Validus' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Validus Holdings, Ltd. (VR)

Q2 2012 Results Earnings Call

July 27, 2012 9:00 AM ET

Executives

Jon Levenson – Executive Vice President

Ed Noonan – Chairman and CEO

Jeff Consolino – President and CFO

Analysts

Amit Kumar – Macquarie

Matt Carletti – JMP Securities

Michael Nannizzi - Goldman Sachs

Jay Cohen – Bank of America-Merrill Lynch

Ryan Byrnes – Langen McAlenney

Josh Shanker – Deutsche Bank

Ian Gutterman – Adage Capital

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the Q2 2012 Validus Holdings Limited Earnings Conference Call. My name is Bhupendra, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Jon Levenson, Executive Vice President. Please proceed.

Jon Levenson

Thank you. Good morning. And welcome to the Validus Holdings conference call for the quarter ended June 30, 2012. After the market closed yesterday, we issued an earnings press release and financial supplement, which are available on our website located at validusholdings.com. Today’s call is being simultaneously webcast and will be available for replay until August 10, 2012. Details are provided on our website.

Leading today’s call are Validus’ Chairman and Chief Executive Officer, Ed Noonan; and Validus’ President and Chief Financial Officer, Jeff Consolino.

Before begin, I would like to remind you that certain comments made during this call may be deemed forward-looking statements as defined within U.S. federal securities laws. These 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.

More details about these risks and uncertainties can be found in the company’s most recent annual report on Form 10-K and quarterly report on Form 10-Q, both as filed with the U.S. Securities and Exchange Commission.

Management will also refer to certain non-GAAP financial measures when describing the company’s performance. These items are reconciled and explained in our earnings release and financial supplement.

With that, I’ll turn the call over to Ed Noonan.

Ed Noonan

Well, thank you, Jon. Good morning. And thanks all of you for taking the time to join us today. This was an outstanding quarter for us in every way. Our financial results were excellent with a 19.5% annualized operating return on average equity, 4.3% growth in diluted book value per share plus dividends and a 66.6% combined ratio for the Group.

We benefited from the absence of catastrophes in the quarter, but that’s only part of the story. From a strategic perspective, the business model that we have built is firing on all cylinders.

Validus Re is the clearly established leader in the global catastrophe sector and increased its size and market presence with 17.3% growth in gross written premiums, and an 11.2% increase in property catastrophe premiums in the quarter.

Validus Re generated a very strong 43.8% combined ratio. Talbot underwriters, our Lloyd syndicate continues to reach the benefits of its rather unique business mix and market leading position in its key classes. Talbot grew by 2.4% in the quarter with an 87% combined ratio.

Finally, our AlphaCat business continues to demonstrate the economic and strategic value of outstanding research and analytical skills, size and market presence. AlphaCat successfully launch two new vehicles in the quarter, AlphaCat Re 2012 and PaCRe, and generated $58 million in catastrophe premiums.

AlphaCat has almost $1 billion in assets under management and we feel as though we are just scratching the surface in this segment. AlphaCat contributed $11.8 million in operating income to the Group in the quarter.

Our strategy is to be a leader in the global short-tail risk business and we’ve spent almost seven years building the size, market position and operating businesses to achieve this goal. It’s very gratifying to us to see all of our businesses generating excellent results and continuing to market leading franchises.

So, with that, I’ll turn the call over to Jeff Consolino, who will walk through our financial results in more detail.

Jeff Consolino

Thank you, Ed. I’m excited to be here to discuss our second quarter results with all of you today. Before we get started on the results of operations and financial position, I want to remind you of the changes we’ve made to our segment disclosure, which were effective starting with the first quarter of this year.

By subdividing the previous Validus Re segment into AlphaCat and Validus Re, we are able to point you more clearly to the two important additions to our business, which I decided, which are contributing to our results this quarter, each within the AlphaCat segment.

First, PaCRe is included in our consolidated results of operations within the AlphaCat segment. You will recall that we announced the formation of PaCRe on April 4th, with $500 million of initial capital.

Our ownership interest is 10%. But as we hold the majority of the voting rights, the financial results for PaCRe our consolidated in our financial statements. With that portion of PaCRe’s earnings and equity attributable to third parties recorded as non-controlling interest on our June 30 balance sheet and in our quarterly income statement.

Secondly, we announced on June 1st the capitalization of AlphaCat Re 2012. Our voting interest in AlphaCat Re 2012 is less than 50%, so we account for our 37.9% interest on the equity method, consistent with the accounting treatment for our 22.3% interest in AlphaCat Re 2011.

Both AlphaCat Re 2011 and AlphaCat Re 2012 contributed meaningfully in the quarter to the growth of our client franchise and growth in managed gross premiums written. We also contributed fee income to our bottom line for managing third-party capital equal to $5.7 million for the quarter.

Our second quarter net income available to Validus shareholders was $157.6 million. This is $1.62 per diluted common share. Net operating income available to Validus was $171.2 million or $1.65 per diluted share. This is a record high operating income for us for second quarter and continues on the heels of our strong first quarter of 2012.

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