
                 

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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)
                         
    Year Ended December 31, 2010  
    Fixed Maturity             Total Fair Market  
    Investments     Other Investments     Value  
Level 3 investments — Beginning of period
  $ 85,336     $ 25,670     $ 111,006  
Purchases
                 
Sales
          (13,850 )     (13,850 )
Issuances
                 
Settlements
                 
Realized gains
          662       662  
Unrealized (losses) gains
    (6,307 )     410       (5,897 )
Amortization
    (11,841 )           (11,841 )
Transfers (out)
    (67,188 )           (67,188 )
 
                 
Level 3 investments — End of period
  $     $ 12,892     $ 12,892  
 
                 
(b) Net investment income
     Net investment income was derived from the following sources:
                 
    Three Months Ended  
    March 31,     March 31,  
    2011     2010  
Fixed maturities and short-term investments
  $ 28,935     $ 35,755  
Cash and cash equivalents
    2,581       586  
Securities lending income
    16       70  
 
           
Total gross investment income
    31,532       36,411  
Investment expenses
    (1,557 )     (2,112 )
 
           
Net investment income
  $ 29,975     $ 34,299  
 
           
(c) Fixed maturity and short-term investments
     The following represents an analysis of net realized gains (losses) and the change in net unrealized (losses) gains on investments:
                 
    Three Months Ended  
    March 31,     March 31,  
    2011     2010  
Fixed maturities, short-term and other investments and cash equivalents
               
Gross realized gains
  $ 15,765     $ 12,765  
Gross realized (losses)
    (9,386 )     (1,367 )
 
           
Net realized gains on investments
    6,379       11,398  
Net unrealized gains (losses) on securities lending
    30       (1,014 )
Change in net unrealized (losses) gains on investments
    (12,858 )     16,427  
 
               
 
           
Total net realized gains and change in net unrealized (losses) gains on investments
  $ (6,449 )   $ 26,811  
 
           

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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)
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at March 31, 2011 were as follows:
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
U.S. Government and Government Agency
  $ 1,044,727     $ 9,871     $ (4,256 )   $ 1,050,342  
Non-U.S. Government and Government Agency
    495,686       9,523       (3,487 )     501,722  
States, municipalities, political subdivision
    31,102       59       (170 )     30,991  
Agency residential mortgage-backed securities
    469,409       14,937       (867 )     483,479  
Non-Agency residential mortgage-backed securities
    58,995       124       (5,750 )     53,369  
U.S. corporate
    1,356,102       24,715       (5,536 )     1,375,281  
Non-U.S. corporate
    634,965       8,078       (2,866 )     640,177  
Bank loans
    205,154       691       (649 )     205,196  
Catastrophe bonds
    57,026       1,346       (301 )     58,071  
Asset-backed securities
    179,919       614       (464 )     180,069  
Commercial mortgage-backed securities
    11,025       127             11,152  
 
                       
 
                               
Total fixed maturities
    4,544,110       70,085       (24,346 )     4,589,849  
Total short-term investments
    565,600       111       (91 )     565,620  
Total other investments
    16,089       3,683             19,772  
 
                       
 
                               
Total
  $ 5,125,799     $ 73,879     $ (24,437 )   $ 5,175,241  
 
                       
     The amortized cost, gross unrealized gains and (losses) and estimated fair value of investments at December 31, 2010 were as follows:
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
U.S. Government and Government Agency
  $ 1,665,050     $ 20,134     $ (8,018 )   $ 1,677,166  
Non-U.S. Government and Government Agency
    550,759       11,635       (8,195 )     554,199  
States, municipalities, political subdivision
    26,365       90       (170 )     26,285  
Agency residential mortgage-backed securities
    430,873       15,491       (505 )     445,859  
Non-Agency residential mortgage-backed securities
    62,020       64       (5,614 )     56,470  
U.S. corporate
    1,288,078       28,526       (8,198 )     1,308,406  
Non-U.S. corporate
    497,689       7,939       (3,561 )     502,067  
Bank loans
    52,612       58       (104 )     52,566  
Catastrophe bonds
    56,991       2,042       (296 )     58,737  
Asset-backed securities
    123,354       605       (390 )     123,569  
Commercial mortgage-backed securities
    18,246       299       (2 )     18,543  
 
                       
 
                               
Total fixed maturities
    4,772,037       86,883       (35,053 )     4,823,867  
Total short-term investments
    273,444       70             273,514  
Total other investments
    18,392       3,086             21,478  
 
                       
 
                               
Total
  $ 5,063,873     $ 90,039     $ (35,053 )   $ 5,118,859  
 
                       

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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)
     The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturities portfolio as at March 31, 2011 and December 31, 2010. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    March 31, 2011     December 31, 2010  
    Estimated Fair             Estimated Fair        
    Value     % of Total     Value     % of Total  
AAA
  $ 2,437,814       53.1 %   $ 2,946,514       61.2 %
AA
    606,860       13.2 %     428,972       8.9 %
A
    926,119       20.2 %     1,077,389       22.3 %
BBB
    322,274       7.0 %     219,523       4.6 %
 
                       
Investment grade
    4,293,067       93.5 %     4,672,398       97.0 %
BB
    154,257       3.4 %     74,475       1.5 %
B
    112,515       2.4 %     45,660       0.9 %
CCC
    27,715       0.6 %     29,219       0.6 %
CC
          0.0 %           0.0 %
D/NR
    2,295       0.1 %     2,115       0.0 %
 
                       
Non-Investment grade
    296,782       6.5 %     151,469       3.0 %
 
                       
 
                               
Total Fixed Maturities
  $ 4,589,849       100.0 %   $ 4,823,867       100.0 %
 
                       
     The amortized cost and estimated fair value amounts for fixed maturity securities held at March 31, 2011 and December 31, 2010 are shown 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.

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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)
                                 
    March 31, 2011     December 31, 2010  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 395,245     $ 398,058     $ 424,327     $ 426,167  
Due after one year through five years
    3,195,073       3,229,472       3,498,334       3,540,408  
Due after five years through ten years
    232,448       232,235       207,918       206,317  
Due after ten years
    1,996       2,015       6,965       6,534  
 
                       
 
    3,824,762       3,861,780       4,137,544       4,179,426  
Asset-backed and mortgage-backed securities
    719,348       728,069       634,493       644,441  
 
                       
Total
  $ 4,544,110     $ 4,589,849     $ 4,772,037     $ 4,823,867  
 
                       
     The Company has a five year, $500,000 secured letter of credit facility provided by a syndicate of commercial banks. At March 31, 2011, approximately $285,048 (December 31, 2010: $268,944) of letters of credit were issued and outstanding under this facility for which $348,182 of investments were pledged as collateral (December 31, 2010: $325,532). In 2007, the Company entered into a $100,000 standby letter of credit facility which provides Funds at Lloyd’s (the “Talbot FAL Facility”). On November 19, 2009, the Company entered into a Second Amendment to the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000. At March 31, 2011, $25,000 (December 31, 2010: $25,000) of letters of credit were issued and outstanding under the Talbot FAL Facility for which $45,278 of investments were pledged as collateral (December 31, 2010: $45,504). In addition, $1,810,402 of investments were held in trust at March 31, 2011 (December 31, 2010: $1,729,631). Of those, $1,553,756 were held in trust for the benefit of Talbot’s cedants and policyholders, and to facilitate the accreditation of Talbot as an alien insurer/reinsurer by certain regulators (December 31, 2010: $1,489,243).
     The Company assumed two letters of credit facilities as part of the acquisition of IPC Holdings, Ltd. (“IPC” and such acquisition, the “IPC Acquisition”). A Credit Facility between IPC, IPCRe Limited, the Lenders party thereto and Wachovia Bank, National Association (the “IPC Syndicated Facility”) and a Letters of Credit Master Agreement between Citibank N.A. and IPCRe Limited (the “IPC Bi-Lateral Facility”). At March 31, 2010, the IPC Syndicated Facility was closed. At March 31, 2011, the IPC Bi-Lateral Facility had $64,368 (December 31, 2010: $68,063) letters of credit issued and outstanding for which $105,771 (December 31, 2010: $105,310) of investments were held in an associated collateral account.
(d) Securities lending
     The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to third parties for short periods of time through a lending agent. The Company retains all economic interest in the securities it lends and receives a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102% of the market value of the loaned securities and is held by a third party. As at March 31, 2011, the Company had $33,407 (December 31, 2010: $22,566) in securities on loan. During the three months ended March 31, 2011, the Company recorded a $30 unrealized gain on this collateral in its Statements of Operations (March 31, 2010: unrealized loss $1,014).
     Securities lending collateral reinvested includes corporate floating rate securities and overnight repo with an average reset period of 4.0 days (December 31, 2010: 17.6 days). As at March 31, 2011, the securities lending collateral reinvested by the Company in connection with its securities lending program was allocated between Levels 1, 2 and 3 as follows:

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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)
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 254     $     $ 254  
Agency
                       
Asset-backed securities
          5,011             5,011  
Short-term investments
    27,572       306             27,878  
 
                       
Total
  $ 27,572     $ 5,571     $     $ 33,143  
 
                       
     As at December 31, 2010, the securities lending collateral reinvested by the Company in connection with its securities program was allocated between Levels 1, 2 and 3 as follows:
                                 
    Level 1     Level 2     Level 3     Total  
Corporate
  $     $ 229     $     $ 229  
Agency
                       
Asset-backed securities
          5,005             5,005  
Short-term investments
    2,644       14,450             17,094  
 
                       
Total
  $ 2,644     $ 19,684     $     $ 22,328  
 
                       
     The following table sets forth certain information regarding the investment ratings of the Company’s securities lending collateral reinvested as at March 31, 2011 and December 31, 2010. Investment ratings are the lower of Moody’s or Standard & Poor’s rating for each investment security, presented in Standard & Poor’s equivalent rating. For investments where Moody’s and Standard & Poor’s ratings are not available, Fitch ratings are used and presented in Standard & Poor’s equivalent rating.
                                 
    March 31, 2011     December 31, 2010  
    Estimated Fair             Estimated        
    Value     % of Total     Fair Value     % of Total  
AAA
  $ 5,317       16.0 %   $ 5,454       24.4 %
AA+
          0.0 %     11,003       49.3 %
AA
          0.0 %            
AA-
          0.0 %     2,998       13.5 %
A+
          0.0 %            
A
          0.0 %            
NR
    254       0.8 %     229       1.0 %
 
                       
 
    5,571       16.8 %     19,684       88.2 %
NR- Short-term investments (a)
    27,572       83.2 %     2,644       11.8 %
 
                       
Total
  $ 33,143       100.0 %   $ 22,328       100.0 %
 
                       
 
(a)   This amount relates to short-term investments and is therefore not a rated security.
     The amortized cost and estimated fair value amounts for securities lending collateral reinvested by the Company at March 31, 2011 and December 31, 2010 are shown by contractual maturity below. 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.

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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)
                                 
    March 31, 2011     December 31, 2010  
    Amortized Cost     Estimated Fair Value     Amortized Cost     Estimated Fair Value  
Due in one year or less
  $ 27,878     $ 27,878     $ 17,093     $ 17,095  
Due after one year through five years
    6,000       5,265       6,000       5,233  
 
                       
Total
  $ 33,878     $ 33,143     $ 23,093     $ 22,328  
 
                       
4. Derivative Instruments Used in Hedging Activities
     The Company enters into derivative instruments for risk management purposes, specifically to economically hedge unmatched foreign currency exposures. During the three months ended March 31, 2011, the Company entered into foreign currency forward exchange contracts to mitigate the risk of fluctuations in the Euro and Australian dollar to U.S. dollar rates. During the year ended December 31, 2010, the Company entered into a foreign currency forward contract to mitigate the risk of foreign currency exposure of unpaid losses denominated in Chilean Pesos (CLP). The CLP foreign currency forward contract was renewed during the three months ended March 31, 2011. The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at March 31, 2011:
                                         
            Asset Derivatives     Liability Derivatives  
            Balance Sheet             Balance Sheet        
Derivatives designated as hedging instruments:   Notional Amount     location     Fair value     location     Fair value  
Foreign exchange contracts
  $ 70,416     Other assets     $ 551     Other liabilities     $ 843  
The following table summarizes information on the location and amount of the derivative fair value on the consolidated balance sheet at December 31, 2010:
                                         
            Asset Derivatives     Liability Derivatives  
            Balance Sheet             Balance Sheet        
Derivatives designated as hedging instruments:   Notional Amount     location     Fair value     location     Fair value  
Foreign exchange contract
  $ 75,000     Other assets     $ 2,905     Other liabilities     $  
(a) Classification within the fair value hierarchy
     As described in Note 3 “Investments” under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. We estimate the fair value for these asset derivatives using a valuation obtained from an independent external source. The assumptions used within the valuation are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.
(b) Derivative instruments designated as a fair value hedge
     The Company designates its derivative instruments as fair value hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the hedging derivatives 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.

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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)
     The following table provides the total impact on earnings relating to the derivative instruments formally designated as fair value hedges along with the impact of the related hedged items for the three months ended March 31, 2011:
                                 
            Three months ended March 31, 2011  
                    Amount of Gain     Amount of Gain  
                    (Loss) on Hedged     (Loss) Recognized  
    Location of     Amount of Gain     Item Recognized in     in Income on  
    Gain (Loss)     (Loss) Recognized     Income Attributable     Derivative  
    Recognized in     in Income on     to Risk Being     (Ineffective  
Derivatives designated as fair value hedges and related hedged item:   Income     Derivative     Hedged     Portion)  
Foreign exchange
  Foreign exchange (losses) gains   $ (3,822 )   $ 3,822     $  
There was no derivative activity for the three months ended March 31, 2010.
5. Reserve for losses and loss expenses
     Reserves for losses and loss expenses are based in part upon the estimation of case losses reported from brokers, insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and 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, case 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 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 the total reserves.
     The following table represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid loss expenses as at March 31, 2011 and December 31, 2010:
                 
    Three Months Ended     Year ended  
    March 31,     December 31,  
    2011     2010  
Reserve for losses and loss expenses, beginning of period
  $ 2,035,973     $ 1,622,134  
Losses and loss expenses recoverable
    (283,134 )     (181,765 )
 
           
Net reserves for losses and loss expenses, beginning of period
    1,752,839       1,440,369  
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
               
Current year
    502,714       1,144,196  
Prior years
    (26,516 )     (156,610 )
 
           
Total incurred losses and loss expenses
    476,198       987,586  
Total net paid losses
    (163,257 )     (673,422 )
Foreign exchange
    14,934       (1,694 )
 
           
Net reserve for losses and loss expenses, end of period
    2,080,714       1,752,839  
Losses and loss expenses recoverable
    453,701       283,134  
 
           
Reserve for losses and loss expenses, end of period
  $ 2,534,415     $ 2,035,973  
 
           

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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)
During the period, the Company recorded losses of $148,926 for the Tohoku earthquake, $52,434, for the Gryphon Alpha mooring failure, $41,881 for the Christchurch earthquake, $31,023 for the Brisbane floods and $19,500 for the CNRL Horizon explosion.
6. 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.
a) 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 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 March 31, 2011, 97.4% of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included $296,998 of IBNR recoverable (December 31, 2010: $146,519). Reinsurance recoverables by reinsurer are as follows:
                                 
    March 31, 2011     December 31, 2010  
    Reinsurance             Reinsurance        
    Recoverable     % of Total     Recoverable     % of Total  
Top 10 reinsurers
  $ 335,458       69.8 %   $ 222,420       71.5 %
Other reinsurers’ balances > $1 million
    136,307       28.4 %     80,221       25.8 %
Other reinsurers’ balances < $1 million
    8,419       1.8 %     8,489       2.7 %
 
                       
Total
  $ 480,184       100.0 %   $ 311,130       100.0 %
 
                       
                         
    March 31, 2011  
            Reinsurance        
Top 10 Reinsurers   Rating     Recoverable     % of Total  
Allianz
  AA   $ 70,807       21.1 %
Lloyd’s Syndicates
    A+       68,541       20.5 %
Hannover Re
  AA-     36,722       10.9 %
Manulife
  AA-     35,000       10.4 %
Tokio Marine / Tokio Millennium
  AA-     26,571       7.9 %
Everest Re
    A+       23,726       7.1 %
Fully collateralized reinsurers
  NR     22,520       6.7 %
Montpelier Re
    A-       20,000       6.0 %
Munich Re
  AA-     16,571       4.9 %
Transatlantic Re
    A+       15,000       4.5 %
 
                   
Total
          $ 335,458       100.0 %
 
                   

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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)
                         
    December 31, 2010  
            Reinsurance        
Top 10 Reinsurers   Rating     recoverable     % of Total  
Lloyd’s Syndicates
    A+     $ 60,716       27.2 %
Hannover Re
  AA-     32,392       14.6 %
Fully collateralized reinsurers
  NR     23,750       10.7 %
Montpelier Re
    A-       20,000       9.0 %
Munich Re
  AA-     17,411       7.8 %
Everest Re
    A+       16,611       7.5 %
Allianz
  AA     14,184       6.4 %
Transatlantic Re
    A+       13,758       6.2 %
Tokio Millennium Re
  AA     11,980       5.4 %
Platinum Re
    A       11,618       5.2 %
 
                   
Total
          $ 222,420       100.0 %
 
                   
     At March 31, 2011 and December 31, 2010, the provision for uncollectible reinsurance relating to losses recoverable was $5,986 and $5,652, respectively. To estimate the provision for uncollectible reinsurance recoverable, 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. As part of this process, ceded IBNR is allocated by reinsurer. Of the $480,184 reinsurance recoverable at March 31, 2011, $22,520 was fully collateralized (December 31, 2010: $23,750).
     The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.
7. Share capital
a) Authorized and issued
     The Company’s authorized share capital is 571,428,571 voting and non-voting shares with a par value of $0.175 per share. The holders of common voting shares are entitled to receive dividends and 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. In November 2009, the Board of Directors of the Company authorized an initial $400,000 share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750,000 to shareholders.

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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)
This amount was in addition to, and in excess of, the $135,494 of common shares purchased by the Company through February 17, 2010 under its previously authorized $400,000 share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company repurchased $300,000 in common shares. On November 4, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company repurchased $238,362 in common shares. In addition, the Board of Directors authorized separate repurchase agreements with funds affiliated with or managed by each of Aquiline Capital Partners LLC, New Mountain Capital LLC, and Vestar Capital Partners pursuant to which the Company repurchased $61,638 in common shares. On December 20, 2010, the Board of Directors authorized the Company to return up to an additional $400,000 to shareholders. This amount is in addition to the $929,173 of common shares purchased by the Company through December 23, 2010 under its previously authorized share repurchase program.
     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, 2010
    132,838,111  
Restricted share awards vested, net of shares withheld
    274,966  
Restricted share units vested, net of shares withheld
    5,376  
Employee seller shares vested
     
Options exercised
    201,709  
Warrants exercised
     
 
     
Common shares issued, March 31, 2011
    133,320,162  
Shares repurchased
    (35,031,985 )
 
     
Common shares outstanding, March 31, 2011
    98,288,177  
 
     
         
    Common Shares  
Common shares issued, December 31, 2009
    131,616,349  
Restricted share awards vested, net of shares withheld
    174,582  
Restricted share units vested, net of shares withheld
    51,436  
Employee seller shares vested
     
Options exercised
    51,534  
Warrants exercised
     
 
     
Common shares issued, March 31, 2010
    131,893,901  
Shares repurchased
    (7,983,471 )
 
     
Common shares outstanding, March 31, 2010
    123,910,430  
 
     

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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)
b) Warrants
     During the three months ended March 31, 2011 no warrants were exercised (March 31, 2010: nil).
c) Deferred share units
     Under the terms of the Company’s Director Stock Compensation Plan, non-management directors may elect to receive their director fees in deferred share units rather than cash. The number of share units distributed in case of election under the plan is equal to the amount of the annual retainer fee otherwise payable to the director on such payment date divided by 100% of the fair market value of a share on such payment date. Additional deferred share units are issued in lieu of dividends that accrue on these deferred share units. The total outstanding deferred share units at March 31, 2011 were 4,762 (December 31, 2010: 4,727).
d) Dividends
     On February 9, 2011, the Company announced a quarterly cash dividend of $0.25 per common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable. This dividend was paid on March 30, 2011 to holders of record on March 15, 2011.
8. 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 13,126,896 shares of which 4,893,061 shares are remaining. 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 ratably or at the end of the required service period from the date of grant. Grant prices are established at the estimated fair value of the Company’s common shares at the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for all grants to date:
                                 
    Weighted average                    
    risk free interest     Weighted average     Expected life        
Year   rate     dividend yield     (years)     Expected volatility  
2008
    3.5%     3.2%     7       30.0%
2009
    3.9%     3.7%     2       34.6%
2010 (a)
    n/a       n/a       n/a       n/a  
 
(a)   The Company did not grant any stock option awards during the year ended December 31, 2010 or the three months ended March 31, 2011.
     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.

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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)
     Share compensation expenses in respect of options of $1,247 were recorded for the three months ended March 31, 2011 (March 31, 2010: $1,038). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to options for the three months ended March 31, 2011 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2010
    2,723,684     $ 6.74     $ 20.19  
Options granted
                 
Options exercised
    (201,709 )     4.48       21.94  
Options forfeited
                 
 
                 
Options outstanding, March 31, 2011
    2,521,975     $ 6.92     $ 20.05  
 
                 
Options exercisable at March 31, 2011
    2,399,880     $ 6.81     $ 19.94  
 
                 
     Activity with respect to options for the three months ended March 31, 2010 was as follows:
                         
            Weighted Average     Weighted Average  
            Grant Date     Grant Date  
    Options     Fair Value     Exercise Price  
Options outstanding, December 31, 2009
    3,278,015     $ 6.83     $ 19.88  
Options granted
                 
Options exercised
    (51,534 )     5.72       22.34  
Options forfeited
    (3,207 )     10.30       20.39  
 
                 
Options outstanding, March 31, 2010
    3,223,274     $ 6.84     $ 19.84  
 
                 
Options exercisable at March 31, 2010
    2,514,697     $ 6.00     $ 20.08  
 
                 
     At March 31, 2011, there were $661 (December 31, 2010: $851) of total unrecognized share compensation expenses in respect of options that are expected to be recognized over a weighted-average period of 0.9 years (December 31, 2010: 1.2 years).
     ii. Restricted share awards
     Restricted shares granted 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. Share compensation expenses of $9,156 were recorded for the three months ended March 31, 2011 (March 31, 2010: $4,326). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

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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)
     Activity with respect to unvested restricted share awards for the three months ended March 31, 2011 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2010
    3,114,039     $ 24.33  
Restricted share awards granted
    3,333       30.92  
Restricted share awards vested
    (314,881 )     25.37  
Restricted share awards forfeited
           
 
           
Restricted share awards outstanding, March 31, 2011
    2,802,491     $ 24.23  
 
           
     Activity with respect to unvested restricted share awards for the three months ended March 31, 2010 was as follows:
                 
    Restricted     Weighted Average  
    Share     Grant Date  
    Awards     Fair Value  
Restricted share awards outstanding, December 31, 2009
    2,525,958     $ 23.43  
Restricted share awards granted
    426,614       26.15  
Restricted share awards vested
    (204,520 )     24.56  
Restricted share awards forfeited
    (11,298 )     22.13  
 
           
Restricted share awards outstanding, March 31, 2010
    2,736,754     $ 23.77  
 
           
     At March 31, 2011, there were $38,548 (December 31, 2010: $44,290) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.4 years (December 31, 2010: 2.5 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. Share compensation expenses of $114 were recorded for the three months ended March 31, 2011 (March 31, 2010: $173). 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 units for the three months ended March 31, 2011 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2010
    47,049     $ 25.04  
Restricted share units granted
           
Restricted share units vested
    (7,129 )     24.24  
Restricted share units reinvested
    296       25.45  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, March 31, 2011
    40,216     $ 25.18  
 
           

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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)
     Activity with respect to unvested restricted share units for the three months ended March 31, 2010 was as follows:
                 
            Weighted Average  
    Restricted     Grant Date  
    Share Units     Fair Value  
Restricted share units outstanding, December 31, 2009
    78,591     $ 24.84  
Restricted share units granted
    7,952       26.07  
Restricted share units vested
    (52,679 )     24.77  
Restricted share units forfeited
           
 
           
Restricted share units outstanding, March 31, 2010
    33,864     $ 25.24  
 
           
     At March 31, 2011, there were $721 (December 31, 2010: $809) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.5 years (December 31, 2010: 2.7 years).
     iv. Performance share awards
     The Performance Share Awards (“PSAs”) contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share over a three year period. For PSAs granted in 2010, the grant date Diluted Book Value per Share (“DBVPS”) is $29.68, the DBVPS as at December 31, 2009. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS as at December 31, 2012. 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 income in the period in which they are determined.
     Share compensation expenses in respect of PSAs of $344 were recorded for three months ended March 31, 2011 (March 31, 2010: $nil). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.
     Activity with respect to unvested performance share awards for the three months ended March 31, 2011 was as follows:
                 
            Weighted Average  
    Performance     Grant Date  
    Share Awards     Fair Value  
Performance share awards outstanding, December 31, 2010
    132,401     $ 28.70  
Performance share awards granted
           
Performance share awards vested
           
Performance share awards forfeited
           
 
           
Performance share awards outstanding, March 31, 2011
    132,401     $ 28.70  
 
           

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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)
     Activity with respect to unvested performance share awards for the three months ended March 31, 2010 was as follows:
                 
            Weighted Average  
    Performance     Grant Date  
    Share Awards     Fair Value  
Performance share awards outstanding, December 31, 2009
        $  
Performance share awards granted
           
Performance share awards vested
           
Performance share awards forfeited
           
 
           
Performance share awards outstanding, March 31, 2010
        $  
 
           
     At March 31, 2011, there were $3,052 (December 31, 2010: $3,375) of total unrecognized share compensation expenses in respect of PSAs that are expected to be recognized over a weighted-average period of 2.2 years (December 31, 2010: 2.4 years).
b) Employee seller shares
     Pursuant to the Share Sale Agreement for the purchase of Talbot Holdings, Ltd. (“Talbot”), the Company issued 1,209,741 restricted shares to Talbot employees (the “employee seller shares”). Upon consummation of the acquisition, the employee seller shares were validly issued, fully-paid and non-assessable and entitled to vote and participate in distributions and dividends in accordance with the Company’s Bye-laws. However, the employee seller shares are subject to a restricted period during which they are subject to forfeiture (as implemented by repurchase by the Company for a nominal amount). Forfeiture of employee seller shares will generally occur in the event that any such Talbot employee’s employment terminates, with certain exceptions, prior to the end of the restricted period. The restricted period will end for 25% of the employee seller shares on each anniversary of the closing date of July 2, 2007 for all Talbot employees other than Talbot’s Chairman, such that after four years the potential for forfeiture will be completely extinguished.
     Share compensation expenses in respect of employee seller shares of $1,188 were recorded for three months ended March 31, 2011 (March 31, 2010: $1,039).
     Activity with respect to unvested employee seller shares for the three months ended March 31, 2011 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2010
    197,879     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
           
Employee seller shares forfeited
           
 
           
Employee seller shares outstanding, March 31, 2011
    197,879     $ 22.01  
 
           
     Activity with respect to unvested employee seller shares for the three months ended March 31, 2010 was as follows:
                 
            Weighted Average  
    Employee     Grant Date  
    Seller Shares     Fair Value  
Employee seller shares outstanding, December 31, 2009
    410,667     $ 22.01  
Employee seller shares granted
           
Employee seller shares vested
           
Employee seller shares forfeited
           
 
           
Employee seller shares outstanding, March 31, 2010
    410,667     $ 22.01  
 
           

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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)
     At March 31, 2011, there were $1,090 (December 31, 2010: $2,141) of total unrecognized share compensation expenses in respect of employee seller shares that are expected to be recognized over a weighted-average period of 0.3 years (December 31, 2010: 0.5 years).
 
c) Total share compensation expenses
     The breakdown of share compensation expenses by award type was as follows:
                 
    Three Months Ended  
    March 31, 2011     March 31, 2010  
Options
  $ 1,247     $ 1,038  
Restricted share awards
    9,156       4,326  
Restricted share units
    114       173  
Performance share awards
    344        
Employee seller shares
    1,188       1,039  
 
           
Total
  $ 12,049     $ 6,576  
 
           
9. Debt and financing arrangements
a) Financing structure and finance expenses
     The financing structure at March 31, 2011 was:
                         
    Commitment     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  
2010 Senior Notes due 2040
    250,000       250,000       246,901  
$340,000 syndicated unsecured letter of credit facility
    340,000              
$60,000 bilateral unsecured letter of credit facility
    60,000              
$500,000 secured letter of credit facility
    500,000       285,048        
Talbot FAL Facility (b)
    25,000       25,000        
IPC Bi-Lateral Facility
    80,000       64,368        
 
                 
Total
  $ 1,605,000     $ 914,216     $ 536,701  
 
                 

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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)
     The financing structure at December 31, 2010 was:
                         
    Commitment     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  
2010 Senior Notes due 2040
    250,000       250,000       246,874  
$340,000 syndicated unsecured letter of credit facility
    340,000              
$60,000 bilateral unsecured letter of credit facility
    60,000              
$500,000 secured letter of credit facility
    500,000       268,944        
Talbot FAL Facility (b)
    25,000       25,000        
IPC Bi-Lateral Facility
    80,000       68,063        
 
                 
Total
    1,605,000       901,807       536,674  
 
                 
 
(a)   Indicates utilization of commitment amount, not drawn borrowings.
 
(b)   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, 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.
     Finance expenses consist of interest on our junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, fees relating to our credit facilities and the costs of FAL as follows:
                 
    Three Months Ended  
    March 31,     March 31,  
    2011     2010  
2006 Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,588  
2007 Junior Subordinated Deferrable Debentures
    3,029       3,029  
2010 Senior Notes due 2040
    5,597       3,978  
Credit facilities
    1,724       1,311  
Talbot FAL Facility
    63       422  
Talbot other interest
          75  
Talbot third party FAL facility
          2,748  
 
           
Total
  $ 14,001     $ 15,151  
 
           
 
(b)   $250,000 2010 Senior Notes due 2040
     On January 21, 2010, the Company offered and sold $250,000 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 Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 2010 Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity or early redemption. Interest on the 2010 Senior Notes is payable semi-annually in arrears on January 26 and July 26 of each year, commencing on July 26, 2010. The net proceeds of $243,967 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 its outstanding capital stock and payment of dividends to shareholders. Debt issuance costs of $2,808 were deferred as an asset and amortized over the life of the 2010 Senior Notes.
     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

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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)
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 will be structurally subordinated to all obligations of the Company’s subsidiaries.
     Future expected payments of interest on the 2010 Senior Notes are as follows:
         
2011
  $ 11,094  
2012
    22,188  
2013
    22,188  
2014
    22,188  
2015 and thereafter
    565,780  
 
     
Total minimum future payments
  $ 643,438  
 
     
(c) Junior subordinated deferrable debentures
     On June 15, 2006, the Company participated in a private placement of $150,000 of junior subordinated deferrable interest debentures due 2036 (the “2006 Junior Subordinated Deferrable Debentures”). The 2006 Junior Subordinated Deferrable Debentures mature on June 15, 2036, are redeemable at the Company’s option at par beginning June 15, 2011, and require quarterly interest payments by the Company to the holders of the 2006 Junior Subordinated Deferrable Debentures. Interest is payable at 9.069% per annum through June 15, 2011, and thereafter at a floating rate of three-month LIBOR plus 355 basis points, reset quarterly. The proceeds of $150,000 from the sale of the 2006 Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, were used by the Company to fund Validus Re segment operations and for general working capital purposes. Debt issuance costs of $3,750 were deferred as an asset and are amortized to income over the five year optional redemption period.
     On June 21, 2007, the Company participated in a private placement of $200,000 of junior subordinated deferrable interest debentures due 2037 (the “2007 Junior Subordinated Deferrable Debentures”). The 2007 Junior Subordinated Deferrable Debentures mature on June 15, 2037, are redeemable at the Company’s option at par beginning June 15, 2012, and require quarterly interest payments by the Company to the holders of the 2007 Junior Subordinated Deferrable Debentures. Interest will be payable at 8.480% per annum through June 15, 2012, and thereafter at a floating rate of three-month LIBOR plus 295 basis points, reset quarterly. The proceeds of $200,000 from the sale of the 2007 Junior Subordinated Deferrable Debentures, after the deduction of commissions paid to the placement agents in the transaction and other expenses, were used by the Company to fund the purchase of Talbot Holdings Ltd. Debt issuance costs of $2,000 were deferred as an asset and are amortized to income over the five year optional redemption period.
     During 2008 and 2009 the Company repurchased from an unaffiliated financial institution $60,200 principal amount of its 2007 Junior Subordinated Deferrable Debentures due 2037.
     Future expected payments of interest and principal on the 2006 and 2007 Junior Subordinated Deferrable Debentures are as follows:
         
2011
  $ 12,292  
2012
    5,928  
2013
     
2014
     
2015 and thereafter
    289,800  
 
     
Total minimum future payments
  $ 308,020  
 
     

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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)
(d) Credit facilities
     (i) $340,000 syndicated unsecured letter of credit facility, $60,000 bilateral unsecured letter of credit facility and $500,000 secured letter of credit facility
     On March 12, 2010, the Company entered into a three-year $340,000 syndicated unsecured letter of credit facility and a $60,000 bilateral unsecured letter of credit facility which provide for letter of credit availability for Validus Re and the Company’s other subsidiaries and revolving credit availability for the Company (the “Three Year Facilities”) (the full $400,000 of which is available for letters of credit and/or revolving loans).
     On March 12, 2007, the Company entered into a $500,000 five-year secured letter of credit facility, as subsequently amended on October 25, 2007, July 24, 2009, and March 12, 2010, which provides for letter of credit availability for Validus Re and the Company’s other subsidiaries (the “Five Year Facility” and, together with the Three Year Facilities, the “Credit Facilities”). The Credit Facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. On October 25, 2007, the Company entered into the First Amendment to the Credit Facilities to provide for, among other things, additional capacity to incur up to $100,000 under a new Funds at Lloyd’s Letter of Credit Facility (as described below) to support underwriting capacity provided to Talbot 2002 Underwriting Ltd through Syndicate 1183 at Lloyd’s of London for the 2008 and 2009 underwriting years of account. The amendment also modified certain provisions in the Credit Facilities in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default.
     On September 4, 2009, the Company announced that it had entered into Amendments to its $500,000 five-year secured letter of credit facility and its then outstanding $200,000 three-year unsecured facility and $100,000 Talbot FAL Facility to amend a specific investment restriction clause in order to permit the completion of the IPC Acquisition. The amendment also modified and updated certain pricing and covenant terms.
     As amended, 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 70% of consolidated net worth ($2,925,590) and, commencing with the end of the fiscal quarter ending December 31, 2009 to be increased quarterly by an amount equal to 50% of its consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, (ii) the requirement that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00, and (iii) the requirement that Validus Re and any other material insurance subsidiaries maintain a financial strength rating by A.M. Best of not less than “B++” (Fair). For purposes of covenant compliance (i) “net worth is calculated with investments carried at amortized cost and (ii) “consolidated total debt” does not include the Company’s junior subordinated deferrable debentures. The credit facilities also contain restrictions on our ability to pay dividends and other payments in respect of equity interests at any time that we are otherwise in default with respect to certain provisions under the credit facilities, make investments, incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others.
     As of March 31, 2011, there was $285,048 in outstanding letters of credit under the Five Year Facility (December 31, 2010: $268,944) and $nil outstanding under the Three Year Facilities (December 31, 2010: $nil).
     As of March 31, 2011, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Credit Facilities.

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(ii) Talbot FAL Facility
Validus Holdings, Ltd.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
     On November 28, 2007, Talbot entered into a $100,000 standby Letter of Credit facility (the “Talbot FAL Facility”) to provide Funds at Lloyd’s for the 2008 and 2009 underwriting years of account; this facility is guaranteed by the Company and is secured against the assets of Validus Re. The Talbot FAL Facility was provided by a syndicate of commercial banks arranged by Lloyds TSB Bank plc and ING Bank N.V., London Branch.
     On November 19, 2009, the Company entered into an Amendment and Restatement of the Talbot FAL Facility to reduce the commitment from $100,000 to $25,000, and to extend the support to the 2010 and 2011 underwriting years of account.
     As amended, the Talbot FAL Facility contains affirmative covenants that include, among other things, (i) the requirement that we initially maintain a minimum level of consolidated net worth of at least 70% of consolidated net worth ($2,607,219), and commencing with the end of the fiscal quarter ending September 30, 2009 to be increased quarterly by an amount equal to 50% of our consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares during such quarter, and (ii) the requirement that we maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.35:1.00.
     The Talbot FAL Facility also contains restrictions on our ability to incur debt at our subsidiaries, incur liens, sell assets and merge or consolidate with others. Other than in respect of existing and future preferred and hybrid securities, the payment of dividends and other payments in respect of equity interests are not permitted at any time that we are in default with respect to certain provisions under the Credit Facilities. As of March 31, 2011, the Company had $25,000 in outstanding letters of credit under this facility.
     As of March 31, 2011, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the Talbot FAL Facility.
     (iii) IPC Syndicated Facility and IPC Bi-Lateral Facility
     IPC obtained letters of credit through the IPC Syndicated Facility and the IPC Bi-Lateral Facility (the “IPC Facilities”). In July, 2009, certain terms of these facilities were amended including suspending IPC’s ability to increase existing letters of credit or to issue new letters of credit. Effective March 31, 2010, the IPC Syndicated Facility was closed. As of March 31, 2011, $64,368 of outstanding letters of credit were issued under the IPC Bi-Lateral Facility (December 31, 2010: $68,063).
     As of March 31, 2011, and throughout the reporting periods presented, the Company was in compliance with all covenants and restrictions under the IPC Bi-Lateral Facility.
10. Commitments and contingencies
a) Concentrations of credit risk
     The Company’s investments are managed following prudent standards of diversification. The Company attempts to limit its credit exposure by purchasing high quality fixed income investments to maintain an average portfolio credit quality of AA- or higher with mortgage and commercial mortgage-backed issues having an aggregate weighted average credit quality of triple-A. In addition, the Company limits its exposure to any single issuer to 3% or less, excluding treasury and agency securities. With the exception of the Company’s bank loan portfolio, the minimum credit rating of any security purchased is Baa3/BBB- and where investments are downgraded, the Company permits a holding of up to 2% in aggregate market value, or 10% with written pre-authorization. At March 31, 2011, 1.8% of the portfolio, excluding bank loans, had a split rating below Baa3/BBB- and the Company did not have an aggregate exposure to any single issuer of more than 1.1% of its investment portfolio, other than with respect to government and agency securities.

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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)
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, 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 at March 31, 2011 amounted to $441,000 (December 31, 2010: $441,000) of which $25,000 is provided under the Talbot FAL Facility (December 31, 2010: $25,000).
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 2011 estimated premium income at Lloyd’s of £560,000, the March 31, 2011 exchange rate of £1 equals $1.6031 and assuming the maximum 3% assessment, the Company would be assessed approximately $26,932.
11. Related party transactions
     The transactions listed below are classified as related party transactions as each counterparty has either a direct or indirect shareholding in the Company.
     a) On December 8, 2005, the Company entered into agreements with Goldman Sachs Asset Management and its affiliates (“GSAM”) under which GSAM provides investment management services for a portion of the Company’s investment portfolio. Goldman Sachs entities, own 9,634,782 non-voting shares in the Company, hold warrants to purchase 1,604,410 non-voting shares. Sumit Rajpal, resigned from the Board of Directors effective February 7, 2011. Mr. Rajpal continues to serves as Managing Director of Goldman, Sachs and Co., GSAM’s parent company. Investment management fees earned by GSAM for three months ended March 31, 2011 were $360 (March 31, 2010: $379) of which $454 was included in accounts payable and accrued expenses at March 31, 2011 (December 31, 2010: $359). Management believes that the fees charged were consistent with those that would have been charged in arm’s-length transactions with unrelated third parties.
     b) Aquiline Capital Partners, LLC and its related companies (“Aquiline”), which own 6,255,943 shares in the Company, 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, also 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 months ended March 31, 2011 of $511 (March 31, 2010: $740), of which $535 was included in premiums receivable at March 31, 2011 (December 31, 2010: $378). The Company also recognized reinsurance premiums ceded during the three months ended March 31, 2011 of $163 (March 31, 2010: $606), of which $89 was included in reinsurance balances payable at March 31, 2011 (December 31, 2010: $132). Earned premium adjustments of $334 were incurred during the three months ended March 31, 2011 (March 31, 2010: nil).
     c) Aquiline is also a shareholder of Tiger Risk Partners LLC (“Tiger Risk”). Christopher E. Watson, a director of the Company serves as a director of Tiger Risk. Pursuant to certain reinsurance contracts, the Company recognized brokerage expenses paid to Tiger Risk during the three months ended March 31, 2011 of $453 (March 31, 2010: $37), of which $638 was included in accounts payable and accrued expenses at March 31, 2011 (December 31, 2010: $792).

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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)
     d) 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. John J. Hendrickson and Jeffrey W. Greenberg, directors of the Company, each serve as a director of Conning Holdings Corp., the parent company of Conning and Michael Carpenter, the Chairman of Talbot Holdings, Ltd. serves as a director of a subsidiary company of Conning Holdings Corp. Investment management fees earned by Conning for the three months ended March 31, 2011 were $146 (March 31, 2010: $85), of which $122 (December 31, 2010: $97) was included in accounts payable and accrued expenses at March 31, 2011.
12. Earnings per share
     The following table sets forth the computation of basic and diluted (loss) per share for the three months ended March 31, 2011 and 2010:
                 
    Three Months Ended  
    March 31,     March 31,  
    2011     2010  
Basic earnings per share
               
(Loss)
  $ (172,364 )   $ (118,378 )
 
               
less: Dividends and distributions declared on outstanding warrants
    (1,984 )     (1,749 )
 
           
(Loss) available to common shareholders
  $ (174,348 )   $ (120,127 )
 
           
 
               
Weighted average number of common shares outstanding
    97,944,340       126,633,277  
 
           
 
               
Basic (loss) per share
  $ (1.78 )   $ (0.95 )
 
           
 
               
Diluted earnings per share
               
(Loss)
  $ (172,364 )   $ (118,378 )
 
               
less: Dividends and distributions declared on outstanding warrants
    (1,984 )     (1,749 )
 
           
(Loss) available to common shareholders
  $ (174,348 )   $ (120,127 )
 
           
 
               
Weighted average number of common shares outstanding
    97,944,340       126,633,277  
 
           
 
               
Diluted (loss) per share
  $ (1.78 )   $ (0.95 )
 
           
     Share equivalents that would result in the issuance of common shares of 15,995 were outstanding for three months ended March 31, 2011 but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Due to the net loss in the three months ended March 31, 2011 and 2010, share equivalents were not included in the computation of diluted earnings per share, because of their anti-dilutive effect.
13. Subsequent events
     During April 2011, a series of tornadoes hit the United States, causing significant property damage across a number of states including Alabama, Mississippi and Tennessee.
     The Company is continuing to review its in-force contracts and preliminary loss information from clients for the event described above and does not expect that losses, either individually or when aggregated, will have a material impact on its shareholders equity or liquidity.

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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)
     On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per each common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable, payable on June 30, 2011 to holders of record on June 15, 2011.
14. Segment information
     The Company conducts its operations worldwide through two wholly-owned subsidiaries, Validus Reinsurance, Ltd. and Talbot Holdings Ltd. from which two operating segments have been determined under U.S. GAAP segment reporting. 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 business requires different strategies.
Validus Re
     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 and motor.
Talbot
     The Talbot segment focuses on a wide range of marine and energy, war, political violence, commercial property, financial institutions, contingency, bloodstock, 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.
Corporate and other reconciling items
     The Company has a “Corporate” function, 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 intersegment revenues and expenses and unusual items that are not allocated to segments.

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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)
     The following tables summarize the results of our operating segments and corporate segment:
                                 
                    Corporate &        
Three Months Ended March 31, 2011   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 611,238     $ 263,057     $ (24,399 )   $ 849,896  
Reinsurance premiums ceded
    (46,805 )     (87,414 )     24,399       (109,820 )
 
                       
Net premiums written
    564,433       175,643             740,076  
Change in unearned premiums
    (312,124 )     1,581             (310,543 )
 
                       
Net premiums earned
    252,309       177,224             429,533  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    310,544       165,654             476,198  
Policy acquisition costs
    40,066       37,216       14       77,296  
General and administrative expenses
    10,657       28,722       9,098       48,477  
Share compensation expenses
    3,105       2,719       6,225       12,049  
 
                       
Total underwriting deductions
    364,372       234,311       15,337       614,020  
 
                       
 
                               
Underwriting (loss)
  $ (112,063 )   $ (57,087 )   $ (15,337 )   $ (184,487 )
 
                               
Net investment income
    25,651       6,590       (2,266 )     29,975  
Other income
    1,433       3,017       (2,844 )     1,606  
Finance expenses
    (1,713 )     (63 )     (12,225 )     (14,001 )
 
                       
Operating (loss) before taxes
    (86,692 )     (47,543 )     (32,672 )     (166,907 )
Tax (expense) benefit
    (2 )     1,793       (332 )     1,459  
 
                       
Net operating (loss)
  $ (86,694 )   $ (45,750 )   $ (33,004 )   $ (165,448 )
 
                               
Net realized gains on investments
    3,919       2,460             6,379  
Net unrealized (losses) on investments
    (8,515 )     (4,313 )           (12,828 )
Foreign exchange (losses) gains
    (4,360 )     3,901       (8 )     (467 )
 
                       
Net (loss)
  $ (95,650 )   $ (43,702 )   $ (33,012 )   $ (172,364 )
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    92.3 %     66.8 %             87.1 %
 
                               
Losses and loss expenses
    123.1 %     93.5 %             110.9 %
 
                               
Policy acquisition costs
    15.9 %     21.0 %             18.0 %
General and administrative expenses (a)
    5.5 %     17.7 %             14.1 %
 
                         
Expense ratio
    21.4 %     38.7 %             32.1 %
 
                         
Combined ratio
    144.5 %     132.2 %             143.0 %
 
                         
 
                               
Total assets
  $ 5,065,128     $ 2,748,079     $ 12,483     $ 7,825,690  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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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)
                                 
                    Corporate &        
Three months ended March 31, 2010   Validus Re     Talbot     Eliminations     Total  
Underwriting income
                               
Gross premiums written
  $ 640,295     $ 270,541     $ (39,902 )   $ 870,934  
Reinsurance premiums ceded
    (13,110 )     (117,531 )     39,902       (90,739 )
 
                       
Net premiums written
    627,185       153,010             780,195  
Change in unearned premiums
    (343,264 )     20,763             (322,501 )
 
                       
Net premiums earned
    283,921       173,773             457,694  
 
                       
 
                               
Underwriting deductions
                               
Losses and loss expenses
    348,920       129,611             478,531  
Policy acquisition costs
    43,503       34,945       (2,272 )     76,176  
General and administrative expenses
    16,312       25,548       11,709       53,569  
Share compensation expenses
    1,629       1,559       3,388       6,576  
 
                       
Total underwriting deductions
    410,364       191,663       12,825       614,852  
 
                       
 
                               
Underwriting (loss)
  $ (126,443 )   $ (17,890 )   $ (12,825 )   $ (157,158 )
 
                               
Net investment income
    29,245       7,320       (2,266 )     34,299  
Other income
    1,078       1,975       (2,165 )     888  
Finance expenses
    (1,293 )     (3,245 )     (10,613 )     (15,151 )
 
                       
Operating (loss) before taxes
    (97,413 )     (11,840 )     (27,869 )     (137,122 )
Tax (expense) benefit
    (91 )     795       (7 )     697  
 
                       
Net operating (loss)
  $ (97,504 )   $ (11,045 )   $ (27,876 )   $ (136,425 )
 
                               
Net realized gains on investments
    9,779       1,619             11,398  
Net unrealized gains on investments
    12,195       3,218             15,413  
Foreign exchange (losses)
    (5,139 )     (3,599 )     (26 )     (8,764 )
 
                       
Net (loss)
  $ (80,669 )   $ (9,807 )   $ (27,902 )   $ (118,378 )
 
                       
 
                               
Selected ratios:
                               
Net premiums written / Gross premiums written
    98.0 %     56.6 %             89.6 %
 
                               
Losses and loss expenses
    122.9 %     74.6 %             104.6 %
 
                               
Policy acquisition costs
    15.3 %     20.1 %             16.6 %
General and administrative expenses (a)
    6.3 %     15.6 %             13.1 %
 
                         
Expense ratio
    21.6 %     35.7 %             29.7 %
 
                         
 
                               
Combined ratio
    144.5 %     110.3 %             134.3 %
 
                         
 
                               
Total assets
  $ 5,114,815     $ 2,429,530     $ 88,231     $ 7,632,576  
 
                       
 
(a)   Ratios are based on net premiums earned. The general and administrative expense ratio includes share compensation expenses.

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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)
     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 March 31, 2011  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 192,365     $ 27,831     $ (1,897 )   $ 218,299       25.7 %
Worldwide excluding United States (a)
    26,978       67,967       (2,712 )     92,233       10.9 %
Europe
    58,966       16,009       (502 )     74,473       8.8 %
Latin America and Caribbean
    25,119       18,268       (13,629 )     29,758       3.5 %
Japan
    10,198       540       (100 )     10,638       1.2 %
Canada
    100       3,808       (100 )     3,808       0.4 %
Rest of the world (b)
    36,057                   36,057       4.2 %
 
                             
Sub-total, non United States
    157,418       106,592       (17,043 )     246,967       29.0 %
Worldwide including United States (a)
    68,196       10,530       (502 )     78,224       9.2 %
Marine and Aerospace (c)
    193,259       118,104       (4,957 )     306,406       36.1 %
 
                             
Total
  $ 611,238     $ 263,057     $ (24,399 )   $ 849,896       100.0 %
 
                             
                                         
    Three Months Ended March 31, 2010  
    Gross premiums written  
    Validus Re     Talbot     Eliminations     Total     %  
United States
  $ 233,567     $ 25,283     $ (3,471 )   $ 255,379       29.3 %
Worldwide excluding United States (a)
    39,764       76,018       (3,832 )     111,950       12.9 %
Europe
    80,476       15,538       (457 )     95,557       11.0 %
Latin America and Caribbean
    28,739       17,227       (15,787 )     30,179       3.5 %
Japan
    650       708       (65 )     1,293       0.1 %
Canada
    65       3,636       (65 )     3,636       0.4 %
Rest of the world (b)
                            0.0 %
 
                             
Sub-total, non United States
    149,694       113,127       (20,206 )     242,615       27.9 %
Worldwide including United States (a)
    76,235       12,776       (1,730 )     87,281       10.0 %
Marine and Aerospace (c)
    180,799       119,355       (14,495 )     285,659       32.8 %
 
                             
Total
  $ 640,295     $ 270,541     $ (39,902 )   $ 870,934       100.0 %
 
                             
 
(a)   Represents risks in two or more geographic zones.
 
(b)   Represents risks in one geographic zone.
 
(c)   Not classified as geographic area as marine and aerospace risks can span multiple geographic areas and are not fixed locations in some instances.

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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 months ended March 31, 2011 and 2010 and the Company’s consolidated financial condition, liquidity and capital resources at March 31, 2011 and December 31, 2010. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2010, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
     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 Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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 underwrites from two distinct global operating segments, Validus Reinsurance, Ltd. (“Validus Re”) and Talbot Holdings Ltd. (“Talbot”). Validus Re, the Company’s principal reinsurance operating segment, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis. Talbot, the Company’s principal insurance operating segment, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd’s of London (“Lloyd’s”) and which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yacht and onshore energy business on behalf of the Talbot syndicate and others.
     The Company’s strategy is to concentrate primarily on short-tail risks, which is an area where management believes current 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 September 4, 2009, the Company acquired all of the outstanding shares of IPC (the “IPC Acquisition”) in exchange for common shares and cash. IPC’s operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The IPC Acquisition was undertaken to increase the Company’s capital base and gain a strategic advantage in the then current reinsurance market. This acquisition created a leading Bermuda carrier in the short-tail reinsurance market that facilitates stronger relationships with major reinsurance intermediaries.
Business Outlook and Trends
     We underwrite global specialty 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 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 trends when pricing contracts.

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     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. The Company was formed in October 2005 in response to the supply/demand imbalance resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed substantial increases in premium rates in 2006 compared to 2005 levels. During the years ended December 31, 2007 and 2008, the Company experienced increased competition in most lines of business. Capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates in most lines. However, during 2008, the insurance and reinsurance industry incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global financial crisis. In the wake of these events, the January 2009 renewal season saw decreased competition and increased premium rates due to relatively scarce capital and increased demand. During 2009, the Company observed reinsurance demand stabilization and industry capital recovery from investment portfolio gains. In 2009, there were few notable large losses affecting the worldwide (re)insurance industry and no major hurricanes making landfall in the United States.
     During 2010, the Company continued to see increased competition and decreased premium rates in most classes of business with the exception of offshore energy, Latin America, financial institutions and political risk lines. During 2010 there was an increased level of catastrophe activity, principally the Chilean earthquake and the Deepwater Horizon events.
     During the January 2011 renewal season, Validus Re increased gross premiums written on the U.S. Cat XOL lines and decreased gross premiums written in the proportional lines. In addition, Validus Re decreased gross premiums written in the International Property lines as market conditions dictated. In the aftermath of 2010’s Deepwater Horizon loss, Validus Re saw additional opportunities and rate increases in the marine lines. Within the specialty lines, Validus Re increased gross premiums written in the terrorism lines among other sub-classes. During the first quarter of 2011, premiums in Talbot have been relatively stable with rate increases occurring on renewals that have suffered losses but rate reductions continuing elsewhere, as a result of good experience and excess capacity in the market. Talbot is expecting improved pricing in the energy, property and political risk lines as a result of recent loss events. The significant elevated worldwide loss activity since the beginning of 2010, in conjunction with changes to certain commercial vendors’ catastrophe models, is resulting in improved pricing and demand for catastrophe reinsurance.
Financial Measures
     The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders:
     Annualized return on average equity represents the level of net income available to shareholders generated from the average shareholders’ equity during the period. Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. Percentages for the quarter and interim periods are annualized. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.
                         
    Three Months Ended     Year Ended  
    March 31,     December 31,  
    2011     2010     2010  
Annualized return on average equity
    (20.2 )%     (12.2 )%     10.8 %
 
                 

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     The decrease in annualized return on average equity for the three months ended March 31, 2011 was driven primarily by a net loss. The net loss for the three months ended March 31, 2011 increased by $54.0 million, or 45.6% compared to the three months ended March 31, 2010. This unfavorable movement was primarily due to the Tohoku earthquake and other large event losses coupled with an unfavorable movement in unrealized losses on investments.
     Diluted book value per common share is considered by management to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per common share decreased by $1.66, or 5.0%, from $32.98 at December 31, 2010 to $31.32 at March 31, 2011. The decrease was due to the loss generated in the three months ended March 31, 2011. Diluted book value per common share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book value per common share. Diluted book value per common share is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise). A reconciliation of diluted book value per common share to book value per common share is presented below in the section entitled “Non-GAAP Financial Measures.”
     Cash dividends per common share are an integral part of the value created for shareholders. On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per each common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable, payable on June 30, 2011 to holders of record on June 15, 2011.
     Underwriting income (loss) measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses) and gain on bargain purchase, net of expenses. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting (loss) for the three months ended March 31, 2011 and 2010 was ($184.5) million and ($157.2) million, respectively. Underwriting income (loss) is a Non-GAAP financial measure as described in detail and reconciled in the section below entitled “Underwriting Income.”
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 our consolidated financial statements:
    Reserve for losses and loss expenses;
 
    Premiums;
 
    Reinsurance premiums ceded and reinsurance recoverable; and
 
    Investment valuation.
     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, 2010.
Segment Reporting
     Management has determined that the Company operates in two reportable segments. The two significant operating segments are Validus Re and Talbot.
Results of Operations
     Validus Re commenced operations on December 16, 2005. The Company’s fiscal year ends on December 31. Financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information.

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The following table presents results of operations for the three months ended March 31, 2011 and 2010:
                 
    Three Months Ended March 31,  
(Dollars in thousands)   2011     2010  
Gross premiums written
  $ 849,896     $ 870,934  
Reinsurance premiums ceded
    (109,820 )     (90,739 )
 
           
Net premiums written
    740,076       780,195  
Change in unearned premiums
    (310,543 )     (322,501 )
 
           
Net premiums earned
    429,533       457,694  
 
               
Losses and loss expenses
    476,198       478,531  
Policy acquisition costs
    77,296       76,176  
General and administrative expenses
    48,477       53,569  
Share compensation expenses
    12,049       6,576  
 
           
Total underwriting deductions
    614,020       614,852  
 
               
Underwriting (loss) (a)
    (184,487 )     (157,158 )
 
               
Net investment income
    29,975       34,299  
Other income
    1,606       888  
Finance expenses
    (14,001 )     (15,151 )
 
           
Operating loss before taxes (a)
    (166,907 )     (137,122 )
Tax benefit
    1,459       697  
 
           
Net operating (loss) (a)
    (165,448 )     (136,425 )
 
               
Net realized gains on investments
    6,379       11,398  
Net unrealized (losses) gains on investments
    (12,828 )     15,413  
Foreign exchange (losses)
    (467 )     (8,764 )
 
           
Net (loss)
  $ (172,364 )   $ (118,378 )
 
           
Selected ratios:
               
Net premiums written / Gross premiums written
    87.1 %     89.6 %
 
               
Losses and loss expenses
    110.9 %     104.6 %
Policy acquisition costs
    18.0 %     16.6 %
General and administrative expenses (b)
    14.1 %     13.1 %
 
           
Expense ratio
    32.1 %     29.7 %
 
           
Combined ratio
    143.0 %     134.3 %
 
           
 
a)   Non-GAAP Financial Measures: In presenting the Company’s results, management has included and discussed underwriting income 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. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”
 
b)   The general and administrative ratio includes share compensation expenses.

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    Three Months Ended March 31,  
(Dollars in thousands)   2011     2010  
Validus Re
               
Gross premiums written
  $ 611,238     $ 640,295  
Reinsurance premiums ceded
    (46,805 )     (13,110 )
 
           
Net premiums written
    564,433       627,185  
Change in unearned premiums
    (312,124 )     (343,264 )
 
           
Net premiums earned
    252,309       283,921  
 
               
Losses and loss expenses
    310,544       348,920  
Policy acquisition costs
    40,066       43,503  
General and administrative expenses
    10,657       16,312  
Share compensation expenses
    3,105       1,629  
 
           
Total underwriting deductions
    364,372       410,364  
 
               
 
           
Underwriting (loss) (a)
    (112,063 )     (126,443 )
 
           
 
               
Talbot
               
Gross premiums written
  $ 263,057     $ 270,541  
Reinsurance premiums ceded
    (87,414 )     (117,531 )
 
           
Net premiums written
    175,643       153,010  
Change in unearned premiums
    1,581       20,763  
 
           
Net premiums earned
    177,224       173,773  
 
               
Losses and loss expenses
    165,654       129,611  
Policy acquisition costs
    37,216       34,945  
General and administrative expenses
    28,722       25,548  
Share compensation expenses
    2,719       1,559  
 
           
Total underwriting deductions
    234,311       191,663  
 
               
 
           
Underwriting (loss) (a)
    (57,087 )     (17,890 )
 
           
 
               
Corporate & Eliminations
               
Gross premiums written
  $ (24,399 )   $ (39,902 )
Reinsurance premiums ceded
    24,399       39,902  
 
           
Net premiums written
           
Change in unearned premiums
           
 
           
Net premiums earned
           
 
               
Losses and loss expenses
           
Policy acquisition costs
    14       (2,272 )
General and administrative expenses
    9,098       11,709  
Share compensation expenses
    6,225       3,388  
 
           
Total underwriting deductions
    15,337       12,825  
 
               
 
           
Underwriting (loss) (a)
    (15,337 )     (12,825 )
 
           
 
               
Total underwriting (loss) (a)
  $ (184,487 )   $ (157,158 )
 
           
 
a)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting 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. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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Three Months Ended March 31, 2011 compared to Three Months Ended March 31, 2010
     Net loss for the three months ended March 31, 2011 was ($172.4) million compared to a net loss of ($118.4) million for the three months ended March 31, 2010, an increase of $54.0 million or 45.6%. The primary factors driving the increase in net loss were:
  An unfavorable movement of $28.2 million in net unrealized (losses) gains on investments.
  Increase in underwriting loss of $27.3 million due primarily to a $28.2 million decrease in net premiums earned. Loss and loss expenses were relatively consistent with the three months ended March 31, 2010, with both quarters experiencing substantial catastrophe losses. Other underwriting deductions including policy acquisition costs and general and administrative expenses remained at levels similar to 2010.
  Decrease in net realized gains on investments of $5.0 million.
The above items were partially offset by the following factor:
  A favorable movement in foreign exchange of $8.3 million.
The change in net income for the three months ended March 31, 2011 of $54.0 million as compared to the three months ended March 31, 2010 is described in the following table:
                                 
    Three Months Ended March 31, 2011  
    Increase (Decrease) Over the Three Months Ended March 31, 2010  
                    Corporate and        
(Dollars in thousands)   Validus Re     Talbot     Eliminations     Total  
Notable losses — decrease (increase) in net loss and loss expenses (a)
  $ 60,954     $ (30,844 )   $     $ 30,110  
Less: Notable losses — increase (decrease) in net reinstatement premiums (a)
    12,241       (6,534 )           5,707  
Other underwriting (loss)
    (58,815 )     (1,819 )     (2,512 )     (63,146 )
 
                       
Underwriting income (loss) (b)
    14,380       (39,197 )     (2,512 )     (27,329 )
Net investment income
    (3,594 )     (730 )           (4,324 )
Other income
    355       1,042       (679 )     718  
Finance expenses
    (420 )     3,182       (1,612 )     1,150  
 
                       
 
    10,721       (35,703 )     (4,803 )     (29,785 )
Taxes
    89       998       (325 )     762  
 
                       
 
    10,810       (34,705 )     (5,128 )     (29,023 )
 
                               
Net realized (losses) gains on investments
    (5,860 )     841             (5,019 )
Net unrealized (losses) on investments
    (20,710 )     (7,531 )           (28,241 )
Net foreign exchange gains
    779       7,500       18       8,297  
 
                       
 
                               
Net (loss)
  $ (14,981 )   $ (33,895 )   $ (5,110 )   $ (53,986 )
 
                       
 
(a)   Notable losses for the three months ended March 31, 2011 include: Tohoku earthquake, Gryphon Alpha, Christchurch earthquake, Brisbane floods and CNRL Horizon. Notable losses for the three months ended March 31, 2010 include Chilean earthquake, windstorm Xynthia and Melbourne hailstorm. Excludes the reserve for potential development on 2010 and 2011 notable loss events.
 
(b)   Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income (loss) 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. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled “Underwriting Income.”

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Gross Premiums Written
     Gross premiums written for the three months ended March 31, 2011 were $849.9 million compared to $870.9 million for the three months ended March 31, 2010, a decrease of $21.0 million or 2.4%. Gross premiums written on the property lines decreased by $58.0 million, while the marine and specialty lines increased by $27.1 million and $9.9 million, respectively. Details of gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 419,123       49.3 %   $ 477,137       54.8 %     (12.2 )%
Marine
    287,748       33.9 %     260,625       29.9 %     10.4 %
Specialty
    143,025       16.8 %     133,172       15.3 %     7.4 %
 
                               
Total
  $ 849,896       100.0 %   $ 870,934       100.0 %     (2.4 )%
 
                               
Validus Re. Validus Re gross premiums written for the three months ended March 31, 2011 were $611.2 million compared to $640.3 million for the three months ended March 31, 2010, a decrease of $29.1 million or 4.5%. Details of Validus Re gross premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 365,268       59.7 %   $ 412,408       64.5 %     (11.4 )%
Marine
    185,033       30.3 %     169,986       26.5 %     8.9 %
Specialty
    60,937       10.0 %     57,901       9.0 %     5.2 %
 
                               
Total
  $ 611,238       100.0 %   $ 640,295       100.0 %     (4.5 )%
 
                               
     The decrease in gross premiums written in the property lines of $47.1 million was due primarily to a $39.7 million decrease in premiums from proportional business. This reduction was caused by a combination of a number of large quota share reinsurance contracts being removed from the market, reduced rates across the majority of territories and cedants increasing their net retention limits. Catastrophe excess of loss gross premiums written also decreased $1.5 million, net of increased reinstatement premiums of $24.4 million. The increase in gross premiums written of $15.0 million in the marine lines was due primarily to a $23.7 million increase in new and renewing business due to growth in proportional lines within the marine lines, this was offset by a $10.0 million decrease in inter-company business written with Talbot. The increase in gross premiums written in the specialty lines of $3.0 million was primarily due to a $2.0 million increase in new business generated by Validus Re Singapore.
     Gross premiums written under the quota share, surplus treaty and excess of loss contracts between Validus Re and Talbot decreased by $4.3 million in the property lines, $10.0 million in the marine lines and $1.2 million in the specialty lines as compared to the three months ended March 31, 2010. These reinsurance agreements with Talbot are eliminated upon consolidation.
Talbot. Talbot gross premiums written for the three months ended March 31, 2011 were $263.1 million compared to $270.5 million for the three months ended March 31, 2010, a decrease of $7.5 million or 2.8%. The $263.1 million of gross premiums written translated at 2010 rates of exchange would have been $261.0 million during the three months ended March 31, 2011, a decrease of $9.5 million compared to 2010. Details of Talbot gross premiums written by line of business are provided below.

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    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Gross Premiums     Gross Premiums     Gross Premiums     Gross Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 70,729       26.9 %   $ 85,874       31.8 %     (17.6 )%
Marine
    104,935       39.9 %     102,873       38.0 %     2.0 %
Specialty
    87,393       33.2 %     81,794       30.2 %     6.8 %
 
                               
Total
  $ 263,057       100.0 %   $ 270,541       100.0 %     (2.8 )%
 
                               
     The decrease in gross premiums written in the property lines of $15.1 million was primarily due to a $14.6 million reduction in reinstatement premiums and premiums written on the property treaty lines. The increase in gross premiums written in the specialty lines of $5.6 million was primarily due to a $6.3 million increase in new and renewing business in the war, political risk and violence lines.
Reinsurance Premiums Ceded
     Reinsurance premiums ceded for the three months ended March 31, 2011 were $109.8 million compared to $90.7 million for the three months ended March 31, 2010, an increase of $19.1 million or 21.0%. Reinsurance premiums ceded in the property lines increased by $26.5 million, partially offset by a decrease in the specialty lines of $7.4 million. Details of reinsurance premiums ceded by line of business are described below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Reinsurance     Reinsurance Premiums     Reinsurance     Reinsurance Premiums        
(Dollars in thousands)   Premiums Ceded     Ceded (%)     Premiums Ceded     Ceded (%)     % Change  
Property
  $ 68,168       62.0 %   $ 41,673       45.9 %     63.6 %
Marine
    15,566       14.2 %     15,624       17.2 %     (0.4 )%
Specialty
    26,086       23.8 %     33,442       36.9 %     (22.0 )%
 
                               
Total
  $ 109,820       100.0 %   $ 90,739       100.0 %     21.0 %
 
                               
Validus Re. Validus Re reinsurance premiums ceded for the three months ended March 31, 2011 were $46.8 million compared to $13.1 million for the three months ended March 31, 2010, an increase of $33.7 million or 257.0%. Details of Validus Re reinsurance premiums ceded by line of business are described below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Reinsurance     Reinsurance Premiums     Reinsurance     Reinsurance Premiums        
(Dollars in thousands)   Premiums Ceded     Ceded (%)     Premiums Ceded     Ceded (%)     % Change  
Property
  $ 46,680       99.7 %   $ 9,342       71.3 %     399.7 %
Marine
    (376 )     (0.8 )%     4,050       30.9 %     (109.3 )%
Specialty
    501       1.1 %     (282 )     (2.2 )%     277.7 %
 
                             
Total
  $ 46,805       100.0 %   $ 13,110       100.0 %     257.0 %
 
                             
     Reinsurance premiums ceded in the property lines increased by $37.3 million, primarily due to the purchase of $39.8 million of additional and replacement retrocessional coverage on the world wide catastrophe portfolio. The replacement retrocessional coverage was purchased following the major loss events in the three months ended March 31, 2011. Reinsurance premiums ceded in the marine lines decreased by $4.4 million, primarily due to $4.1 million of retrocessional coverage purchased in the three months ended March 31, 2010.

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There was a change in renewal dates as a result of a notable loss in the three months ended June 30, 2010, and this coverage is now expected to renew in the three months ended June 30, 2011.
Talbot. Talbot reinsurance premiums ceded for the three months ended March 31, 2011 were $87.4 million compared to $117.5 million for the three months ended March 31, 2010, a decrease of $30.1 million or 25.6%. Details of Talbot reinsurance premiums ceded by line of business are described below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
            Reinsurance             Reinsurance        
    Reinsurance     Premiums Ceded     Reinsurance     Premiums Ceded        
(Dollars in thousands)   Premiums Ceded     (%)     Premiums Ceded     (%)     % Change  
Property
  $ 38,362       43.9 %   $ 53,476       45.5 %     (28.3 )%
Marine
    18,162       20.8 %     23,808       20.3 %     (23.7 )%
Specialty
    30,890       35.3 %     40,247       34.2 %     (23.2 )%
 
                               
Total
  $ 87,414       100.0 %   $ 117,531       100.0 %     (25.6 )%
 
                               
     Reinsurance premiums ceded in the property lines decreased by $15.1 million. The decrease was primarily due to a $14.6 million reduction in premiums ceded in property treaty business and the onshore energy lines. Reinsurance premiums ceded in the marine lines decreased by $5.6 million, primarily due to a $10.0 million decrease in premiums ceded on the surplus lines partially offset by a $6.6 million reinstatement premium in relation to a large marine loss recorded in the three months ended March 31, 2011. Reinsurance premiums ceded in the specialty lines decreased by $9.4 million, primarily due to a $7.6 million decrease in premiums ceded in the aviation treaty lines relating to changes in the program inception date.
     Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re decreased by $4.3 million in the property lines, $10.0 million in the marine lines and $1.2 million in its specialty lines as compared to the three months ended March 31, 2010. These reinsurance agreements with Validus Re are eliminated upon consolidation.
Net Premiums Written
     Net premiums written for the three months ended March 31, 2011 were $740.1 million compared to $780.2 million for the three months ended March 31, 2010, a decrease of $40.1 million, or 5.1%. The ratios of net premiums written to gross premiums written for the three months ended March 31, 2011 and 2010 were 87.1% and 89.6%, respectively. Details of net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 350,955       47.4 %   $ 435,464       55.8 %     (19.4 )%
Marine
    272,182       36.8 %     245,001       31.4 %     11.1 %
Specialty
    116,939       15.8 %     99,730       12.8 %     17.3 %
 
                               
Total
  $ 740,076       100.0 %   $ 780,195       100.0 %     (5.1 )%
 
                               
Validus Re. Validus Re net premiums written for the three months ended March 31, 2011 were $564.4 million compared to $627.2 million for the three months ended March 31, 2010, a decrease of $62.8 million or 10.0%. Details of Validus Re net premiums written by line of business are provided below.

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    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 318,588       56.5 %   $ 403,066       64.2 %     (21.0 )%
Marine
    185,409       32.8 %     165,936       26.5 %     11.7 %
Specialty
    60,436       10.7 %     58,183       9.3 %     3.9 %
 
                               
Total
  $ 564,433       100.0 %   $ 627,185       100.0 %     (10.0 )%
 
                               
     The decrease in Validus Re net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 92.3% and 98.0% for the three months ended March 31, 2011 and 2010, respectively, reflecting the increase in reinsurance premiums ceded as a result of the purchase of additional and replacement retrocessional coverage described above.
Talbot. Talbot net premiums written for the three months ended March 31, 2011 were $175.6 million compared to $153.0 million for the three months ended March 31, 2010, an increase of $22.6 million or 14.8%. Details of Talbot net premiums written by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Written     Written (%)     Written     Written (%)     % Change  
Property
  $ 32,367       18.4 %   $ 32,398       21.1 %     (0.1 )%
Marine
    86,773       49.4 %     79,065       51.7 %     9.7 %
Specialty
    56,503       32.2 %     41,547       27.2 %     36.0 %
 
                               
Total
  $ 175,643       100.0 %   $ 153,010       100.0 %     14.8 %
 
                               
     The increase in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written for the three months ended March 31, 2011 and 2010 were 66.8% and 56.6%, respectively, reflecting the lower reinsurance premiums ceded.
Change in Unearned Premiums
     Net change in unearned premiums for the three months ended March 31, 2011 was ($310.5) million compared to ($322.5) million for the three months ended March 31, 2010, a change of $12.0 million or 3.7%.
                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (354,648 )   $ (367,154 )     (3.4 )%
Change in prepaid reinsurance premium
    44,105       44,653       (1.2 )%
 
                   
Net change in unearned premium
  $ (310,543 )   $ (322,501 )     (3.7 )%
 
                   
Validus Re. Validus Re’s net change in unearned premiums for the three months ended March 31, 2011 were ($312.1) million compared to ($343.3) million for the three months ended March 31, 2010, a change of $31.1 million or 9.1%.

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    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Change in     Change in        
    Unearned     Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (320,176 )   $ (331,600 )     (3.4 )%
Change in prepaid reinsurance premium
    8,052       (11,664 )     (169.0 )%
 
                   
Net change in unearned premium
  $ (312,124 )   $ (343,264 )     (9.1 )%
 
                   
The Validus Re net change in unearned premium has decreased for the three months ended March 31, 2011 primarily due to the increased premiums ceded and a decrease in gross premiums written for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Talbot. The Talbot net change in unearned premiums for the three months ended March 31, 2011 was $1.6 million compared to $20.8 million for the three months ended March 31, 2010, a change of $19.2 million, or 92.4%.
                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Change in Unearned     Change in Unearned        
(Dollars in thousands)   Premiums     Premiums     % Change  
Change in gross unearned premium
  $ (34,472 )   $ (35,554 )     3.0 %
Change in prepaid reinsurance premium
    36,053       56,317       36.0 %
 
                   
Net change in unearned premium
  $ 1,581     $ 20,763       92.4 %
 
                   
     The Talbot net change in unearned premium has decreased for the three months ended March 31, 2011 primarily due to the decrease in reinsurance premiums ceded and the decrease in gross premiums written for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Net Premiums Earned
     Net premiums earned for the three months ended March 31, 2011 were $429.5 million compared to $457.7 million for the three months ended March 31, 2010, a decrease of $28.2 million or 6.2%. The decrease in net premiums earned was driven by a decrease in net premiums earned of $31.6 million in the Validus Re segment, partially offset by an increase of $3.5 million in the Talbot segment. Details of net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 215,713       50.3 %   $ 249,485       54.5 %     (13.5 )%
Marine
    118,297       27.5 %     104,253       22.8 %     13.5 %
Specialty
    95,523       22.2 %     103,956       22.7 %     (8.1 )%
 
                               
Total
  $ 429,533       100.0 %   $ 457,694       100.0 %     (6.2 )%
 
                               
Validus Re. Validus Re net premiums earned for the three months ended March 31, 2011 were $252.3 million compared to $283.9 million for the three months ended March 31, 2010, a decrease of $31.6 million or 11.1%. Details of Validus Re net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 176,770       70.1 %   $ 211,444       74.4 %     (16.4 )%
Marine
    53,858       21.3 %     41,029       14.5 %     31.3 %
Specialty
    21,681       8.6 %     31,448       11.1 %     (31.1 )%
 
                               
Total
  $ 252,309       100.0 %   $ 283,921       100.0 %     (11.1 )%
 
                               

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     The decrease in net premiums earned is consistent with the decrease in net written premiums and increase in premiums ceded for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Talbot. Talbot net premiums earned for the three months ended March 31, 2011 were $177.2 million compared to $173.8 million for the three months ended March 31, 2010, an increase of $3.5 million or 2.0%. Details of Talbot net premiums earned by line of business are provided below.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Net Premiums     Net Premiums     Net Premiums     Net Premiums        
(Dollars in thousands)   Earned     Earned (%)     Earned     Earned (%)     % Change  
Property
  $ 38,943       22.0 %   $ 38,041       21.9 %     2.4 %
Marine
    64,439       36.4 %     63,224       36.4 %     1.9 %
Specialty
    73,842       41.6 %     72,508       41.7 %     1.8 %
 
                               
Total
  $ 177,224       100.0 %   $ 173,773       100.0 %     2.0 %
 
                               
     The increase in net premiums earned is a result of the increase in net premiums written over the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, as discussed above.
Losses and Loss Expenses
     Losses and loss expenses for the three months ended March 31, 2011 were $476.2 million compared to $478.5 million for the three months ended March 31, 2010, a decrease of $2.3 million or 0.5%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended March 31, 2011 and 2010 were 110.9% and 104.6%, respectively. Details of loss ratios by line of business are provided below.
                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010     % Change  
Property
    136.0 %     149.8 %     (13.8 )
Marine
    114.5 %     55.3 %     59.2  
Specialty
    49.7 %     45.4 %     4.3  
All lines
    110.9 %     104.6 %     6.3  
     At March 31, 2011 and 2010, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the critical accounting policies and estimates as discussed 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, 2010. The Company did not make any significant changes in the assumptions or methodology used in its reserving process for the three months ended March 31, 2011.
                         
    As at March 31, 2011  
                    Total Gross Reserve  
                    for  
                    Losses and Loss  
(Dollars in thousands)   Gross Case Reserves     Gross IBNR     Expenses  
Property
  $ 497,174     $ 757,771     $ 1,254,945  
Marine
    353,938       400,951       754,889  
Specialty
    224,704       299,877       524,581  
 
                 
Total
  $ 1,075,816     $ 1,458,599     $ 2,534,415  
 
                 

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    As at March 31, 2011  
                    Total Net Reserve for  
                    Losses and Loss  
(Dollars in thousands)   Net Case Reserves     Net IBNR     Expenses  
Property
  $ 446,059     $ 580,627     $ 1,026,686  
Marine
    296,362       331,160       627,522  
Specialty
    176,692       249,814       426,506  
 
                 
Total
  $ 919,113     $ 1,161,601     $ 2,080,714  
 
                 
     The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended March 31, 2011:
                                 
    Three Months Ended March 31, 2011  
(Dollars in thousands)   Validus Re     Talbot     Eliminations     Total  
Gross reserves at period beginning
  $ 998,165     $ 1,191,548     $ (153,740 )   $ 2,035,973  
Losses recoverable
    (80,219 )     (356,655 )     153,740       (283,134 )
 
                       
Net reserves at period beginning
    917,946       834,893             1,752,839  
 
                       
Incurred losses — current year
    321,822       180,892             502,714  
Change in prior accident years
    (11,278 )     (15,238 )           (26,516 )
 
                       
Incurred losses
    310,544       165,654             476,198  
 
                       
 
Foreign exchange
    7,574       7,360             14,934  
Paid losses
    (111,946 )     (51,311 )           (163,257 )
 
                       
Net reserves at period end
    1,124,118       956,596             2,080,714  
Losses recoverable
    216,300       368,371       (130,970 )     453,701  
 
                       
Gross reserves at period end
  $ 1,340,418     $ 1,324,967     $ (130,970 )   $ 2,534,415  
 
                       
     The amount of recorded reserves represents management’s best estimate of expected losses and loss expenses on premiums earned. For the three months ended March 31, 2011, favorable loss reserve development on prior years totaled $26.5 million. $11.3 million of the favorable loss reserve development related to the Validus Re segment and $15.2 million related to the Talbot segment. Favorable loss reserve development benefited the Company’s loss ratio by 6.2 percentage points for the three months ended March 31, 2011. For the three months ended March 31, 2010, favorable loss reserve development on prior years totaled $26.7 million. Of this, $11.5 million related to the Validus Re segment and $15.3 million related to the Talbot segment. Favorable loss reserve development benefited the Company’s loss ratio by 5.8 percentage points for the three months ended March 31, 2010.
     For the three months ended March 31, 2011, the Company incurred $293.8 million from notable loss events, which represented 68.4 percentage points of the loss ratio, excluding reserve for potential development on 2011 notable loss events, as described below. Net of $22.7 million of reinstatement premiums, the effect of these events on net income was $271.1 million. For the three months ended March 31, 2010, the Company incurred $323.9 million from notable loss events, which represented 70.8 percentage points of the loss ratio, excluding reserve for development on 2010 notable loss events, as described below. Net of $17.0 million of reinstatement premiums, the effect of these events on net income was $306.9 million. The Company’s loss ratio, excluding prior year development and notable loss events for the three months ended March 31, 2011 and 2010 was 48.7% and 39.6%, respectively.
     Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for recent notable loss events. The Company’s actual ultimate net loss may vary materially from these estimates. Validus Re ultimate losses for notable loss events

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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 are reserved for in the reserve for potential development on notable loss events. During the three months ended March 31, 2011, the Company incurred $50.0 million for a reserve for potential development on 2011 notable loss events as compared to a $19.2 million reserve for potential development on 2010 notable loss events for the three months ended March 31, 2010. At December 31, 2010 the reserve for potential development on 2010 notable loss events was $33.4 million, therefore as at March 31, 2011 the total reserve for potential development on both 2010 and 2011 events was $83.4 million.
                                                     
        Three months ended March 31, 2011  
    (Dollars in thousands)  
First Quarter 2011 Notable Loss Events (a)   Validus Re     Talbot     Total  
        Net Losses             Net Losses             Net Losses        
        and Loss             and Loss             and Loss        
Description       Expenses (b)     % of NPE     Expenses (b)     % of NPE     Expenses (b)     % of NPE  
Tohoku earthquake
  Earthquake   $ 101,156       40.1 %   $ 47,770       26.9 %   $ 148,926       34.7 %
Gryphon Alpha
  Mooring failure     42,914       17.0 %     9,520       5.4 %     52,434       12.2 %
Christchurch earthquake
  Earthquake     32,381       12.8 %     9,500       5.4 %     41,881       9.8 %
Brisbane floods
  Floods     25,023       9.9 %     6,000       3.4 %     31,023       7.2 %
CNRL Horizon
  Explosion     12,000       4.8 %     7,500       4.2 %     19,500       4.5 %
 
                                       
Total
      $ 213,474       84.6 %   $ 80,290       45.3 %   $ 293,764       68.4 %
 
                                       
                                                     
        Three months ended March 31, 2010  
        (Dollars in thousands)  
First Quarter 2010 Notable Loss Events (a)   Validus Re     Talbot     Total  
        Net Losses             Net Losses             Net Losses        
        and Loss             and Loss             and Loss        
Description       Expenses (b)     % of NPE     Expenses (b)     % of NPE     Expenses (b)     % of NPE  
Chilean earthquake
  Earthquake   $ 243,670       85.8 %   $ 49,446       28.5 %   $ 293,116       64.0 %
Windstorm Xynthia
  Windstorm     12,558       4.4 %                 12,558       2.8 %
Melbourne hailstorm
  Hailstorm     18,200       6.5 %                 18,200       4.0 %
 
                                       
Total
      $ 274,428       96.7 %   $ 49,446       28.5 %   $ 323,874       70.8 %
 
                                       
 
(a)   These notable loss event amounts exclude the reserve for potential development on 2010 and 2011 notable loss events and are based on management’s estimates following a review of the Company’s potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events may vary materially from these estimates.
 
(b)   Net of reinsurance but not net of reinstatement premiums. Reinstatement premiums were $22.7 million for the three months ended March 31, 2011 and $17.0 million for the three months ended March 31, 2010.

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Validus Re. Validus Re losses and loss expenses for the three months ended March 31, 2011 were $310.5 million compared to $348.9 million for the three months ended March 31, 2010, a decrease of $38.4 million or 11.0%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 123.1% and 122.9% for the three months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 2011, favorable loss development on prior years totaled $11.3 million and benefited the Validus Re loss ratio by 4.5 percentage points. For the three months ended March 31, 2010, favorable loss development on prior years totaled $11.5 million and benefited the Validus Re loss ratio by 4.0 percentage points.
     For the three months ended March 31, 2011, Validus Re incurred notable loss events as identified above of $213.5 million, which represented 84.6 percentage points of the loss ratio, excluding the reserve for potential development on 2011 notable loss events. Net of reinstatement premiums of $28.6 million, the effect of these events on Validus Re segment income was $184.9 million. For the three months ended March 31, 2010, Validus Re incurred notable loss events as identified above of $274.4 million, which represented 96.7 percentage points of the loss ratio, excluding the reserve for potential development on 2010 notable loss events. Net of reinstatement premiums of $16.4 million, the effect of these events on Validus Re segment income was $258.0 million. Validus Re segment loss ratios, excluding prior year development and notable loss events identified above, for the three months ended March 31, 2011 and 2010 were 43.0% and 30.2%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended March 31,  
    2011     2010     % Change  
Property — current year
    127.9 %     152.2 %     (24.3 )
Property — change in prior accident years
    (3.4 )%     (3.9 )%     0.5  
 
                 
Property — loss ratio
    124.5 %     148.3 %     (23.8 )
 
Marine — current year
    157.0 %     66.6 %     90.4  
Marine — change in prior accident years
    0.2 %     (9.7 )%     9.9  
 
                 
Marine — loss ratio
    157.2 %     56.9 %     100.3  
 
Specialty — current year
    51.7 %     35.9 %     15.8  
Specialty — change in prior accident years
    (25.0 )%     2.5 %     (27.5 )
 
                 
Specialty — loss ratio
    26.7 %     38.4 %     (11.7 )
 
All lines — current year
    127.6 %     126.9 %     0.7  
All lines — change in prior accident years
    (4.5 )%     (4.0 )%     (0.5 )
 
                 
All lines — loss ratio
    123.1 %     122.9 %     0.2  
     For the three months ended March 31, 2011, Validus Re property lines losses and loss expenses include $226.1 million related to current year losses and $6.0 million of favorable development relating to prior accident years. This favorable development is attributable to lower than expected claims development. For the three months ended March 31, 2010, Validus Re property lines losses and loss expenses included $321.8 million related to current year losses and $8.3 million of favorable development relating to prior accident years. This favorable development was partially attributable to $3.7 million lower than expected claims development on the Dublin Floods.
     For the three months ended March 31, 2011, Validus Re’s property lines incurred $146.1 million of notable losses, which represented 82.6 percentage points of the property lines loss ratio, excluding the reserve for potential development on 2011 notable loss events. For the three months ended March 31, 2010, Validus Re’s property lines incurred $266.1 million of notable losses, which represented 125.9 percentage points of the property lines loss ratio, excluding reserve for potential development on 2010 notable loss events. Validus Re property lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended March 31, 2011 and 2010 were 45.3% and 26.3%, respectively.

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     For the three months ended March 31, 2011, Validus Re marine lines losses and loss expenses include $84.5 million related to current year losses and $0.1 million of adverse development relating to prior accident years. For the three months ended March 31, 2010, Validus Re marine lines losses and loss expenses included $27.3 million related to current year losses and $4.0 million of favorable development relating to prior accident years.
     For the three months ended March 31, 2011, Validus Re’s marine lines incurred $62.9 million of notable losses which represented 116.8 percentage points of the marine lines loss ratio, excluding the reserve for potential development on 2011 notable loss events. For the three months ended March 31, 2010, Validus Re’s marine lines incurred $8.3 million of notable losses, which represented 20.3 percentage points of the marine lines loss ratio, excluding the 2010 reserve for potential development on notable loss events. Validus Re marine lines loss ratios, excluding prior year development and notable loss events identified above, for the three months ended March 31, 2011 and 2010 were 40.2 % and 46.3%, respectively.
     For the three months ended March 31, 2011, Validus Re specialty lines losses and loss expenses include $11.2 million related to current year losses and $5.4 million of favorable development relating to prior accident years. For the three months ended March 31, 2010, Validus Re specialty lines losses and loss expenses included $11.3 million related to current year losses and $0.8 million of adverse development on a small number of losses relating to prior accident years.
     For the three months ended March 31, 2011, Validus Re’s specialty lines incurred $4.5 million of notable losses which represented 20.8 percentage points of the specialty lines loss ratio, excluding the reserve for potential development on 2011 notable loss events. For the three months ended March 31, 2010, Validus Re’s specialty lines did not incur any notable losses. Validus Re specialty lines loss ratios, excluding prior year development, for the three months ended March 31, 2011 and 2010 were 30.9% and 35.9%, respectively.
Talbot. Talbot losses and loss expenses for the three months ended March 31, 2011 were $165.7 million compared to $129.6 million for the three months ended March 31, 2010, an increase of $36.0 million, or 27.8%. The Talbot loss ratio was 93.5% and 74.6% for the three months ended March 31, 2011 and 2010, respectively. For the three months ended March 31, 2011, Talbot incurred losses of $180.9 million related to current year losses and $15.2 million in favorable development relating to prior accident years. For the three months ended March 31, 2010, Talbot incurred losses of $144.9 million related to current year losses and $15.3 million in favorable development relating to prior accident years. This favorable development was attributable to lower than expected claim attritional loss development, plus a reduction in the ultimate losses from Hurricanes Ivan and Katrina, offset by deterioration in large specialty and marine losses.
     For the three months ended March 31, 2011, Talbot incurred $80.3 million of notable losses, which represented 45.3 percentage points of the loss ratio. Net of reinstatement premiums of $(5.9) million, the effect of these events on Talbot segment income is $86.2 million. For the three months ended March 31, 2010, Talbot incurred $49.4 million of notable losses, which represented 28.5 percentage points of the Talbot loss ratio. Net of reinstatement premiums of $0.6 million, the effect of these events on Talbot segment income was $48.8 million. Talbot loss ratios, excluding prior year loss development and notable loss events identified above, for the three months ended March 31, 2011 and three months ended March 31, 2010 were 56.8% and 54.9%, respectively. Details of loss ratios by line of business and period of occurrence are provided below.
                         
    Three Months Ended March 31,  
    2011     2010     % Change  
Property — current year
    202.2 %     169.4 %     32.8  
Property — change in prior accident years
    (14.3 )%     (11.1 )%     (3.2 )
 
                 
Property — loss ratio
    187.9 %     158.3 %     29.6  
 
Marine — current year
    86.6 %     67.8 %     18.8  
Marine — change in prior accident years
    (7.9 )%     (13.6 )%     5.7  
 
                 
Marine — loss ratio
    78.7 %     54.2 %     24.5  
 
Specialty — current year
    62.7 %     51.8 %     10.9  
Specialty — change in prior accident years
    (6.2 )%     (3.4 )%     (2.8 )
 
                 
Specialty — loss ratio
    56.5 %     48.4 %     8.1  
 
All lines — current year
    102.1 %     83.4 %     18.7  
All lines — change in prior accident years
    (8.6 )%     (8.8 )%     0.2  
 
                 
All lines — loss ratio
    93.5 %     74.6 %     18.9  

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     For the three months ended March 31, 2011, Talbot property lines losses and loss expenses include $78.8 million related to current year losses and $5.6 million of favorable development relating to prior accident years. The prior year favorable development is attributable to lower than expected claims development across most lines of business. For the three months ended March 31, 2010, Talbot property lines losses and loss expenses included $64.5 million related to current year losses and $4.2 million of favorable development relating to prior accident years. The prior year favorable development was attributable to a reduction in ultimate losses from Hurricanes Ivan and Katrina, and lower than expected attritional loss development.
     For the three months ended March 31, 2011, Talbot’s property lines incurred $56.3 million of notable losses, which represented 144.5 percentage points of the property lines loss ratio. For the three months ended March 31, 2010, Talbot’s property lines incurred $42.5 million of notable losses, which represented 111.7 percentage points of the property lines loss ratio. Talbot property line loss ratio, excluding prior year development and loss events noted above for the three months ended March 31, 2011 and 2010 were 57.7% and 57.7%, respectively.
     For the three months ended March 31, 2011, Talbot marine lines losses and loss expenses include $55.9 million related to current year losses and $5.1 million of favorable development relating to prior accident years. The prior year favorable development is primarily due to lower than expected loss development across a number of lines. For the three months ended March 31, 2010, Talbot marine lines losses and loss expenses included $42.9 million related to current year losses and $8.6 million of favorable development relating to prior accident years. The prior year favorable development was primarily due to lower than expected attritional losses partially offset by deterioration in large losses.
     For the three months ended March 31, 2011, Talbot’s marine lines incurred $20.2 million of notable losses, which represented 31.3 percentage points of the marine lines loss ratio. For the three months ended March 31, 2010, Talbot’s marine lines incurred $5.7 million of notable losses, which represented 8.9 percentage points of the marine lines loss ratio. Talbot marine lines loss ratios, excluding prior year development and loss events noted above, for the three months ended March 31, 2011 and 2010 were 55.3% and 58.9%, respectively.
     For the three months ended March 31, 2011, Talbot specialty lines losses and loss expenses include $46.3 million relating to current year losses and $4.5 million of favorable development relating to prior accident years. The prior year favorable development is attributable to lower than expected claims development across some lines together with a reclassification of one loss the from specialty to marine line. For the three months ended March 31, 2010, Talbot specialty lines losses and loss expenses included $37.5 million relating to current year losses and $2.5 million of favorable development relating to prior accident years. The prior year favorable development was primarily due to lower than expected attritional losses partially offset by deterioration in large losses.
     For the three months ended March 31, 2011, Talbot’s specialty lines incurred $3.8 million of notable losses, which represented 5.2 percentage points of the specialty lines loss ratio. For the three months ended March 31, 2010, Talbot’s specialty lines incurred $1.3 million of notable losses, which represented 1.8 percentage points of the specialty lines loss ratio. Talbot specialty lines loss ratios, excluding prior year development for the three months ended March 31, 2011 and 2010 were 57.5% and 50.0%, respectively.
Policy Acquisition Costs
     Policy acquisition costs for the three months ended March 31, 2011 were $77.3 million compared to $76.2 million for the three months ended March 31, 2010, an increase of $1.1 million or 1.5%.

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Policy acquisition costs as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 18.0% and 16.6%, respectively. The changes in policy acquisition costs are due to the factors described below.
                                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 29,184       37.8 %     13.5 %   $ 37,102       48.7 %     14.9 %     (21.3 )%
Marine
    27,083       35.0 %     22.9 %     18,163       23.8 %     17.4 %     49.1 %
Specialty
    21,029       27.2 %     22.0 %     20,911       27.5 %     20.1 %     0.6 %
 
                                         
Total
  $ 77,296       100.0 %     18.0 %   $ 76,176       100.0 %     16.6 %     1.5 %
 
                                         
Validus Re. Validus Re policy acquisition costs for the three months ended March 31, 2011 were $40.1 million compared to $43.5 million for the three months ended March 31, 2010, a decrease of $3.4 million or 7.9%.
                                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 25,875       64.6 %     14.6 %   $ 32,258       74.1 %     15.3 %     (19.8 )%
Marine
    10,510       26.2 %     19.5 %     6,809       15.7 %     16.6 %     54.4 %
Specialty
    3,681       9.2 %     17.0 %     4,436       10.2 %     14.1 %     (17.0 )%
 
                                         
Total
  $ 40,066       100.0 %     15.9 %   $ 43,503       100.0 %     15.3 %     (7.9 )%
 
                                         
     Policy acquisition costs include brokerage, commission, excise tax, are generally driven by contract terms and are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Validus Re policy acquisition costs as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 15.9% and 15.3%, respectively. The policy acquisition cost ratio in the property lines has remained relatively consistent for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The policy acquisition cost ratio in the marine lines increased by 2.9% primarily due to the largest single reinsurance contract, by gross premium written, having an acquisition cost ratio of 36%. This contract incepted in the three months ended March 31, 2010 on a risks attaching basis and therefore has a higher earned premium impact in the three months ended March 31, 2011. Items such as ceded premium, earned premium adjustments and reinstatement premiums that are recognized in the period have an effect on policy acquisition costs.
Talbot. Talbot policy acquisition costs for the three months ended March 31, 2011 were $37.2 million compared to $34.9 million for the three months ended March 31, 2010, an increase of $2.3 million or 6.5%.
                                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Policy     Policy             Policy     Policy              
    Acquisition     Acquisition     Acquisition     Acquisition     Acquisition     Acquisition        
(Dollars in thousands)   Costs     Costs (%)     Cost Ratio     Costs     Costs (%)     Cost Ratio     % Change  
Property
  $ 3,366       9.0 %     8.6 %   $ 7,056       20.2 %     18.5 %     (52.3 )%
Marine
    16,593       44.6 %     25.7 %     11,395       32.6 %     18.0 %     45.6 %
Specialty
    17,257       46.4 %     23.4 %     16,494       47.2 %     22.7 %     4.6 %
 
                                         
Total
  $ 37,216       100.0 %     21.0 %   $ 34,945       100.0 %     20.1 %     6.5 %
 
                                         

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     The policy acquisition cost ratio in the Talbot property lines decreased due to increases in intercompany policy acquisition costs on the property treaty line. The policy acquisition cost ratio on the Talbot marine lines increased primarily due to acquisition cost rate increases in the Hull, Cargo and other treaty lines. Policy acquisition costs as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 21.0% and 20.1%, respectively.
General and Administrative Expenses
     General and administrative expenses for the three months ended March 31, 2011 were $48.5 million compared to $53.6 million for the three months ended March 31, 2010, a decrease of $5.1 million or 9.5%. The decrease was a result of decreased expenses in the Validus Re and Corporate segments, offset by an increase in the Talbot segment.
                                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    General and     General and     General and     General and        
    Administrative     Administrative     Administrative     Administrative        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 10,657       22.0 %   $ 16,312       30.4 %     (34.7 )%
Talbot
    28,722       59.2 %     25,548       47.7 %     12.4 %
Corporate & Eliminations
    9,098       18.8 %     11,709       21.9 %     (22.3 )%
 
                               
Total
  $ 48,477       100.0 %   $ 53,569       100.0 %     (9.5 )%
 
                               
     General and administrative expenses of $48.5 million in the three months ended March 31, 2011 represents 11.3 percentage points of the expense ratio. Share compensation expense is discussed in the following section.
Validus Re. Validus Re general and administrative expenses for the three months ended March 31, 2011 were $10.7 million compared to $16.3 million for the three months ended March 31, 2010, a decrease of $5.7 million or 34.7%. General and administrative expenses have decreased primarily as a result of a decrease in salaries and benefits driven by the absence of severance costs related to IPC, which amounted to $3.0 million in the three months ended March 31, 2010. In addition, there was a reduction in the performance bonus accrued during the quarter. General and administrative expenses include salaries and benefits, professional fees, rent and office expenses. Validus Re’s general and administrative expenses as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 4.2% and 5.7%, respectively.
Talbot. Talbot general and administrative expenses for the three months ended March 31, 2011 were $28.7 million compared to $25.5 million for the three months ended March 31, 2010, an increase of $3.2 million or 12.4%. General and administrative expenses have increased primarily as a result of a $1.7 million increase in syndicate costs. Talbot’s general and administrative expenses as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 16.2% and 14.7%, respectively.
     Corporate & Eliminations. Corporate general and administrative expenses for the three months ended March 31, 2011 were $9.1 million compared to $11.7 million for the three months ended March 31, 2010, a decrease of $2.6 million or 22.3%.
Share Compensation Expenses
     Share compensation expenses for the three months ended March 31, 2011 were $12.0 million compared to $6.6 million for the three months ended March 31, 2010, an increase of $5.5 million or 83.2%. This expense is non-cash and has no net effect on total shareholders’ equity, as it is balanced by an increase in additional paid-in capital.

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    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010        
    Share     Share     Share     Share        
    Compensation     Compensation     Compensation     Compensation        
(Dollars in thousands)   Expenses     Expenses (%)     Expenses     Expenses (%)     % Change  
Validus Re
  $ 3,105       25.7 %   $ 1,629       24.8 %     90.6 %
Talbot
    2,719       22.6 %     1,559       23.7 %     74.4 %
Corporate & Eliminations
    6,225       51.7 %     3,388       51.5 %     83.7 %
 
                               
Total
  $ 12,049       100.0 %   $ 6,576       100.0 %     83.2 %
 
                               
     Share compensation expenses of $12.0 million in the three months ended March 31, 2011 represents 2.8 percentage points of the general and administrative expense ratio.
Validus Re. Validus Re share compensation expenses for the three months ended March 31, 2011 were $3.1 million compared to $1.6 million for the three months ended March 31, 2010 an increase of $1.5 million or 90.6%. During the three month ended March 31, 2011, a change in forfeiture rates resulted in an increase of $1.2 million in share compensation expenses in the Validus Re segment primarily relating to restricted share awards. Share compensation expense as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 1.2% and 0.6%, respectively.
Talbot. Talbot share compensation expenses for the three months ended March 31, 2011 was $2.7 million compared to $1.6 million for the three months ended March 31, 2010 an increase of $1.2 million or 74.4%. This increase was primarily due to a change in forfeiture rates which resulted in an increase of $0.5 million in share compensation expenses and an increase of $0.6 million in restricted share award expenses due to a large number of grants being issued in 2010. Share compensation expense as a percent of net premiums earned for the three months ended March 31, 2011 and 2010 were 1.5% and 0.9%, respectively.
Corporate & Eliminations. Corporate share compensation expenses for the three months ended March 31, 2011 were $6.2 million compared to $3.4 million for the three months ended March 31, 2010, an increase of $2.8 million or 83.7%. During the three month ended March 31, 2011, a change in forfeiture rates resulted in an increase of $2.3 million in share compensation expenses in the Corporate segment primarily relating to restricted share awards.
Selected 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 loss ratio and the expense ratio. The net loss 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 (including share compensation expenses) by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended March 31, 2011 and 2010.
                         
    Three Months Ended     Three Months Ended        
    March 31, 2011     March 31, 2010     %Change  
Losses and loss expense ratio
    110.9 %     104.6 %     6.3  
Policy acquisition cost ratio
    18.0 %     16.6 %     1.4  
General and administrative expense ratio (a)
    14.1 %     13.1 %     1.0  
 
                 
Expense ratio
    32.1 %     29.7 %     2.4  
 
                 
Combined ratio
    143.0 %     134.3 %     8.7  
 
                 
                         
    Three Months Ended     Three Months Ended        
Validus Re   March 31, 2011     March 31, 2010     %Change  
Losses and loss expense ratio
    123.1 %     122.9 %     0.2  
Policy acquisition cost ratio
    15.9 %     15.3 %     0.6  
General and administrative expense ratio (a)
    5.5 %     6.3 %     (0.8 )
 
                 
Expense ratio
    21.4 %     21.6 %     (0.2 )
 
                 
Combined ratio
    144.5 %     144.5 %      
 
                 

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    Three Months Ended     Three Months Ended        
Talbot   March 31, 2011     March 31, 2010     %Change  
Losses and loss expense ratio
    93.5 %     74.6 %     18.9  
Policy acquisition cost ratio
    21.0 %     20.1 %     0.9  
General and administrative expense ratio (a)
    17.7 %     15.6 %     2.1  
 
                 
Expense ratio
    38.7 %     35.7 %     3.0  
 
                 
Combined ratio
    132.2 %     110.3 %     21.9  
 
                 
 
(a)   Includes general and administrative expenses and share compensation expenses.
     General and administrative expense ratios for the three months ended March 31, 2011 and 2010 were 14.1% and 13.1%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.
                                 
    Three Months Ended     Three Months Ended  
    March 31, 2011     March 31, 2010  
            Expenses as % of             Expenses as % of  
            Net Earned             Net Earned  
(Dollars in thousands)   Expenses     Premiums     Expenses     Premiums  
General and administrative expenses
  $ 48,477       11.3 %   $ 53,569       11.7 %
Share compensation expenses
    12,049       2.8 %     6,576       1.4 %
 
                       
Total
  $ 60,526       14.1 %   $ 60,145       13.1 %
 
                       
Underwriting (Loss)
     Underwriting (loss) for the three months ended March 31, 2011 was ($184.5) million compared to underwriting (loss) of ($157.2) million for the three months ended March 31, 2010, an increase of $27.3 million, or 17.4%.
                                         
    Three Months             Three Months              
    Ended March 31,             Ended March 31,              
(Dollars in thousands)   2011     % of sub-total     2010     % of sub-total     % Change  
Validus Re
  $ (112,063 )     66.3 %   $ (126,443 )     87.6 %     (11.4 )%
Talbot
    (57,087 )     33.7 %     (17,890 )     12.4 %     219.1 %
 
                               
Sub-total
    (169,150 )     100.0 %     (144,333 )     100.0 %     17.2 %
 
                                   
Corporate & Eliminations
    (15,337 )             (12,825 )             19.6 %
 
                                   
Total
  $ (184,487 )           $ (157,158 )             17.4 %
 
                                   
     The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP financial measure. Underwriting 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 Operations and Comprehensive Income line items, as illustrated below.
                 
    Three Months Ended     Three Months Ended  
(Dollars in thousands)   March 31, 2011     March 31, 2010  
Underwriting (loss)
  $ (184,487 )   $ (157,158 )
Net investment income
    29,975       34,299  
Other income
    1,606       888  
Finance expenses
    (14,001 )     (15,151 )
Net realized gains on investments
    6,379       11,398  
Net unrealized (losses) gains on investments
    (12,828 )     15,413  
Foreign exchange (losses)
    (467 )     (8,764 )
 
           
Net (loss) before tax
  $ (173,823 )   $ (119,075 )
 
           

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     Underwriting 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 underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.
     The Company excludes the U.S. GAAP income statement line items noted above, from its calculation of underwriting income. Net realized and unrealized gains and losses on investments are excluded 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 the other line items excluded are largely independent of its underwriting business 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 underwriting income 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. The Company 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 bonus component of the total annual incentive compensation.
     Underwriting 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 underwriting 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 underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides more 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 underwriting income to net income.
Net Investment Income
     Net investment income for the three months ended March 31, 2011 was $30.0 million compared to $34.3 million for the three months ended March 31, 2010, a decrease of $4.3 million or 12.6%. Net investment income decreased due to falling yields in fixed maturity investments. Net investment income includes accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended March 31, 2011 and 2010 are as presented below.
                         
    Three Months Ended     Three Months Ended        
(Dollars in thousands)   March 31, 2011     March 31, 2010     %Change  
Fixed maturities and short-term investments
  $ 28,935     $ 35,755       19.1 %
Cash and cash equivalents
    2,581       586       340.4 %
Securities lending income
    16       70       (77.1 )%
 
                   
Total gross investment income
    31,532       36,411       13.4 %
Investment expenses
    (1,557 )     (2,112 )     26.3 %
 
                   
Net investment income
  $ 29,975     $ 34,299       12.6 %
 
                   

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     Annualized effective investment yield is based on the weighted average investments held calculated on a simple period average and excludes net unrealized gains (losses), realized gains (losses) on investments, foreign exchange gains (losses) on investments and the foreign exchange effect of insurance balances. The Company’s annualized effective investment yield was 2.06% and 2.33% for the three months ended March 31, 2011 and 2010, respectively, and the average duration of the portfolio at March 31, 2011 was 1.83 years (December 31, 2010 – 2.27 years).
Other Income
     Other income for the three months ended March 31, 2011 was $1.6 million compared to $0.9 million for the three months ended March 31, 2010.
Finance Expenses
     Finance expenses for the three months ended March 31, 2011 were $14.0 million compared to $15.2 million for the three months ended March 31, 2010, a decrease of $1.2 million or 7.6%. The decrease was primarily driven by a $2.7 million decrease in payments under the Talbot third party FAL facility which was closed as of December 31, 2009. This was offset by a $1.6 million increase in interest in relation to the 2010 Senior Notes which were issued on January 26, 2010 and so did not incur a full months interest expense in January 2010. Finance expenses also include the amortization of debt offering costs and discounts, and fees related to our credit facilities.
                         
    Three Months Ended March 31,        
(Dollars in thousands)   2011     2010     %Change  
2006 Junior Subordinated Deferrable Debentures
  $ 3,588     $ 3,588       0.0 %
2007 Junior Subordinated Deferrable Debentures
    3,029       3,029       0.0 %
2010 Senior Notes due 2040
    5,597       3,978       40.7 %
Credit facilities
    1,724       1,311       31.5 %
Talbot FAL Facility
    63       422       (85.2 )%
Talbot other interest
          75       (100.0 )%
Talbot third party FAL facility
          2,748       (100.0 )%
 
                   
Finance expenses
  $ 14,001     $ 15,151       (7.6 )%
 
                   
     Capital in Lloyd’s entities, whether personal or corporate, is required to be set annually for the prospective year and held by Lloyd’s in trust (“Funds at Lloyd’s” or “FAL”). For underwriting years up to and including 2007, Talbot’s FAL has been provided both by Talbot and by third parties, thereafter Talbot’s FAL has been provided exclusively by the Company. As all of the underwriting years up to and including 2007 are closed with effect from December 31, 2009, the FAL relating to these years has been returned to the third party providers. There were some costs paid in 2010, which are the final amounts payable under the Talbot third party FAL facility.
Tax Benefit
     Tax benefit for the three months ended March 31, 2011 was $1.5 million compared to a benefit of $0.7 million for the three months ended March 31, 2010, an increase of $0.8 million or 109.3%. The increase is primarily due to adjustments to deferred tax balances in the Talbot segment following the reduction in the effective U.K. tax rate from 28% to 26.5%.
Net Realized Gains on Investments
     Net realized gains on investments for the three months ended March 31, 2011 were $6.4 million compared to gains of $11.4 million for the three months ended March 31, 2010, a decrease of $5.0 million or 44.0%.

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Net Unrealized (Losses) Gains on Investments
     Net unrealized losses on investments for the three months ended March 31, 2011 were ($12.8) million compared to gains of $15.4 million for the three months ended March 31, 2010 an unfavorable movement of $28.2 million or 183.2%. The net unrealized losses in the three months ended March 31, 2011 experienced an unfavorable movement due to increasing interest rates which reduced the value of the fixed income portfolio.
     Net unrealized gains on investments are recorded as a component of net income. The Company has adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance sheet date. Consistent with these standards, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Certain non-Agency RMBS securities were previously identified as trading in inactive markets.
Foreign Exchange (Losses) Gains
     Foreign exchange losses for the three months ended March 31, 2011 were ($0.5) million compared to losses of ($8.8) million for the three months ended March 31, 2010, a favorable movement of $8.3 million or 94.7%. The favorable movement in foreign exchange was due primarily to the increased value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010. For the three months ended March 31, 2011, Validus Re recognized foreign exchange losses of ($4.4) million, Talbot recognized foreign exchange gains of $3.9 million.
     For the three months ended March 31, 2011, Validus Re segment foreign exchange losses were ($4.4) million compared to losses of ($5.1) million for the three months ended March 31, 2010, a favorable movement of $0.8 million. The losses in the current quarter were primarily driven by a ($3.8) million loss on forward exchange contracts to hedge currency movements for the Chilean peso, Australian dollar and Euro.
     For the three months ended March 31, 2011, Talbot segment foreign exchange gains were $3.9 million compared to (losses) of $(3.6) million for the three months ended March 31, 2010, a favorable movement of $7.5 million. The favorable movement in Talbot segment foreign exchange was due primarily to the appreciation of the British pound sterling during the three months ended March 31, 2011. Certain premiums receivable and liabilities for losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in value resulting from fluctuations in foreign exchange rates and may affect financial results in the future.
     The Euro to U.S. dollar exchange rates were 1.33 and 1.41 at December 31, 2010 and March 31, 2011, respectively. The British pound sterling to U.S. dollar exchange rates were 1.55 and 1.60 at December 31, 2010 and March 31, 2011, respectively. During the quarter, the Euro appreciated by 6.0 percent, while the British pound sterling appreciated by 3.2 percent.
     At March 31, 2011, Talbot’s balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $100.1 million and $22.7 million, respectively. These balances consisted of British pound sterling and Canadian dollars of $67.6 million and $9.8 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic exchange rates. All of Talbot’s other balance sheet items are classified as monetary items and are translated at period end exchange rates. Additional foreign exchange gains (losses) may be incurred on the translation of net unearned premiums and deferred acquisition costs arising from insurance and reinsurance premiums written in future periods.
Other Non-GAAP Financial Measures
     In presenting the Company’s results, management has included and discussed certain schedules containing net operating income, underwriting income (loss), annualized return on average equity and diluted book value per common share that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The calculation of annualized return on average equity is discussed in the section above entitled “Financial Measures.” A reconciliation of underwriting income to net income, the most comparable U.S. GAAP financial measure, is presented above in the section entitled “Underwriting Income.” A reconciliation of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, is presented below.

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Operating income is calculated based on net income (loss) excluding net realized gains (losses), net unrealized gains (losses) on investments, gains (losses) arising from translation of non-US$ denominated balances and non-recurring items. A reconciliation of operating income to net income, the most comparable U.S. GAAP financial measure, is embedded in the table presenting results of operations for the three months ended March 31, 2011 and 2010 in the section above entitled “Results of Operations.” Realized gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance. Gains (losses) arising from translation of non-US$ denominated balances are unrelated to our underlying business.
     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 March 31, 2011 and December 31, 2010.
                                 
    As at March 31, 2011  
    (unaudited)  
                            Book Value Per  
    Equity Amount     Shares     Exercise Price     Share  
Book value per common share
                               
Total shareholders’ equity
  $ 3,315,321       98,288,177             $ 33.73  
 
                             
 
                               
Diluted book value per common share
                               
Total shareholders’ equity
    3,315,321       98,288,177                  
Assumed exercise of outstanding warrants
    139,272       7,934,860     $ 17.55          
Assumed exercise of outstanding stock options
    50,571       2,521,975     $ 20.05          
Unvested restricted shares
          3,177,751                  
 
                           
Diluted book value per common share
  $ 3,505,164       111,922,763             $ 31.32  
 
                         
                                 
    As at December 31, 2010  
                            Book Value Per  
    Equity Amount     Shares     Exercise Price     Share  
Book value per common share
                               
Total shareholders’ equity
  $ 3,504,831       98,001,226             $ 35.76  
 
                             
 
                               
Diluted book value per common share
                               
Total shareholders’ equity
    3,504,831       98,001,226                  
Assumed exercise of outstanding warrants
    139,272       7,934,860     $ 17.55          
Assumed exercise of outstanding stock options
    54,997       2,723,684     $ 20.19          
Unvested restricted shares
          3,496,096                  
 
                           
Diluted book value per common share
  $ 3,699,100       112,155,866             $ 32.98  
 
                         
Financial Condition and 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 Validus Re and Talbot to pay finance expenses and other holding company expenses. There are restrictions on the payment of dividends from Validus Re and Talbot to the Company. Please refer to Part II, Item 5, “Market for Registrants, Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 for further discussion of the Company’s dividend policy.
     Three main sources provide cash flows for the Company: operating activities, investing activities and financing activities. Cash flow from operating activities is derived primarily from the net receipt of premiums less claims and expenses related to underwriting activities. Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s total investment portfolio. Cash flow from financing activities is derived primarily from the issuance of common shares and debentures payable. The movement in net cash provided by operating activities, net cash provided by (used in) investing activities, net cash (used in) provided by financing

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activities and the effect of foreign currency rate changes on cash and cash equivalents for the three months ended March 31, 2011 and 2010 is described in the following table.
                         
    Three Months Ended March 31,  
(Dollars in thousands)   2011     2010     %Change  
Net cash provided by operating activities
  $ 168,557     $ 183,966       (8.4 )%
Net cash (used in) investing activities
    (62,779 )     (186,214 )     66.3 %
Net cash (used in) provided by financing activities
    (19,267 )     98,934       119.5 %
Effect of foreign currency rate changes on cash and cash equivalents
    10,193       (5,795 )     (275.9 )%
 
                   
Net increase in cash
  $ 96,704     $ 90,891       6.4 %
 
                   
     During the three months ended March 31, 2011, net cash provided by operating activities of $168.6 million was driven primarily by a significant portion of the 2011 incurred losses which have yet to be paid. Net cash used in investing activities of $62.8 million was driven primarily by a net purchase of investments of $52.0 million and an increase in securities lending collateral of $10.8 million. Net cash used in financing activities of $19.3 million was driven primarily by the payment of $27.2 million in quarterly dividends, partially offset by a $10.8 million increase in securities lending payables.
     During the three months ended March 31, 2010, net cash provided by operating activities of $184.0 million was driven primarily by a $366.2 million increase in reserve for losses and loss expenses primarily due to the Chilean earthquake, windstorm Xynthia and the Melbourne hailstorm and a $359.5 million increase in unearned premiums offset by a $255.4 million decrease in premiums receivable, a net loss of $118.4 million, a combined $122.5 million decrease in deferred acquisition costs, prepaid reinsurance premiums, reinsurance balances payable and accounts payable. Net cash used in investing activities of $186.2 million was driven primarily by the investment of operating surpluses. Net cash provided by financing activities of $98.9 million was driven primarily by the issuance $246.8 million of Senior Notes, offset by share repurchases of $128.2 million and quarterly dividend payments of $29.9 million.
     As at March 31, 2011, the Company’s portfolio was composed of fixed income investments including; short-term investments, agency securities and sovereign securities amounting to $5,175.2 million or 87.8% of total cash and investments. Details of the Company’s debt and financing arrangements at March 31, 2011 are provided below.
                 
    Maturity Date /     In Use/  
(Dollars in thousands)   Term     Outstanding  
2006 Junior Subordinated Deferrable Debentures
  June 15, 2036   $ 150,000  
2007 Junior Subordinated Deferrable Debentures
  June 15, 2037     139,800  
2010 Senior Notes due 2040
  January 26, 2040     250,000  
$340,000 syndicated unsecured letter of credit facility
  March 12, 2013      
$60,000 bilateral unsecured letter of credit facility
  March 12, 2013      
$500,000 secured letter of credit facility
  March 12, 2012     285,048  
Talbot FAL facility
  April 13, 2011     25,000  
IPC Bi-Lateral Facility
  December 31, 2010     64,368  
 
             
Total
          $ 914,216  
 
             
Capital Resources
     Shareholders’ equity at March 31, 2011 was $3,315.3 million.
     On February 9, 2011, the Company announced that its Board of Directors (the “Board”) had increased the Company’s annual dividend by 13.6% from $0.88 to $1.00 per common share and common share equivalent for which each outstanding warrant is exercisable.

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     On May 4, 2011, the Company announced a quarterly cash dividend of $0.25 per common share and $0.25 per common share equivalent for which each outstanding warrant is exercisable, payable on June 30, 2011 to holders of record on June 5, 2011.
The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon our results of operations and cash flows, our 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. In November 2009, the Board of Directors of the Company authorized an initial $400.0 million share repurchase program. On February 17, 2010, the Board of Directors of the Company authorized the Company to return up to $750.0 million to shareholders. This amount was in addition to, and in excess of, the $135.5 million of common shares purchased by the Company through February 17, 2010 under its previously authorized $400.0 million share repurchase program. On May 6, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased $300.0 million in common shares. On November 4, 2010, the Board of Directors authorized a self tender offer pursuant to which the Company has repurchased $238.4 million in common shares. In addition, the Board of Directors authorized separate repurchase agreements with funds affiliated with or managed by each of Aquiline Capital Partners LLC, New Mountain Capital LLC, and Vestar Capital Partners pursuant to which the Company has repurchased $61.6 million in common shares. On December 20, 2010, the Board of Directors authorized the Company to return up to $400.0 million to shareholders. This amount is in addition to the $929.2 million of common shares purchased by the Company through December 23, 2010 under its previously authorized share repurchase program.
     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.
     On November 4, 2010, the Company announced that its Board of Directors had approved share repurchase transactions aggregating $300.0 million. These repurchases were effected by a tender offer.
     The Company repurchased 35.0 million shares at a cost of $947.2 million under the share repurchase programs for the period November 4, 2009 through May 3, 2011.
     On August 7, 2008, the Company filed a shelf registration statement on Form S-3 (No. 333-152856) with the U.S Securities Exchange Committee in which we may offer from time to time common shares, preference shares, depository shares representing common shares or preference shares, senior or subordinated debt securities, warrants to purchase common shares, preference shares and debt securities, share purchase contracts, share purchase units and units which may consist of any combination of the securities listed above. In addition, the shelf registration statement will provide for secondary sales of common shares sold by the Company’s shareholders. The registration statement is intended to provide the Company with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and the Company’s capital needs.
     The following table details the capital resources of the Company’s more significant subsidiaries on an unconsolidated basis.
         
    Capital at  
(Dollars in thousands)   March 31, 2011  
Validus Reinsurance, Ltd. (consolidated), excluding IPCRe, Ltd.
  $ 2,931,084  
IPCRe, Ltd
    304,379  
 
     
Total Validus Reinsurance, Ltd. (consolidated)
    3,235,463  
Talbot Holdings, Ltd
    679,564  
Other subsidiaries, net
    8,741  
 
     
Total consolidated capitalization
    3,923,768  
Other, net
    (11,546 )
Senior notes payable
    (246,901 )
Debentures payable
    (350,000 )
 
     
Total shareholders’ equity
  $ 3,315,321  
 
     

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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 May 6, 2011:
                 
    A.M. Best (a)   S&P (b)   Moody’s (c)   Fitch (d)
Validus Holdings, Ltd.
               
Issuer credit rating
  bbb-   BBB   Baa2   BBB+
Senior debt
  bbb-   BBB     BBB
Subordinated debt
  bb+   BBB-     BB+
Preferred stock
  bb   BB+    
Outlook on ratings
  Positive   Stable   Stable   Stable
 
               
Validus Reinsurance, Ltd.
               
Financial strength rating
  A-   A-   A3   A-
Issuer credit rating
  a-      
Outlook on ratings
  Positive   Stable   Stable   Stable
 
               
IPCRe Ltd.
               
Financial strength rating
  A-      
Issuer credit rating
  a-      
Outlook on rating
  Stable      
 
               
Validus Re Europe Ltd.
               
Financial strength rating
  A-      
Issuer credit rating
  a-      
Outlook on rating
  Stable      
 
               
Talbot
               
Financial strength rating applicable to all Lloyds syndicates
  A   A+     A+
 
(a)   The A.M. Best ratings were most recently affirmed on November 3, 2010
 
(b)   The S&P ratings were upgraded to the levels noted above on August 24, 2010
 
(c)   All Moody’s ratings were most recently referred to in a November 16, 2010 Credit opinion on the Validus Holdings, Ltd.
 
(d)   All Fitch ratings were most recently affirmed on January 10, 2011
Recent accounting pronouncements

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     Please refer to Note 2 to the Consolidated Financial Statements (Part I, Item I) for further discussion of relevant recent accounting pronouncements.
Debt and Financing Arrangements
     The following table details the Company’s borrowings and credit facilities as at March 31, 2011.
                 
(Dollars in thousands)   Commitments     Outstanding(a)  
2006 Junior Subordinated Deferrable Debentures
  $ 150,000     $ 150,000  
2007 Junior Subordinated Deferrable Debentures
    200,000       139,800  
2010 Senior Notes due 2040
    250,000       250,000  
$340,000 syndicated unsecured letter of credit facility
    340,000        
$60,000 bilateral unsecured letter of credit facility
    60,000        
$500,000 secured letter of credit facility
    500,000       285,048  
Talbot FAL facility (b)
    25,000       25,000  
IPC Bi-Lateral Facility
    80,000       64,368  
 
           
Total
  $ 1,605,000     $ 914,216  
 
           
 
(a)   Indicates utilization of commitment amount, not drawn borrowings.
 
(b)   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, 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.
     Please refer to Note 9 the Consolidated Financial Statements (Part I, Item I) for further discussion of the Company’s debt and financing arrangements.
Investments
     A significant portion of contracts written provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in a significant amount of losses on short notice. Accordingly, the Company’s investment portfolio is structured to provide significant liquidity and preserve capital, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments, such as U.S. government securities, U.S. government-sponsored enterprises securities, corporate debt securities and mortgage-backed and asset-backed securities.
     Substantially all of the fixed maturity investments held at March 31, 2011 were publicly traded. At March 31, 2011, the average duration of the Company’s fixed maturity portfolio was 1.83 years (December 31, 2010: 2.27 years) and the average rating of the portfolio was AA (December 31, 2010: AA+). At March 31, 2011, the total fixed maturity portfolio was $4,589.8 million (December 31, 2010: $4,823.9 million), of which $2,437.8 million (December 31, 2010: $2,946.5 million) were rated AAA.
     With the exception of the bank loan portfolio, the Company’s investment guidelines require that investments be rated BBB- or higher at the time of purchase. The Company reports the ratings of its investment portfolio securities at the lower of Moody’s or Standard & Poor’s rating for each investment security and, as a result, the Company’s investment portfolio now has $36.3 million of non-agency mortgage backed securities rated less than investment grade. The other components of less than investment grade securities held by the Company at March 31, 2011 were $58.1 million of catastrophe bonds, $200.1 million of bank loans and $2.3 million of corporate bonds.
     Cash and cash equivalents and investments in Talbot of $1,553.8 million at March 31, 2011 were held in trust for the benefit of cedants and policyholders and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2010: $1,489.2 million). Total cash and cash equivalents and investments in Talbot were $1,668.8 million at March 31, 2011 (December 31, 2010: $1,592.1 million).

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     As of March 31, 2011, the Company had approximately $1.3 million of asset-backed securities with sub-prime collateral (December 31, 2010: $1.6 million) and $9.2 million of Alt-A RMBS (December 31, 2010: $9.9 million).
Cash Flows
     During the three months ended March 31, 2011 and 2010, the Company generated net cash from operating activities of $168.6 million and $184.0 million, respectively. Cash flows from operations generally represent premiums collected, less losses and loss expenses paid and underwriting and other expenses paid. Cash flows from operations may differ substantially from net income.
     As of March 31, 2011 and December 31, 2010, the Company had cash and cash equivalents of $717.4 million and $620.7 million, respectively.
     The Company has written certain 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. Please refer to the table detailing the Company’s borrowings and credit facilities as at March 31, 2011, presented above.
     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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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;
 
    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;
 
    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

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      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;