Validus Announces Second Quarter Net Operating Income Available to Validus of $1.03 Per Diluted Shar

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Validus AnnouncesSecond Quarter Net Operating Income Available to Validus of $1.03 Per Diluted Share

Annualized Net Operating Return on Average Equity of 11.9%

Net Income Available to Validus of $30.7 Million


PEMBROKE, Bermuda--(BUSINESS WIRE)-- Validus Holdings, Ltd. ("Validus" or the "Company") (NYS: VR) today reported net income available to Validus of $30.7 million, or $0.28 per diluted common share for the three months ended June 30, 2013, compared to $167.6 million, or $1.62 per diluted common share, for the three months ended June 30, 2012. Net income available to Validus for the six months ended June 30, 2013 was $254.0 million, or $2.21 per diluted common share compared to $291.9 million, or $2.80 per diluted common share, for the six months ended June 30, 2012.

Net operating income available to Validus for the three months ended June 30, 2013 was $111.4 million, or $1.03 per diluted common share, compared to $171.2 million, or $1.65 per diluted common share, for the three months ended June 30, 2012. Net operating income available to Validus for the six months ended June 30, 2013 was $327.1 million, or $2.90 per diluted common share, compared to $264.1 million, or $2.53 per diluted common share, for the six months ended June 30, 2012.

Commenting on the financial results for the quarter ended June 30, 2013, Validus' Chairman and CEO Ed Noonan stated:

"I am pleased to announce another very good quarter for Validus with diluted net operating income of $1.03 per share and an annualized net operating return on average equity of 11.9%. All three of our segments - Validus Re, AlphaCat and Talbot - performed strongly, with particularly notable numbers posted by Talbot, which had record second quarter net operating income of 56.6 million."

Net income available to Validus, diluted earnings per share available to Validus, net operating income available to Validus, and diluted operating earnings per share available to Validus by entity for the three months ended June 30, 2013 were as follows:

  

Net Income
Available to
Validus

Diluted Earnings
Per Share
Available to
Validus

Net Operating
Income Available
to Validus

Diluted
Operating
Earnings Per
Share Available
to Validus

(Expressed in millions of U.S. dollars, except per share information)
Validus Re$14.4$73.6
PaCRe, Ltd.(6.9)0.2
Other AlphaCat Companies12.211.6
Talbot41.956.6
Corporate & Eliminations (30.9) (30.6) 
Total$30.7 $0.28 $111.4 $1.03

Net operating income (loss), a non-GAAP financial measure, is defined as net income (loss) excluding net realized and unrealized gains (losses) on investments, foreign exchange gains (losses), income (loss) from investment affiliates and non-recurring items. Net operating income (loss) available (attributable) to Validus is defined as net operating income (loss) as defined above, but excludes income (loss) available (attributable) to noncontrolling interest. Reconciliations of these measures to net income (loss) and net income (loss) available (attributable) to Validus, the most directly comparable GAAP measures, are presented at the end of this release.

Second Quarter 2013 Results

Highlights for the second quarter include the following:

  • Gross premiums written for the three months ended June 30, 2013 were $702.3 million compared to $627.1 million for the three months ended June 30, 2012, an increase of $75.2 million, or 12.0%.
  • Net premiums earned for the three months ended June 30, 2013 were $547.5 million compared to $447.6 million for the three months ended June 30, 2012, an increase of $99.8 million, or 22.3%.
  • Underwriting income for the three months ended June 30, 2013 was $117.7 million compared to $149.4 million for the three months ended June 30, 2012, a decrease of $31.7 million, or 21.2%.
  • Combined ratio of 78.5% which included $41.0 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 7.5 percentage points.
  • Net operating income available to Validus for the three months ended June 30, 2013 was $111.4 million compared to $171.2 million for the three months ended June 30, 2012, a decrease of $59.8 million, or 34.9%.
  • Net income available to Validus for the three months ended June 30, 2013 was $30.7 million compared to $167.6 million for the three months ended June 30, 2012, a decrease of $136.9 million, or 81.7%.
  • Annualized return on average equity of 3.3% and annualized net operating return on average equity of 11.9%.

Highlights for the year to date include the following:

  • Gross premiums written for the six months ended June 30, 2013 were $1,807.1 million compared to $1,464.4 million for the six months ended June 30, 2012, an increase of $342.7 million, or 23.4%.
  • Net premiums earned for the six months ended June 30, 2013 were $1,078.5 million compared to $898.8 million for the six months ended June 30, 2012, an increase of $179.7 million, or 20.0%.
  • Underwriting income for the six months ended June 30, 2013 was $327.7 million compared to $218.6 million for the six months ended June 30, 2012, an increase of $109.1 million, or 49.9%.
  • Combined ratio of 69.7% which included $106.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.9 percentage points.
  • Net operating income available to Validus for the six months ended June 30, 2013 was $327.1 million compared to $264.1 million for the six months ended June 30, 2012, an increase of $63.0 million, or 23.9%.
  • Net income available to Validus for the six months ended June 30, 2013 was $254.0 million compared to $291.9 million for the six months ended June 30, 2012, a decrease of $37.9 million, or 13.0%.
  • Annualized return on average equity of 13.2% and annualized net operating return on average equity of 17.0%.

Notable Loss Events

During the three months ended June 30, 2013, the Company incurred $77.6 million of losses from a notable loss event, which represented 14.2 percentage points of the loss ratio. For the three months ended June 30, 2012, the Company did not incur any losses from notable events. Including the impact of $7.1 million of reinstatement premiums, the effect of this event on second quarter 2013 net income was a decrease of $70.4 million. The Company's loss ratio, excluding prior year development, and notable loss events for the three months ended June 30, 2013 and 2012 was 41.7% and 42.7%, respectively.

         
Three Months Ended June 30, 2013
(Dollars in thousands) 

Second Quarter 2013 Notable
Loss Event (a)

Validus ReAlphaCat (d) TalbotTotal
Description  

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

 

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

European floodsFloods$69,895 22.9%$975 2.8% $6,717 3.2%$77,587 14.2%
Total$69,895 22.9%$975 2.8% $6,717 3.2%$77,587 14.2%
 
 
Three Months Ended June 30, 2012
(Dollars in thousands) 

Second Quarter 2012 Notable
Loss Events (a)

Validus ReAlphaCatTalbotTotal
Description  

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

Net Losses
and Loss
Expenses (b)

% of NPE
(c)

None$ %$ %$ %$ %
Total$ %$ %$ %$ %
(a) The notable loss event amounts were based on management's estimates following a review of the company's potential exposure and discussions with certain clients and brokers. Given the magnitude of this event, and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from this event and the Company's actual ultimate net losses from this event may vary materially from this estimate.
 
(b)Net of reinsurance but not net of reinstatement premiums. Total reinstatement premiums were $7.1 million for the three months ended June 30, 2013.
 
(c)NPE = Net premiums earned
 
(d)The AlphaCat segment incurred loss and loss expenses of $1.0 million. The Company's share of the loss was $0.1 million as a result of Validus' investment in an AlphaCat ILS fund.

Validus Re Segment Results

Gross premiums written for the three months ended June 30, 2013 were $353.4 million compared to $340.9 million for the three months ended June 30, 2012, an increase of $12.5 million, or 3.7%. Gross premiums written for the three months ended June 30, 2013 included $304.9 million of property premiums, $10.8 million of marine premiums and $37.7 million of specialty premiums compared to $292.3 million of property premiums, $24.9 million of marine premiums and $23.7 million of specialty premiums for the three months ended June 30, 2012.

Net premiums earned for the three months ended June 30, 2013 were $304.8 million compared to $242.7 million for the three months ended June 30, 2012, an increase of $62.1 million, or 25.6%.

The combined ratio for the three months ended June 30, 2013 was 81.5% compared to 43.8% for the three months ended June 30, 2012, an increase of 37.7 percentage points.

The loss ratio for the three months ended June 30, 2013 was 60.3% compared to 21.9% for the three months ended June 30, 2012, an increase of 38.4 percentage points. The loss ratio for the three months ended June 30, 2013 included favorable loss reserve development on prior accident years of $3.0 million, benefiting the loss ratio by 1.0 percentage point.

General and administrative expenses for the three months ended June 30, 2013 were $20.4 million compared to $14.1 million for the three months ended June 30, 2012, an increase of $6.3 million or 44.4%. General and administrative expenses have increased primarily due to the acquisition of Flagstone, which accounted for $6.0 million of additional general and administrative expenses for the three months ended June 30, 2013.

Gross premiums written for the six months ended June 30, 2013 were $1,101.3 million compared to $907.7 million for the six months ended June 30, 2012, an increase of $193.6 million, or 21.3%. Gross premiums written for the six months ended June 30, 2013 included $630.9 million of property premiums, $172.2 million of marine premiums and $298.2 million of specialty premiums compared to $610.7 million of property premiums, $223.3 million of marine premiums and $73.6 million of specialty premiums for the six months ended June 30, 2012.

Net premiums earned for the six months ended June 30, 2013 were $607.9 million compared to $495.7 million for the six months ended June 30, 2012, an increase of $112.2 million, or 22.6%.

The combined ratio for the six months ended June 30, 2013 was 66.6% compared to 58.2% for the six months ended June 30, 2012, an increase of 8.4 percentage points.

The loss ratio for the six months ended June 30, 2013 was 42.3% compared to 35.8% for the six months ended June 30, 2012, an increase of 6.5 percentage points. The loss ratio for the six months ended June 30, 2013 included favorable loss reserve development on prior accident years of $31.8 million, benefiting the loss ratio by 5.2 percentage points.

General and administrative expenses for the six months ended June 30, 2013 were $49.9 million compared to $31.4 million for the six months ended June 30, 2012, an increase of $18.5 million or 58.8%. General and administrative expenses have increased primarily due to the acquisition of Flagstone, which accounted for $19.4 million of additional general and administrative expenses for the six months ended June 30, 2013.

AlphaCat Segment Results

Gross premiums written from our consolidated entities, including PaCRe, for the three months ended June 30, 2013 were $46.8 million compared to $15.2 million for the three months ended June 30, 2012, an increase of $31.6 million, or 208.5%.

Managed gross premiums written, including our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the three months ended June 30, 2013 were $46.3 million compared to $58.5 million for the three months ended June 30, 2012, a decrease of $12.3 million, or 20.9%.

Net premiums earned for the three months ended June 30, 2013 were $35.0 million compared to $3.6 million for the three months ended June 30, 2012, an increase of $31.4 million.

The combined ratio for the three months ended June 30, 2013 was 25.7% compared to 79.2% for the three months ended June 30, 2012, a decrease of 53.5 percentage points.

The loss ratio for the three months ended June 30, 2013 was 3.8% compared to 0.0% for the three months ended June 30, 2012, an increase of 3.8 percentage points.

Gross premiums written from our consolidated entities, including PaCRe, for the six months ended June 30, 2013 were $143.3 million compared to $18.7 million for the six months ended June 30, 2012, an increase of $124.6 million.

Managed gross premiums written, including our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the six months ended June 30, 2013 were $142.3 million compared to $135.9 million for the six months ended June 30, 2012, an increase of $6.4 million or 4.7%.

Net premiums earned for the six months ended June 30, 2013 were $62.6 million compared to $6.3 million for the six months ended June 30, 2012, an increase of $56.4 million.

The combined ratio for the six months ended June 30, 2013 was 25.1% compared to 66.9% for the six months ended June 30, 2012, a decrease of 41.8 percentage points.

The loss ratio for the six months ended June 30, 2013 was 2.1% compared to 0.0% for the six months ended June 30, 2012, an increase of 2.1 percentage points.

Talbot Segment Results

Gross premiums written for the three months ended June 30, 2013 were $315.5 million compared to $283.5 million for the three months ended June 30, 2012, an increase of $32.0 million, or 11.3%. Gross premiums written for the three months ended June 30, 2013 included $124.2 million of property premiums, $105.5 million of marine premiums and $85.8 million of specialty premiums compared to $96.8 million of property premiums, $103.8 million of marine premiums and $82.9 million of specialty premiums for the three months ended June 30, 2012.

Net premiums earned for the three months ended June 30, 2013 were $207.7 million compared to $201.4 million for the three months ended June 30, 2012, an increase of $6.4 million, or 3.2%.

The combined ratio for the three months ended June 30, 2013 was 75.3% compared to 87.0% for the three months ended June 30, 2012, a decrease of 11.7 percentage points.

The loss ratio for the three months ended June 30, 2013 was 38.6% compared to 49.9% for the three months ended June 30, 2012, a decrease of 11.3 percentage points. The loss ratio for the three months ended June 30, 2013 included favorable loss reserve development on prior accident years of $38.0 million, benefiting the loss ratio by 18.3 percentage points.

Gross premiums written for the six months ended June 30, 2013 were $609.0 million compared to $576.8 million for the six months ended June 30, 2012, an increase of $32.3 million, or 5.6%. Gross premiums written for the six months ended June 30, 2013 included $202.2 million of property premiums, $230.3 million of marine premiums and $176.6 million of specialty premiums compared to $178.3 million of property premiums, $213.8 million of marine premiums and $184.6 million of specialty premiums for the six months ended June 30, 2012.

Net premiums earned for the six months ended June 30, 2013 were $408.0 million compared to $396.9 million for the six months ended June 30, 2012, an increase of $11.1 million, or 2.8%.

The combined ratio for the six months ended June 30, 2013 was 73.6% compared to 89.8% for the six months ended June 30, 2012, a decrease of 16.2 percentage points.

The loss ratio for the six months ended June 30, 2013 was 37.1% compared to 52.5% for the six months ended June 30, 2012, a decrease of 15.4 percentage points. The loss ratio for the six months ended June 30, 2013 included favorable loss reserve development on prior accident years of $75.0 million, benefiting the loss ratio by 18.4 percentage points.

Corporate Results

Corporate results include executive and board expenses, internal and external audit expenses, interest and costs incurred in connection with the Company's senior notes and junior subordinated deferrable debentures and other costs relating to the Company as a whole. General and administrative expenses for the three months ended June 30, 2013 were $14.4 million compared to $14.1 million for the three months ended June 30, 2012, an increase of $0.2 million, or 1.6%. Share compensation expenses for the three months ended June 30, 2013 were $2.7 million compared to $3.0 million for the three months ended June 30, 2012, a decrease of $0.3 million, or 10.4%.

General and administrative expenses for the six months ended June 30, 2013 were $30.2 million compared to $28.9 million for the six months ended June 30, 2012, an increase of $1.4 million, or 4.8%. Share compensation expenses for the six months ended June 30, 2013 were $2.1 million compared to $5.1 million for the six months ended June 30, 2012, a decrease of $3.1 million, or 59.4%.

Investments

Net investment income for the three months ended June 30, 2013 was $26.2 million compared to $25.9 million for the three months ended June 30, 2012, an increase of $0.3 million, or 1.3%. Net investment income for the six months ended June 30, 2013 was $51.9 million compared to $53.6 million for the six months ended June 30, 2012, a decrease of $1.8 million, or 3.3%.

Net realized gains on investments for the three months ended June 30, 2013 were $3.4 million compared to $6.2 million for the three months ended June 30, 2012, a decrease of $2.7 million, or 44.6%. Net realized gains on investments for the six months ended June 30, 2013 were $5.1 million compared to $13.7 million for the six months ended June 30, 2012, a decrease of $8.6 million, or 62.5%.

Net unrealized losses on investments for the three months ended June 30, 2013 were $141.3 million compared to $53.6 million for the three months ended June 30, 2012, an unfavorable movement of $87.8 million, or 163.8%. Net unrealized losses on other investments for the three months ended June 30, 2013 were primarily driven by $70.8 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $63.7 million for the three months ended June 30, 2013, leaving a net impact to the Company of $7.1 million.

Net unrealized losses on investments for the six months ended June 30, 2013 were $148.6 million compared to $32.9 million for the six months ended June 30, 2012, an unfavorable movement of $115.7 million. Net unrealized losses on other investments for the six months ended June 30, 2013 were primarily driven by $75.9 million in unrealized losses relating to PaCRe. The amount of PaCRe's net unrealized losses attributable to noncontrolling interest was $68.3 million for the six months ended June 30, 2013, leaving a net impact to the Company of $7.6 million.

Finance Expenses

Finance expenses for the three months ended June 30, 2013 were $37.8 million compared to $13.7 million for the three months ended June 30, 2012, an increase of $24.1 million, or 176.0%. Finance expenses for the six months ended June 30, 2013 were $62.3 million compared to $30.0 million for the six months ended June 30, 2012, an increase of $32.3 million, or 107.7%. The increase in finance expenses is primarily related to the expense on the variable funding notes which were $21.0 million and $32.2 million for the three and six months ended June 30, 2013, respectively.

Shareholders' Equity and Capitalization

As at June 30, 2013, total shareholders' equity was $4.1 billion including $498.4 million of noncontrolling interest. Shareholders' equity available to Validus was $3.6 billion as at June 30, 2013. Diluted book value per common share was $34.19 at June 30, 2013, compared to $34.79 at March 31, 2013. Diluted book value per common share is a non-GAAP financial measure. A reconciliation of this measure to shareholders' equity is presented at the end of this release.

Total capitalization at June 30, 2013 was $4.9 billion, including $540.5 million of junior subordinated deferrable debentures and $247.1 million of senior notes. Total capitalization available to Validus at June 30, 2013 was $4.4 billion, excluding $498.4 million of noncontrolling interest.

Share Repurchases

A summary of the share repurchases made to date under the Company's previously announced share repurchase program is as follows:

  Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)
As at March 31, 2013   Quarter ended
Effect of share repurchases:(cumulative)AprilMayJuneJune 30, 2013
Aggregate purchase price (a)$1,276,536$71,058$112,291$104,144$287,493
Shares repurchased

 

45,042,446

 

1,883,310

 

3,048,599

 

2,875,090

 

7,806,999

Average price (a)$28.34 $37.73 $36.83 $36.22 $36.83
 

Estimated cumulative net accretive
(dilutive) impact on:

Diluted BV per common share (b)

 

1.49

Diluted EPS - Quarter (c)

 

0.08

Share Repurchase Activity
(Expressed in thousands of U.S. dollars except for share and per share information)

Effect of share repurchases:As at June 30, 2013 July As at July 23, 2013

Cumulative to Date Effect

Aggregate purchase price (a)$1,564,029$$$

1,564,029

Shares repurchased

 

52,849,445

 

52,849,445

Average price (a)$29.59$$$29.59
(a) Share transactions are on a trade date basis through July 23, 2013 and are inclusive of commissions. Average share price is rounded to two decimal places.
 
(b)As the average price per share repurchased during certain periods between 2009 and 2013 was lower than the book value per common share, the repurchase of shares increased the Company's period ending book value per share.
 
(c)The estimated impact on diluted earnings per share was calculated by comparing reported results versus i) net income per share plus an estimate of lost net investment income on the cumulative share repurchases divided by ii) weighted average diluted shares outstanding excluding the weighted average impact of cumulative share repurchases. The impact of cumulative share repurchases was accretive to diluted earnings per share.

Conference Call

The Company will host a conference call for analysts and investors on July 26, 2013 at 10:00 AM (Eastern) to discuss the second quarter 2013 financial results and related matters. The conference call may be accessed by dialing 1-877-299-4454 (toll-free U.S.) or 1-617-597-5447 (international) and entering the passcode 89488453. Those who intend to participate in the conference call should register at least ten minutes in advance to ensure access to the call. A telephone replay of the conference call will be available through August 9, 2013, by dialing 1-888-286-8010 (toll-free U.S.) or 1-617-801-6888 (international) and entering the passcode 89565519.

This conference call will also be available through a live audio webcast accessible through the Investor Relations section of the Company's website located at www.validusholdings.com. A replay of the webcast will be available at the Investor Relations section of the Company's website through August 9, 2013. In addition, a financial supplement relating to the Company's financial results for the three and six months ended June 30, 2013 is available in the Investor Relations section of the Company's website.

About Validus Holdings, Ltd.

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

Validus Holdings, Ltd.

Consolidated Balance Sheets

As atJune 30, 2013 and December 31, 2012