Quarterly Report (10-q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________

Form 10-Q

__________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

Commission file number 001-33606

__________________________________________________

VALIDUS HOLDINGS, LTD.

(Exact name of registrant as specified in its charter )

__________________________________________________



BERMUDA		98-0501001
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

29 Richmond Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

(441) 278-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)
		Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 x

As of May 3, 2017 there were 79,140,542 outstanding Common Shares, $0.175 par value per share, of the registrant.

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INDEX



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	50

Item 3. Quantitative and Qualitative Disclosures About Market Risk	81

Item 4. Controls and Procedures	81

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	82

Item 1A. Risk Factors	82

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	83

Item 3. Defaults Upon Senior Securities	84

Item 4. Mine Safety Disclosure	84

Item 5. Other Information	84

Item 6. Exhibits	85

SIGNATURES	86

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



Table of Contents		Page

Consolidated Balance Sheets as at March 31, 2017 (unaudited) and December 31, 2016		3
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)		4
Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2017 and 2016 (unaudited)		5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)		6
Notes to the Consolidated Financial Statements (Unaudited)		7
Note 1 - Basis of preparation and consolidation		7
Note 2 - Recent accounting pronouncements		7
Note 3 - Investments		9
Note 4 - Fair value measurements		16
Note 5 - Variable interest entities		23
Note 6 - Noncontrolling interests		25
Note 7 - Derivative instruments		26
Note 8 - Reserve for losses and loss expenses		27
Note 9 - Reinsurance		29
Note 10 - Share capital		31
Note 11 - Stock plans		32
Note 12 - Debt and financing arrangements		34
Note 13 - Accumulated other comprehensive loss		36
Note 14 - Commitments and contingencies		37
Note 15 - Related party transactions		38
Note 16 - Earnings per common share		39
Note 17 - Segment information		40
Note 18 - Subsequent events		49

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Validus Holdings, Ltd.

Consolidated Balance Sheets

As at March 31, 2017 (unaudited) and December 31, 2016

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



	March 31, 2017			December 31, 2016
	(unaudited)
Assets
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,391,103; 2016—$5,584,599)	$	5,365,216		$	5,543,030
Short-term investments trading, at fair value (amortized cost: 2017—$2,785,232; 2016—$2,796,358)	2,785,226			2,796,170
Other investments, at fair value (cost: 2017—$415,679; 2016—$380,130)	443,004			405,712
Investments in investment affiliates, equity method (cost: 2017—$73,918; 2016—$84,840)	94,697			100,431
Cash and cash equivalents	623,937			419,976
Restricted cash	92,547			70,956
Total investments and cash	9,404,627			9,336,275
Premiums receivable	1,214,745			725,390
Deferred acquisition costs	292,180			209,227
Prepaid reinsurance premiums	199,046			77,996
Securities lending collateral	10,386			9,779
Loss reserves recoverable	451,856			430,421
Paid losses recoverable	37,837			35,247
Income taxes recoverable	6,757			4,870
Deferred tax asset	45,995			43,529
Receivable for investments sold	9,302			3,901
Intangible assets	114,176			115,592
Goodwill	196,758			196,758
Accrued investment income	25,962			26,488
Other assets	127,494			134,282
Total assets	$	12,137,121		$	11,349,755
Liabilities
Reserve for losses and loss expenses	$	3,052,745		$	2,995,195
Unearned premiums	1,612,474			1,076,049
Reinsurance balances payable	118,119			54,781
Securities lending payable	10,852			10,245
Deferred tax liability	3,818			3,331
Payable for investments purchased	38,486			29,447
Accounts payable and accrued expenses	171,134			587,648
Notes payable to AlphaCat investors	446,576			278,202
Senior notes payable	245,412			245,362
Debentures payable	537,402			537,226
Total liabilities	6,237,018			5,817,486
Commitments and contingent liabilities
Redeemable noncontrolling interests	1,657,630			1,528,001
Shareholders’ equity
Preferred shares (Issued and Outstanding: 2017—6,000; 2016—6,000)	150,000			150,000
Common shares (Issued: 2017—161,285,411; 2016—161,279,976; Outstanding: 2017—79,137,590; 2016—79,132,252)	28,225			28,224
Treasury shares (2017—82,147,821; 2016—82,147,724)	(14,376		)	(14,376		)
Additional paid-in capital	830,346			821,023
Accumulated other comprehensive loss	(22,453		)	(23,216		)
Retained earnings	2,940,134			2,876,636
Total shareholders’ equity available to Validus	3,911,876			3,838,291
Noncontrolling interests	330,597			165,977
Total shareholders’ equity	4,242,473			4,004,268
Total liabilities, noncontrolling interests and shareholders’ equity	$	12,137,121		$	11,349,755

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Validus Holdings, Ltd.

Consolidated Statements of Income and Comprehensive Income

For the Three Months Ended March 31, 2017 and 2016 (unaudited)

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



	Three Months Ended March 31,
	2017			2016
	(unaudited)
Revenues
Gross premiums written	$	1,190,857		$	1,172,791
Reinsurance premiums ceded	(200,106		)	(167,835		)
Net premiums written	990,751			1,004,956
Change in unearned premiums	(415,375		)	(433,688		)
Net premiums earned	575,376			571,268
Net investment income	40,214			29,461
Net realized losses on investments	(1,164		)	(584		)
Change in net unrealized gains on investments	13,348			47,444
Income (loss) from investment affiliates	5,188			(4,113		)
Other insurance related income and other income	1,330			1,413
Foreign exchange gains	1,569			6,245
Total revenues	635,861			651,134
Expenses
Losses and loss expenses	269,585			224,447
Policy acquisition costs	111,628			107,193
General and administrative expenses	87,924			86,208
Share compensation expenses	9,491			11,237
Finance expenses	13,943			15,203
Total expenses	492,571			444,288
Income before taxes, loss from operating affiliate and (income) attributable to AlphaCat investors	143,290			206,846
Tax benefit	3,549			2,118
Loss from operating affiliate	—			(23		)
(Income) attributable to AlphaCat investors	(7,503		)	(4,600		)
Net income	$	139,336		$	204,341
Net (income) attributable to noncontrolling interests	(42,572		)	(37,531		)
Net income available to Validus	96,764			166,810
Dividends on preferred shares	(2,203		)	—
Net income available to Validus common shareholders	$	94,561		$	166,810

Comprehensive income
Net income	$	139,336		$	204,341
Other comprehensive income (loss)
Change in foreign currency translation adjustments	597			(2,028		)
Change in minimum pension liability, net of tax	68			(83		)
Change in fair value of cash flow hedge	98			(758		)
Other comprehensive income (loss), net of tax	763			(2,869		)
Comprehensive (income) attributable to noncontrolling interests	(42,572		)	(37,531		)
Comprehensive income available to Validus	$	97,527		$	163,941

Earnings per common share
Basic earnings per share available to Validus common shareholders	$	1.19		$	2.01
Earnings per diluted share available to Validus common shareholders	$	1.17		$	1.98
Cash dividends declared per common share	$	0.38		$	0.35

Weighted average number of common shares and common share equivalents outstanding:
Basic	79,133,671			82,821,261
Diluted	80,739,142			84,198,315

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Validus Holdings, Ltd.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended March 31, 2017 and 2016 (unaudited)

(Expressed in thousands of U.S. dollars)



	Three Months Ended March 31,
	2017			2016
	(unaudited)
Preferred shares
Balance, beginning and end of period	$	150,000		$	—

Common shares
Balance, beginning of period	$	28,224		$	28,100
Common shares issued, net	1			2
Balance, end of period	$	28,225		$	28,102

Treasury shares
Balance, beginning of period	$	(14,376	)	$	(13,592	)
Repurchase of common shares	—			(238		)
Balance, end of period	$	(14,376	)	$	(13,830	)

Additional paid-in capital
Balance, beginning of period	$	821,023		$	1,002,980
Common shares (redeemed) issued, net	(168		)	398
Repurchase of common shares	—			(60,130		)
Share compensation expenses	9,491			11,237
Balance, end of period	$	830,346		$	954,485

Accumulated other comprehensive loss
Balance, beginning of period	$	(23,216	)	$	(12,569	)
Other comprehensive income (loss)	763			(2,869		)
Balance, end of period	$	(22,453	)	$	(15,438	)

Retained earnings
Balance, beginning of period	$	2,876,636		$	2,634,056
Net income	139,336			204,341
Net (income) attributable to noncontrolling interest	(42,572		)	(37,531		)
Dividends on preferred shares	(2,203		)	—
Dividends on common shares	(31,063		)	(29,759		)
Balance, end of period	$	2,940,134		$	2,771,107

Total shareholders’ equity available to Validus	$	3,911,876		$	3,724,426
Noncontrolling interest	$	330,597		$	157,223
Total shareholders’ equity	$	4,242,473		$	3,881,649

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Validus Holdings, Ltd.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2017 and 2016 (unaudited)

(Expressed in thousands of U.S. dollars)



	Three Months Ended March 31,
	2017			2016
	(unaudited)
Cash flows provided by (used in) operating activities
Net income	$	139,336		$	204,341
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Share compensation expenses	9,491			11,237
Amortization of discount on senior notes	27			27
(Income) loss from investment affiliates	(5,188		)	4,113
Net realized and change in net unrealized losses on investments	(12,184		)	(46,860		)
Amortization of intangible assets	1,416			1,416
Loss from operating affiliate	—			23
Foreign exchange gains included in net income	(4,938		)	(6,457		)
Amortization of premium on fixed maturity investments	3,536			4,538
Change in:
Premiums receivable	(488,653		)	(519,713		)
Deferred acquisition costs	(82,953		)	(81,673		)
Prepaid reinsurance premiums	(121,050		)	(103,263		)
Loss reserves recoverable	(20,743		)	(20,966		)
Paid losses recoverable	(2,619		)	(1,807		)
Reserve for losses and loss expenses	53,436			(10,740		)
Unearned premiums	536,425			536,951
Reinsurance balances payable	63,070			21,658
Other operational balance sheet items, net	(50,610		)	(26,871		)
Net cash provided by (used in) operating activities	17,799			(34,046		)

Cash flows provided by (used in) investing activities
Proceeds on sales of fixed maturity investments	743,631			734,892
Proceeds on maturities of fixed maturity investments	123,269			79,925
Purchases of fixed maturity investments	(676,349		)	(726,233		)
Proceeds on sales (purchases) of short-term investments, net	11,030			(166,362		)
Purchases of other investments, net	(34,295		)	(3,690		)
Increase in securities lending collateral	(607		)	(4,858		)
Distributions from (investments) in investment affiliates, net	10,922			(575		)
Increase in restricted cash	(21,591		)	(35,125		)
Net cash provided by (used in) investing activities	156,010			(122,026		)

Cash flows provided by (used in) financing activities
Net proceeds on issuance of notes payable to AlphaCat investors	73,048			247,400
(Redemption) issuance of common shares, net	(167		)	400
Purchases of common shares under share repurchase program	—			(60,368		)
Dividends paid on preferred shares	(2,203		)	—
Dividends paid on common shares	(30,092		)	(28,637		)
Increase in securities lending payable	607			4,858
Third party investment in redeemable noncontrolling interests	103,699			268,750
Third party redemption of redeemable noncontrolling interests	(68,296		)	(10,800		)
Third party investment in noncontrolling interests	154,980			112,325
Third party distributions of noncontrolling interests	(62,770		)	(118,722		)
Third party subscriptions deployed on AlphaCat Funds and Sidecars	(144,452		)	(412,036		)
Net cash provided by financing activities	24,354			3,170
Effect of foreign currency rate changes on cash and cash equivalents	5,798			(433		)
Net increase (decrease) in cash and cash equivalents	203,961			(153,335		)
Cash and cash equivalents - beginning of period	419,976			723,109
Cash and cash equivalents - end of period	$	623,937		$	569,774

Supplemental disclosure of cash flow information:
Taxes paid during the period	$	16		$	2,117
Interest paid during the period	$	19,073		$	19,303

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

1. Basis of preparation and consolidation

These unaudited Consolidated Financial Statements (the “Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 in Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in Validus Holdings, Ltd.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2016 , as filed with the U.S. Securities and Exchange Commission (the “SEC”).

The Company consolidates in these Consolidated Financial Statements the results of operations and financial position of all voting interest entities (“VOE”) in which the Company has a controlling financial interest and all variable interest entities (“VIE”) in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

In the opinion of management, these unaudited Consolidated Financial Statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair statement of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for any interim period are not necessarily indicative of the results for a full year.

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ materially from those estimates. The Company’s principal estimates include:

• reserve for losses and loss expenses;

• premium estimates for business written on a line slip or proportional basis;

• the valuation of goodwill and intangible assets;

• reinsurance recoverable balances including the provision for uncollectible amounts; and

• investment valuation of financial assets.

The term “ASC” used in these notes refers to Accounting Standard Codification issued by the United States Financial Accounting Standards Board (the “FASB”).

2. Recent accounting pronouncements


(a)	Recently issued accounting standards adopted during the period

In March 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323) - Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement to retroactively adopt the equity method of accounting when an investment becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810) - Interests Held Through Related Parties That Are Under Common Control.” The amendments in this ASU do not change the characteristics of a primary beneficiary in current U.S. GAAP. Rather, the ASU requires that a reporting entity, in determining whether it satisfies the second characteristic of a primary

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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)

beneficiary, include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity. The amendments in this ASU became effective for the Company on January 1, 2017. Adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.


(b)	Recently issued accounting standards not yet adopted

In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20).” The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact of this guidance and it will not have a material impact on the Company’s Consolidated Financial Statements. The Company plans to adopt this guidance on January 1, 2019.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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

3. Investments

Managed investments represent assets governed by the Company’s investment policy statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 5 , “Variable interest entities,” for further details.

The Company classifies its fixed maturity and short-term investments as trading and accounts for its other investments in accordance with ASC Topic 825 “ Financial Instruments. ” As such, all investments are carried at fair value with interest and dividend income and realized and unrealized gains and losses included in net income for the period.

The amortized cost (or cost) and fair value of the Company’s investments as at March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017				December 31, 2016
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value
Managed investments
U.S. government and government agency	$	721,859	$	718,025	$	809,392	$	804,126
Non-U.S. government and government agency	261,860		258,463		245,651		240,791
U.S. states, municipalities and political subdivisions	228,818		229,129		271,742		271,830
Agency residential mortgage-backed securities	658,476		653,395		684,490		679,595
Non-agency residential mortgage-backed securities	19,678		19,382		15,858		15,477
U.S. corporate	1,484,897		1,486,882		1,540,036		1,534,508
Non-U.S. corporate	403,471		397,989		418,520		410,227
Bank loans	573,263		567,012		579,121		570,399
Asset-backed securities	515,219		514,690		528,563		526,814
Commercial mortgage-backed securities	321,562		318,288		333,740		330,932
Total fixed maturities	5,189,103		5,163,255		5,427,113		5,384,699
Short-term investments	232,961		232,955		228,574		228,386
Other investments
Fund of hedge funds	1,457		996		1,457		955
Hedge funds	11,292		17,624		11,292		17,381
Private equity investments	78,871		95,927		66,383		82,627
Fixed income investment funds	267,425		269,113		247,967		249,275
Overseas deposits	53,709		53,709		50,106		50,106
Mutual funds	2,925		5,635		2,925		5,368
Total other investments	415,679		443,004		380,130		405,712
Investments in investment affiliates ^(a)	73,918		94,697		84,840		100,431
Total managed investments	$	5,911,661	$	5,933,911	$	6,120,657	$	6,119,228
Non-managed investments
Catastrophe bonds	$	202,000	$	201,961	$	157,486	$	158,331
Short-term investments	2,552,271		2,552,271		2,567,784		2,567,784
Total non-managed investments	2,754,271		2,754,232		2,725,270		2,726,115
Total investments	$	8,665,932	$	8,688,143	$	8,845,927	$	8,845,343


(a)	The Company’s investments in investment affiliates have been treated as equity method investments with the corresponding gains and losses recorded in

income as “Income (loss) from investment affiliates.”

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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)


(a)	Fixed maturity investments

The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investments as at March 31, 2017 and December 31, 2016 .



	March 31, 2017				December 31, 2016
	Fair Value		% of Total		Fair Value		% of Total
Managed fixed maturities
AAA	$	2,265,668	42.2	%	$	2,405,597	43.4	%
AA	533,767		9.9	%	538,289		9.7	%
A	1,000,955		18.7	%	1,081,949		19.5	%
BBB	730,325		13.6	%	740,861		13.4	%
Total investment grade managed fixed maturities	4,530,715		84.4	%	4,766,696		86.0	%

BB	236,477		4.4	%	213,568		3.9	%
B	167,170		3.1	%	177,737		3.2	%
CCC	11,818		0.2	%	13,371		0.2	%
NR	217,075		4.1	%	213,327		3.8	%
Total non-investment grade fixed maturities	632,540		11.8	%	618,003		11.1	%
Total managed fixed maturities	$	5,163,255	96.2	%	$	5,384,699	97.1	%

Non-managed fixed maturities
BB	25,275		0.5	%	29,731		0.6	%
B	4,509		0.1	%	4,524		0.1	%
NR	172,177		3.2	%	124,076		2.2	%
Total non-managed fixed maturities	201,961		3.8	%	158,331		2.9	%
Total fixed maturities	$	5,365,216	100.0	%	$	5,543,030	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)

The amortized cost and fair value amounts for the Company’s fixed maturity investments held at March 31, 2017 and December 31, 2016 are shown below by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.



	March 31, 2017				December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Managed fixed maturities
Due in one year or less	$	438,198	$	433,710	$	350,733	$	346,161
Due after one year through five years	2,703,019		2,691,398		2,954,856		2,933,146
Due after five years through ten years	443,791		443,221		430,365		426,647
Due after ten years	89,160		89,171		128,508		125,927
	3,674,168		3,657,500		3,864,462		3,831,881
Asset-backed and mortgage-backed securities	1,514,935		1,505,755		1,562,651		1,552,818
Total managed fixed maturities	$	5,189,103	$	5,163,255	$	5,427,113	$	5,384,699

Non-managed catastrophe bonds
Due in one year or less	$	43,052	$	41,242	$	43,664	$	45,418
Due after one year through five years	157,698		159,463		112,572		111,656
Due after five years through ten years	1,250		1,256		1,250		1,257
Due after ten years	—		—		—		—
Total non-managed fixed maturities	202,000		201,961		157,486		158,331
Total fixed maturities	$	5,391,103	$	5,365,216	$	5,584,599	$	5,543,030

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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)	Other investments

The following tables set forth certain information regarding the Company’s other investment portfolio as at March 31, 2017 and December 31, 2016 :



	March 31, 2017
	Fair Value		Investments with redemption restrictions		Investments without redemption restrictions		Redemption frequency ^(a)	Redemption notice period ^(a)
Fund of hedge funds	$	996	$	996	$	—
Hedge funds	17,624		17,624		—
Private equity investments	95,927		95,927		—
Fixed income investment funds	269,113		229,790		39,323		Daily	Daily to 2 days
Overseas deposits	53,709		53,709		—
Mutual funds	5,635		—		5,635		Daily	Daily
Total other investments	$	443,004	$	398,046	$	44,958

	December 31, 2016
	Fair Value		Investments with redemption restrictions		Investments without redemption restrictions		Redemption frequency ^(a)	Redemption notice period ^(a)
Fund of hedge funds	$	955	$	955	$	—
Hedge funds	17,381		17,381		—
Private equity investments	82,627		82,627		—
Fixed income investment funds	249,275		218,333		30,942		Daily	2 days
Overseas deposits	50,106		50,106		—
Mutual funds	5,368		—		5,368		Daily	Daily
Total other investments	$	405,712	$	369,402	$	36,310

(a) The redemption frequency and notice periods only apply to investments without redemption restrictions.

Other investments include alternative investments in various funds and pooled investment schemes. These alternative investments employ various investment strategies primarily involving, but not limited to, investments in collateralized obligations, fixed income securities, private equities, distressed debt and equity securities.

Certain securities included in other investments are subject to redemption restrictions and are unable to be redeemed from the funds. Distributions from these funds will be received as the underlying investments of the funds are liquidated. Currently, it is not known to the Company when these underlying assets will be sold by their investment managers; however, it is estimated that the majority of the underlying assets of the investments would liquidate over five to ten years from inception of the funds. In addition, one of the investment funds with a fair value of $188,682 ( December 31, 2016 : $184,749 ), has a lock-up period of approximately two years as at March 31, 2017 and may also impose a redemption gate. A lock-up period refers to the initial amount of time an investor is contractually required to remain invested before having the ability to redeem. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. The underlying investments held in the overseas deposit funds are liquid and will generally trade freely in an open market. However, the Company’s ability to withdraw from the overseas deposit funds is restricted by an annual and quarterly funding and release process for Lloyd’s market participants.

The Company’s maximum exposure to any of these alternative investments is limited to the amount invested and any remaining capital commitments. Refer to Note 14 , “ Commitments and contingencies ,” for further details. As at March 31, 2017 , the Company does not have any plans to sell any of the other investments listed above.

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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)

Included in the Company’s managed investment portfolio as at March 31, 2017 were investments in Aquiline Financial Services Fund II L.P. (“Aquiline II”), Aquiline Financial Services Fund III L.P. (the “Aquiline III”) and Aquiline Technology Growth Fund L.P. (“Aquiline Tech”).

Aquiline Tech

On March 20, 2017, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Aquiline Technology Growth GP Ltd, (the “General Partner”) pursuant to which the Company committed and agreed to purchase limited partnership or other comparable limited liability equity interests in Aquiline Tech, a Cayman Islands exempted limited partnership, with a capital commitment in an amount equal to $20,000 . The limited partnership interests are governed by the terms of an amended and restated exempted limited partnership agreement. As at March 31, 2017 , the unfunded investment commitment to Aquiline Tech was $20,000 .

Aquiline II and III

For further information regarding Aquiline II and III please refer to Note 7(c), “Investments in investment affiliates,” included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 . As at March 31, 2017 , the Company’s total unfunded investment commitment to Aquiline II and III was $2,830 and $62,031 , respectively ( December 31, 2016 : $2,040 and $62,031 ).

The following table presents a reconciliation of the Company’s beginning and ending investments in investment affiliates for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017			2016
Investments in investment affiliates, beginning of period	$	100,431		$	87,673
Net capital (distributions) contributions	(10,922		)	575
Income (loss) from investment affiliates	5,188			(4,113		)
Investments in investment affiliates, end of period	$	94,697		$	84,135

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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 presents the Company’s investments in investment affiliates as at March 31, 2017 and December 31, 2016 :



	March 31, 2017
	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline II	$	35,949	—	%	8.1	%	$	54,524
Aquiline III	37,969		—	%	9.0	%	40,173
Aquiline Tech	—		—	%	16.4	%	—
Total investments in investment affiliates	$	73,918					$	94,697

	December 31, 2016
	Investment at cost		Voting ownership %		Equity ownership %		Carrying value
Aquiline II	$	46,871	—	%	8.1	%	$	61,999
Aquiline III	37,969		—	%	9.0	%	38,432
Total investments in investment affiliates	$	84,840					$	100,431

(d) Net investment income

Net investment income was derived from the following sources:



	Three Months Ended March 31,
	2017			2016
Managed investments
Fixed maturities and short-term investments	$	31,671		$	28,017
Other investments	6,870			872
Cash and cash equivalents and restricted cash	610			865
Securities lending income	13			5
Total gross investment income	39,164			29,759
Investment expenses	(2,972		)	(1,836		)
Total managed net investment income	$	36,192		$	27,923
Non managed investments
Fixed maturities and short-term investments	$	3,060		$	1,295
Restricted cash, cash and cash equivalents	962			243
Total non-managed net investment income	4,022			1,538
Total net investment income	$	40,214		$	29,461

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

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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)

(e) Net realized and change in net unrealized gains on investments

The following table sets forth an analysis of net realized losses and the change in net unrealized gains on investments:



	Three Months Ended March 31,
	2017			2016
Managed fixed maturities, short-term and other investments
Gross realized gains	$	2,690		$	3,217
Gross realized (losses)	(5,582		)	(4,303		)
Net realized losses on investments	(2,892		)	(1,086		)
Change in net unrealized gains on investments	14,349			47,078
Total net realized and change in net unrealized gains on managed investments	$	11,457		$	45,992
Non-managed fixed maturities, short-term and other investments
Gross realized gains	$	1,728		$	511
Gross realized (losses)	—			(9		)
Net realized gains on investments	1,728			502
Change in net unrealized (losses) gains on investments	(1,001		)	366
Total net realized and change in net unrealized gains on non-managed investments	727			868
Total net realized and change in net unrealized gains on total investments	$	12,184		$	46,860

(f) Pledged cash and investments

As at March 31, 2017 , the Company had $5,173,735 ( December 31, 2016 : $5,173,966 ) of cash and cash equivalents, restricted cash, short-term investments and fixed maturity investments that were pledged during the normal course of business. Of those, $5,105,855 were held in trust ( December 31, 2016 : $5,068,092 ). Pledged assets are generally for the benefit of the Company’s cedants and policyholders, to support AlphaCat’s fully collateralized reinsurance transactions and to facilitate the accreditation of Validus Reinsurance, Ltd., Validus Reinsurance (Switzerland) Ltd. (“Validus Re Swiss”) and Talbot as an alien Insurer/Reinsurer by certain regulators.

In addition, the Company has pledged cash and investments as collateral under the Company’s credit facilities in the total amount of $412,176 ( December 31, 2016 : $442,184 ). For further details on the credit facilities, please refer to Note 12 , “ Debt and financing arrangements .”

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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)

4. Fair value measurements


(a)	Classification within the fair value hierarchy

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The three levels of the fair value hierarchy are described below:

Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of our valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within the fair value hierarchy.

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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, 2017 , the Company’s investments were allocated between Levels 1, 2 and 3 as follows:



	Level 1		Level 2		Level 3		Fair value based on NAV practical expedient ^(a)		Total
Managed investments
U.S. government and government agency	$	—	$	718,025	$	—	$	—	$	718,025
Non-U.S. government and government agency	—		258,463		—		—		258,463
U.S. states, municipalities and political subdivisions	—		229,129		—		—		229,129
Agency residential mortgage-backed securities	—		653,395		—		—		653,395
Non-agency residential mortgage-backed securities	—		19,382		—		—		19,382
U.S. corporate	—		1,486,882		—		—		1,486,882
Non-U.S. corporate	—		397,989		—		—		397,989
Bank loans	—		330,318		236,694		—		567,012
Asset-backed securities	—		490,808		23,882		—		514,690
Commercial mortgage-backed securities	—		318,288		—		—		318,288
Total fixed maturities	—		4,902,679		260,576		—		5,163,255
Short-term investments	214,859		18,096		—		—		232,955
Other investments
Fund of hedge funds	—		—		—		996		996
Hedge funds	—		—		—		17,624		17,624
Private equity investments	—		—		—		95,927		95,927
Fixed income investment funds	—		39,323		12,560		217,230		269,113
Overseas deposits	—		—		—		53,709		53,709
Mutual funds	—		5,635		—		—		5,635
Total other investments	—		44,958		12,560		385,486		443,004
Investments in investment affiliates ^(b)	—		—		—		—		94,697
Total managed investments	$	214,859	$	4,965,733	$	273,136	$	385,486	$	5,933,911
Non-managed investments
Catastrophe bonds	$	—	$	129,285	$	72,676	$	—	$	201,961
Short-term investments	2,552,271		—		—		—		2,552,271
Total non-managed investments	2,552,271		129,285		72,676		—		2,754,232
Total investments	$	2,767,130	$	5,095,018	$	345,812	$	385,486	$	8,688,143


(a)	In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.


(b)	In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.

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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, 2016 , the Company’s investments were allocated between Levels 1, 2 and 3 as follows:



	Level 1		Level 2		Level 3		Fair value based on NAV practical expedient ^(a)		Total
Managed investments
U.S. government and government agency	$	—	$	804,126	$	—	$	—	$	804,126
Non-U.S. government and government agency	—		240,791		—		—		240,791
U.S. states, municipalities and political subdivisions	—		271,830		—		—		271,830
Agency residential mortgage-backed securities	—		679,595		—		—		679,595
Non-agency residential mortgage-backed securities	—		15,477		—		—		15,477
U.S. corporate	—		1,534,508		—		—		1,534,508
Non-U.S. corporate	—		410,227		—		—		410,227
Bank loans	—		323,903		246,496		—		570,399
Asset-backed securities	—		502,883		23,931		—		526,814
Commercial mortgage-backed securities	—		330,932		—		—		330,932
Total fixed maturities	—		5,114,272		270,427		—		5,384,699
Short-term investments	209,651		18,735		—		—		228,386
Other investments
Fund of hedge funds	—		—		—		955		955
Hedge funds	—		—		—		17,381		17,381
Private equity investments	—		—		—		82,627		82,627
Fixed income investment funds	—		30,941		12,168		206,166		249,275
Overseas deposits	—		—		—		50,106		50,106
Mutual funds	—		5,368		—		—		5,368
Total other investments	—		36,309		12,168		357,235		405,712
Investments in investment affiliates ^(b)	—		—		—		—		100,431
Total managed investments	$	209,651	$	5,169,316	$	282,595	$	357,235	$	6,119,228
Non-managed investments
Catastrophe bonds	$	—	$	109,956	$	48,375	$	—	$	158,331
Short-term investments	2,567,784		—		—		—		2,567,784
Total non-managed investments	2,567,784		109,956		48,375		—		2,726,115
Total investments	$	2,777,435	$	5,279,272	$	330,970	$	357,235	$	8,845,343


(a)	In accordance with ASC Topic 820 “Fair Value Measurements,” investments measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.


(b)	In accordance with ASC Topic 825 “Financial Instruments,” the Company’s investments in investment affiliates have not been classified in the fair value hierarchy.

At March 31, 2017 , managed Level 3 investments totaled $273,136 (December 31, 2016 : $282,595 ), representing 4.6% (December 31, 2016 : 4.6% ) of total managed investments.


(b)	Valuation techniques

There have been no material changes in the Company’s valuation techniques during the period, or periods, represented by these Consolidated Financial Statements. The following methods and assumptions were used in estimating the fair value of each class of financial instrument recorded in the Consolidated Balance Sheets.

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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)

Fixed maturity investments

In general, valuation of the Company’s fixed maturity investment portfolio is provided by pricing services, such as index providers and pricing vendors, as well as broker quotations. The pricing vendors provide valuations for a high volume of liquid securities that are actively traded. For securities that do not trade on an exchange, the pricing services generally utilize market data and other observable inputs in matrix pricing models to determine month end prices. Prices are generally verified using third party data. Securities which are priced by an index provider are generally included in the index.

In general, broker-dealers value securities through their trading desks based on observable inputs. The methodologies include mapping securities based on trade data, bids or offers, observed spreads, and performance on newly issued securities. Broker-dealers also determine valuations by observing secondary trading of similar securities. Prices obtained from broker quotations are considered non-binding, however they are based on observable inputs and by observing secondary trading of similar securities obtained from active, non-distressed markets. The Company considers these Level 2 inputs as they are corroborated with other market observable inputs. The techniques generally used to determine the fair value of the Company’s fixed maturity investments are detailed below by asset class.

U.S. government and government agency

U.S. government and government agency securities consist primarily of debt securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Fixed maturity investments included in U.S. government and government agency securities are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources and integrate other observations from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The fair value of each security is individually computed using analytical models which incorporate option adjusted spreads and other daily interest rate data. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Non-U.S. government and government agency

Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

U.S. states, municipalities and political subdivisions

The Company’s U.S. states, municipalities and political subdivisions portfolio contains debt securities issued by U.S. domiciled state and municipal entities. These securities are generally priced by independent pricing services using the techniques described for U.S. government and government agency securities described above. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Agency residential mortgage-backed securities

The Company’s agency residential mortgage-backed investments are primarily priced by pricing services using a mortgage pool specific model which utilizes daily inputs from the active to be announced ( “ TBA ” ) market which is very liquid, as well as the U.S. treasury market. The model also utilizes additional information, such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the sponsoring agency. Valuations are also corroborated with daily active market quotes. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Non-agency residential mortgage-backed securities

The Company’s non-agency mortgage-backed investments include non-agency prime residential mortgage-backed fixed maturity investments. The Company has no fixed maturity investments classified as sub-prime held in its fixed maturity investments portfolio. Securities held in these sectors are primarily priced by pricing services using an option adjusted spread model or other

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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)

relevant models, which principally utilize inputs including benchmark yields, available trade information or broker quotes, and issuer spreads. The pricing services also review collateral prepayment speeds, loss severity and delinquencies among other collateral performance indicators for the securities valuation, when applicable. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

U.S. corporate

Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. corporate issuers and industries. The Company’s corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. In certain instances, securities are individually evaluated using a spread which is added to the U.S. treasury curve or a security specific swap curve as appropriate. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Non-U.S. corporate

Non-U.S. corporate debt securities consist primarily of investment-grade debt of a wide variety of non-U.S. corporate issuers and industries. The Company’s non-U.S. corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Bank loans

The Company’s bank loan investments consist primarily of below-investment-grade debt of a wide variety of corporate issuers and industries. The Company’s bank loans are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Also, included in the bank loan portfolio is a collection of loan participations held through an intermediary. A third party pricing service provides monthly valuation reports for each loan and participation using a combination of quotations from loan pricing services, leveraged loan indices or market price quotes obtained directly from the intermediary. Significant unobservable inputs used to price these securities include credit spreads and default rates; therefore, the fair value of these investments are classified as Level 3.

Asset-backed securities

Asset backed securities include mostly investment-grade debt securities backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and collateralized loan obligations originated by a variety of financial institutions. Securities held in these sectors are primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.

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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)

Commercial mortgage-backed securities

Commercial mortgage backed securities are investment-grade debt primarily priced by pricing services. The pricing services apply dealer quotes and other available trade information such as bids and offers, prepayment speeds which may be adjusted for the underlying collateral or current price data, the U.S. treasury curve and swap curve as well as cash settlement. The pricing services determine the expected cash flows for each security held in this sector using historical prepayment and default projections for the underlying collateral and current market data. In addition, a spread is applied to the relevant benchmark and used to discount the cash flows noted above to determine the fair value of the securities held in this sector. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2.

Catastrophe bonds

Catastrophe bonds are priced based on broker or underwriter bid indications. As the significant inputs used to price these securities are observable, the fair value of these investments are classified as Level 2. To the extent that these indications are based on significant unobservable inputs, the fair value of the relevant bonds will be classified as a Level 3.

Short-term investments

Short-term investments consist primarily of highly liquid securities, all with maturities of less than one year from the date of purchase. The fair value of the portfolio is generally determined using amortized cost which approximates fair value. As the highly liquid money market-type funds are actively traded, the fair value of these investments are classified as Level 1. To the extent that the remaining securities are not actively traded due to their approaching maturity, the fair value of these investments are classified as Level 2.

Other investments

Fund of hedge funds

The fund of hedge funds includes a side pocket. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund’s administrator provides a monthly reported NAV with a three month delay in its valuation. The fund manager has provided an estimate of the fund NAV at year end based on the estimated performance provided from the underlying funds. To determine the reasonableness of the estimated NAV, the Company compares the fund administrator’s NAV to the fund manager’s estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.

Hedge funds

The hedge fund investment was assumed by the Company in the acquisition of Flagstone Reinsurance Holdings, S.A. (“Flagstone”) (the “Flagstone hedge fund”). The Flagstone hedge fund’s administrator provides quarterly NAVs with a three month delay in valuation. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy.

Private equity investments

The private equity funds provide quarterly or semi-annual partnership capital statements with a three or six month delay which are used as a basis for valuation. These private equity investments vary in investment strategies and are not actively traded in any open markets. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.

Fixed income investment funds

The Company’s investment funds classified as Level 2 consist of a pooled investment fund. The pooled investment is invested in fixed income securities with high credit ratings and is only open to Lloyd’s Trust Fund participants. The fair value of units in the investment fund is based on the NAV of the fund and is traded on a daily basis.

Included in investment funds is a residual equity tranche of a structured credit fund valued using a dynamic yield that calculates an income accrual based on an underlying valuation model with a typical cash flow waterfall structure. Significant unobservable inputs used to price this fund include default rates and prepayment rates; therefore, the fair value of the investment fund is classified as Level 3.

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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 fair value of the Company’s remaining investment funds is based on the NAV of the fund as reported by the independent fund administrator. The fund’s administrators provide a monthly reported NAV with a one or three month delay in their valuation. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.

Overseas deposits

The Company’s share of a portfolio of Lloyd’s overseas deposits are managed centrally by Lloyd’s and invested according to local regulatory requirements. The composition of the portfolio varies and the deposits are made across the market. The fair value of the deposits is based on the portfolio level reporting that is provided by Lloyd’s. The fair value of these investments are measured using the NAV practical expedient and therefore have not been categorized within the fair value hierarchy.

Mutual funds

Mutual funds consist of an investment fund which invests in various quoted investments. The fair value of units in the mutual fund is based on the NAV of the fund as reported by the fund manager. The mutual fund has daily liquidity which allows us to redeem our holdings at the applicable NAV in the near term. As such, the Company has classified this investment as Level 2.


(c)	Level 3 investments

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31, 2017
	Bank Loans			Catastrophe Bonds			Fixed Income Investment Funds		Asset Backed Securities			Total
Level 3 investments, beginning of period	$	246,496		$	48,375		$	12,168	$	23,931		$	330,970
Purchases	23,176			61,091			—		—			84,267
Settlements	(33,110		)	(38,780		)	392		—			(71,498		)
Net realized gains	—			3,134			—		—			3,134
Change in net unrealized gains (losses)	132			(1,144		)	—		(49		)	(1,061		)
Level 3 investments, end of period	$	236,694		$	72,676		$	12,560	$	23,882		$	345,812



	Three Months Ended March 31, 2016
	Bank Loans			Catastrophe Bonds			Total
Level 3 investments, beginning of period	$	232,337		$	13,500		$	245,837
Purchases	42,103			23,272			65,375
Sales	(2,389		)	—			(2,389		)
Settlements	(16,249		)	(125		)	(16,374		)
Change in net unrealized (losses) gains	(791		)	458			(333		)
Level 3 investments, end of period	$	255,011		$	37,105		$	292,116

There have not been any transfers into or out of Level 3 during the three months ended March 31, 2017 or 2016 , respectively.


(d)	Financial instruments not carried at fair value

ASC Topic 825 “Financial Instruments” is also applicable to disclosures of financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts and investments in affiliates. The carrying values of cash and cash equivalents, restricted cash, accrued investment income, other assets, net payable for investments purchased and accounts payable and accrued expenses approximated their fair values at March 31, 2017 , due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

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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)

5. Variable interest entities

The Company consolidates all VOEs in which it has a controlling financial interest and all VIEs in which it is considered to be the primary beneficiary. The Company’s VIEs are primarily entities in the AlphaCat segment.


(a)	Consolidated VIEs

AlphaCat sidecars

Beginning on May 25, 2011, the Company joined with other investors in capitalizing a series of sidecars for the purpose of investing in collateralized reinsurance and retrocessional contracts. Certain of these sidecars deployed their capital through transactions entered into by AlphaCat Reinsurance Ltd. (“AlphaCat Re”). Each of these entities return capital once the risk period expires and all losses have been paid out. The AlphaCat sidecars are VIEs and are consolidated by the Company as the primary beneficiary. The Company’s maximum exposure to any of the sidecars is the amount of capital invested at any given time.

AlphaCat ILS funds

The AlphaCat ILS funds received third party subscriptions beginning on December 17, 2012 . The Company and third party investors invest in the AlphaCat ILS funds for the purpose of investing in instruments with returns linked to property catastrophe reinsurance, retrocession and ILS contracts. The AlphaCat ILS funds have varying risk profiles and are categorized by the expected loss of the fund. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit. Lower risk ILS funds are defined as having a maximum permitted portfolio expected loss of less than 7% , whereas higher risk ILS funds have a maximum permitted portfolio expected loss of greater than 7% . The AlphaCat ILS funds primarily deploy their capital through transactions entered into by AlphaCat Re and AlphaCat Master Fund Ltd. (“AlphaCat Master Fund”). The AlphaCat ILS funds are VIEs and are consolidated by the Company as the primary beneficiary. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time and any remaining capital commitments. Refer to Note 14 , “Commitments and contingencies,” for further details.

AlphaCat Re and AlphaCat Master Fund

The Company utilizes AlphaCat Re and AlphaCat Master Fund (collectively the “master funds”), both market facing entities, for the purpose of writing collateralized reinsurance and investing in capital markets products, respectively, on behalf of certain entities within the AlphaCat segment and direct third party investors. AlphaCat Re enters into transactions on behalf of the AlphaCat sidecars and ILS funds (collectively the “feeder funds”) and direct third party investors, whereas AlphaCat Master Fund only enters into transactions on behalf of certain AlphaCat ILS funds. All of the risks and rewards of the underlying transactions are allocated to the feeder funds and direct third party investors using variable funding notes. The master funds are VIEs and are consolidated by the Company as the primary beneficiary.

Notes Payable to AlphaCat Investors

The master funds issue variable funding notes to the feeder funds, and direct to third party investors, in order to write collateralized reinsurance and invest in capital markets products on their behalf. The Company’s investments in the feeder funds, together with investments made by third parties in the feeder funds and on a direct basis, are provided as consideration for the notes to the master funds. The duration of the underlying collateralized reinsurance contracts and capital market products is typically twelve months ; however, the variable funding notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the underlying transactions. Therefore, the notes are subsequently redeemed as the underlying transactions are settled. The income or loss generated by the underlying transactions is then transferred to the feeder funds and direct third party investors via the variable funding notes.

As both the master and feeder funds are consolidated by the Company, any notes issued by the master funds to the feeder funds are eliminated on consolidation and only variable funding notes issued by AlphaCat Re to direct third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with the related income or loss included in the Consolidated Statements of Income and Comprehensive Income as (income) attributable to AlphaCat investors. To the extent that the income has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

During 2016 and 2017, one of the AlphaCat ILS funds (the “Fund”) issued both common shares and structured notes to the Company and other third party investors in order to capitalize the fund. The Fund deploys its capital through AlphaCat Re; therefore,

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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 structured notes do not have a stated maturity date or principal amount since repayment is dependent on the settlement and income or loss of the variable funding notes with AlphaCat Re. The structured notes rank senior to the common shares and earn an interest rate of 8.0% per annum, payable on a cumulative basis in arrears.

As the Fund is consolidated by the Company, the structured notes issued to the Company are eliminated on consolidation and only the structured notes issued to third party investors remain on the Consolidated Balance Sheets as notes payable to AlphaCat investors with any related interest included in the Consolidated Statements of Income and Comprehensive Income as (income) loss attributable to AlphaCat investors. To the extent that the accrued interest on the structured notes has not been returned to the investors, it is included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

The following table presents a reconciliation of the beginning and ending notes payable to AlphaCat investors as at March 31, 2017 and December 31, 2016 :



	Three Months Ended March 31, 2017
	Variable Funding Notes			Structured Notes			Total
Notes payable to AlphaCat investors, beginning of period	$	278,202		$	—		$	278,202
Issuance of notes payable to AlphaCat investors	274,010			103,320			377,330
Redemption of notes payable to AlphaCat investors	(208,956		)	—			(208,956		)
Foreign exchange gains	—			—			—
Notes payable to AlphaCat investors, end of period	$	343,256		$	103,320		$	446,576

	Year Ended December 31, 2016
	Variable Funding Notes			Structured Notes			Total
Notes payable to AlphaCat investors, beginning of year	$	75,493		$	—		$	75,493
Issuance of notes payable to AlphaCat investors	311,711			94,326			406,037
Redemption of notes payable to AlphaCat investors	(109,712		)	(94,326		)	(204,038		)
Foreign exchange gains	710			—			710
Notes payable to AlphaCat investors, end of year	$	278,202		$	—		$	278,202

As at December 31, 2016 , $1,000 of the structured notes redeemed during the year were payable to AlphaCat investors and included in accounts payable and accrued expenses.

The income attributable to AlphaCat investors for the three months ended March 31, 2017 was $7,503 ( 2016 : $4,600 ), with $9,510 included in accounts payable and accrued expenses as at March 31, 2017 (December 31, 2016 : $17,068 ).

BetaCat ILS funds

The BetaCat ILS funds invest exclusively in catastrophe bonds (principal-at-risk variable rate notes and other event-linked securities, being referred to collectively as “Cat Bonds”) focused on property and casualty risk and issued under Rule 144A of the Securities Act of 1933, as amended, following a passive buy-and-hold investment strategy. Two of the funds are VIEs, one of which is consolidated by the Company as the primary beneficiary. The remaining fund is a VOE and is consolidated by the Company as it owns all of the voting equity interests. The Company’s maximum exposure to any of the funds is the amount of capital invested at any given time.

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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 presents the total assets and total liabilities of the Company’s consolidated VIEs, excluding intercompany eliminations, as at March 31, 2017 and December 31, 2016 :



	March 31, 2017				December 31, 2016
	Total Assets		Total Liabilities		Total Assets		Total Liabilities
AlphaCat sidecars	$	28,998	$	3,196	$	40,041	$	3,206
AlphaCat ILS funds - Lower Risk ^(a)	1,430,039		41,699		1,498,276		42,457
AlphaCat ILS funds - Higher Risk ^(a)	866,386		143,629		972,633		381,332
AlphaCat Re and AlphaCat Master Fund	2,541,415		2,541,245		2,510,415		2,510,245
BetaCat ILS funds	88,656		219		82,471		30,663


(a)	Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.

Assets of consolidated VIEs can only be used to settle obligations and liabilities of the consolidated VIEs and do not have recourse to the general credit of the Company. Investments held by these entities are presented separately in Note 3 , “ Investments ,” as non-managed investments.


(b)	Non-Consolidated VIEs

The Company invests in private equity and other investment vehicles as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding investments and the Company’s involvement in these entities is passive in nature. The Company’s maximum exposure to the VIEs is the amount of capital invested at any given time, and the Company does not have the power to direct the activities which most significantly impact the VIEs economic performance. The Company is therefore not the primary beneficiary of these VIEs.

6. Noncontrolling interests

The following tables present a reconciliation of the beginning and ending balances of redeemable noncontrolling interests and noncontrolling interests for the three months ended March 31, 2017 and 2016 :



	Redeemable noncontrolling interests				Noncontrolling interests						Total
	Three Months Ended March 31,				Three Months Ended March 31,						Three Months Ended March 31,
	2017		2016		2017			2016			2017			2016
Balance, beginning of period	$	1,528,001	$	1,111,714	$	165,977		$	154,662		$	1,693,978		$	1,266,376
Issuance of shares	103,699		268,750		154,980			112,325			258,679			381,075
Income attributable to noncontrolling interests	25,930		28,573		16,642			8,958			42,572			37,531
Redemption of shares / distributions	—		—		(7,002		)	(118,722		)	(7,002		)	(118,722		)
Balance, end of period	$	1,657,630	$	1,409,037	$	330,597		$	157,223		$	1,988,227		$	1,566,260

As at March 31, 2017 , redemptions of $3,234 and distributions of $nil (December 31, 2016 : $71,530 and $16,144 ) were payable to redeemable noncontrolling interests and noncontrolling interests, respectively. These amounts are classified within accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets.

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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)

7. Derivative instruments

The Company enters into derivative instruments for risk management purposes, specifically to hedge unmatched foreign currency and interest rate exposures.


(a)	Derivatives not designated as hedging instruments

The following table summarizes information on the classification and amount of the fair value of derivatives not designated as hedging instruments for accounting purposes within the Company’s Consolidated Balance Sheets as at March 31, 2017 and December 31, 2016 :



	March 31, 2017						December 31, 2016
Derivatives not designated as hedging instruments	Notional Exposure		Asset Derivative at Fair Value ^(a)		Liability Derivative at Fair Value ^(a)		Notional Exposure		Asset Derivative at Fair Value ^(a)		Liability Derivative at Fair Value ^(a)
Foreign currency forward contracts	$	152,683	$	1,475	$	1,517	$	181,375	$	2,351	$	3,421


(a)	Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.

The following table summarizes information on the classification and net impact on earnings, recognized in the Company’s Consolidated Statements of Income and Comprehensive Income relating to the foreign currency forward contracts that were not designated as hedging instruments for accounting purposes during the three months ended March 31, 2017 and 2016 :



Derivatives not designated as hedging instruments	Classification of gains (losses) recognized in earnings	Three Months Ended March 31,
Derivatives not designated as hedging instruments	Classification of gains (losses) recognized in earnings	2017			2016
Foreign currency forward contracts	Foreign exchange gains (losses)	$	453		$	(2,013	)
Foreign currency forward contracts	Other (loss) income	(105		)	36


(b)	Derivatives designated as hedging instruments

The following table summarizes information on the classification and amount of the fair value of derivatives designated as hedging instruments for accounting purposes on the Consolidated Balance Sheets as at March 31, 2017 and December 31, 2016 :



	March 31, 2017						December 31, 2016
Derivatives designated as hedging instruments	Notional Exposure		Asset Derivative at Fair Value ^(a)		Liability Derivative at Fair Value ^(a)		Notional Exposure		Asset Derivative at Fair Value ^(a)		Liability Derivative at Fair Value ^(a)
Interest rate swap contracts	$	552,563	$	20	$	1,314	$	552,263	$	20	$	1,479


(a)	Asset and liability derivatives are classified within other assets and accounts payable and accrued expenses, respectively, within the Company’s consolidated balance sheets.

Derivative instruments designated as a cash flow hedge

The Company designates its interest rate derivative instruments as cash flow hedges for accounting purposes and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the derivative instruments to specific assets and liabilities. The Company assesses the effectiveness of the hedges, both at inception and on an on-going basis and determines whether the hedges are highly effective in offsetting changes in fair value of the linked hedged items. The Company currently applies the long haul method when assessing the hedge’s effectiveness.

The following table provides the total impact on other comprehensive income (loss) and earnings relating to the derivative instruments formally designated as cash flow hedges along with the impact of the related hedged items for the three months ended March 31, 2017 and 2016 :

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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)



	Three Months Ended March 31,
Interest rate swap contracts	2017			2016
Amount of effective portion recognized in other comprehensive income	$	2,160		$	3,656
Amount of effective portion subsequently reclassified to earnings	$	(2,257	)	$	(2,898	)
Amount of ineffective portion excluded from effectiveness testing	$	97		$	(758	)

The above balances relate to interest payments and have therefore been classified as finance expenses in the Consolidated Statements of Income and Comprehensive Income.


(c)	Classification within the fair value hierarchy

As described in Note 4 , “ Fair value measurements ,” under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The assumptions used within the valuation of the Company’s derivative instruments are observable in the marketplace, can be derived from observable data or are supported by observable levels at which other similar transactions are executed in the marketplace. Accordingly, these derivatives were classified within Level 2 of the fair value hierarchy.


(d)	Balance sheet offsetting

There was no balance sheet offsetting activity as at March 31, 2017 or December 31, 2016 .

The Company currently provides cash collateral as security for interest rate swap contracts. The Company does not provide cash collateral or financial instruments as security for foreign currency forward contracts. Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. On a periodic basis, the amounts receivable from or payable to the counterparties are settled in cash.

The Company has not elected to settle multiple transactions with an individual counterparty on a net basis.

8. Reserve for losses and loss expenses

Reserves for losses and loss expenses are based in part upon the estimation of case reserves from broker, insured and ceding company reported data. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and loss expenses, from which incurred but not reported losses (“IBNR”) can be calculated. The period of time from the occurrence of a loss to the reporting of a loss to the Company and to the settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be revealed. As these factors become apparent, reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case reserves. These estimates are reviewed and adjusted regularly, and such adjustments, if any, are reflected in earnings in the period in which they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no assurances that ultimate losses and loss expenses will not exceed this estimate.

The following table summarizes the total reserve for losses and loss expenses as at March 31, 2017 and December 31, 2016 :



	March 31, 2017		December 31, 2016
Case reserves	$	1,234,156	$	1,237,772
IBNR	1,818,589		1,757,423
Total reserve for losses and loss expenses	$	3,052,745	$	2,995,195

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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 represents an analysis of paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017			2016
Reserve for losses and loss expenses, beginning of period	$	2,995,195		$	2,996,567
Loss reserves recoverable	(430,421		)	(350,586		)
Net reserves for losses and loss expenses, beginning of period	2,564,774			2,645,981
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year	330,816			278,186
Prior years	(61,231		)	(53,739		)
Total net incurred losses and loss expenses	269,585			224,447
Less net losses and loss expenses paid in respect of losses occurring in:
Current year	(7,698		)	(15,774		)
Prior years	(238,089		)	(253,303		)
Total net paid losses	(245,787		)	(269,077		)
Foreign exchange loss	12,317			8,260
Net reserve for losses and loss expenses, end of period	2,600,889			2,609,611
Loss reserves recoverable	451,856			370,689
Reserve for losses and loss expenses, end of period	$	3,052,745		$	2,980,300

Incurred losses and loss expenses comprise:



	Three Months Ended March 31,
	2017			2016
Gross losses and loss expenses	$	346,795		$	269,853
Reinsurance recoverable	(77,210		)	(45,406		)
Net incurred losses and loss expenses	$	269,585		$	224,447

The net favorable development on prior years by segment and line of business for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31, 2017
	Property			Marine			Specialty			Liability		Total
Validus Re	$	(3,571	)	$	(15,429	)	$	(9,780	)	$	—	$	(28,780	)
Talbot	(6,334		)	(15,996		)	(6,484		)	—		(28,814		)
Western World	(2,823		)	—			—			2,604		(219		)
AlphaCat	(4,395		)	—			977			—		(3,418		)
Net (favorable) adverse development	$	(17,123	)	$	(31,425	)	$	(15,287	)	$	2,604	$	(61,231	)

The favorable development on prior years was primarily due to favorable development on attritional losses.

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Validus Holdings, Ltd.

Notes to Consolidated Financial Statements (unaudited)

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



	Three Months Ended March 31, 2016
	Property			Marine		Specialty			Liability			Total
Validus Re	$	(22,832	)	$	3,555	$	(6,407	)	$	—		$	(25,684	)
Talbot	(18,446		)	2,964		(7,238		)	—			(22,720		)
Western World	(441		)	—		—			(3,985		)	(4,426		)
AlphaCat	(181		)	—		(728		)	—			(909		)
Net favorable development	$	(41,900	)	$	6,519	$	(14,373	)	$	(3,985	)	$	(53,739	)

The Validus Re and Talbot segments experienced favorable development on prior years in the property and specialty lines primarily due to favorable development on attritional losses; whereas, the unfavorable development in the marine lines was primarily driven by adverse development on events, which included unfavorable development on an individual marine policy that incepted during the second half of 2015. This adverse development was partially offset by favorable development on attritional losses. The Western World segment experienced favorable development on prior years primarily due to favorable development on attritional losses.

9. Reinsurance

The Company’s reinsurance balances recoverable at March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017		December 31, 2016
Loss reserves recoverable on unpaid:
Case reserves	$	175,863	$	165,328
IBNR	275,993		265,093
Total loss reserves recoverable	451,856		430,421
Paid losses recoverable	37,837		35,247
Total reinsurance balances recoverable	$	489,693	$	465,668

The Company enters into reinsurance and retrocession agreements in order to mitigate its accumulation of loss, reduce its liability on individual risks, enable it to underwrite policies with higher limits and increase its aggregate capacity. The cession of insurance and reinsurance does not legally discharge the Company from its primary liability for the full amount of the policies, and the Company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance or retrocession agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liabilities.

Credit risk

The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure to individual reinsurers. The reinsurance program is generally placed with reinsurers whose rating, at the time of placement, was A- or better as rated by Standard & Poor’s or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with restrictions dependent on rating. As at March 31, 2017 , $484,664 or 99.0% ( December 31, 2016 : $461,369 or 99.1% ) of the Company’s reinsurance balances recoverable were either fully collateralized or recoverable from reinsurers rated A- or better.

Reinsurance balances recoverable by reinsurer as at March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017				December 31, 2016
	Reinsurance Recoverable		% of Total		Reinsurance Recoverable		% of Total
Top 10 reinsurers	$	401,038	81.9	%	$	395,308	84.9	%
Other reinsurers’ balances > $1 million	83,242		17.0	%	66,944		14.4	%
Other reinsurers’ balances < $1 million	5,413		1.1	%	3,416		0.7	%
Total	$	489,693	100.0	%	$	465,668	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)

The following tables show the reinsurance balances recoverable due from, and the ratings associated with, the Company’s top ten reinsurers as at March 31, 2017 and December 31, 2016 :



	March 31, 2017
Top 10 Reinsurers	Rating	Reinsurance Recoverable		% of Total
Lloyd's Syndicates	A+	$	79,547	16.2	%
Swiss Re	AA-	77,143		15.8	%
Fully collateralized reinsurers	NR	71,014		14.5	%
Hannover Re	AA-	55,274		11.3	%
Everest Re	A+	48,829		10.0	%
Munich Re	AA-	20,167		4.1	%
Transatlantic Re	A+	18,222		3.7	%
XL Catlin	A+	12,652		2.6	%
Hamilton Re	A-	9,874		2.0	%
Helvetia Group	A	8,316		1.7	%
Total		$	401,038	81.9	%



	December 31, 2016
Top 10 Reinsurers	Rating	Reinsurance Recoverable		% of Total
Lloyd's Syndicates	A+	$	84,419	18.2	%
Swiss Re	AA-	84,044		18.1	%
Fully collateralized reinsurers	NR	83,088		17.8	%
Hannover Re	AA-	50,603		10.9	%
Everest Re	A+	36,912		7.9	%
Munich Re	AA-	18,214		3.9	%
Transatlantic Re	A+	10,593		2.3	%
Hamilton Re	A-	10,343		2.2	%
Toa Re	A+	9,510		2.0	%
National Indemnity Company	AA+	7,582		1.6	%
Total		$	395,308	84.9	%

At March 31, 2017 and December 31, 2016 , the provision for uncollectible reinsurance relating to reinsurance balances recoverable was $6,019 and $5,153 , respectively. To estimate this provision for uncollectible reinsurance, reinsurance balances recoverable are first allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment is applied, especially in relation to ceded IBNR. The Company then uses default factors to determine the portion of a reinsurer’s balance deemed to be uncollectible. Default factors require considerable judgment and are determined in part using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

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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)

10. Share capital

The Company is authorized to issue up to an aggregate of 571,428,571 common and preferred shares with a par value of $0.175 per share.


(a)	Preferred shares

On June 13, 2016, the Company issued 6,000 shares of its 5.875% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) (equivalent to 6,000,000 Depositary Shares, each of which represents a 1/1,000th interest in a Series A Preferred Share), $0.175 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). Holders of the Series A Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or the Company’s bye-laws.

The Company had 6,000 Series A Preferred Shares issued and outstanding as at both March 31, 2017 and December 31, 2016.

(b) Common Shares

The holders of common 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. On February 3, 2015, the Board of Directors of the Company approved an increase in the Company’s common share repurchase authorization to $750,000 . This amount is in addition to the $2,274,401 of common shares repurchased by the Company through February 3, 2015 under its previously authorized share repurchase programs.

The Company has repurchased 80,508,849 common shares for an aggregate purchase price of $2,704,406 from the inception of its share repurchase program to March 31, 2017 . The Company had $319,995 remaining under its authorized share repurchase program as of March 31, 2017 .

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 share activity during the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017		2016
Common shares issued, beginning of period	161,279,976		160,570,772
Restricted share awards vested, net of shares withheld	3,440		9,566
Restricted share units vested, net of shares withheld	1,995		1,939
Common shares issued, end of period	161,285,411		160,582,277
Treasury shares, end of period	(82,147,821	)	(79,026,791	)
Common shares outstanding, end of period	79,137,590		81,555,486


(c)	Dividends

On February 9, 2017 , the Company announced a quarterly cash dividend of $0.38 ( 2016 : $0.35 ) per common share and a quarterly cash dividend of $0.3671875 per depositary share on its outstanding Series A Preferred Shares. The common share dividend was paid on March 31, 2017 to holders of record on March 15, 2017 . The preferred share dividend was paid on March 15, 2017 to holders of record on March 1, 2017.

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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)

11. Stock plans


(a)	Long 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. The total number of shares reserved for issuance under the LTIP are 2,753,292 shares of which 1,275,446 shares remain available for issuance at March 31, 2017 . The LTIP is 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. Outstanding options have a life of 10 years and vest either pro rata or at the end of the required service period from the date of grant. Fair value of the option awards at the date of grant is determined using the Black-Scholes option-pricing model.

Expected volatility is based on stock price volatility of comparable publicly-traded companies. The Company used the simplified method consistent with U.S. GAAP authoritative guidance on stock compensation expenses to estimate expected lives for options granted during the period as historical exercise data was not available and the options met the requirement as set out in the guidance.

The Company has not granted any stock option awards since September 4, 2009. These stock option awards were fully amortized during the year ended December 31, 2012.

Activity with respect to options for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31,
	2017					2016
	Options	Weighted Average Grant Date Fair Value		Weighted Average Grant Date Exercise Price		Options	Weighted Average Grant Date Fair Value		Weighted Average Grant Date Exercise Price
Options outstanding, beginning of period	26,136	$	6.78	$	23.48	65,401	$	7.74	$	20.17
Options exercised	—	—		—		—	—		—
Options outstanding, end of period	26,136	$	6.78	$	23.48	65,401	$	7.74	$	20.17


ii.	Restricted share awards

Restricted shares granted under the LTIP vest either pro rata or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three months ended March 31, 2017 of $9,044 ( 2016 : $9,129 ). The expenses represent the proportionate accrual of the fair value of each grant based on the remaining vesting period.

Activity with respect to unvested restricted share awards for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31,
	2017				2016
	Restricted Share Awards		Weighted Average Grant Date Fair Value		Restricted Share Awards		Weighted Average Grant Date Fair Value
Restricted share awards outstanding, beginning of period	2,469,982		$	40.89	2,739,446		$	38.25
Restricted share awards granted	2,082		57.66		—		—
Restricted share awards vested	(4,571	)	37.93		(12,550	)	35.75
Restricted share awards forfeited	(513	)	48.69		(8,317	)	37.94
Restricted share awards outstanding, end of period	2,466,980		$	40.91	2,718,579		$	38.26

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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, 2017 , there were $50,207 ( December 31, 2016 : $58,804 ) of total unrecognized share compensation expenses in respect of restricted share awards that are expected to be recognized over a weighted-average period of 2.1 years ( December 31, 2016 : 2.3 years ).


iii.	Restricted share units

Restricted share units under the LTIP vest either ratably or at the end of the required service period and contain certain restrictions during the vesting period, relating to, among other things, forfeiture in the event of termination of employment and transferability. The Company recognized share compensation expenses during the three months ended March 31, 2017 of $315 ( 2016 : $311 ). 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, 2017 and 2016 was as follows:



	Three Months Ended March 31,
	2017				2016
	Restricted Share Units		Weighted Average Grant Date Fair Value		Restricted Share Units		Weighted Average Grant Date Fair Value
Restricted share units outstanding, beginning of period	112,808		$	40.95	114,337		$	38.47
Restricted share units vested	(2,115	)	38.24		(2,056	)	38.24
Restricted share units issued in lieu of cash dividends	717		40.95		790		38.47
Restricted share units outstanding, end of period	111,410		$	41.01	113,071		$	38.47

At March 31, 2017 , there were $2,241 ( December 31, 2016 : $2,542 ) of total unrecognized share compensation expenses in respect of restricted share units that are expected to be recognized over a weighted-average period of 2.4 years ( December 31, 2016 : 2.6 years ).


iv.	Performance share awards

The performance share awards contain a performance based component. The performance component relates to the compounded growth in the Dividend Adjusted Diluted Book Value per Share (“DBVPS”) over a three -year period relative to the Company’s peer group. For performance share awards granted during the period, the grant date DBVPS is based on the DBVPS at the end of the most recent financial reporting year. The Dividend Adjusted Performance Period End DBVPS will be the DBVPS three years after the grant date DBVPS. The fair value estimate earns over the requisite attribution period and the estimate will be reassessed at the end of each performance period which will reflect any adjustments in the Consolidated Statements of Income and Comprehensive Income in the period in which they are determined.

The Company recognized share compensation expenses during the three months ended March 31, 2017 of $132 ( 2016 : $1,797 ).

Activity with respect to unvested performance share awards for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31,
	2017				2016
	Performance Share Awards		Weighted Average Grant Date Fair Value		Performance Share Awards	Weighted Average Grant Date Fair Value
Performance share awards outstanding, beginning of period	285,820		$	44.53	172,594	$	40.70
Performance share awards conversion adjustment	(26,322	)	36.82		45,517	36.82
Performance share awards outstanding, end of period	259,498		$	45.26	218,111	$	39.89

At March 31, 2017 , there were $5,848 ( December 31, 2016 : $6,902 ) of total unrecognized share compensation expenses in respect of performance share awards that are expected to be recognized over a weighted-average period of 1.9 years ( December 31, 2016 : 2.1 years ).

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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)	Total share compensation expenses

The breakdown of share compensation expenses by award type for the periods indicated was as follows:



	Three Months Ended March 31,
	2017		2016
Restricted share awards	$	9,044	$	9,129
Restricted share units	315		311
Performance share awards	132		1,797
Total	$	9,491	$	11,237

12. Debt and financing arrangements

The Company’s financing structure is comprised of debentures and senior notes payable along with credit and other facilities.

The Company’s outstanding debentures and senior notes payable as at March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017			December 31, 2016
Deferrable debentures
2006 Junior Subordinated	$	150,000		$	150,000
2007 Junior Subordinated	139,800			139,800
Flagstone 2006 Junior Subordinated	133,852			133,676
Flagstone 2007 Junior Subordinated	113,750			113,750
Total debentures payable	537,402			537,226
2010 Senior notes payable	250,000			250,000
Less: Unamortized debt issuance costs	(4,588		)	(4,638		)
Total senior notes payable	245,412			245,362
Total debentures and senior notes payable	$	782,814		$	782,588

The Company’s outstanding credit and other facilities as at March 31, 2017 and December 31, 2016 were as follows:



	March 31, 2017				December 31, 2016
	Commitment		Drawn and outstanding		Commitment		Drawn and outstanding
Credit and other facilities
$85,000 syndicated unsecured letter of credit facility	$	85,000	$	—	$	85,000	$	—
$300,000 syndicated secured letter of credit facility	300,000		83,655		300,000		90,252
$24,000 secured bi-lateral letter of credit facility	24,000		2,590		24,000		4,553
$20,000 AlphaCat Re secured letter of credit facility ^(a)	—		—		20,000		20,000
$25,000 IPC bi-lateral facility	25,000		4,952		25,000		5,842
$236,000 Flagstone bi-lateral facility	236,000		144,158		236,000		144,392
Total credit and other facilities	$	670,000	$	235,355	$	690,000	$	265,039


(a)	The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.

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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)


(a)	Senior notes and junior subordinated deferrable debentures

The following table summarizes the key terms of the Company’s senior notes and junior subordinated deferrable debentures:



Description	Issuance date	Issued		Maturity date	Interest Rate as at						Interest payments due
Description	Issuance date	Issued		Maturity date	Issuance Date			March 31, 2017			Interest payments due
2006 Junior Subordinated Deferrable Debentures	June 15, 2006	$	150,000	June 15, 2036	9.069	%	^(a)	5.831	%	^(e)	Quarterly
Flagstone 2006 Junior Subordinated Deferrable Debentures	August 23, 2006	$	133,852	September 15, 2036	3.540	%	^(b)	6.463	%	^(e)	Quarterly
2007 Junior Subordinated Deferrable Debentures	June 21, 2007	$	200,000	June 15, 2037	8.480	%	^(c)	5.180	%	^(e)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	June 8, 2007	$	100,000	July 30, 2037	3.000	%	^(b)	5.900	%	^(e)	Quarterly
Flagstone 2007 Junior Subordinated Deferrable Debentures	September 20, 2007	$	25,000	September 15, 2037	3.100	%	^(b)	5.983	%	^(e)	Quarterly
2010 Senior Notes due 2040	January 26, 2010	$	250,000	January 26, 2040	8.875	%	^(d)	8.875	%	^(d)	Semi-annually in arrears


(a)	Fixed interest rate for 5 years , floating interest rate of three-month LIBOR plus 3.550% thereafter, reset quarterly.


(b)	Floating interest rate of three-month LIBOR plus amount stated, reset quarterly.


(c)	Fixed interest rate for 5 years , floating interest rate of three-month LIBOR plus 2.950% thereafter, reset quarterly.


(d)	Fixed interest rate.


(e)	Fixed interest rate as a result of interest rate swap contracts entered into by the Company.

Future payments of principal of $250,000 and $537,402 on the 2010 Senior Notes and the debentures, respectively, are expected to be made after 2022.


(b)	Credit facilities

The Company has pledged cash and investments as collateral under the Company’s credit facilities in the total amount of $412,176 (December 31, 2016 : $442,184 ) as detailed in the table below:



	Cash and investments pledged as collateral
Description	March 31, 2017		December 31, 2016
$300,000 syndicated secured letter of credit facility	$	146,375	$	157,597
$24,000 secured bi-lateral letter of credit facility	48,219		48,097
AlphaCat Re secured letter of credit facility ^(a)	—		20,032
$236,000 Flagstone bi-lateral facility	217,582		216,458
Total	$	412,176	$	442,184


(a)	The Company terminated its AlphaCat Re secured letter of credit facility on January 6, 2017.

As of March 31, 2017 and December 31, 2016 , the Company was in compliance with all covenants and restrictions under its credit facilities.

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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)


(c)	Finance expenses

Finance expenses consist of interest on the junior subordinated deferrable debentures and senior notes, the amortization of debt offering costs, credit facility fees, bank charges, Talbot Funds at Lloyds (“FAL”) facility, AlphaCat financing fees and other charges as follows:



	Three Months Ended March 31,
	2017		2016
2006 Junior Subordinated Deferrable Debentures	$	2,187	$	2,211
2007 Junior Subordinated Deferrable Debentures	1,810		1,831
Flagstone 2006 Junior Subordinated Deferrable Debentures	2,221		2,245
Flagstone 2007 Junior Subordinated Deferrable Debentures	1,723		1,767
2010 Senior Notes due 2040	5,597		5,597
Credit facilities	218		661
Bank and other charges	151		7
AlphaCat fees ^(a)	36		884
Total finance expenses	$	13,943	$	15,203


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

13. Accumulated other comprehensive loss

The changes in accumulated other comprehensive loss, by component for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31, 2017
	Foreign currency translation adjustment			Minimum pension liability			Cash flow hedge			Total
Balance, net of tax, beginning of period	$	(22,274	)	$	(150	)	$	(792	)	$	(23,216	)
Other comprehensive income, net of tax	597			68			98			763
Balance, net of tax, end of period	$	(21,677	)	$	(82	)	$	(694	)	$	(22,453	)

	Three Months Ended March 31, 2016
	Foreign currency translation adjustment			Minimum pension liability			Cash flow hedge			Total
Balance, net of tax, beginning of period	$	(11,834	)	$	334		$	(1,069	)	$	(12,569	)
Other comprehensive loss, net of tax	(2,028		)	(83		)	(758		)	(2,869		)
Balance, net of tax, end of period	$	(13,862	)	$	251		$	(1,827	)	$	(15,438	)

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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)

14. Commitments and contingencies


(a)	Funds at Lloyd’s

Talbot operates in Lloyd’s through a corporate member, Talbot 2002 Underwriting Capital Ltd (“T02”), which is the sole participant in Syndicate 1183. Lloyd’s sets T02’s required capital annually based on Syndicate 1183’s business plan, rating environment and reserving environment together with input arising from Lloyd’s discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd’s (“FAL”), comprises cash and investments. The Company provided FAL in the amount of $583,600 for the 2017 underwriting year ( 2016 underwriting year: $617,000 ).

The amounts which are provided as FAL are not available for distribution to the Company for the payment of dividends. Talbot’s corporate member may also be required to maintain funds under the control of Lloyd’s in excess of its capital requirement and such funds also may not be available for distribution to the Company for the payment of dividends.


(b)	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 2017 underwriting capacity at Lloyd’s of £600,000 , at the March 31, 2017 exchange rate of £1 equals $1.26 and assuming the maximum 3% assessment, the Company would be assessed approximately $22,680 .

As at March 31, 2017 and December 31, 2016 , the Company had total unfunded investment commitments related to the following:



	Unfunded investment commitments as at
	March 31, 2017		December 31, 2016
Fixed maturity investments	$	27,375	$	28,499
Other investments ^(a)	138,636		156,134
Investments in investment affiliates ^(b)	84,861		64,071
AlphaCat ILS Fund	8,000		10,000
Total unfunded investment commitments	$	258,872	$	258,704


(a)	The Company’s total capital commitments related to other investments as at both March 31, 2017 and December 31, 2016 was $308,000 .


(b)	Refer to Note 3(c), “Investments in Investment Affiliates.”

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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)

15. Related party transactions

The transactions listed below are classified as related party transactions as principals and/or directors of each counterparty are members of the Company’s board of directors.


(a)	Aquiline Capital Partners LLC (“Aquiline Capital”)

Group Ark Insurance

Subsequent to July 2016, Aquiline Capital ceased to be shareholders of Group Ark Insurance Holdings Ltd. (“Group Ark”). Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, continues to serve as a director of Group Ark. Pursuant to reinsurance agreements with a subsidiary of Group Ark, the Company recognized gross premiums written, reinsurance premiums ceded and earned premium adjustments during the three months ended March 31, 2016 of $1,906 , $17 and $526 , respectively. As at December 31, 2016 the Company had recorded premiums receivable and loss reserves recoverable of $292 and $798 , respectively.

Wellington

Pursuant to reinsurance agreements with a subsidiary of Wellington Insurance Company (“Wellington”), during the three months ended March 31, 2017 the Company recognized gross premiums written and earned premium adjustments of $2,974 and $861 ( 2016 : $nil and $ nil ), respectively. As at March 31, 2017 and December 31, 2016 the Company had recorded premiums receivable of $2,676 and $666 , respectively. Aquiline Capital are shareholders of Wellington and Christopher E. Watson, a director of the Company and senior principal of Aquiline Capital, serves as a director of Wellington.

Aquiline II, Aquiline III and Aquiline Tech

The Company had, as of March 31, 2017 and December 31, 2016 , investments in Aquiline II, III and Tech with a total value of $94,697 and $100,431 and outstanding unfunded commitments of $84,861 and $64,071 , respectively. For the three months ended March 31, 2017 , the Company incurred $356 ( 2016 : $nil ) in partnership fees associated with these investments. Additional information related to Aquiline II, III and Tech is disclosed in Note 3(c), “Investments in Investment Affiliates.”


(b)	Other

Certain shareholders of the Company and their affiliates, as well as employers of entities associated with directors or officers have purchased insurance and/or reinsurance from the Company in the ordinary course of business. The Company believes these transactions were settled for arm’s length consideration.

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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)

16. Earnings per common share

The following table sets forth the computation of basic earnings per common share and earnings per diluted common share for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017		2016
Basic earnings per common share
Net income available to Validus common shareholders	$	94,561	$	166,810
Weighted average number of common shares outstanding	79,133,671		82,821,261
Basic earnings per share available to Validus common shareholders	$	1.19	$	2.01

Earnings per diluted common share
Net income available to Validus common shareholders	$	94,561	$	166,810

Weighted average number of common shares outstanding	79,133,671		82,821,261
Share equivalents:
Stock options	15,379		35,878
Unvested restricted shares	1,590,092		1,341,176
Weighted average number of diluted common shares outstanding	80,739,142		84,198,315
Earnings per diluted share available to Validus common shareholders	$	1.17	$	1.98

Share equivalents that would result in the issuance of 1,503 common shares were outstanding for the three months ended March 31, 2017 , but were not included in the computation of earnings per diluted common share because the effect would be antidilutive. There were no antidilutive shares noted for the three months ended March 31, 2016 .

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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)

17. Segment information

The Company conducts its operations worldwide through four operating segments, which have been determined under ASC Topic 280 “Segment Reporting” to be Validus Re, Talbot, Western World and AlphaCat. The Company’s operating segments are strategic business units that offer different products and services. They are managed and have capital allocated separately because each segment undertakes different strategies.

A description of each of the Company’s operating segments and its Corporate and Investments function is as follows:

Validus Re Segment

The Validus Re segment is focused primarily on treaty reinsurance. The primary lines in which the segment conducts business are property, marine and specialty which includes agriculture, aerospace and aviation, financial lines of business, nuclear, terrorism, life, accident & health, workers’ compensation, crisis management, contingency, technical lines, composite, trade credit and casualty.

Talbot Segment

The Talbot segment is focused on a wide range of marine and energy, political lines, commercial property, financial lines, contingency, accident & health and aviation classes of business on an insurance or facultative reinsurance basis and principally property, aerospace and marine classes of business on a treaty reinsurance basis.

Western World Segment

The Western World segment is focused on providing commercial insurance products on a surplus lines and specialty admitted basis. Western World specializes in underwriting classes of business that are not easily placed in the standard insurance market due to their complexity, high hazard, or unusual nature; including general liability, property and professional liability classes of business.

AlphaCat Segment

The AlphaCat segment leverages the Company’s underwriting and analytical expertise and earns management and performance fees from the Company and other third party investors primarily through the AlphaCat ILS funds and sidecars.

Corporate and Investments

The Company has a corporate and investments function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment under these circumstances. Other reconciling items include, but are not limited to, the elimination of certain inter segment revenues and expenses and other items that are not allocated to the operating segments.

A reconciliation of segmental income to net income available to Validus is included in the tables below.

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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 and Investments”:



	Three Months Ended March 31,
Validus Re Segment Information	2017			2016
Underwriting revenues
Gross premiums written	$	620,522		$	691,668
Reinsurance premiums ceded	(108,813		)	(92,495		)
Net premiums written	511,709			599,173
Change in unearned premiums	(293,297		)	(355,342		)
Net premiums earned	218,412			243,831
Other insurance related income (loss)	78			(315		)
Total underwriting revenues	218,490			243,516
Underwriting deductions
Losses and loss expenses	86,154			82,868
Policy acquisition costs	41,256			42,259
General and administrative expenses	16,832			17,179
Share compensation expenses	2,477			2,901
Total underwriting deductions	146,719			145,207
Underwriting income	$	71,771		$	98,309

Selected ratios
Ratio of net to gross premiums written	82.5		%	86.6		%

Losses and loss expense ratio	39.4		%	34.0		%

Policy acquisition cost ratio	18.9		%	17.4		%
General and administrative expense ratio ^(a)	8.9		%	8.2		%
Expense ratio	27.8		%	25.6		%
Combined ratio	67.2		%	59.6		%


(a)	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)



	Three Months Ended March 31,
Talbot Segment Information	2017			2016
Underwriting revenues
Gross premiums written	$	247,175		$	266,317
Reinsurance premiums ceded	(92,824		)	(87,458		)
Net premiums written	154,351			178,859
Change in unearned premiums	40,714			27,933
Net premiums earned	195,065			206,792
Other insurance related income	755			11
Total underwriting revenues	195,820			206,803
Underwriting deductions
Losses and loss expenses	106,412			100,101
Policy acquisition costs	43,276			44,343
General and administrative expenses	38,443			38,535
Share compensation expenses	2,827			3,522
Total underwriting deductions	190,958			186,501
Underwriting income	$	4,862		$	20,302

Selected ratios
Ratio of net to gross premiums written	62.4		%	67.2		%

Losses and loss expense ratio	54.6		%	48.4		%

Policy acquisition cost ratio	22.2		%	21.5		%
General and administrative expense ratio ^(a)	21.1		%	20.3		%
Expense ratio	43.3		%	41.8		%
Combined ratio	97.9		%	90.2		%


(a)	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)



	Three Months Ended March 31,
Western World Segment Information	2017			2016
Underwriting revenues
Gross premiums written	$	172,043		$	63,959
Reinsurance premiums ceded	(5,618		)	(4,139		)
Net premiums written	166,425			59,820
Change in unearned premiums	(69,153		)	1,679
Net premiums earned	97,272			61,499
Other insurance related income	241			288
Total underwriting revenues	97,513			61,787
Underwriting deductions
Losses and loss expenses	74,925			39,646
Policy acquisition costs	20,236			14,200
General and administrative expenses	10,754			12,075
Share compensation expenses	692			581
Total underwriting deductions	106,607			66,502
Underwriting loss	$	(9,094	)	$	(4,715	)

Selected ratios
Ratio of net to gross premiums written	96.7		%	93.5		%

Losses and loss expense ratio	77.0		%	64.5		%

Policy acquisition cost ratio	20.8		%	23.1		%
General and administrative expense ratio ^(a)	11.8		%	20.5		%
Expense ratio	32.6		%	43.6		%
Combined ratio	109.6		%	108.1		%


(a)	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)



	Three Months Ended March 31,
AlphaCat Segment Information	2017			2016
Revenues
Third party	$	4,644		$	4,727
Related party	631			891
Total revenues	5,275			5,618

Expenses
General and administrative expenses	3,844			1,482
Share compensation expenses	82			141
Finance expenses	31			808
Tax benefit	(1		)	—
Foreign exchange (gains) losses	(1		)	8
Total expenses	3,955			2,439
Income before investments from AlphaCat Funds and Sidecars	1,320			3,179

Investment income (loss) from AlphaCat Funds and Sidecars ^(a)
AlphaCat Sidecars	(112		)	124
AlphaCat ILS Funds - Lower Risk ^(b)	2,189			2,507
AlphaCat ILS Funds - Higher Risk ^(b)	2,367			2,436
BetaCat ILS Funds	368			563
PaCRe	—			(23		)
Total investment income from AlphaCat Funds and Sidecars	4,812			5,607
Validus’ share of AlphaCat segment income	$	6,132		$	8,786

Supplemental information
Gross premiums written
AlphaCat Sidecars	$	66		$	(52	)
AlphaCat ILS Funds - Lower Risk ^(b)	52,908			59,958
AlphaCat ILS Funds - Higher Risk ^(b)	93,536			96,320
AlphaCat Direct ^(c)	18,416			11,122
Total gross premiums written	$	164,926		$	167,348


(a)	The investment income from the AlphaCat funds and sidecars is based on equity accounting.


(b)	Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.


(c)	AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

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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)



	Three Months Ended March 31,
Corporate and Investments	2017			2016
Investment income
Managed net investment income ^(a)	$	36,192		$	27,923

Corporate expenses
General and administrative expenses	17,177			16,183
Share compensation expenses	3,413			4,092
Finance expenses ^(a)	13,864			14,341
Dividends on preferred shares	2,203			—
Tax benefit	(3,548		)	(2,118		)
Total Corporate expenses	33,109			32,498

Other items
Net realized losses on managed investments ^(a)	(2,892		)	(1,086		)
Change in net unrealized gains on managed investments ^(a)	14,349			47,078
Income (loss) from investment affiliate	5,188			(4,113		)
Foreign exchange gains ^(a)	1,103			6,074
Other income	94			677
Total other items	17,842			48,630
Total Corporate and Investments	$	20,925		$	44,055


(a)	These items exclude the components which are included in Validus’ share of AlphaCat and amounts which are consolidated from VIEs.

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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 reconcile the results of our operating segments along with our corporate and investments function to the Consolidated results of the Company for the periods indicated:



	Three Months Ended March 31, 2017
	Validus Re Segment			Talbot Segment			Western World Segment			AlphaCat Segment and Consolidated VIEs			Corporate and Investments			Eliminations			Total
Underwriting revenues
Gross premiums written	$	620,522		$	247,175		$	172,043		$	164,926		$	—		$	(13,809	)	$	1,190,857
Reinsurance premiums ceded	(108,813		)	(92,824		)	(5,618		)	(6,660		)	—			13,809			(200,106		)
Net premiums written	511,709			154,351			166,425			158,266			—			—			990,751
Change in unearned premiums	(293,297		)	40,714			(69,153		)	(93,639		)	—			—			(415,375		)
Net premiums earned	218,412			195,065			97,272			64,627			—			—			575,376
Other insurance related income	78			755			241			5,161			—			(4,999		)	1,236
Total underwriting revenues	218,490			195,820			97,513			69,788			—			(4,999		)	576,612
Underwriting deductions
Losses and loss expenses	86,154			106,412			74,925			2,094			—			—			269,585
Policy acquisition costs	41,256			43,276			20,236			6,901			—			(41		)	111,628
General and administrative expenses	16,832			38,443			10,754			9,641			17,177			(4,923		)	87,924
Share compensation expenses	2,477			2,827			692			82			3,413			—			9,491
Total underwriting deductions	146,719			190,958			106,607			18,718			20,590			(4,964		)	478,628
Underwriting income (loss)	$	71,771		$	4,862		$	(9,094	)	$	51,070		$	(20,590	)	$	(35	)	$	97,984
Other items ^(a)	—			—			—			1,115			7,526			—			8,641
Dividends on preferred shares	—			—			—			—			(2,203		)	—			(2,203		)
Net investment income	—			—			—			4,022			36,192			—			40,214
(Income) attributable to AlphaCat investors	—			—			—			(7,503		)	—			—			(7,503		)
Net (income) attributable to noncontrolling interest	—			—			—			(42,572		)	—			—			(42,572		)
Segmental income (loss)	$	71,771		$	4,862		$	(9,094	)	$	6,132		$	20,925		$	(35	)
Net income available to Validus common shareholders																			$	94,561


(a)	Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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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)



	Three Months Ended March 31, 2016
	Validus Re Segment			Talbot Segment			Western World Segment			AlphaCat Segment and Consolidated VIEs			Corporate and Investments			Eliminations			Total
Underwriting revenues
Gross premiums written	$	691,668		$	266,317		$	63,959		$	167,348		$	—		$	(16,501	)	$	1,172,791
Reinsurance premiums ceded	(92,495		)	(87,458		)	(4,139		)	(244		)	—			16,501			(167,835		)
Net premiums written	599,173			178,859			59,820			167,104			—			—			1,004,956
Change in unearned premiums	(355,342		)	27,933			1,679			(107,958		)	—			—			(433,688		)
Net premiums earned	243,831			206,792			61,499			59,146			—			—			571,268
Other insurance related (loss) income	(315		)	11			288			5,665			—			(4,913		)	736
Total underwriting revenues	243,516			206,803			61,787			64,811			—			(4,913		)	572,004
Underwriting deductions
Losses and loss expenses	82,868			100,101			39,646			1,832			—			—			224,447
Policy acquisition costs	42,259			44,343			14,200			6,157			—			234			107,193
General and administrative expenses	17,179			38,535			12,075			7,456			16,183			(5,220		)	86,208
Share compensation expenses	2,901			3,522			581			141			4,092			—			11,237
Total underwriting deductions	145,207			186,501			66,502			15,586			20,275			(4,986		)	429,085
Underwriting income (loss)	$	98,309		$	20,302		$	(4,715	)	$	49,225		$	(20,275	)	$	73		$	142,919
Other items ^(a)	—			—			—			154			36,407			—			36,561
Dividends on preferred shares	—			—			—			—			—			—			—
Net investment income	—			—			—			1,538			27,923			—			29,461
(Income) attributable to AlphaCat investors	—			—			—			(4,600		)	—			—			(4,600		)
Net (income) attributable to noncontrolling interest	—			—			—			(37,531		)	—			—			(37,531		)
Segmental income (loss)	$	98,309		$	20,302		$	(4,715	)	$	8,786		$	44,055		$	73
Net income available to Validus common shareholders																			$	166,810


(a)	Other items includes finance expenses, tax expenses, foreign exchange gains (losses), net realized and change in net unrealized gains (losses) on investments, income from investment and operating affiliates and other income (loss).

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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 by operating segment allocated to the territory of coverage exposure for the periods indicated:



	Gross Premiums Written
	Three Months Ended March 31, 2017
	Validus Re		Talbot		Western World		AlphaCat		Eliminations			Total		%
United States	$	213,868	$	29,085	$	172,043	$	28,203	$	(880	)	$	442,319	37.1	%

Worldwide excluding United States ^(a)	34,068		34,331		—		7,035		(653		)	74,781		6.3	%
Australia and New Zealand	931		3,182		—		—		(150		)	3,963		0.3	%
Europe	29,616		11,715		—		466		(705		)	41,092		3.5	%
Latin America and Caribbean	9,342		24,177		—		—		(2,872		)	30,647		2.6	%
Japan	1,161		1,825		—		1,193		(30		)	4,149		0.3	%
Canada	1,715		1,137		—		—		(45		)	2,807		0.2	%
Rest of the world ^(b)	13,905		23,272		—		—		(1,682		)	35,495		3.0	%
Sub-total, non United States	90,738		99,639		—		8,694		(6,137		)	192,934		16.2	%
Worldwide including United States ^(a)	102,421		27,357		—		123,309		(6,790		)	246,297		20.7	%
Other locations non-specific ^(c)	213,495		91,094		—		4,720		(2		)	309,307		26.0	%
Total	$	620,522	$	247,175	$	172,043	$	164,926	$	(13,809	)	$	1,190,857	100.0	%



	Gross Premiums Written
	Three Months Ended March 31, 2016
	Validus Re		Talbot		Western World		AlphaCat		Eliminations			Total		%
United States	$	295,394	$	26,110	$	63,959	$	25,391	$	(1,138	)	$	409,716	35.0	%

Worldwide excluding United States ^(a)	30,264		35,504		—		16,011		(475		)	81,304		6.9	%
Australia and New Zealand	4,923		2,312		—		4,082		(134		)	11,183		1.0	%
Europe	22,467		13,861		—		3,451		(924		)	38,855		3.3	%
Latin America and Caribbean	13,582		23,807		—		—		(3,026		)	34,363		2.9	%
Japan	872		617		—		1,500		(24		)	2,965		0.3	%
Canada	1,676		1,092		—		—		(51		)	2,717		0.2	%
Rest of the world ^(b)	16,688		27,484		—		—		(1,885		)	42,287		3.6	%
Sub-total, non United States	90,472		104,677		—		25,044		(6,519		)	213,674		18.2	%
Worldwide including United States ^(a)	111,777		28,454		—		115,373		(8,834		)	246,770		21.0	%
Other locations non-specific ^(c)	194,025		107,076		—		1,540		(10		)	302,631		25.8	%
Total	$	691,668	$	266,317	$	63,959	$	167,348	$	(16,501	)	$	1,172,791	100.0	%


(a)	Represents risks in two or more geographic zones.


(b)	Represents risks in one geographic zone.


(c)	The Other locations non-specific category refers to business for which an analysis of exposure by geographic zone is not applicable since these exposures can span multiple geographic areas and, in some instances, are not fixed locations.

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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)

18. Subsequent events

On May 1, 2017, the Company completed its acquisition of Archer Daniels Midland Company’s (“ADM”) Crop Risk Services business (“CRS”). Under the terms of the transaction, ADM received $127,500 in cash, subject to certain working capital and balance sheet adjustments, in exchange for 100% of the outstanding stock of CRS.

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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 unaudited consolidated results of operations for the three months ended March 31, 2017 and 2016 and the Company’s consolidated financial condition, liquidity and capital resources as at March 31, 2017 and December 31, 2016 . This discussion and analysis should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and notes thereto included in this filing and the Company’s audited Consolidated Financial Statements and related notes for the fiscal year ended December 31, 2016 , the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk, as well as management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 .

For a number of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 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.



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Section		Page
Executive Overview		51
Business Outlook and Trends		51
Non-GAAP Financial Measures		52
Results of Operations - Three Months Ended March 31, 2017 and 2016		55
Validus Re Segment		58
Talbot Segment		61
Western World Segment		64
AlphaCat Segment		66
Corporate and Investments		68
Liquidity and Capital Resources		70
Investments		70
Reserve for Losses and Loss Expenses		73
Sources of Liquidity		75
Capital Resources		77
Ratings		79
Recent Accounting Pronouncements		79
Critical Accounting Policies		80
Cautionary Note Regarding Forward-Looking Statements		80

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Executive Overview

The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, Talbot, Western World, and AlphaCat.

In addition, the Company has a corporate and investment function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance expenses. Corporate and Investments also includes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment. The Company’s corporate expenses, capital servicing and debt costs and investment results are presented separately within the corporate and investments discussion.

The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is a function of net earned premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. The Company’s insurance and reinsurance portfolio, as measured by gross premium written, was comprised of 31% insurance and 69% reinsurance for the three months ended March 31, 2017 compared to 22% insurance and 78% reinsurance for the three months ended March 31, 2016 . 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.

Business Outlook and Trends

We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.

Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates on most lines. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy, but the Company continues to see increased competition and decreased premium rates in most classes of business. In the absence of significant catastrophes in recent years, the market supply of capital is greater than the demand and therefore we expect to see continued pressure on rates in the near term.

During the January 2017 renewal season, the Validus Re and AlphaCat segments underwrote $628.9 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), an increase of 3.0% from the prior year renewal period. This increase was driven by an increase in U.S. property, marine and other specialty renewals and was partially offset by decreases in international property and casualty renewals. Terms and conditions across the market were generally unchanged, however the overall market continues to see downwards pressure on rates in the low single digits.

Business written by the Talbot and Western World segments is distributed more evenly throughout the year. Through March 31, 2017 , the Talbot segment experienced a whole account rate decrease of approximately 4.9% driven primarily by decreases in the downstream and upstream energy classes. The Western World segment experienced a modest whole account rate decrease of approximately 0.6% through March 31, 2017 .

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Non-GAAP Financial Measures

In presenting the Company’s results, management has included and discussed certain non-GAAP financial measures. The Company believes that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company’s results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

Book value financial indicators

In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.

The following table presents reconciliations of book value per common share to book value per diluted common share plus accumulated dividends and other non-GAAP book value financial indicators:



	March 31, 2017
	Equity Amount			Common Shares	Per Share Amount ^(a)
Book value per common share ^(b)	$	3,761,876		79,137,590	$	47.54
Non-GAAP Adjustments:
Assumed exercise of outstanding stock options ^(c)(d)	614			26,136
Unvested restricted shares	—			2,837,888
Book value per diluted common share ^(e)	3,762,490			82,001,614	$	45.88
Goodwill	(196,758		)	—
Intangible assets	(114,176		)	—
Tangible book value per diluted common share ^(e)	$	3,451,556		82,001,614	$	42.09

Book value per diluted common share ^(e)					$	45.88
Accumulated dividends					11.94
Book value per diluted common share plus accumulated dividends ^(e)					$	57.82



	December 31, 2016
	Equity Amount			Common Shares	Per Share Amount ^(a)
Book value per common share ^(b)	$	3,688,291		79,132,252	$	46.61
Non-GAAP Adjustments:
Assumed exercise of outstanding stock options ^(c)(d)	614			26,136
Unvested restricted shares	—			2,868,610
Book value per diluted common share ^(e)	3,688,905			82,026,998	$	44.97
Goodwill	(196,758		)	—
Intangible assets	(115,592		)	—
Tangible book value per diluted common share ^(e)	$	3,376,555		82,026,998	$	41.16

Book value per diluted common share ^(e)					$	44.97
Accumulated dividends					11.56
Book value per diluted common share plus accumulated dividends ^(e)					$	56.53


(a)	Per share amounts are calculated by dividing the equity amount by the common shares.


(b)	The equity amount used in the calculation of book value per common share represents total shareholders' equity available to Validus excluding the liquidation value of the preferred shares of $150 million.


(c)	Using the "as-if-converted" method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.


(d)	At March 31, 2017 , the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $23.48 ( December 31, 2016 : $23.48 ).


(e)	Non-GAAP financial measure.

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Book value per common share, a GAAP financial measure, increased by $0.93 , or 2.0% , from $46.61 at December 31, 2016 to $47.54 at March 31, 2017 .

Book value per diluted common share plus accumulated dividends, a non-GAAP financial measure, is considered by management to be the key financial indicator of performance, as the Company believes growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends increased by $1.29 , or 2.3% , from $56.53 at December 31, 2016 to $57.82 at March 31, 2017 . Cash dividends per common share are an integral part of the value created for shareholders. During the three months ended March 31, 2017 , the Company paid cash dividends of $0.38 (2016: $0.35 ) per common share.

Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid increased by $0.91 , or 2.0% , from $44.97 at December 31, 2016 to $45.88 at March 31, 2017 . Growth in book value per diluted common share inclusive of dividends paid was 2.9% and 4.8% for the three months ended March 31, 2017 and 2016 , respectively.

Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share increased by $0.93 , or 2.3% , from $41.16 at December 31, 2016 to $42.09 at March 31, 2017 .

Other financial indicators

In addition to presenting net income available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating income available to Validus common shareholders, a non-GAAP financial measure, provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.

Net operating income available to Validus common shareholders is calculated by the addition or subtraction of certain Consolidated Statement of Income and Comprehensive Income line items from net income available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:



	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Net income available to Validus common shareholders	$	94,561		$	166,810
Non-GAAP Adjustments:
Net realized losses on investments	1,164			584
Change in net unrealized gains on investments	(13,348		)	(47,444		)
(Income) loss from investment affiliates	(5,188		)	4,113
Foreign exchange gains	(1,569		)	(6,245		)
Other income	(94		)	(677		)
Net income attributable to noncontrolling interest	728			237
Tax expense ^(a)	580			4,127
Net operating income available to Validus common shareholders ^(b)	$	76,834		$	121,505

Average shareholders' equity available to Validus common shareholders ^(c)	$	3,725,084		$	3,681,701

Annualized return on average equity	10.2		%	18.1		%
Annualized net operating return on average equity ^(b)	8.3		%	13.2		%


(a)	Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.


(b)	Non-GAAP financial measure.


(c)	Average shareholders’ equity for the three months ended is the average of the beginning and ending quarter end shareholders’ equity balances, excluding the liquidation value of the preferred shares of $150,000.

Net operating income available to Validus common shareholders, a non-GAAP financial measure, measures the performance of the Company’s operations without the influence of gains or losses on investments and foreign currencies and other items as noted in the table above. The Company excludes these items from its calculation of net operating income available to Validus common

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shareholders because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities and other factors. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. The Company believes the reporting of net operating income available to Validus common shareholders enhances the understanding of results by highlighting the underlying profitability of the Company’s core (re)insurance operations. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing, as well as loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.

Return on average equity, a GAAP financial measure, and net operating return on average equity, a non-GAAP financial measure, represents the returns generated on common shareholders’ equity during the year. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed.

For further discussion of the components driving the Company’s financial indicators refer to the “Results of Operations” sections.

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First Quarter 2017 Results of Operations - Consolidated

The following table presents the results of operations for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017			2016
Revenues
Gross premiums written	$	1,190,857		$	1,172,791
Reinsurance premiums ceded	(200,106		)	(167,835		)
Net premiums written	990,751			1,004,956
Change in unearned premiums	(415,375		)	(433,688		)
Net premiums earned	575,376			571,268
Net investment income	40,214			29,461
Net realized losses on investments	(1,164		)	(584		)
Change in net unrealized gains on investments	13,348			47,444
Income (loss) from investment affiliates	5,188			(4,113		)
Other insurance related income and other income	1,330			1,413
Foreign exchange gains	1,569			6,245
Total revenues	635,861			651,134
Expenses
Losses and loss expenses	269,585			224,447
Policy acquisition costs	111,628			107,193
General and administrative expenses	87,924			86,208
Share compensation expenses	9,491			11,237
Finance expenses	13,943			15,203
Total expenses	492,571			444,288
Income before taxes, loss from operating affiliate and (income) attributable to AlphaCat investors	143,290			206,846
Tax benefit	3,549			2,118
Loss from operating affiliate	—			(23		)
(Income) attributable to AlphaCat investors	(7,503		)	(4,600		)
Net income	$	139,336		$	204,341
Net (income) attributable to noncontrolling interests	(42,572		)	(37,531		)
Net income available to Validus	96,764			166,810
Dividends on preferred shares	(2,203		)	—
Net income available to Validus common shareholders	$	94,561		$	166,810

Supplemental information:
Losses and loss expenses:
Current period excluding items below	$	311,054		$	278,186
Current period—notable loss events	—			—
Current period—non-notable loss events	19,762			—
Change in prior accident years	(61,231		)	(53,739		)
Total losses and loss expenses	$	269,585		$	224,447
Selected ratios:
Ratio of net to gross premiums written	83.2		%	85.7		%
Losses and loss expense ratio:
Current period excluding items below	54.1		%	48.7		%
Current period—notable loss events	—		%	—		%
Current period—non-notable loss events	3.4		%	—		%
Change in prior accident years	(10.6		)%	(9.4		)%
Losses and loss expense ratio	46.9		%	39.3		%
Policy acquisition cost ratio	19.4		%	18.8		%
General and administrative expense ratio ^(a)	16.9		%	17.0		%
Expense ratio	36.3		%	35.8		%
Combined ratio	83.2		%	75.1		%


(a)	The general and administrative expense ratio includes share compensation expenses.

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Highlights for the first quarter 2017 as compared to 2016 were as follows:

•

Gross premiums written for the three months ended March 31, 2017 and 2016 were $1,190.9 million and $1,172.8 million , respectively, an increase of $18.1 million , or 1.5% . The increase was primarily driven by an increase in the Western World segment and was offset by decreases in the Validus Re and Talbot segments. The decrease in the Validus Re segment was driven by a decline in agriculture premiums of $76.3 million due to lower crop premiums available for reinsurers as a result of recent mergers and acquisitions in the primary insurance space, including the Company's announced acquisition of CRS. This decrease was offset by an increase in agriculture premiums of $84.3 million in the Western World segment, which resulted from a new quota-share arrangement between CRS and the Company. The results of this quota-share arrangement have been presented within the Western World segment in anticipation of these premiums being written by Western World upon closing of the transaction.


•	Reinsurance premiums ceded for the three months ended March 31, 2017 and 2016 were $200.1 million and $167.8 million , respectively, an increase of $32.3 million , or 19.2% . The increase was primarily driven by increases in the Validus Re, Talbot and AlphaCat segments.


•	Losses and loss expenses for the three months ended March 31, 2017 were $269.6 million compared to $224.4 million for the three months ended March 31, 2016 , an increase of $45.1 million or 20.1% . The increase was driven by an increase in attritional and non-notable losses.

Notable and Non-notable Loss Events

•

The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million. The term “events” refers to aggregate notable and non-notable losses incurred.


•	There were no notable loss events occurring during the three months ended March 31, 2017 . There were no notable or non-notable loss events occurring during the three months ended March 31, 2016 . Losses and loss expenses incurred from a single energy non-notable loss event during the three months ended March 31, 2017 were as follows:



	Three Months Ended March 31, 2017
(Dollars in thousands)	Non-Notable Loss Event
Net losses and loss expenses	19,762
Plus: Reinstatement premiums payable, net	1,060
Net loss attributable to Validus	$	20,822

Loss Ratios

•

The loss ratio for the three months ended March 31, 2017 was 46.9% , which included $61.2 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.6 percentage points compared to a loss ratio for the three months ended March 31, 2016 of 39.3% , which included $53.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.4 percentage points. The favorable development of $61.2 million on prior accident years for the three months ended March 31, 2017 was primarily due to favorable development on attritional losses of $50.6 million and favorable development on event losses of $10.6 million. The favorable loss reserve development on prior accident years of $53.7 million during the three months ended March 31, 2016 was primarily due to favorable development on attritional losses of $71.4 million; partially offset by unfavorable development on event losses of $17.7 million. The unfavorable development on event losses was driven by reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015.


•	The combined ratio for the three months ended March 31, 2017 and 2016 was 83.2% and 75.1% , respectively, an increase of 8.1 percentage points.

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•	Loss ratios by line of business for the three months ended March 31, 2017 and 2016 were as follows:



	Three Months Ended March 31,
	2017		2016
Property	33.1	%	10.0	%
Marine	20.3	%	63.5	%
Specialty	67.3	%	56.4	%
Liability	73.3	%	62.0	%
All lines	46.9	%	39.3	%


•	Policy acquisition cost ratio for the three months ended March 31, 2017 was 19.4% compared to 18.8% for the three months ended March 31, 2016 , an increase of 0.6 percentage points.


•	General and administrative (“G&A”) expenses for the three months ended March 31, 2017 were $87.9 million compared to $86.2 million for the three months ended March 31, 2016 , an increase of $1.7 million or 2.0% .

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First Quarter 2017 Results of Operations - Validus Re Segment

The following table presents underwriting income by line of business for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017												2016
(Dollars in thousands)	Property			Marine			Specialty			Total			Property			Marine			Specialty			Total
Underwriting revenues
Gross premiums written	$	203,704		$	100,548		$	316,270		$620,522			$	192,637		$	106,603		$	392,428		$	691,668
Reinsurance premiums ceded	(83,814		)	(14,433		)	(10,566		)	(108,813		)	(72,496		)	(7,415		)	(12,584		)	(92,495		)
Net premiums written	119,890			86,115			305,704			511,709			120,141			99,188			379,844			599,173
Change in unearned premiums	(22,149		)	(62,240		)	(208,908		)	(293,297		)	(17,989		)	(64,317		)	(273,036		)	(355,342		)
Net premiums earned	97,741			23,875			96,796			218,412			102,152			34,871			106,808			243,831
Other insurance related income										78												(315		)
Total underwriting revenues										218,490												243,516
Underwriting deductions
Losses and loss expenses	24,287			971			60,896			86,154			(3,242		)	20,411			65,699			82,868
Policy acquisition costs	17,465			4,988			18,803			41,256			18,944			4,912			18,403			42,259
Total underwriting deductions before G&A	41,752			5,959			79,699			127,410			15,702			25,323			84,102			125,127
Underwriting income before G&A	$	55,989		$	17,916		$	17,097		$	91,080		$	86,450		$	9,548		$	22,706		$	118,389
General and administrative expenses										16,832												17,179
Share compensation expenses										2,477												2,901
Total underwriting deductions										146,719												145,207
Underwriting income										$	71,771											$	98,309

Supplemental information:
Losses and loss expenses:
Current period excluding items below	$	21,564		$	16,400		$	65,958		$	103,922		$	19,590		$	16,856		$	72,106		$	108,552
Current period—notable loss events	—			—			—			—			—			—			—			—
Current period—non-notable loss events	6,294			—			4,718			11,012			—			—			—			—
Change in prior accident years	(3,571		)	(15,429		)	(9,780		)	(28,780		)	(22,832		)	3,555			(6,407		)	(25,684		)
Total losses and loss expenses	$	24,287		$	971		$	60,896		$	86,154		$	(3,242	)	$	20,411		$	65,699		$	82,868
Selected ratios:
Ratio of net to gross premiums written	58.9		%	85.6		%	96.7		%	82.5		%	62.4		%	93.0		%	96.8		%	86.6		%
Losses and loss expense ratio:
Current period excluding items below	22.1		%	68.7		%	68.1		%	47.6		%	19.2		%	48.3		%	67.5		%	44.5		%
Current period—notable loss events	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Current period—non-notable loss events	6.4		%	—		%	4.9		%	5.0		%	—		%	—		%	—		%	—		%
Change in prior accident years	(3.7		)%	(64.6		)%	(10.1		)%	(13.2		)%	(22.4		)%	10.2		%	(6.0		)%	(10.5		)%
Losses and loss expense ratio	24.8		%	4.1		%	62.9		%	39.4		%	(3.2		)%	58.5		%	61.5		%	34.0		%
Policy acquisition cost ratio	17.9		%	20.9		%	19.4		%	18.9		%	18.5		%	14.1		%	17.2		%	17.4		%
General and administrative expense ratio ^(a)										8.9		%										8.2		%
Expense ratio										27.8		%										25.6		%
Combined ratio										67.2		%										59.6		%


(a)	The general and administrative expense ratio includes share compensation expenses.

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Highlights for the first quarter 2017 as compared to 2016 were as follows:


•	Gross premiums written for the three months ended March 31, 2017 were $620.5 million compared to $691.7 million for the three months ended March 31, 2016 , a decrease of $71.1 million , or 10.3% . The decrease in gross premiums written was primarily driven by:


◦	A decrease in gross premiums written in the specialty lines of $76.2 million , primarily driven by a decline in agriculture premiums; and


◦	A decrease in gross premiums written in the marine lines of $6.1 million , primarily due to adjustments to existing business; partially offset by


◦	An increase in gross premiums written in the property lines of $11.1 million , primarily driven by new business written of $6.0 million and adjustments to existing business of $3.5 million.


•	Reinsurance premiums ceded for the three months ended March 31, 2017 were $108.8 million compared to $92.5 million for the three months ended March 31, 2016 , an increase of $16.3 million , or 17.6% . The increase was driven by an increase in coverage purchased of $8.5 million, a new proportional retrocession program of $5.8 million and the timing of certain reinsurance purchases.

•

Net premiums earned for the three months ended March 31, 2017 were $218.4 million compared to $243.8 million for the three months ended March 31, 2016 , a decrease of $25.4 million , or 10.4% . The decrease was primarily driven by decreases in the marine and specialty lines as a result of lower gross premiums written in recent quarters as well as adjustments to existing business, and was partially offset by new casualty business written during the twelve months ended March 31, 2017.

•

Losses and loss expenses for the three months ended March 31, 2017 were $86.2 million compared to $82.9 million for the three months ended March 31, 2016 , an increase of $3.3 million or 4.0% . The increase was primarily as a result of higher losses and loss expenses from non-notable loss events and was partially offset by lower losses and loss expenses from attritional losses and higher favorable development on prior accident years.

◦

The loss ratio for the three months ended March 31, 2017 was 39.4% , which included $28.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 13.2 percentage points compared to a loss ratio for the three months ended March 31, 2016 of 34.0% which included $25.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.5 percentage points.

Notable and Non-notable Loss Events


◦	There were no notable loss events occurring during the three months ended March 31, 2017 . There were no notable or non-notable loss events occurring during the three months ended March 31, 2016 . Losses and loss expenses incurred from a single energy non-notable loss event during the three months ended March 31, 2017 were as follows:



	Three Months Ended March 31, 2017
(Dollars in thousands)	Non-Notable Loss Event
Validus Re’s share of net losses and loss expenses	11,012
Less: Reinstatement premiums	(567		)
Net loss attributable to Validus Re	$	10,445

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Change in prior accident years


•	Loss reserve development by line of business for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31, 2017
(Dollars in thousands)	Property			Marine			Specialty			Total
Adverse (favorable) development on event losses	$	2,460		$	(11,759	)	$	—		$	(9,299	)
(Favorable) development on attritional losses	(6,031		)	(3,670		)	(9,780		)	(19,481		)
Change in prior accident years	$	(3,571	)	$	(15,429	)	$	(9,780	)	$	(28,780	)

The adverse development on event losses in the property lines was primarily related to a non-notable loss event. The favorable development in the marine lines primarily related to the 2015 Pemex notable loss event.



	Three Months Ended March 31, 2016
(Dollars in thousands)	Property			Marine			Specialty			Total
(Favorable) adverse development on event losses	$	(10,554	)	$	12,091		$	859		$	2,396
(Favorable) development on attritional losses	(12,278		)	(8,536		)	(7,266		)	(28,080		)
Change in prior accident years	$	(22,832	)	$	3,555		$	(6,407	)	$	(25,684	)

The adverse development on event losses in the marine lines was driven by reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015.


•	Policy acquisition cost ratio for the three months ended March 31, 2017 was 18.9% compared to 17.4% for the three months ended March 31, 2016 , an increase of 1.5 percentage points.


•	General and administration expenses for the three months ended March 31, 2017 were $16.8 million compared to $17.2 million for the three months ended March 31, 2016 , a decrease of $0.3 million , or 2.0% .

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First Quarter 2017 Results of Operations - Talbot Segment

The following table presents underwriting income by line of business for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017												2016
(Dollars in thousands)	Property			Marine			Specialty			Total			Property			Marine			Specialty			Total
Underwriting revenues
Gross premiums written	$	73,260		$	77,318		$	96,597		$247,175			$	69,767		$	88,220		$	108,330		$	266,317
Reinsurance premiums ceded	(39,781		)	(15,007		)	(38,036		)	(92,824		)	(34,056		)	(21,372		)	(32,030		)	(87,458		)
Net premiums written	33,479			62,311			58,561			154,351			35,711			66,848			76,300			178,859
Change in unearned premiums	19,370			1,504			19,840			40,714			25,285			3,023			(375		)	27,933
Net premiums earned	52,849			63,815			78,401			195,065			60,996			69,871			75,925			206,792
Other insurance related income										755												11
Total underwriting revenues										195,820												206,803
Underwriting deductions
Losses and loss expenses	37,912			16,788			51,712			106,412			15,455			46,107			38,539			100,101
Policy acquisition costs	8,905			14,750			19,621			43,276			8,417			18,515			17,411			44,343
Total underwriting deductions before G&A	46,817			31,538			71,333			149,688			23,872			64,622			55,950			144,444
Underwriting income before G&A	$	6,032		$	32,277		$	7,068		$	46,132		$	37,124		$	5,249		$	19,975		$	62,359
General and administrative expenses										38,443												38,535
Share compensation expenses										2,827												3,522
Total underwriting deductions										190,958												186,501
Underwriting income										$	4,862											$	20,302

Supplemental information:
Losses and loss expenses:
Current period excluding items below	$	35,496		$	32,784		$	58,196		$	126,476		$	33,901		$	43,143		$	45,777		$	122,821
Current period—notable loss events	—			—			—			—			—			—			—			—
Current period—non-notable loss events	8,750			—			—			8,750			—			—			—			—
Change in prior accident years	(6,334		)	(15,996		)	(6,484		)	(28,814		)	(18,446		)	2,964			(7,238		)	(22,720		)
Total losses and loss expenses	$	37,912		$	16,788		$	51,712		$	106,412		$	15,455		$	46,107		$	38,539		$	100,101
Selected ratios:
Ratio of net to gross premiums written	45.7		%	80.6		%	60.6		%	62.4		%	51.2		%	75.8		%	70.4		%	67.2		%
Losses and loss expense ratio:
Current period excluding items below	67.1		%	51.4		%	74.3		%	64.9		%	55.5		%	61.8		%	60.3		%	59.4		%
Current period—notable loss events	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Current period—non-notable loss events	16.6		%	—		%	—		%	4.5		%	—		%	—		%	—		%	—		%
Change in prior accident years	(12.0		)%	(25.1		)%	(8.3		)%	(14.8		)%	(30.2		)%	4.2		%	(9.5		)%	(11.0		)%
Losses and loss expense ratio	71.7		%	26.3		%	66.0		%	54.6		%	25.3		%	66.0		%	50.8		%	48.4		%
Policy acquisition cost ratio	16.8		%	23.1		%	25.0		%	22.2		%	13.8		%	26.5		%	22.9		%	21.5		%
General and administrative expense ratio ^(a)										21.1		%										20.3		%
Expense ratio										43.3		%										41.8		%
Combined ratio										97.9		%										90.2		%


(a)	The general and administrative expense ratio includes share compensation expenses.

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Highlights for the first quarter 2017 as compared to 2016 were as follows:


•	Gross premiums written for the three months ended March 31, 2017 were $247.2 million compared to $266.3 million for the three months ended March 31, 2016 , a decrease of $19.1 million , or 7.2% . The decrease in gross premiums written was primarily driven by:


◦	A decrease in the marine and specialty lines of $10.9 million and $11.7 million , respectively, primarily driven by decreases across a number of classes as a result of reductions in participation and non-renewals on various programs due to the current rate environment; partially offset by,


◦	An increase in gross premiums written in the property lines of $3.5 million .

•

Reinsurance premiums ceded for the three months ended March 31, 2017 were $92.8 million compared to $87.5 million for the three months ended March 31, 2016 , an increase of $5.4 million , or 6.1% . The increase was driven by increases in the property and specialty lines of $5.7 million and $6.0 million , respectively, and was partially offset by a decrease in the marine lines of $6.4 million . The increases in the property and specialty lines were driven by lower premium adjustments on quota share policies during the three months ended March 31, 2017 . The decrease in the marine lines was primarily due to higher reinstatement premiums across a number of classes during the three months ended March 31, 2016 .


•	Net premiums earned for the three months ended March 31, 2017 were $195.1 million compared to $206.8 million for the three months ended March 31, 2016 , a decrease of $11.7 million , or 5.7% .


•	Losses and loss expenses for the three months ended March 31, 2017 were $106.4 million compared to $100.1 million for the three months ended March 31, 2016 , an increase of $6.3 million or 6.3% . The increase was primarily as a result of higher losses and loss expenses from attritional and non-notable loss events and was partially offset by higher favorable development on prior accident years.

◦

The loss ratio for the three months ended March 31, 2017 was 54.6% , which included $28.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 14.8 percentage points compared to a loss ratio for the three months ended March 31, 2016 of 48.4% , which included $22.7 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.0 percentage points.

Notable and Non-notable Loss Events


◦	There were no notable loss events occurring during the three months ended March 31, 2017 . There were no notable or non-notable loss events occurring during the three months ended March 31, 2016 . Losses and loss expenses incurred from a single energy non-notable loss event during the three months ended March 31, 2017 were as follows:



	Three Months Ended March 31, 2017
(Dollars in thousands)	Non-Notable Loss Event
Talbot’s share of net losses and loss expenses	8,750
Plus: Reinstatement premiums payable	1,627
Net loss attributable to Talbot	$	10,377

Change in prior accident years


•	Loss reserve development by line of business for the three months ended March 31, 2017 and 2016 was as follows:



	Three Months Ended March 31, 2017
(Dollars in thousands)	Property			Marine			Specialty			Total
Adverse (favorable) development on event losses	$	118		$	(215	)	$	(234	)	$	(331	)
(Favorable) development on attritional losses	(6,452		)	(15,781		)	(6,250		)	(28,483		)
Change in prior accident years	$	(6,334	)	$	(15,996	)	$	(6,484	)	$	(28,814	)

The net favorable development across all lines was primarily driven by favorable development on attritional losses.

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	Three Months Ended March 31, 2016
(Dollars in thousands)	Property			Marine			Specialty			Total
(Favorable) adverse development on event losses	$	(2,687	)	$	19,356		$	(1,367	)	$	15,302
(Favorable) development on attritional losses	(15,759		)	(16,392		)	(5,871		)	(38,022		)
Change in prior accident years	$	(18,446	)	$	2,964		$	(7,238	)	$	(22,720	)


•	Policy acquisition cost ratio for the three months ended March 31, 2017 was 22.2% compared to 21.5% for the three months ended March 31, 2016 , an increase of 0.7 percentage points.


•	General and administration expenses for the three months ended March 31, 2017 were $38.4 million compared to $38.5 million for the three months ended March 31, 2016 , a decrease of $0.1 million , or 0.2% .

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First Quarter 2017 Results of Operations - Western World Segment

The following table presents underwriting (loss) income by line of business for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
	2017												2016
(Dollars in thousands)	Property			Liability			Specialty			Total			Property			Liability			Specialty			Total
Underwriting revenues
Gross premiums written	$	28,136		$	59,608		$	84,299		$172,043			$	15,426		$	48,533		$	—		$	63,959
Reinsurance premiums ceded	(4,972		)	(646		)	—			(5,618		)	(1,554		)	(2,585		)	—			(4,139		)
Net premiums written	23,164			58,962			84,299			166,425			13,872			45,948			—			59,820
Change in unearned premiums	(3,097		)	(2,543		)	(63,513		)	(69,153		)	(1,677		)	3,356			—			1,679
Net premiums earned	20,067			56,419			20,786			97,272			12,195			49,304			—			61,499
Other insurance related income										241												288
Total underwriting revenues										97,513												61,787
Underwriting deductions
Losses and loss expenses	14,725			41,378			18,822			74,925			9,055			30,591			—			39,646
Policy acquisition costs	5,386			12,886			1,964			20,236			2,902			11,298			—			14,200
Total underwriting deductions before G&A	20,111			54,264			20,786			95,161			11,957			41,889			—			53,846
Underwriting (loss) income before G&A	$	(44	)	$	2,155		$	—		$	2,352		$	238		$	7,415		$	—		$	7,941
General and administrative expenses										10,754												12,075
Share compensation expenses										692												581
Total underwriting deductions										106,607												66,502
Underwriting loss										$	(9,094	)										$	(4,715	)

Supplemental information:
Losses and loss expenses:
Current period excluding items below	$	17,548		$	38,774		$	18,822		$	75,144		$	9,496		$	34,576		$	—		$	44,072
Current period—notable loss events	—			—			—			—			—			—			—			—
Current period—non-notable loss events	—			—			—			—			—			—			—			—
Change in prior accident years	(2,823		)	2,604			—			(219		)	(441		)	(3,985		)	—			(4,426		)
Total losses and loss expenses	$	14,725		$	41,378		$	18,822		$	74,925		$	9,055		$	30,591		$	—		$	39,646
Selected ratios:
Ratio of net to gross premiums written	82.3		%	98.9		%	100.0		%	96.7		%	89.9		%	94.7		%	—		%	93.5		%
Losses and loss expense ratio:
Current period excluding items below	87.5		%	68.7		%	90.6		%	77.2		%	77.9		%	70.1		%	—		%	71.7		%
Current period—notable loss events	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Current period—non-notable loss events	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Change in prior accident years	(14.1		)%	4.6		%	—		%	(0.2		)%	(3.6		)%	(8.1		)%	—		%	(7.2		)%
Losses and loss expense ratio	73.4		%	73.3		%	90.6		%	77.0		%	74.3		%	62.0		%	—		%	64.5		%
Policy acquisition cost ratio	26.8		%	22.8		%	9.4		%	20.8		%	23.8		%	22.9		%	—		%	23.1		%
General and administrative expense ratio ^(a)										11.8		%										20.5		%
Expense ratio										32.6		%										43.6		%
Combined ratio										109.6		%										108.1		%


(a)	The general and administrative expense ratio includes share compensation expenses.

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Highlights for the first quarter 2017 as compared to 2016 were as follows:


•	Gross premiums written for the three months ended March 31, 2017 were $172.0 million compared to $64.0 million for the three months ended March 31, 2016 , an increase of $108.1 million , or 169.0% . The increase in gross premiums written was primarily driven by:


◦	An increase in gross premiums written in specialty lines of $84.3 million due to new agriculture business written in relation to CRS; and

◦

An increase in gross premiums written in the property and liability lines of $12.7 million and $11.1 million , respectively, primarily due to the continued build out of product offerings in the short-tail property lines. The increase in the liability lines was primarily driven by an increase in the contract liability lines and was partially offset by decreases resulting from the discontinuation of other underperforming general liability lines.


•	Reinsurance premiums ceded for the three months ended March 31, 2017 were $5.6 million compared to $4.1 million for the three months ended March 31, 2016 , an increase of $1.5 million , or 35.7% .


•	Net premiums earned for the three months ended March 31, 2017 were $97.3 million compared to $61.5 million for the three months ended March 31, 2016 , an increase of $35.8 million , or 58.2% . The increase was primarily driven by the increase in gross premiums written in all lines of business and was partially offset by the discontinuation of underperforming liability lines as noted above.

•

Losses and loss expenses for the three months ended March 31, 2017 were $74.9 million compared to $39.6 million for the three months ended March 31, 2016 , an increase of $35.3 million or 89.0% . The increase was driven by higher U.S.-based weather related losses and lower favorable development on prior accident years during the three months ended March 31, 2017. The loss ratio for the three months ended March 31, 2017 included U.S.-based weather related losses of $8.1 million, or 8.3 percentage points of the loss ratio, compared to $2.0 million, or 3.3 percentage points of the loss ratio during the three months ended March 31, 2016.

Notable and Non-notable Loss Events


◦	There were no notable or non-notable loss events occurring during the three months ended March 31, 2017 or 2016 .


•	Policy acquisition cost ratio for the three months ended March 31, 2017 was 20.8% compared to 23.1% for the three months ended March 31, 2016 , a decrease of 2.3 percentage points of the policy acquisition costs ratio. The decrease was primarily driven by new agriculture business written during the three months ended March 31, 2017 .


•	General and administration expenses for the three months ended March 31, 2017 were $10.8 million compared to $12.1 million for the three months ended March 31, 2016 , a decrease of $1.3 million , or 10.9% , primarily as a result of staff reductions in the second quarter of 2016.

•

Combined ratio for the three months ended March 31, 2017 and 2016 was 109.6% and 108.1% , respectively, an increase of 1.5 percentage points. The increase was primarily due to the increase in the loss ratio as noted above and was partially offset by a decrease in the expense ratio as a result of premium growth in the property and liability lines as well as new agriculture business written during the three months ended March 31, 2017 .

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First Quarter 2017 Results of Operations - AlphaCat Segment

The following table presents Validus’ share of the AlphaCat segment income on an asset manager basis for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Revenues
Third party	$	4,644		$	4,727
Related party	631			891
Total revenues	5,275			5,618

Expenses
General and administrative expenses	3,844			1,482
Share compensation expenses	82			141
Finance expenses	31			808
Tax benefit	(1		)	—
Foreign exchange (losses) gains	(1		)	8
Total expenses	3,955			2,439
Income before investment income from AlphaCat Funds and Sidecars	$	1,320		$	3,179

Investment income (loss) from AlphaCat Funds and Sidecars ^(a)
AlphaCat Sidecars	(112		)	124
AlphaCat ILS Funds - Lower Risk ^(b)	2,189			2,507
AlphaCat ILS Funds - Higher Risk ^(b)	2,367			2,436
BetaCat ILS Funds	368			563
PaCRe	—			(23		)
Total investment income from AlphaCat Funds and Sidecars	4,812			5,607
Validus’ share of AlphaCat segment income	$	6,132		$	8,786

Supplemental information:
Gross premiums written
AlphaCat Sidecars	$	66		$	(52	)
AlphaCat ILS Funds - Lower Risk ^(b)	52,908			59,958
AlphaCat ILS Funds - Higher Risk ^(b)	93,536			96,320
AlphaCat Direct ^(c)	18,416			11,122
Total	$	164,926		$	167,348


(a)	The investment income from the AlphaCat funds and sidecars is based on equity accounting.


(b)	Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.


(c)	AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

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Revenues

Revenues earned for the three months ended March 31, 2017 were $5.3 million compared to $5.6 million during the three months ended March 31, 2016 , a decrease of $0.3 million or 6.1% . Third party revenues earned during the three months ended March 31, 2017 were $4.6 million , compared to $4.7 million , a decrease of $0.1 million or 1.8% .

Expenses

Expenses for the three months ended March 31, 2017 were $4.0 million compared to $2.4 million during the three months ended March 31, 2016 , an increase of $1.5 million , or 62.2% , primarily driven by a higher allocation of costs to the AlphaCat segment.

Investment income from AlphaCat Funds and Sidecars

Investment income from the AlphaCat Funds and Sidecars for the three months ended March 31, 2017 was $4.8 million compared to $5.6 million during the three months ended March 31, 2017 , a decrease of $0.8 million or 14.2% .

Assets Under Management



	Assets Under Management ^(a)
(Dollars in thousands)	April 1, 2017		January 1, 2017
Assets Under Management - Related Party
AlphaCat Sidecars	$	5,656	$	7,729
AlphaCat ILS Funds - Lower Risk	125,098		124,297
AlphaCat ILS Funds - Higher Risk	86,679		83,881
AlphaCat Direct ^(b)	—		—
BetaCat ILS Funds	27,062		26,808
Total	$	244,495	$	242,715

Assets Under Management - Third Party
AlphaCat Sidecars	$	20,422	$	28,829
AlphaCat ILS Funds - Lower Risk	1,302,337		1,257,287
AlphaCat ILS Funds - Higher Risk	790,734		738,813
AlphaCat Direct ^(b)	457,744		444,668
BetaCat ILS Funds	87,375		29,000
Total	2,658,612		2,498,597
Total Assets Under Management	$	2,903,107	$	2,741,312


(a)	The Company’s assets under management are based on NAV and are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.


(b)	AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.

AlphaCat’s assets under management were $2.9 billion as at April 1, 2017 , compared to $2.7 billion as at January 1, 2017 . Third party assets under management were $2.7 billion as at April 1, 2017 , compared to $2.5 billion as at January 1, 2017 . During the three months ended April 1, 2017 , a total of $140.5 million of capital was raised, of which $138.5 million was raised from third parties. During the three months ended April 1, 2017 , $12.6 million was returned to investors, of which $10.5 million was returned to third party investors.

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First Quarter 2017 Results - Corporate and Investments

The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended March 31, 2017 and 2016 :



	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Investment income
Managed net investment income ^(a)	$	36,192		$	27,923

Corporate expenses
General and administrative expenses	17,177			16,183
Share compensation expenses	3,413			4,092
Finance expenses ^(a)	13,864			14,341
Dividends on preferred shares	2,203			—
Tax benefit ^(a)	(3,548		)	(2,118		)
Total Corporate expenses	33,109			32,498

Other items
Net realized losses on managed investments ^(a)	(2,892		)	(1,086		)
Change in net unrealized gains on managed investments ^(a)	14,349			47,078
Income (loss) from investment affiliates	5,188			(4,113		)
Foreign exchange gains ^(a)	1,103			6,074
Other income	94			677
Total other items	17,842			48,630
Total Corporate and Investments	$	20,925		$	44,055


(a)	These items exclude the components which are included in the Company’s share of AlphaCat and amounts which are consolidated from VIEs.

Investments

Highlights for the first quarter 2017 as compared to 2016 were as follows:

•

Managed net investment income from our managed investment portfolio for the three months ended March 31, 2017 was $36.2 million compared to $27.9 million for the three months ended March 31, 2016 , an increase of $8.3 million , or 29.6% . The increase was primarily driven by returns on the Company's portfolio of structured securities, of which $3.9 million was generated from a single fixed income fund during the three months ended March 31, 2017 compared to a loss of $2.4 million from the same fund during the three months ended March 31, 2016 .


•	Annualized effective yield for the three months ended March 31, 2017 was 2.27% , compared to 1.79% for the three months ended March 31, 2016 , an increase of 48 basis points.


•	Net realized losses on managed investments for the three months ended March 31, 2017 were $2.9 million compared to $1.1 million for the three months ended March 31, 2016 , an unfavorable movement of $1.8 million .

•

The change in net unrealized gains on managed investments for the three months ended March 31, 2017 was $14.3 million compared to $47.1 million for the three months ended March 31, 2016 , an unfavorable movement of $32.7 million , or 69.5% . The unfavorable movement was primarily driven by the impact of changes in interest rates on the Company's managed fixed maturity investment portfolio during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

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Corporate Expenses

Highlights for the first quarter 2017 as compared to 2016 were as follows:


•	General and administrative expenses for the three months ended March 31, 2017 were $17.2 million compared to $16.2 million for the three months ended March 31, 2016 , an increase of $1.0 million or 6.1% .


•	Share compensation expenses for the three months ended March 31, 2017 were $3.4 million compared to $4.1 million for the three months ended March 31, 2016 , a decrease of $0.7 million or 16.6% .


•	Finance expenses, excluding the Company's share of AlphaCat finance expenses from consolidated variable interest entities, for the three months ended March 31, 2017 were $13.9 million compared to $14.3 million for the three months ended March 31, 2016 , a decrease of $0.5 million or 3.3% .


•	The Company issued $150.0 million of preferred shares in June 2016. Dividends paid on preferred shares during the three months ended March 31, 2017 were $2.2 million .

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Liquidity and Capital Resources

Investments

Managed investments represent assets governed by the Company’s Investment Policy Statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 5 , “ Variable interest entities ,” to the Consolidated Financial Statements in Part I, Item 1 for further details.

The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at March 31, 2017 and December 31, 2016 was as follows:



	Fair Value
	March 31, 2017		December 31, 2016
Managed investments, cash and cash equivalents and restricted cash
Fixed maturities
U.S. government and government agency	$	718,025	$	804,126
Non-U.S. government and government agency	258,463		240,791
U.S. states, municipalities and political subdivisions	229,129		271,830
Agency residential mortgage-backed securities	653,395		679,595
Non-agency residential mortgage-backed securities	19,382		15,477
U.S. corporate	1,486,882		1,534,508
Non-U.S. corporate	397,989		410,227
Bank loans	567,012		570,399
Asset-backed securities	514,690		526,814
Commercial mortgage-backed securities	318,288		330,932
Total fixed maturities	5,163,255		5,384,699
Short-term investments	232,955		228,386
Other investments
Fund of hedge funds	996		955
Hedge funds	17,624		17,381
Private equity investments	95,927		82,627
Fixed income investment funds	269,113		249,275
Overseas deposits	53,709		50,106
Mutual funds	5,635		5,368
Total other investments	443,004		405,712
Investment in investment affiliate	94,697		100,431
Cash and cash equivalents	619,810		415,419
Restricted cash	36,099		15,000
Total managed investments, cash and cash equivalents and restricted cash	$	6,589,820	$	6,549,647

Non-managed investments, cash and cash equivalents and restricted cash
Catastrophe bonds	$	201,961	$	158,331
Short-term investments	2,552,271		2,567,784
Cash and cash equivalents	4,127		4,557
Restricted cash	56,448		55,956
Total non-managed investments, cash and cash equivalents and restricted cash	2,814,807		2,786,628
Total investments and cash	$	9,404,627	$	9,336,275

As at March 31, 2017 , the Company’s managed cash and investment portfolio totaled $6.6 billion ( December 31, 2016 : $6.5 billion ). Refer to Note 3 , “ Investments ,” to the Consolidated Financial Statements in Part I, Item 1 for further details related to the Company’s managed investments.

A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s IPS specifically requires

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certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.

The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.00 years. At March 31, 2017 , the average duration of the Company’s managed investment portfolio was 2.16 years (December 31, 2016 : 2.26 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and general market conditions.

The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities assigned ratings. Further limits on asset classes and security types are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At March 31, 2017 , the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- ( December 31, 2016 : AA- ). Refer to Note 3 (a) to the Consolidated Financial Statements, “Investments,” in Part I, Item 1 for further details related to the investment ratings of the Company’s fixed maturity portfolio.

The value of the Company’s managed fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, investment funds and private equity investments. For further details on market risks, refer to

Item 7A, “ Quantitative and Qualitative Disclosures About Market Risk ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

As part of the ongoing risk management process, the Company monitors the aggregation of country or jurisdiction risk exposure. Jurisdiction risk exposure is the risk that events within a jurisdiction, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors within the jurisdiction to honor their obligations. The following table provides a breakdown of the fair value of jurisdiction risk exposures outside the United States within the Company’s managed fixed maturity portfolio:



	March 31, 2017
(Dollars in thousands)	Fair Value		% of Total
Germany	$	77,134	11.8	%
Supranational	40,574		6.2	%
United Kingdom	29,063		4.4	%
Canada	21,150		3.2	%
Province of Ontario	13,423		2.0	%
France	11,392		1.7	%
Jordan	10,083		1.5	%
Other (individual jurisdictions below $10,000)	55,643		8.5	%
Total Managed Non-U.S. Government Securities	258,462		39.4	%
European Corporate Securities	186,199		28.4	%
United Kingdom Corporate Securities	96,684		14.7	%
Other Non-U.S. Corporate Securities	115,106		17.5	%
Total Managed Non-U.S. Fixed Maturity Portfolio	$	656,451	100.0	%

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	December 31, 2016
(Dollars in thousands)	Fair Value		% of Total
Germany	$	66,886	10.3	%
Supranational	41,502		6.4	%
United Kingdom	36,178		5.6	%
Canada	15,836		2.4	%
Province of Ontario	12,387		1.9	%
Norway	12,085		1.9	%
France	10,360		1.6	%
Jordan	10,080		1.5	%
Other (individual jurisdictions below $10,000)	35,477		5.4	%
Total Managed Non-U.S. Government Securities	240,791		37.0	%
European Corporate Securities	173,326		26.6	%
United Kingdom Corporate Securities	96,425		14.8	%
Other Non-U.S. Corporate Securities	140,476		21.6	%
Total Managed Non-U.S. Fixed Maturity Portfolio	$	651,018	100.0	%

At March 31, 2017 , the Company did not have an aggregate exposure to any single issuer of more than 1.0% ( December 31, 2016 : 1.0% ) of total managed investments and cash, other than with respect to government and agency securities. The top ten exposures to fixed income corporate issuers at March 31, 2017 were as follows:



	March 31, 2017
Issuer ^(a)	Fair Value ^(b)		S&P Rating ^(c)	% of Managed Investments and Cash
JPMorgan Chase & Co	$	61,927	BBB+	1.0	%
Morgan Stanley	50,826		BBB+	0.8	%
Bank of America Corp	49,113		BBB+	0.7	%
Wells Fargo & Company	45,991		A	0.7	%
Citigroup Inc	45,943		BBB	0.7	%
Goldman Sachs Group	44,520		BBB+	0.7	%
Anheuser-Busch Inbev NV	35,051		A-	0.5	%
Bank of New York Mellon Corp	32,727		A	0.5	%
US Bancorp	28,325		A+	0.4	%
Daimler AG	26,631		A	0.4	%
Total	$	421,054		6.4	%

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	December 31, 2016
Issuer ^(a)	Fair Value ^(b)		S&P Rating ^(c)	% of Managed Investments and Cash
JPMorgan Chase & Co	$	66,827	BBB+	1.0	%
Citigroup Inc	52,737		BBB	0.8	%
Bank of America Corp	50,280		BBB+	0.8	%
Morgan Stanley	48,273		BBB+	0.7	%
Goldman Sachs Group	46,261		BBB+	0.7	%
Wells Fargo & Company	44,596		A	0.7	%
Anheuser-Busch Inbev NV	39,674		A-	0.6	%
Bank of New York Mellon Corp	34,619		A	0.5	%
HSBC Holdings plc	29,411		A	0.4	%
US Bancorp	28,175		AA-	0.4	%
Total	$	440,853		6.6	%


(a)	Issuers exclude government-backed government-sponsored enterprises and cash and cash equivalents.


(b)	Credit exposures represent only direct exposure to fixed maturities and short-term investments of the parent issuer and its major subsidiaries. These exposures exclude asset and mortgage backed securities that were issued, sponsored or serviced by the parent.


(c)	Investment ratings are the median of Moody’s, Standard & Poor’s and Fitch. For investments where three ratings are unavailable, the lower of the ratings shall apply. All investment ratings are presented as the Standard & Poor’s equivalent rating.

Reserves for Losses and Loss Expenses

At March 31, 2017 , gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

The following tables indicate the breakdown of gross and net reserves for losses and loss expenses between lines of business and between case reserves and IBNR.



	March 31, 2017						December 31, 2016
(Dollars in thousands)	Gross Case Reserves		Gross IBNR		Total Gross Reserve for Losses and Loss Expenses		Gross Case Reserves		Gross IBNR		Total Gross Reserve for Losses and Loss Expenses
Property	$	401,020	$	470,837	$	871,857	$	390,141	$	440,531	$	830,672
Marine	369,523		415,291		784,814		389,614		471,845		861,459
Specialty	266,246		559,470		825,716		259,251		473,656		732,907
Liability	197,367		372,991		570,358		198,766		371,391		570,157
Total	$	1,234,156	$	1,818,589	$	3,052,745	$	1,237,772	$	1,757,423	$	2,995,195



	March 31, 2017						December 31, 2016
(Dollars in thousands)	Net Case Reserves		Net IBNR		Total Net Reserve for Losses and Loss Expenses		Net Case Reserves		Net IBNR		Total Net Reserve for Losses and Loss Expenses
Property	$	336,921	$	389,099	$	726,020	$	330,213	$	392,886	$	723,099
Marine	308,703		350,263		658,966		337,550		369,908		707,458
Specialty	230,800		499,780		730,580		222,496		428,864		651,360
Liability	181,869		303,454		485,323		182,185		300,672		482,857
Total	$	1,058,293	$	1,542,596	$	2,600,889	$	1,072,444	$	1,492,330	$	2,564,774

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The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by operating segment for the three months ended March 31, 2017 .



	Three Months Ended March 31, 2017
(Dollars in thousands)	Validus Re			Talbot			Western World			AlphaCat			Eliminations			Total
Reserve for losses and loss expenses, beginning of period	$	1,116,753		$	1,301,517		$	589,500		$	48,534		$	(61,109	)	$	2,995,195
Loss reserves recoverable	(98,005		)	(306,038		)	(87,487		)	—			61,109			(430,421		)
Net reserves for losses and loss expenses, beginning of period	1,018,748			995,479			502,013			48,534			—			2,564,774
Increase (decrease) in net reserves for losses and loss expenses in respect of losses occurring in:
Current year	114,934			135,226			75,144			5,512			—			330,816
Prior years	(28,780		)	(28,814		)	(219		)	(3,418		)	—			(61,231		)
Total net incurred losses and loss expenses	86,154			106,412			74,925			2,094			—			269,585

Foreign exchange loss	8,746			3,423			—			148			—			12,317

Less net losses and loss expenses paid in respect of losses occurring in:
Current year	(2,256		)	(1,083		)	(4,359		)	—			—			(7,698		)
Prior years	(93,957		)	(93,066		)	(46,095		)	(4,971		)	—			(238,089		)
Total net paid losses	(96,213		)	(94,149		)	(50,454		)	(4,971		)	—			(245,787		)

Net reserve for losses and loss expenses, end of period	1,017,435			1,011,165			526,484			45,805			—			2,600,889
Loss reserves recoverable	89,645			335,352			88,944			—			(62,085		)	451,856
Reserve for losses and loss expenses, end of period	$	1,107,080		$	1,346,517		$	615,428		$	45,805		$	(62,085	)	$	3,052,745

For further information regarding the Company’s reserves for losses and loss expenses refer to Note 8 , “Reserve for losses and loss expenses,” to the Consolidated Financial Statements in Part I, Item 1. 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, 2017 , favorable loss reserve development on prior accident years was $61.2 million , of which $28.8 million related to the Validus Re segment, $28.8 million related to the Talbot segment, $0.2 million related to the Western World segment and $3.4 million related to the AlphaCat segment.

The management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of some notable loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for these events. The Company’s actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review may be reserved for in the reserve for potential development on notable loss events (“RDE”) and would be included as part of the Company’s overall reserves. As at March 31, 2017 and December 31, 2016 the Company had no RDE.

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For disclosure purposes, only those notable loss events which have an ultimate loss estimate above $30.0 million are disclosed separately and included in the reserves for notable loss event roll forward table below. To the extent that there are increased complexity and volatility factors relating to notable loss events in the aggregate, RDE may be established for a specific accident year. There were no notable loss events during the three months ended March 31, 2017.



			Year Ended December 31, 2016					Three Months Ended March 31, 2017
2016 Notable Loss Events	Initial estimate ^(a)		Development (Favorable) / Unfavorable			Closing Estimate ^(b)		Development (Favorable) / Unfavorable			Closing Estimate ^(b)
Canadian Wildfires	$	36,915	$	(17,265	)	$	19,650	$	—		$	19,650
Hurricane Matthew	39,140		—			39,140		(1,000		)	38,140
2016 New Zealand Earthquake	31,421		—			31,421		—			31,421
Total	$	107,476	$	(17,265	)	$	90,211	$	(1,000	)	$	89,211

			Paid Loss (Recovery)			Closing Reserve ^(c)		Paid Loss (Recovery)			Closing Reserve ^(c)
Canadian Wildfires			$	5,676		$	13,974	$	1,462		$	12,512
Hurricane Matthew			6,712			32,428		10,885			20,543
2016 New Zealand Earthquake			—			31,421		283			31,138
Total			$	12,388		$	77,823	$	12,630		$	64,193


(a)	Includes paid losses, case reserves and IBNR reserves.


(b)	Excludes impact of movements in foreign exchange rates.


(c)	Closing Reserve for the period equals Closing Estimate for the period less cumulative paid losses (recovery).

Sources of Liquidity

Holding Company Liquidity

Validus Holdings is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from operating subsidiaries within the Validus Re, Talbot, Western World and AlphaCat segments to pay dividends, finance expenses and other holding company expenses. There are restrictions on the payment of dividends from most operating subsidiaries, primarily due to regulatory requirements in the jurisdictions in which the operating subsidiaries are domiciled. The Company believes the dividend/distribution capacity of the Company’s subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing capital structure to meet its short and long-term objectives.

The following table details the capital resources of certain subsidiaries of the Company on an unconsolidated basis:



(Dollars in thousands)	March 31, 2017			December 31, 2016
Validus Reinsurance, Ltd. (excluding capital supporting FAL) ^{(a) (b)}	$	3,794,835		$	3,720,595
Talbot Holdings, Ltd. (including capital supporting FAL) ^(b)	935,728			914,442
Other, net	(35,873		)	(14,158		)
Redeemable noncontrolling interests in AlphaCat	1,657,630			1,528,001
Noncontrolling interests in AlphaCat	330,597			165,977
Total consolidated capitalization	6,682,917			6,314,857
Senior notes payable	(245,412		)	(245,362		)
Debentures payable	(537,402		)	(537,226		)
Redeemable noncontrolling interests in AlphaCat	(1,657,630		)	(1,528,001		)
Total shareholders’ equity	4,242,473			4,004,268
Preferred shares ^(c)	(150,000		)	(150,000		)
Noncontrolling interests in AlphaCat	(330,597		)	(165,977		)
Total shareholders’ equity available to Validus common shareholders ^(c)	$	3,761,876		$	3,688,291


(a)	Validus Reinsurance, Ltd. (excluding capital supporting FAL) includes capital of $740,207 ( December 31, 2016 : $639,113 ) relating to Western World Insurance Group, Inc.


(b)	Validus Reinsurance, Ltd. (excluding capital supporting FAL) excludes capital of $735,731 ( December 31, 2016 : $723,888 ) which supports Talbot’s FAL. This capital was included in Talbot Holdings, Ltd. (including capital supporting FAL).

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(c)	Total shareholders’ equity available to Validus common shareholders excludes the liquidation value of the preferred shares of $150,000.

Sources and Uses of Cash

The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Management believes the Company’s unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies.

In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities. The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

There are three main sources of cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by or used in operating, investing and financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the three months ended March 31, 2017 and 2016 is provided in the following table:



	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Net cash provided by (used in) operating activities	$	17,799	$	(34,046	)
Net cash provided by (used) in investing activities	156,010		(122,026		)
Net cash provided by financing activities	24,354		3,170
Effect of foreign currency rate changes on cash and cash equivalents	5,798		(433		)
Net increase (decrease) in cash and cash equivalents	$	203,961	$	(153,335	)

Operating Activities

Cash flow from operating activities is derived primarily from the receipt of premiums less the payment of losses and loss expenses related to underwriting activities.

Net cash provided by operating activities during the three months ended March 31, 2017 was $17.8 million compared to net cash used used in operating activities $34.0 million during the three months ended March 31, 2016 , a favorable movement of $51.8 million . This favorable movement was primarily due to the timing of cash receipts and payments, notably with regard to premiums receivable and losses payable, respectively.

We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the “Capital Resources” section below for further information on our anticipated obligations.

Investing Activities

Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company’s investment portfolio. As at March 31, 2017 , the Company’s portfolio was composed of fixed income, short-term and other investments and investments in investment affiliates amounting to $8.7 billion or 92.4% of total cash and investments. For further details related to investments pledged as collateral, refer to Note 3 , “Investments,” to the Consolidated Financial Statements in Part I, Item 1.

Net cash provided by investing activities during the three months ended March 31, 2017 was $156.0 million compared to net cash used of $122.0 million for the three months ended March 31, 2016 , representing a favorable movement of $278.0 million . This favorable movement was primarily due to lower purchases of fixed maturity investments and the sale of short-term investments during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 .

Financing Activities

Cash flow from financing activities is derived primarily from the issuance and purchase of shares in the Company and its subsidiaries, including third party investments in the AlphaCat ILS funds and sidecars, as well as the issuance of notes payable to AlphaCat investors.

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Net cash provided by financing activities during the three months ended March 31, 2017 was $24.4 million compared to $3.2 million during the three months ended March 31, 2016 , a favorable movement of $21.2 million .

This favorable movement was driven primarily by a decrease in share repurchases of $60.4 million and an increase in third party subscriptions deployed on AlphaCat funds and sidecars of $267.6 million and was partially offset by net redemptions in third party noncontrolling and redeemable noncontrolling interests of $123.9 million and a decrease in the issuance of notes payable to AlphaCat investors of $174.4 million .

Capital Resources

The following table details the Company’s capital position as at March 31, 2017 and December 31, 2016 .



(Dollars in thousands)	March 31, 2017			December 31, 2016
Senior Notes ^(a)	$	245,412		$	245,362
Junior Subordinated Deferrable Debentures (JSDs) ^(a)	289,800			289,800
Flagstone Junior Subordinated Deferrable Debentures (JSDs) ^(a)	247,602			247,426
Total debt	$	782,814		$	782,588

Redeemable noncontrolling interests	$	1,657,630		$	1,528,001

Preferred shares, liquidation value ^(b)	$	150,000		$	150,000
Ordinary shares, capital and surplus available to Validus common shareholders	3,784,329			3,711,507
Accumulated other comprehensive loss	(22,453		)	(23,216		)
Noncontrolling interests	330,597			165,977
Total shareholders’ equity	$	4,242,473		$	4,004,268

Total capitalization ^(c)	$	6,682,917		$	6,314,857

Total capitalization available to Validus ^(d)	$	4,694,690		$	4,620,879

Debt to total capitalization	11.7		%	12.4		%
Debt (excluding JSDs) to total capitalization	3.7		%	3.9		%
Debt and preferred shares to total capitalization	14.0		%	14.8		%

Debt to total capitalization available to Validus	16.7		%	16.9		%
Debt (excluding JSDs) to total capitalization available to Validus	5.2		%	5.3		%
Debt and preferred shares to total capitalization available to Validus	19.9		%	20.2		%


(a)	Refer to Part I, Item 1, Note 12 to the Consolidated Financial Statements, “ Debt and financing arrangements,” for further details and discussion on the debt and financing arrangements of the Company.


(b)	Refer to Part I, Item 1, Note 10 to the Consolidated Financial Statements, “ Share capital ,” for further details and discussion on the Company’s preferred shares.


(c)	Total capitalization equals total shareholders’ equity plus redeemable noncontrolling interests and total debt.


(d)	Total capitalization available to Validus equals total capitalization as per (c) less redeemable noncontrolling interests and noncontrolling interests.

Shareholders’ Equity

Shareholders’ equity available to Validus common shareholders at March 31, 2017 was $3.8 billion , compared to $3.7 billion at December 31, 2016 . Including $150.0 million of preferred shares, shareholders’ equity available to Validus at March 31, 2017 was $3.9 billion , compared to $3.8 billion at December 31, 2016 .

On February 9, 2017 , the Company announced a quarterly cash dividend of $0.38 per common share, which was paid on March 31, 2017 to shareholders of record on March 15, 2017 and a cash dividend of $0.3671875 per depositary share on the outstanding Series A Preferred Shares, which was paid on March 15, 2017 to shareholders of record on March 1, 2017 . The timing and amount of any future cash dividends, however, will be at the discretion of the Board and will depend upon results of operations and cash

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flows, the Company’s financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that the Board deems relevant.

The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. The Company has repurchased 80,508,849 common shares for an aggregate purchase price of $2.7 billion from the inception of the share repurchase program to May 3, 2017 . The Company had $320.0 million remaining under its authorized share repurchase program as of May 3, 2017 .

Debt and Financing Arrangements

For additional information about our debt, including the terms of our financing arrangements, basis for interest rates and debt covenants, refer to Part I, Item 1, Note 12 to the Consolidated Financial Statements, “Debt and financing arrangements” and Part I, Item 1, Note 20 to the Consolidated Financial Statements, “ Debt and financing arrangements, ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

Noncontrolling interests

Investors in certain of the AlphaCat and BetaCat ILS funds have rights that enable them, subject to certain limitations, to redeem their shares. The third party equity is therefore recorded in the Company’s Consolidated Balance Sheets as redeemable noncontrolling interests. When and if a redemption notice is received, the fair value of the redemption is reclassified to a liability. As at March 31, 2017 and December 31, 2016 , the amount of the Company’s total capitalization owed to third parties as redeemable noncontrolling interests was $1.7 billion and $1.5 billion , respectively.

The AlphaCat sidecars and one of the AlphaCat ILS funds have no shareholder redemption rights. Therefore, the third party equity is recorded in the Company’s Consolidated Balance Sheets as noncontrolling interests. As at March 31, 2017 and December 31, 2016 , the amount of the Company’s total capitalization owed to third parties as noncontrolling interests was $330.6 million and $166.0 million , respectively. Refer to Part I, Item I, Notes 5 and 6 to the Consolidated Financial Statements, “Variable Interest Entities,” and “Noncontrolling interests,” respectively, for further details.

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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 5, 2017 :



	A.M. Best	S&P	Moody’s	Fitch
Validus Holdings, Ltd.
Issuer credit rating	bbb	BBB+	Baa1	A-
Senior debt	bbb	BBB+	Baa1	BBB+
Subordinated debt	bbb-	—	Baa2	BBB
Preferred stock	bb+	BBB-	Baa3	BBB
Outlook on ratings	Positive	Stable	Stable	Stable

Validus Reinsurance, Ltd.
Financial strength rating	A	A	A2	A
Outlook on ratings	Stable	Stable	Stable	Stable

Lloyd’s of London
Financial strength rating applicable to all Lloyd’s syndicates	A	A+	—	AA-
Outlook on ratings	Stable	Stable	—	Stable

Validus Reinsurance (Switzerland) Ltd
Financial strength rating	A	A	—	—
Outlook on ratings	Stable	Stable	—	—

Western World Insurance Company
Financial strength rating	A	—	—	—
Outlook on ratings	Stable	—	—	—

Recent Accounting Pronouncements

For information relating to relevant recent accounting pronouncements, refer to Part I, Item 1, Note 2 to the Consolidated Financial Statements, “ Recent accounting pronouncements ,” for further details.

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Critical Accounting Policies and Estimates

There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of the Company’s Consolidated Financial Statements:


•	reserve for losses and loss expenses;


•	premium estimates for business written on a line slip or proportional basis;


•	the valuation of goodwill and intangible assets;


•	reinsurance recoverable balances including the provision for uncollectible amounts; and


•	investment valuation of financial assets.

Critical accounting policies and estimates are discussed further in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

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.

The Company believes 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 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;

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•	general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate;


•	the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to these new businesses;

•

accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information;


•	the effect on the Company’s investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors;


•	acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events;


•	availability and cost of reinsurance and retrocession coverage;


•	the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us;


•	the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us;


•	changes in domestic or foreign laws or regulations, or their interpretations;


•	changes in accounting principles or the application of such principles by regulators;


•	statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers; and

•

the other factors set forth under Part I Item 1A “ Risk Factors ” and under Part II Item 7 “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the other sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 , as well as the risk and other factors set forth in the Company’s other filings with the SEC, as well as management’s response to any of the aforementioned factors.

In addition, other general factors could affect the Company’s results, including: (a) developments in the world’s financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company or our business or operations. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A, “ Quantitative and Qualitative Disclosures About Market Risk ” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 . The Company’s exposure to market risks has not changed materially since December 31, 2016 .

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined and in pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed

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in this report has been recorded, processed, summarized and reported when required and the information is accumulated and communicated, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the normal course of business, the Company and its subsidiaries are subject to litigation and arbitration. Legal proceedings such as claims litigation are common in the insurance and reinsurance industry in general. The Company and its subsidiaries may be subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on reinsurance treaties or contracts or insurance policies.

Litigation typically can include, but is not limited to, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. These events are difficult, if not impossible, to predict with certainty. It is Company policy to dispute all allegations against the Company and/or its subsidiaries that management believes are without merit.

As at March 31, 2017 , the Company was not a party to, or involved in any litigation or arbitration that it believes could have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

ITEM 1A. RISK FACTORS

The Company’s results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 . The risk factors identified therein have not materially changed.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company, from time to time, repurchases its shares in the open market, or in privately negotiated transactions, under its share repurchase program. 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. Share repurchases may also include repurchases by the Company of shares from employees in order to facilitate the payment of withholding taxes on restricted shares that have vested. The Company repurchases these shares at their fair market value, as determined by reference to the closing price of its common shares on the day the restricted shares vested. The Company’s share repurchase program may be modified, extended or terminated by its Board of Directors at any time.

The Company did not repurchase any shares during the three months ended March 31, 2017 . The Company has, from the inception of its share repurchase program to May 3, 2017 , repurchased 80,508,849 common shares for an aggregate purchase price of $2.7 billion . As of May 3, 2017 , the Company had $320.0 million remaining under its authorized share repurchase program.

The table below details the following repurchases that were made under the Program through to May 3, 2017 .



	Total shares repurchased under publicly announced repurchase program
(Dollars in thousands, except share and per share amounts)	Total number of shares repurchased	Aggregate Purchase Price ^(a)		Average Price per Share ^(a)		Approximate dollar value of shares that may yet be purchased under the Program
Cumulative inception-to-date to May 3, 2017	80,508,849	$	2,704,406	$	33.59	$	319,995


(a)	Share transactions are on a trade date basis through May 3, 2017 and are inclusive of commissions. Average share price is rounded to two decimal places.


(b)	The maximum number of shares that may yet be purchased under the program is calculated using the average execution price at month end.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION

Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934

Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.

Effective January 16, 2016, the Office of Foreign Assets Control of the U.S. Department of the Treasury adopted General License H which authorizes non-U.S. entities that are owned or controlled by a U.S. person to engage in certain activities with Iran so long as they comply with certain specific requirements set forth therein.

Certain of the Company’s non-U.S. subsidiaries provide global marine hull & war policies that provide coverage for vessels navigating into and out of ports worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that certain of its policyholders have begun to ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Since these policies insure multiple voyages and fleets containing multiple ships, the Company is unable to attribute gross revenues and net profits from such marine policies to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.

Certain of the Company’s other non-U.S. subsidiaries have policies that provide excess of loss reinsurance coverage for various risks worldwide. In light of EU and U.S. modifications to Iran sanctions in 2016, including the issuance of General License H, and consistent with General License H, the Company has been notified that one of its cedants provides hull and marine, war and related coverage to a drilling contractor that operates drilling rigs located in offshore Iranian oilfields. As the reinsurance coverage provided to this cedant covers multiple global risks and multiple insureds, the Company is unable to attribute gross revenues and net profits from such policy to these activities involving Iran. The Company intends for its non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.

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ITEM 6. EXHIBITS



Exhibit	Description

Exhibit 31.1*	Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

Exhibit 31.2*	Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

Exhibit 32*	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

Exhibit 101.1 INS*	XBRL Instance Document

Exhibit 101.SCH*	XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

*Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		VALIDUS HOLDINGS, LTD.
		(Registrant)

Date:	May 5, 2017	/s/ Edward J. Noonan
		Edward J. Noonan
		Chief Executive Officer

Date:	May 5, 2017	/s/ Jeffrey D. Sangster
		Jeffrey D. Sangster
		Executive Vice President and Chief Financial Officer