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TheStreet Open House

Validus Announces Full Year 2012 Net Income Of $408.4 Million And Fourth Quarter 2012 Net Loss Of $(90.7) Million

This conference call will also be available through a live audio webcast accessible through the Investor Relations section of the Company's website located at www.validusholdings.com. A replay of the webcast will be available at the Investor Relations section of the Company's website through February 15, 2013. In addition, a financial supplement relating to the Company's financial results for the three months and year ended December 31, 2012 is available in the Investor Relations section of the Company's website.

About Validus Holdings, Ltd.

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

Validus Holdings, Ltd.

Consolidated Balance Sheets

As at December 31, 2012 and December 31, 2011

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

 
December 31, 2012 December 31, 2011
 
Assets
Fixed maturities, at fair value (amortized cost: 2012—$5,008,514; 2011—$4,859,705) $ 5,085,334 $ 4,894,145
Short-term investments, at fair value (amortized cost: 2012—$1,112,929; 2011—$280,299) 1,114,250 280,191
Other investments, at fair value (amortized cost: 2012—$583,068; 2011—$15,002) 564,448 16,787
Cash and cash equivalents 1,219,379   832,844  
Total investments and cash 7,983,411 6,023,967
Investments in affiliates 172,329 53,031
Premiums receivable 802,159 646,354
Deferred acquisition costs 146,588 121,505
Prepaid reinsurance premiums 99,593 91,381
Securities lending collateral 225 7,736
Loss reserves recoverable 439,967 372,485
Paid losses recoverable 46,435 90,495
Intangible assets 110,569 114,731
Goodwill 20,393 20,393
Accrued investment income 21,321 25,906
Other assets   177,274     50,487  
Total assets $ 10,020,264   $ 7,618,471  
 
Liabilities
Reserve for losses and loss expenses $ 3,517,573 $ 2,631,143
Unearned premiums 894,362 772,382
Reinsurance balances payable 138,550 119,899
Securities lending payable 691 8,462
Deferred income taxes 20,259 16,720
Net payable for investments purchased 38,346 1,256
Accounts payable and accrued expenses 167,577 83,402
Senior notes payable 247,090 246,982
Debentures payable   540,709     289,800  
Total liabilities   5,565,157     4,170,046  
 
Commitments and contingent liabilities
 
Shareholders' equity

Common shares, 571,428,571 authorized, par value $0.175 (Issued: 2012—152,698,191; 2011—134,503,065; Outstanding: 2012—107,921,259; 2011—99,471,080)

26,722 23,538
Treasury shares (2012—44,776,932; 2011—35,031,985) (7,836 ) (6,131 )
Additional paid-in-capital 2,160,478 1,893,890
Accumulated other comprehensive (loss) (2,953 ) (6,601 )
Retained earnings   1,844,416     1,543,729  
Total shareholders' equity available to Validus   4,020,827     3,448,425  
 
Noncontrolling interest 434,280
       
Total shareholders' equity   4,455,107     3,448,425  
 
Total liabilities and shareholders' equity $ 10,020,264   $ 7,618,471  

Validus Holdings, Ltd.

Consolidated Statement of Operations

For the three months and year ended December 31, 2012 and 2011

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

   
Three Months Ended December 31, Year Ended December 31,
2012   2011 2012   2011
Underwriting income
Gross premiums written $ 311,847 $ 278,279 $ 2,166,440 $ 2,124,691
Reinsurance premiums ceded   (35,659 )   (16,489 )   (307,506 )   (289,241 )
Net premiums written 276,188 261,790 1,858,934 1,835,450
Change in unearned premiums   223,098     226,556     14,282     (33,307 )
Net premiums earned   499,286     488,346     1,873,216     1,802,143  
 
Underwriting deductions
Losses and loss expenses 458,310 334,829 999,446 1,244,401
Policy acquisition costs 81,814 81,253 334,698 314,184
General and administrative expenses 65,095 52,253 263,652 197,497
Share compensation expenses   7,126     7,237     26,709     34,296  
Total underwriting deductions   612,345     475,572     1,624,505     1,790,378  
 
Underwriting (loss) income $ (113,059 ) $ 12,774 $ 248,711 $ 11,765
 
Net investment income 28,802 28,080 107,936 112,296
Other income 187 3,517 22,396 5,718
Finance expenses   (14,510 )   (13,520 )   (53,857 )   (54,817 )

Operating (loss) income before taxes and (loss) income from operating affiliates

$ (98,580 ) $ 30,851 $ 325,186 $ 74,962
Tax (expense) benefit (615 ) 226 (2,501 ) (824 )
(Loss) income from operating affiliates   (614 )       12,580      
Net operating (loss) income $ (99,809 ) $ 31,077 $ 335,265 $ 74,138
 
Gain on bargain purchase, net of expenses (a) 21,485 17,701
Net realized (losses) gains on investments (4,516 ) 5,355 18,233 28,532
Net unrealized (losses) gains on investments (35,857 ) 2,159 17,585 (19,991 )
(Loss) from investment affiliate (406 ) (964 )
Foreign exchange gains (losses) 1,181 266 4,798 (22,124 )
Transaction expenses (b)       (3,850 )       (17,433 )
Net (loss) income $ (117,922 ) $ 35,007 $ 392,618 $ 43,122
 
Net loss (income) attributable to noncontrolling interest 27,206 (7,683 ) 15,820 (21,793 )
               
Net (loss) income (attributable) available to Validus $ (90,716 ) $ 27,324   $ 408,438   $ 21,329  
 
Selected ratios:
Net premiums written / Gross premiums written 88.6 % 94.1 % 85.8 % 86.4 %
 
Losses and loss expenses 91.8 % 68.6 % 53.4 % 69.1 %
Policy acquisition costs 16.4 % 16.6 % 17.9 % 17.4 %
General and administrative expenses (c)   14.5 %   12.2 %   15.5 %   12.9 %
Expense ratio   30.9 %   28.8 %   33.4 %   30.3 %
 
Combined ratio   122.7 %   97.4 %   86.8 %   99.4 %
(a)  

The gain on bargain purchase, net of expenses, arose from the acquisition of Flagstone Reinsurance Holdings S.A. on November 30, 2012 and is net of transaction related expenses which included legal, financial advisory, audit related services and termination expenses.

 
(b) The transaction expenses for 2011 relate to costs incurred in connection with the Company's proposed acquisition of Transatlantic Holdings, Inc. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
 
(c) The general and administrative expense ratio includes share compensation expenses.

Validus Holdings, Ltd.

Consolidated Segment Underwriting Income (Loss)

For the three months and year ended December 31, 2012 and 2011

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

   
Three Months Ended December 31, Year Ended December 31,
2012   2011 2012   2011

Validus Re

Gross premiums written $ 79,233 $ 55,851 $ 1,131,959 $ 1,114,493
Reinsurance premiums ceded   (7,074 )   (49 )   (144,578 )   (150,718 )
Net premiums written 72,159 55,802 987,381 963,775
Change in unearned premiums   213,105     196,679     35,890     2,150  
Net premiums earned   285,264     252,481     1,023,271     965,925  
Underwriting deductions
Losses and loss expenses 331,130 215,903 575,416 749,305
Policy acquisition costs 40,703 39,227 154,362 154,582
General and administrative expenses 14,716 11,716 63,048 44,663
Share compensation expenses   1,849     2,191     7,763     9,309  
Total underwriting deductions   388,398     269,037     800,589     957,859  
 

Underwriting (loss) income

  (103,134 )   (16,556 )   222,682     8,066  
 

AlphaCat

Gross premiums written $ (4 ) $ (1,323 ) $ 21,603 $ 75,727
Reinsurance premiums ceded                
Net premiums written (4 ) (1,323 ) 21,603 75,727
Change in unearned premiums   5,895     27,834     (3,937 )   (9,761 )
Net premiums earned   5,891     26,511     17,666     65,966  
Underwriting deductions
Losses and loss expenses 10,000 10,000
Policy acquisition costs 589 3,331 1,774 7,946
General and administrative expenses 2,011 6,807 7,532 10,929
Share compensation expenses   84     33     279     107  
Total underwriting deductions   2,684     20,171     9,585     28,982  
 
Underwriting income   3,207     6,340     8,081     36,984  
 

Talbot

Gross premiums written $ 241,100 $ 235,242 $ 1,078,636 $ 1,014,122
Reinsurance premiums ceded   (37,067 )   (27,931 )   (228,686 )   (218,174 )
Net premiums written 204,033 207,311 849,950 795,948
Change in unearned premiums   4,098     2,043     (17,671 )   (25,696 )
Net premiums earned   208,131     209,354     832,279     770,252  
Underwriting deductions
Losses and loss expenses 127,180 108,926 424,030 485,096
Policy acquisition costs 41,745 41,160 183,926 157,334
General and administrative expenses 32,371 29,676 133,281 112,072
Share compensation expenses   2,442     1,934     7,789     8,582  
Total underwriting deductions   203,738     181,696     749,026     763,084  
 
Underwriting income   4,393     27,658     83,253     7,168  

Validus Holdings, Ltd.

Consolidated Segment Underwriting Income (Loss) - Continued

For the three months and year ended months ended December 31, 2012 and 2011

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

   
Three Months Ended December 31, Year Ended December 31,
2012   2011 2012   2011

Corporate & Eliminations

Gross premiums written $ (8,482 ) $ (11,491 ) $ (65,758 ) $ (79,651 )
Reinsurance premiums ceded   8,482     11,491     65,758     79,651  
Net premiums written
Change in unearned premiums                
Net premiums earned                
Underwriting deductions
Losses and loss expenses
Policy acquisition costs (1,223 ) (2,465 ) (5,364 ) (5,678 )
General and administrative expenses 15,997 4,054 59,791 29,833
Share compensation expenses   2,751     3,079     10,878     16,298  
Total underwriting deductions   17,525     4,668     65,305     40,453  
 
Underwriting (loss)   (17,525 )   (4,668 )   (65,305 )   (40,453 )
               
Total underwriting (loss) income $ (113,059 ) $ 12,774   $ 248,711   $ 11,765  

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Managed Gross Premiums Written

For the three months and year ended December 31, 2012 and 2011

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

   
Three Months Ended Year Ended
December 31,   December 31, December 31,   December 31,
2012   2011(a)   2012   2011(a)
 
Total gross premiums written $ 311,847 $ 278,279 $ 2,166,440 $ 2,124,691
Adjustments for:
Gross premiums written on behalf of AlphaCat Re 2011 8 94,317
Gross premiums written on behalf of AlphaCat Re 2012   (45 )       32,171    
Total managed gross premiums written $ 311,810   $ 278,279   $ 2,292,928   $ 2,124,691
(a)   Total gross premiums written for the three months and year ended December 31, 2011 included $(1.4) million and $60.0 million, respectively of gross premiums written from AlphaCat Re 2011, which was a consolidated subsidiary during the three months ended June 30, September 30 and December 31, 2011. The balance sheet of AlphaCat Re 2011 was deconsolidated as at December 31, 2011.

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

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

For the three months and year ended December 31, 2012 and 2011

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

   
Three Months Ended Year Ended
December 31,   December 31, December 31,   December 31,
  2012   2011   2012   2011
 
Net (loss) income (attributable) available to Validus $ (90,716 ) $ 27,324 $ 408,438 $ 21,329
Adjustments for:
Gain on bargain purchase, net of expenses (a) (21,485 ) (17,701 )
Net realized losses (gains) on investments 4,516 (5,355 ) (18,233 ) (28,532 )

Net unrealized losses (gains) on investments

35,857 (2,159 ) (17,585 ) 19,991
Loss from investment affiliate 406 964
Foreign exchange (gains) losses (1,181 ) (266 ) (4,798 ) 22,124

Transaction expenses (b)

3,850 17,433
Net (loss) attributable to noncontrolling interest (28,193 )   (17,253 )  

Net operating (loss) income (attributable) available toValidus

(100,796 ) 23,394 333,832 52,345

Less: Dividends and distributions declared onoutstanding warrants

  (1,572 )   (1,728 )   (6,693 )   (7,644 )

Net operating (loss) income (attributable) available to Validus, adjusted

$ (102,368 ) $ 21,666   $ 327,139   $ 44,701  
 

Net (loss) income per share (attributable) available to Validus - diluted

$ (0.94 ) $ 0.25 $ 3.99 $ 0.14
Adjustments for:
Gain on bargain purchase, net of expenses (a) (0.23 ) (0.17 )
Net realized losses (gains) on investments 0.05 (0.06 ) (0.18 ) (0.28 )
Net unrealized losses (gains) on investments 0.37 (0.02 ) (0.17 ) 0.19
Loss from investment affiliate 0.01
Foreign exchange (gains) losses (0.01 ) (0.05 ) 0.22
Transaction expenses (b) 0.04 0.17
Net (loss) attributable to noncontrolling interest   (0.29 )       (0.17 )    

Net operating (loss) income per share (attributable) available to Validus - diluted

$ (1.05 ) $ 0.21   $ 3.26   $ 0.44  
 

Weighted average number of common shares and common share equivalents

97,688,338 101,324,291 102,384,923 100,928,284
 

Average shareholders' equity available to Validus

$ 3,827,340 $ 3,426,093 $ 3,624,090 $ 3,424,153
 
Annualized net operating return on average equity   (10.5 )%   2.7 %   9.2 %   1.5 %
(a)  

The gain on bargain purchase, net of expenses, arises from the acquisition of Flagstone Reinsurance Holdings S.A. on November 30, 2012 and is net of transaction related expenses which included legal, financial advisory, audit related services and termination expenses.

(b) The transaction expenses for 2011 relate to costs incurred in connection with the Company's proposed acquisition of Transatlantic Holdings, Inc. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

Validus Holdings, Ltd.

Non-GAAP Financial Measure Reconciliation

Book Value and Diluted Book Value per Common Share

As at December 31, 2012 and December 31, 2011

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

 
As at December 31, 2012

Equity Amount

  Shares  

Exercise Price

 

Book Value Per Share

Book value per common share  
Total shareholders' equity available to Validus $ 4,020,827 107,921,259 $ 37.26
 
Diluted book value per common share
Total shareholders' equity available to Validus 4,020,827 107,921,259
Assumed exercise of outstanding warrants 118,015 6,410,472 $ 18.41
Assumed exercise of outstanding stock options 37,745 1,823,947 $ 20.69
Unvested restricted shares       2,443,631  
Diluted book value per common share $ 4,176,587     118,599,309   $ 35.22
 
As at December 31, 2011

Equity Amount

Shares

Exercise Price

Book Value Per Share

Book value per common share
Total shareholders' equity available to Validus $ 3,448,425 99,471,080 $ 34.67
 
Diluted book value per common share
Total shareholders' equity available to Validus 3,448,425 99,471,080
Assumed exercise of outstanding warrants 121,445 6,916,678 $ 17.56
Assumed exercise of outstanding stock options 45,530 2,263,012 $ 20.12
Unvested restricted shares       3,340,729  
Diluted book value per common share $ 3,615,400     111,991,499   $ 32.28

Cautionary Note Regarding Forward-Looking Statements

This press release may include forward-looking statements, both with respect to the Company and its industry, that reflect our current views with respect to future events and financial performance. Statements that include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", "may" and similar statements of a future or forward-looking nature identify forward-looking statements. All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond the Company's control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such statements. We believe that these factors include, but are not limited to, the following: 1) unpredictability and severity of catastrophic events; 2) rating agency actions; 3) adequacy of Validus' risk management and loss limitation methods; 4) cyclicality of demand and pricing in the insurance and reinsurance markets; 5) statutory or regulatory developments including tax policy, reinsurance and other regulatory matters; 6) Validus' ability to implement its business strategy during "soft" as well as "hard" markets; 7) adequacy of Validus' loss reserves; 8) continued availability of capital and financing; 9) retention of key personnel; 10) competition; 11) potential loss of business from one or more major insurance or reinsurance brokers; 12) Validus' ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements; 13) general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates); 14) the integration of businesses Validus may acquire or new business ventures Validus may start; 15) the effect on Validus' investment portfolios of changing financial market conditions including inflation, interest rates, liquidity and other factors; 16) acts of terrorism or outbreak of war; and 17) availability of reinsurance and retrocessional coverage, as well as management's response to any of the aforementioned factors.

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