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 June 30, 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 July 31, 2017 there were 79,465,860 outstanding Common Shares, $0.175 par value per share, of the registrant.
INDEX
Page | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Table of Contents | Page | |
2
Validus Holdings, Ltd.
Consolidated Balance Sheets
As at June 30, 2017 (unaudited) and December 31, 2016
(Expressed in thousands of U.S. dollars, except share and per share information)
June 30, 2017 | December 31, 2016 | ||||||
(unaudited) | |||||||
Assets | |||||||
Fixed maturity investments trading, at fair value (amortized cost: 2017—$5,424,562; 2016—$5,584,599) | $ | 5,418,643 | $ | 5,543,030 | |||
Short-term investments trading, at fair value (amortized cost: 2017—$2,871,126; 2016—$2,796,358) | 2,871,353 | 2,796,170 | |||||
Other investments, at fair value (cost: 2017—$416,996; 2016—$380,130) | 448,618 | 405,712 | |||||
Investments in investment affiliates, equity method (cost: 2017—$72,532; 2016—$84,840) | 103,377 | 100,431 | |||||
Cash and cash equivalents | 800,405 | 419,976 | |||||
Restricted cash | 195,039 | 70,956 | |||||
Total investments and cash | 9,837,435 | 9,336,275 | |||||
Premiums receivable | 1,940,637 | 725,390 | |||||
Deferred acquisition costs | 302,857 | 209,227 | |||||
Prepaid reinsurance premiums | 335,837 | 77,996 | |||||
Securities lending collateral | 2,514 | 9,779 | |||||
Loss reserves recoverable | 600,207 | 430,421 | |||||
Paid losses recoverable | 35,675 | 35,247 | |||||
Income taxes recoverable | 4,763 | 4,870 | |||||
Deferred tax asset | 52,655 | 43,529 | |||||
Receivable for investments sold | 20,519 | 3,901 | |||||
Intangible assets | 175,518 | 115,592 | |||||
Goodwill | 227,701 | 196,758 | |||||
Accrued investment income | 26,968 | 26,488 | |||||
Other assets | 387,860 | 134,282 | |||||
Total assets | $ | 13,951,146 | $ | 11,349,755 | |||
Liabilities | |||||||
Reserve for losses and loss expenses | $ | 3,305,191 | $ | 2,995,195 | |||
Unearned premiums | 1,970,896 | 1,076,049 | |||||
Reinsurance balances payable | 461,261 | 54,781 | |||||
Securities lending payable | 2,980 | 10,245 | |||||
Deferred tax liability | 4,012 | 3,331 | |||||
Payable for investments purchased | 92,077 | 29,447 | |||||
Accounts payable and accrued expenses | 385,958 | 587,648 | |||||
Notes payable to AlphaCat investors | 1,066,159 | 278,202 | |||||
Senior notes payable | 245,463 | 245,362 | |||||
Debentures payable | 538,400 | 537,226 | |||||
Total liabilities | 8,072,397 | 5,817,486 | |||||
Commitments and contingent liabilities | |||||||
Redeemable noncontrolling interests | 1,251,660 | 1,528,001 | |||||
Shareholders’ equity | |||||||
Preferred shares (Issued and Outstanding: 2017—16,000; 2016—6,000) | 400,000 | 150,000 | |||||
Common shares (Issued: 2017—161,934,355; 2016—161,279,976; Outstanding: 2017—79,518,581; 2016—79,132,252) | 28,339 | 28,224 | |||||
Treasury shares (2017—82,415,774; 2016—82,147,724) | (14,423 | ) | (14,376 | ) | |||
Additional paid-in capital | 807,321 | 821,023 | |||||
Accumulated other comprehensive loss | (19,924 | ) | (23,216 | ) | |||
Retained earnings | 3,010,118 | 2,876,636 | |||||
Total shareholders’ equity available to Validus | 4,211,431 | 3,838,291 | |||||
Noncontrolling interests | 415,658 | 165,977 | |||||
Total shareholders’ equity | 4,627,089 | 4,004,268 | |||||
Total liabilities, noncontrolling interests and shareholders’ equity | $ | 13,951,146 | $ | 11,349,755 | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Validus Holdings, Ltd.
Consolidated Statements of Income and Comprehensive Income
For the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||||
Revenues | |||||||||||||||
Gross premiums written | $ | 792,902 | $ | 764,042 | $ | 1,983,759 | $ | 1,936,833 | |||||||
Reinsurance premiums ceded | (56,222 | ) | (36,229 | ) | (256,328 | ) | (204,064 | ) | |||||||
Net premiums written | 736,680 | 727,813 | 1,727,431 | 1,732,769 | |||||||||||
Change in unearned premiums | (105,653 | ) | (154,090 | ) | (521,028 | ) | (587,778 | ) | |||||||
Net premiums earned | 631,027 | 573,723 | 1,206,403 | 1,144,991 | |||||||||||
Net investment income | 44,241 | 39,257 | 84,455 | 68,718 | |||||||||||
Net realized gains on investments | 2,274 | 2,724 | 1,110 | 2,140 | |||||||||||
Change in net unrealized gains on investments | 16,321 | 31,428 | 29,669 | 78,872 | |||||||||||
Income (loss) from investment affiliates | 9,466 | (589 | ) | 14,654 | (4,702 | ) | |||||||||
Other insurance related income and other income | 1,339 | 824 | 2,669 | 2,237 | |||||||||||
Foreign exchange (losses) gains | (7,329 | ) | 6,286 | (5,760 | ) | 12,531 | |||||||||
Total revenues | 697,339 | 653,653 | 1,333,200 | 1,304,787 | |||||||||||
Expenses | |||||||||||||||
Losses and loss expenses | 296,149 | 307,130 | 565,734 | 531,577 | |||||||||||
Policy acquisition costs | 117,268 | 107,966 | 228,896 | 215,159 | |||||||||||
General and administrative expenses | 96,349 | 89,688 | 184,273 | 175,896 | |||||||||||
Share compensation expenses | 11,146 | 10,727 | 20,637 | 21,964 | |||||||||||
Finance expenses | 14,209 | 14,166 | 28,152 | 29,369 | |||||||||||
Transaction expenses | 4,427 | — | 4,427 | — | |||||||||||
Total expenses | 539,548 | 529,677 | 1,032,119 | 973,965 | |||||||||||
Income before taxes, loss from operating affiliate and (income) attributable to AlphaCat investors | 157,791 | 123,976 | 301,081 | 330,822 | |||||||||||
Tax benefit (expense) | 987 | (1,706 | ) | 4,536 | 412 | ||||||||||
Loss from operating affiliate | — | — | — | (23 | ) | ||||||||||
(Income) attributable to AlphaCat investors | (11,830 | ) | (6,114 | ) | (19,333 | ) | (10,714 | ) | |||||||
Net income | $ | 146,948 | $ | 116,156 | $ | 286,284 | $ | 320,497 | |||||||
Net (income) attributable to noncontrolling interests | (43,650 | ) | (21,193 | ) | (86,222 | ) | (58,724 | ) | |||||||
Net income available to Validus | 103,298 | 94,963 | 200,062 | 261,773 | |||||||||||
Dividends on preferred shares | (2,203 | ) | — | (4,406 | ) | — | |||||||||
Net income available to Validus common shareholders | $ | 101,095 | $ | 94,963 | $ | 195,656 | $ | 261,773 | |||||||
Comprehensive income | |||||||||||||||
Net income | $ | 146,948 | $ | 116,156 | $ | 286,284 | $ | 320,497 | |||||||
Other comprehensive income (loss) | |||||||||||||||
Change in foreign currency translation adjustments | 1,489 | (3,287 | ) | 2,086 | (5,315 | ) | |||||||||
Change in minimum pension liability, net of tax | 1,184 | 479 | 1,252 | 396 | |||||||||||
Change in fair value of cash flow hedge | (144 | ) | 64 | (46 | ) | (694 | ) | ||||||||
Other comprehensive income (loss), net of tax | 2,529 | (2,744 | ) | 3,292 | (5,613 | ) | |||||||||
Comprehensive (income) attributable to noncontrolling interests | (43,650 | ) | (21,193 | ) | (86,222 | ) | (58,724 | ) | |||||||
Comprehensive income available to Validus | $ | 105,827 | $ | 92,219 | $ | 203,354 | $ | 256,160 | |||||||
Earnings per common share | |||||||||||||||
Basic earnings per share available to Validus common shareholders | $ | 1.28 | $ | 1.16 | $ | 2.47 | $ | 3.18 | |||||||
Earnings per diluted share available to Validus common shareholders | $ | 1.25 | $ | 1.14 | $ | 2.42 | $ | 3.12 | |||||||
Cash dividends declared per common share | $ | 0.38 | $ | 0.35 | $ | 0.76 | $ | 0.70 | |||||||
Weighted average number of common shares and common share equivalents outstanding: | |||||||||||||||
Basic | 79,270,561 | 81,950,833 | 79,202,116 | 82,386,047 | |||||||||||
Diluted | 80,872,451 | 83,373,003 | 80,861,998 | 83,785,659 | |||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Validus Holdings, Ltd.
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
(unaudited) | |||||||
Preferred shares | |||||||
Balance, beginning of period | $ | 150,000 | $ | — | |||
Preferred shares issued | 250,000 | 150,000 | |||||
Balance, end of period | $ | 400,000 | $ | 150,000 | |||
Common shares | |||||||
Balance, beginning of period | $ | 28,224 | $ | 28,100 | |||
Common shares issued, net | 115 | 119 | |||||
Balance, end of period | $ | 28,339 | $ | 28,219 | |||
Treasury shares | |||||||
Balance, beginning of period | $ | (14,376 | ) | $ | (13,592 | ) | |
Repurchase of common shares | (47 | ) | (492 | ) | |||
Balance, end of period | $ | (14,423 | ) | $ | (14,084 | ) | |
Additional paid-in capital | |||||||
Balance, beginning of period | $ | 821,023 | $ | 1,002,980 | |||
Offering expenses on preferred shares | (8,314 | ) | (5,148 | ) | |||
Common shares redeemed, net | (12,076 | ) | (7,504 | ) | |||
Repurchase of common shares | (13,949 | ) | (128,591 | ) | |||
Share compensation expenses | 20,637 | 21,964 | |||||
Balance, end of period | $ | 807,321 | $ | 883,701 | |||
Accumulated other comprehensive loss | |||||||
Balance, beginning of period | $ | (23,216 | ) | $ | (12,569 | ) | |
Other comprehensive income (loss) | 3,292 | (5,613 | ) | ||||
Balance, end of period | $ | (19,924 | ) | $ | (18,182 | ) | |
Retained earnings | |||||||
Balance, beginning of period | $ | 2,876,636 | $ | 2,634,056 | |||
Net income | 286,284 | 320,497 | |||||
Net (income) attributable to noncontrolling interests | (86,222 | ) | (58,724 | ) | |||
Dividends on preferred shares | (4,406 | ) | — | ||||
Dividends on common shares | (62,174 | ) | (59,227 | ) | |||
Balance, end of period | $ | 3,010,118 | $ | 2,836,602 | |||
Total shareholders’ equity available to Validus | $ | 4,211,431 | $ | 3,866,256 | |||
Noncontrolling interests | $ | 415,658 | $ | 212,154 | |||
Total shareholders’ equity | $ | 4,627,089 | $ | 4,078,410 | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Validus Holdings, Ltd.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2017 and 2016 (unaudited)
(Expressed in thousands of U.S. dollars)
Six Months Ended June 30, | |||||||
2017 | 2016 | ||||||
(unaudited) | |||||||
Cash flows provided by (used in) operating activities | |||||||
Net income | $ | 286,284 | $ | 320,497 | |||
Adjustments to reconcile net income to cash provided by (used in) operating activities: | |||||||
Share compensation expenses | 20,637 | 21,964 | |||||
Loss on deconsolidation of AlphaCat ILS fund | 402 | — | |||||
Amortization of discount on senior notes | 54 | 54 | |||||
(Income) loss from investment affiliates | (14,654 | ) | 4,702 | ||||
Net realized and change in net unrealized gains on investments | (30,779 | ) | (81,012 | ) | |||
Amortization of intangible assets | 3,995 | 2,832 | |||||
Loss from operating affiliate | — | 23 | |||||
Foreign exchange gains included in net income | (9,686 | ) | (6,289 | ) | |||
Amortization of premium on fixed maturity investments | 7,012 | 8,710 | |||||
Change in: | |||||||
Premiums receivable | (648,195 | ) | (719,070 | ) | |||
Deferred acquisition costs | (97,746 | ) | (102,211 | ) | |||
Prepaid reinsurance premiums | (30,684 | ) | (67,575 | ) | |||
Loss reserves recoverable | (113,508 | ) | (95,429 | ) | |||
Paid losses recoverable | 17,500 | (4,571 | ) | ||||
Reserve for losses and loss expenses | 199,985 | 147,305 | |||||
Unearned premiums | 488,198 | 655,353 | |||||
Reinsurance balances payable | 111,488 | 18,610 | |||||
Other operational balance sheet items, net | (137,618 | ) | (34,450 | ) | |||
Net cash provided by operating activities | 52,685 | 69,443 | |||||
Cash flows provided by (used in) investing activities | |||||||
Proceeds on sales of fixed maturity investments | 1,632,371 | 1,376,077 | |||||
Proceeds on maturities of fixed maturity investments | 247,394 | 184,413 | |||||
Purchases of fixed maturity investments | (1,682,609 | ) | (1,537,606 | ) | |||
Purchases of short-term investments, net | (88,623 | ) | (428,040 | ) | |||
Purchases of other investments, net | (33,870 | ) | (19,796 | ) | |||
Decrease (increase) in securities lending collateral | 7,265 | (5,361 | ) | ||||
Redemption from operating affiliates | — | 369 | |||||
Distributions from (investments in) investment affiliates, net | 11,708 | (16,307 | ) | ||||
Increase in restricted cash | (124,083 | ) | (22,752 | ) | |||
Purchase of subsidiary, net of cash acquired | (183,923 | ) | — | ||||
Net cash used in investing activities | (214,370 | ) | (469,003 | ) | |||
Cash flows provided by (used in) financing activities | |||||||
Net proceeds on issuance of notes payable to AlphaCat investors | 269,645 | 294,748 | |||||
Net proceeds on issuance of preferred shares | 241,686 | 144,852 | |||||
Redemption of common shares, net | (11,961 | ) | (7,385 | ) | |||
Purchases of common shares under share repurchase program | (13,996 | ) | (129,083 | ) | |||
Dividends paid on preferred shares | (4,406 | ) | — | ||||
Dividends paid on common shares | (63,286 | ) | (59,961 | ) | |||
(Decrease) increase in securities lending payable | (7,265 | ) | 5,361 | ||||
Third party investment in redeemable noncontrolling interests | 210,200 | 381,250 | |||||
Third party redemption of redeemable noncontrolling interests | (79,334 | ) | (10,800 | ) | |||
Third party investment in noncontrolling interests | 258,300 | 171,674 | |||||
Third party distributions of noncontrolling interests | (96,125 | ) | (127,103 | ) | |||
Third party subscriptions deployed in AlphaCat Funds and Sidecars | (171,952 | ) | (411,336 | ) | |||
Net cash provided by financing activities | 531,506 | 252,217 | |||||
Effect of foreign currency rate changes on cash and cash equivalents | 10,608 | (6,968 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 380,429 | (154,311 | ) | ||||
Cash and cash equivalents - beginning of period | 419,976 | 723,109 | |||||
Cash and cash equivalents - end of period | $ | 800,405 | $ | 568,798 | |||
Supplemental disclosure of cash flow information: | |||||||
Taxes paid during the period | $ | 568 | $ | 3,837 | |||
Interest paid during the period | $ | 27,186 | $ | 27,552 | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Validus Holdings, Ltd.
Notes to the 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
Recently issued accounting standards not yet adopted
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718).” This ASU is directed at reducing diversity in practice when applying the accounting guidance to a change in the terms or conditions of a share-based payment award. The ASU is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. 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, 2018.
7
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
3. Business combination
On May 1, 2017, Western World Insurance Group, Inc. (“Western World”), a wholly owned subsidiary of the Company acquired all of the outstanding capital stock of Crop Risk Services (“CRS”) for an aggregate purchase price of $185,576 in cash. CRS is a primary crop insurance managing general agent (“MGA”) based in Decatur, Illinois with 1,170 agents across 36 states. CRS does not have insurance licenses of its own, but acts solely as an MGA in that it can produce business for any properly licensed entity on a commission basis. Concurrent with closing of the transaction, Stratford Insurance Company (“Stratford”), a wholly–owned subsidiary of Western World, was granted the required license to write crop insurance in the United States and executed several agreements to transfer the related agriculture book of business to Stratford.
The CRS acquisition was undertaken to complement the Company’s existing agricultural business and expand the Company’s presence in U.S. primary specialty lines.
For segmental reporting purposes, the results of CRS’ operations, including the related agricultural book of business have been included within the Western World segment in the Consolidated Financial Statements from the date of acquisition.
On closing, the Company recorded intangible assets totaling $63,921 for Distribution Channels, Brand Name and Technology. Distribution Channels and Brand Name were estimated to have finite useful economic lives of ten years on acquisition and are being amortized on a straight line basis over such period. Technology was estimated to have a finite useful economic life of two years on acquisition and is being amortized on a straight line basis over such a period.
The purchase price was allocated to the acquired assets and liabilities of CRS based on estimated fair values on May 1, 2017, the date the transaction closed, as detailed below. The Company recognized goodwill of $30,943 primarily attributable to CRS’s assembled workforce and synergies expected to result upon the integration of CRS and its related book of business into the Company’s operations. The estimates of fair values for tangible assets acquired and liabilities assumed were determined by management based on various market and income analyses. The Company estimated the fair values of intangible assets acquired based on variations of the income and cost approaches. Significant judgment was required to arrive at these estimates of fair value and changes to assumptions used could have led to materially different results.
The purchase of CRS was a taxable transaction and as such, goodwill and intangibles recorded at closing will be deductible for income tax purposes. The Company has recognized and recorded a deferred tax asset of $6,443 which results from the excess of tax-deductible goodwill over book goodwill as recognized in the purchase price allocation.
8
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The fair value of net assets acquired, including GAAP adjustments, are summarized as follows:
Total purchase price | $ | 185,576 | ||||
Assets acquired | ||||||
Cash and cash equivalents | $ | 1,653 | ||||
Premiums receivable | 564,453 | |||||
Prepaid reinsurance premiums | 227,157 | |||||
Other assets | 157,146 | |||||
Assets acquired | 950,409 | |||||
Liabilities acquired | ||||||
Reinsurance balances payable | $ | 294,201 | ||||
Unearned premiums | 406,649 | |||||
Net loss reserves | 42,575 | |||||
Other liabilities | 122,715 | |||||
Liabilities acquired | 866,140 | |||||
Excess purchase price | $ | 101,307 | ||||
Goodwill and other intangible assets acquired | ||||||
Intangible asset - Distribution channels | $ | 52,898 | ||||
Intangible asset - Brand name | 9,568 | |||||
Intangible asset - Technology | 1,455 | |||||
Total intangible assets | 63,921 | |||||
Goodwill | 30,943 | |||||
Deferred tax arising on Goodwill | 6,443 | |||||
Total goodwill and intangible assets | $ | 101,307 | ||||
The Company also incurred transaction expenses related to the CRS acquisition of $4,427. Transaction expenses included legal, financial advisory and audit related services.
9
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
The following tables reconcile the carrying amount of goodwill and intangible assets from December 31, 2016 to June 30, 2017:
Goodwill | |||||||||
Six Months Ended June 30, 2017 | |||||||||
Talbot | Western World | Total | |||||||
Balance at December 31, 2016 | 20,393 | 176,365 | 196,758 | ||||||
Additions | — | 30,943 | 30,943 | ||||||
Balance at June 30, 2017 | 20,393 | 207,308 | 227,701 | ||||||
Intangible assets | |||||||||
Six Months Ended June 30, 2017 | |||||||||
Talbot | Western World | Total | |||||||
Balance at December 31, 2016 | 93,924 | 21,668 | 115,592 | ||||||
Additions | — | 63,921 | 63,921 | ||||||
Amortization | (2,081 | ) | (1,914 | ) | (3,995 | ) | |||
Balance at June 30, 2017 | 91,843 | 83,675 | 175,518 | ||||||
Intangible assets | |||||||||
Six Months Ended June 30, 2017 | |||||||||
With a Finite Life | With an Indefinite Life | Total | |||||||
Balance at December 31, 2016 | 11,424 | 104,168 | 115,592 | ||||||
Additions | 63,921 | — | 63,921 | ||||||
Amortization | (3,995 | ) | — | (3,995 | ) | ||||
Balance at June 30, 2017 | 71,350 | 104,168 | 175,518 | ||||||
Operating results of CRS have been included in the Consolidated Financial Statements from the May 1, 2017 acquisition date.
The following selected unaudited information has been provided to present a summary of the results of CRS that have been included in the Consolidated Financial Statements for the three and six months ended June 30, 2017.
From Acquisition Date to | ||
June 30, 2017 | ||
Net premiums written | 6,988 | |
Net premiums earned | 50,044 | |
Total underwriting deductions | 44,780 | |
Underwriting income, before general and administrative expenses | 5,264 | |
10
Validus Holdings, Ltd.
Notes to the Consolidated Financial Statements (unaudited)
(Expressed in thousands of U.S. dollars, except share and per share information)
4. 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 6, “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 June 30, 2017 and December 31, 2016 were as follows:
June 30, 2017 | December 31, 2016 | ||||||||||||||
Amortized Cost or Cost | Fair Value | Amortized Cost or Cost | Fair Value | ||||||||||||
Managed investments | |||||||||||||||
U.S. government and government agency | $ | 649,214 | $ | 646,436 | $ | 809,392 | $ | 804,126 | |||||||
Non-U.S. government and government agency | 293,002 | 292,504 | 245,651 | 240,791 | |||||||||||
U.S. states, municipalities and political subdivisions | 227,047 | 227,949 | 271,742 | 271,830 | |||||||||||
Agency residential mortgage-backed securities | 786,784 | 783,006 | 684,490 | 679,595 | |||||||||||
Non-agency residential mortgage-backed securities | 26,745 | 26,683 | 15,858 | 15,477 | |||||||||||
U.S. corporate | 1,378,884 | 1,386,484 | 1,540,036 | 1,534,508 | |||||||||||
Non-U.S. corporate | 380,317 | 379,480 | 418,520 | 410,227 | |||||||||||
Bank loans | 560,446 | 552,901 | 579,121 | 570,399 | |||||||||||
Asset-backed securities | 500,679 | 502,056 | 528,563 | 526,814 | |||||||||||
Commercial mortgage-backed securities | 317,732 | 316,190 | 333,740 | 330,932 | |||||||||||
Total fixed maturities | 5,120,850 | 5,113,689 | 5,427,113 | 5,384,699 | |||||||||||
Short-term investments | 255,289 | 255,516 | 228,574 | 228,386 | |||||||||||
Other investments | |||||||||||||||
Fund of hedge funds | — | — | 1,457 | 955 | |||||||||||
Hedge funds | 11,292 | 18,303 | 11,292 | 17,381 | |||||||||||
Private equity investments | 79,871 | 100,391 | 66,383 | 82,627 | |||||||||||
Fixed income investment funds | 266,041 | 268,110 | 247,967 | 249,275 | |||||||||||
Overseas deposits | 57,874 | 57,874 | 50,106 | 50,106 | |||||||||||
Mutual funds | 1,918 | 3,940 | 2,925 | 5,368 | |||||||||||
Total other investments | 416,996 | 448,618 | 380,130 | 405,712 | |||||||||||
Investments in investment affiliates (a) | 72,532 | 103,377 | 84,840 | 100,431 | |||||||||||
Total managed investments | $ | 5,865,667 | $ | 5,921,200 | $ | 6,120,657 | $ | 6,119,228 | |||||||
Non-managed investments | |||||||||||||||
Catastrophe bonds | $ | 303,712 | $ | 304,954 | $ | 157,486 | $ | 158,331 | |||||||
Short-term investments | 2,615,837 | 2,615,837 | 2,567,784 | 2,567,784 | |||||||||||
Total non-managed investments | 2,919,549 | 2,920,791 | 2,725,270 | 2,726,115 | |||||||||||
Total investments | $ | 8,785,216 | $ | 8,841,991 | $ | 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.”
11
Validus Holdings, Ltd.
Notes to the 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 June 30, 2017 and December 31, 2016.
June 30, 2017 | December 31, 2016 | ||||||||||||
Fair Value | % of Total | Fair Value | % of Total | ||||||||||
Managed fixed maturities | |||||||||||||
AAA | $ | 2,318,254 | 42.8 | % | $ | 2,405,597 | 43.4 | % | |||||
AA | 463,060 | 8.5 | % | 538,289 | 9.7 | % | |||||||
A | 1,009,366 | 18.6 | % | 1,081,949 | 19.5 | % | |||||||
BBB | 703,563 | 13.0 | % | 740,861 | 13.4 | % | |||||||
Total investment grade managed fixed maturities | 4,494,243 | 82.9 | % | 4,766,696 | 86.0 | % | |||||||
BB | 229,023 | 4.2 | % | 213,568 | 3.9 | % | |||||||
B | 176,743 | 3.3 | % | 177,737 | 3.2 | % | |||||||
CCC | 11,114 | 0.2 | % | 13,371 | 0.2 | % | |||||||
NR | 202,566 | 3.8 | % | 213,327 | 3.8 | % | |||||||
Total non-investment grade fixed maturities | 619,446 | 11.5 | % | 618,003 | 11.1 | % | |||||||
Total managed fixed maturities | $ | 5,113,689 | 94.4 | % | $ | 5,384,699 | 97.1 | % | |||||
Non-managed fixed maturities | |||||||||||||
BB | 28,177 | 0.4 | % | 29,731 | 0.6 | % | |||||||
B | 2,781 | 0.1 | % | 4,524 | 0.1 | % | |||||||
NR | 273,996 | 5.1 | % | 124,076 | 2.2 | % | |||||||
Total non-managed fixed maturities | 304,954 | 5.6 | % | 158,331 | 2.9 | % | |||||||
Total fixed maturities | $ | 5,418,643 | 100.0 | % | $ | 5,543,030 | 100.0 | % | |||||
12
Validus Holdings, Ltd.
Notes to the 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 June 30, 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.
June 30, 2017 | December 31, 2016 | ||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Managed fixed maturities | |||||||||||||||
Due in one year or less | $ | 497,473 | $ | 492,256 | $ | 350,733 | $ | 346,161 | |||||||
Due after one year through five years | 2,464,093 | 2,461,870 | 2,954,856 | 2,933,146 | |||||||||||
Due after five years through ten years | 456,793 | 459,311 | 430,365 | 426,647 | |||||||||||
Due after ten years | 70,551 | 72,317 | 128,508 | 125,927 | |||||||||||
3,488,910 | 3,485,754 | 3,864,462 | 3,831,881 | ||||||||||||
Asset-backed and mortgage-backed securities | 1,631,940 | 1,627,935 | 1,562,651 | 1,552,818 | |||||||||||
Total managed fixed maturities | $ | 5,120,850 | $ | 5,113,689 | $ | 5,427,113 | $ | 5,384,699 | |||||||
Non-managed catastrophe bonds | |||||||||||||||
Due in one year or less | $ | 33,662 | $ | 32,441 | $ | 43,664 | $ | 45,418 | |||||||
Due after one year through five years | 263,300 | 265,735 | 112,572 | 111,656 | |||||||||||
Due after five years through ten years | 6,750 | 6,778 | 1,250 | 1,257 | |||||||||||
Due after ten years | — | — | — | — | |||||||||||
Total non-managed fixed maturities | 303,712 | 304,954 | 157,486 | 158,331 | |||||||||||
Total fixed maturities | $ | 5,424,562 | $ | 5,418,643 | $ | 5,584,599 | $ | 5,543,030 | |||||||
13
Validus Holdings, Ltd.
Notes to the 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 June 30, 2017 and December 31, 2016:
June 30, 2017 | ||||||||||||||||
Fair Value | Investments with redemption restrictions | Investments without redemption restrictions | Redemption frequency (a) | Redemption notice period (a) | ||||||||||||
Hedge funds | 18,303 | 18,303 | — | |||||||||||||
Private equity investments | 100,391 | 100,391 | — | |||||||||||||
Fixed income investment funds | 268,110 | 237,986 | 30,124 | Daily | Daily to 2 days | |||||||||||
Overseas deposits | 57,874 | 57,874 | — | |||||||||||||
Mutual funds | 3,940 | — | 3,940 | Daily | Daily | |||||||||||
Total other investments | $ | 448,618 | $ | 414,554 | $ | 34,064 | ||||||||||
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 | ||||||||||||||||