As filed with the Securities and Exchange Commission on July 5, 2007

Registration No. 333-139989

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

 

Validus Holdings, Ltd.

19 Par-La-Ville Road

Hamilton HM11 Bermuda

(441) 278-9000

(Address, including zip code, and telephone number, including area code, of

registrant’s principal executive offices)

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 590-9200

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

 

 

Table of Contents

 

 

You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of our common shares.

 

The selling shareholders are offering to sell, and seeking offers to buy, our common shares only in jurisdictions where offers and sales are permitted. The distribution of this prospectus and the public offering of our common shares in certain jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of our common shares and the distribution of this prospectus outside the United States. This prospectus does not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, any securities offered by this prospectus by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation.

 

Common shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003 and the Exchange Control Act of 1972, and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, the Bermuda Monetary Authority, which we refer to herein as the “BMA,” must approve all issuances and transfers of securities of a Bermuda exempted company. We have received from the BMA permission for the issue of our common shares and for the free transferability of our common shares as long as the common shares are listed on the New York Stock Exchange or other appointed stock exchange. Any other transfers remain subject to approval by the BMA. The BMA accepts no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus.

 

PROSPECTUS SUMMARY

	•	Focus on Short-Tail Lines of Reinsurance.   Substantially all of our $670.7 million in gross premiums written for the twelve-month period ended March 31, 2007 are in short-tail lines. Since inception, we have focused on writing short-tail reinsurance risks, which is an area where we believe prices and terms provide an attractive risk adjusted return and our management team has proven expertise. We believe based on industry data that rates for U.S.  property catastrophe reinsurance in 2006 were at the highest levels recorded as measured by rate on line , which is the premium paid by an insurer to a reinsurer as a percentage of the reinsurer’s exposure. There can be no assurance, however, that these favorable market conditions will continue to exist.

	•	Management with Proven Industry Leadership Experience.   Our executive management team has an average of 21 years of industry experience and senior expertise spanning multiple aspects of the global reinsurance business. Edward J. Noonan, our chairman and chief executive officer, has 27 years of industry experience and was previously president and chief executive officer of American Re-Insurance Company. George P. Reeth, our deputy chairman and president, has 30 years of industry experience and previously served as chairman and chief executive officer of Willis Re Inc., a division of Willis Group Holdings Limited. Conan M. Ward, our chief underwriting officer, has 15 years of insurance industry experience and was previously executive vice president of the Global Reinsurance division of Axis Capital Holdings, Limited.

	•	Highly Skilled Underwriters and Analytical Staff.   Since the Company’s inception, management’s objective has been to target underwriting and technical staff who can differentiate our company through expertise and experience and who can apply analytical rigor to our goal of building a diversified portfolio of reinsurance risks. We currently employ eight underwriters in the property catastrophe, international property, marine and other specialty lines areas. These eight underwriters have an average of 16 years of industry experience and have produced $670.7 million in gross premiums written for the twelve-month period ended March 31, 2007 while evaluating over 3,250 applications for coverage, or submissions , and declining approximately 57% of the risks presented to them. Our risk analytics staff is comprised of 17 individuals, many of whom have advanced technical degrees, including five PhDs and three Masters degrees in related fields.

	•	Concentrated Investor Group with Strong Industry Insight.   Aquiline Capital Partners and our five largest shareholders have an equity ownership interest in our company of approximately 80.0%. Members of our investor group have been sponsoring investors in previous Bermuda insurance and reinsurance companies (including GCR Holdings Limited; AXIS Capital Holdings Limited; Allied World Assurance Company Holdings, Limited; and Montpelier Re Holdings Limited) and have participated in the formation, governance, initial public offering and, in some cases, sale processes for these entities. In addition, management holds an approximate 5.5% ownership interest in the company and has similar experience in the full range of such activities at American Re-Insurance Company, Willis Group Holdings Limited and AXIS Capital Holdings Limited, among other companies.
	•	Substantial Capital with No Prior Liabilities or Contingencies.   We commenced operations with approximately $1.0 billion of equity capital and augmented our equity through the placement of $150.0 million of Junior Subordinated Deferrable Debentures in June 2006. As we are a newly formed company, our balance sheet is unencumbered by any historical losses relating to the 2005 hurricane season, the events of September 11, 2001, asbestos or other legacy exposures affecting our industry. As a result, we have no risk that deteriorating loss reserves related to legacy exposures prior to our formation will impact our future financial results. However, there has been a relatively low level of catastrophic events in 2006 and to date in

		2007 and as a consequence we have not experienced a high volume of claims so far during our short operating history.

	•	Timely Response to 2006 Market Dislocation and Capacity Shortage.   We entered the global reinsurance market in 2006 during a period of imbalance between the supply of underwriting capacity available for reinsurance on catastrophe-exposed property, marine and energy risks and demand for such reinsurance coverage. Our business strategy was responsive to these capacity needs and as of January 1, 2006 a significant portion of our current underwriting and analytical staff was in place, including six underwriters and four catastrophe modellers and risk analytic experts. As a consequence, we believe we developed an industry reputation for thorough and timely quotes for difficult technical risks. A significant volume of property catastrophe business is written in the January 1 renewal period and we believe the combination of our available capacity, staffing levels and management leadership permitted us to underwrite an attractive portfolio of catastrophe-exposed risks at January 1, 2006. Our gross premiums written for the three months ended March 31, 2006 were $248.2 million, of which $217.4 million was underwritten at January 1. In the January 1, 2007 renewal period we believe we were able to capitalize on our established relationships and to further expand our business. In total for the January 1, 2007 renewal season, we underwrote $362.0 million in gross premiums written, representing an increase of $144.6 million or 66.5% over the comparable period for 2006.

	•	Balanced, Diverse Book of Short-Tail Reinsurance.   We seek to balance and diversify our portfolio both by line of business and by geography. Of our $670.7 million in gross premiums written for the twelve-month period ended March 31, 2007, $283.5 million (42.3%) is property catastrophe reinsurance. Among other property coverages, we wrote $135.8 million (20.2%) of property pro rata and $45.4 million (6.8%) of property per risk. We also underwrote $138.8 million (20.7%) of marine reinsurance and $67.2 million (10.0%) of other specialty lines. The other specialty lines of reinsurance we underwrite — such as aerospace, life and accident & health, terrorism and workers’ compensation catastrophe coverages — are short-tail and provide us with risk diversification as they are generally non- accumulating with our property risks. We actively manage our exposures by geographic zone to maintain a diverse portfolio of underlying risks. For the twelve-month period ended March 31, 2007, we wrote $295.7 million of gross premiums written in the United States (44.1% of total gross premiums written), $102.9 million in territories outside the United States (15.3%) and $94.6 million on a worldwide basis including the United States (14.1%). The remaining $177.5 million of our gross premiums written (26.5%) related to our marine and aerospace lines of business, which we do not classify by geographic area as risks may span multiple zones and risk exposures may not reside at fixed locations in some cases.

	•	Effective Use of Third-party Capital.   In 2006, we entered into collateralized quota share retrocession treaties with Petrel Re Limited (“Petrel Re”), a newly-formed Bermuda reinsurance company, pursuant to which Petrel Re assumes a quota share of certain lines of marine and energy and other lines of business underwritten by the Company for the 2006 and 2007 underwriting years. Petrel Re is a separate legal entity of which we have no equity investment, management or board interests, or “related party” relationships. This “ sidecar ” relationship provides the Company with the capacity to increase premiums written in specific programs where favorable underwriting opportunities are seen. A specified portion of this incremental business is then reinsured with, or ceded to, Petrel Re and fees are earned for the services provided in underwriting the original business. The equity investor in Petrel Re is First Reserve Corporation, a leading private equity firm with a 25-year history of investing exclusively in the energy industry. We believe that the quality of our underwriting and analytical staff, as well as our management, was one of the primary reasons that First Reserve Corporation selected us as the cedant to Petrel Re when it organized and funded the vehicle.

	•	Enhanced Business Mix and Underwriting Abilities as a Result of the Talbot Acquisition.   The acquisition of Talbot is expected to provide us significant benefits in terms of product line and geographic diversification as well as offer us broader access to underwriting expertise. Similar to Validus, Talbot writes primarily short-tail lines of business but, as a complement to Validus, focuses mostly on insurance, as opposed to reinsurance, risks and on specialty lines where Validus currently has limited or no presence (e.g. political violence, political risk, hull, cargo). In addition, Talbot provides Validus access to the Lloyd’s marketplace where we currently do not operate. As a London-based insurer, Talbot also writes the majority of its premiums on risks outside the United States, which risks generally do not aggregate with Validus’. Finally, Validus will benefit from Talbot’s highly experienced team of underwriters who, in many cases, have spent most of their careers writing niche, short-tail business and who will bring their expertise to bear on expanding Validus’ short-tail business franchise.

	•	Build on Our Already Established Market Position.   We believe that our company is widely accepted by intermediaries and ceding clients as an important provider of targeted short-tail reinsurance lines. We base this belief on subjective feedback we receive from intermediaries and ceding clients as well as objective data such as our $670.7 million in gross premiums written for the twelve-month period ended March 31, 2007 or over 3,250 submissions received for the same period. In the January 1, 2007 renewal period we believe we were able to capitalize on our established relationships and to further expand our business. In total for the three months ended March 31, 2007, we underwrote $378.1 million in gross premiums written, representing an increase of $129.9 million or 52.3% over the comparable prior year period.

	•	Assess Underwriting Decisions Based on Incremental Return on Equity.   Our principal operating objective is to utilize our capital efficiently by underwriting short-tail reinsurance contracts with superior risk and return characteristics. We have developed Validus Capital Allocation and Pricing System (“VCAPS”), a proprietary computer-based system for modeling, pricing, allocating capital and analyzing catastrophe-exposed risks, and that also enables us to model various contract features, all on an expedited basis. VCAPS permits us to make underwriting decisions based on incremental return on capital.

	•	Prudently Manage Risk Accumulations.   We believe expertise in risk management is intrinsic to building a successful reinsurance organization. We have employed a chief risk officer — Stuart W. Mercer — since the formation of the company. Mr. Mercer manages a staff of 16, including five PhDs. Our primary risk measure is the aggregate amount of contractual limits to which we expose our capital. While we believe this is a more conservative risk tolerance than many of our competitors and while it may serve to diminish our profit potential in low loss years, we believe in higher loss years we will lose a smaller proportion of our capital.

	•	Employ All Forms of Capital Efficiently.   We aim to underwrite as much attractively priced business as is available and manage all forms of capital accordingly. In the current hard market for catastrophe-exposed lines of reinsurance, we have raised in excess of $1.0 billion in common equity in our initial capitalization and then augmented this capital with collateralized retrocessional reinsurance agreements with Petrel Re, and the placement of $150.0 million of junior subordinated deferrable debentures in June 2006 (the “2006 Junior Subordinated Deferrable Debentures”) and an additional $200.0 million of the 2007 Junior Subordinated Deferrable Debentures (together with the 2006 Junior Subordinated Deferrable Debentures, the “Junior Subordinated Deferrable Debentures”). See “Description of Certain Indebtedness — Junior Subordinated Deferrable Debentures.” In addition to the prudent use of financial leverage, we intend to actively manage our capital by evaluating the returns available in the

		short-tail reinsurance lines, assessing returns in complementary lines of business and, where appropriate and subject to applicable law and rating agency and other considerations, returning excess capital to shareholders.

	•	We have a limited operating history and our historical financial results do not accurately indicate our future performance.   We were formed in October 2005 and were fully operational by December 2005. We, therefore, have a limited operating and financial history. We then began underwriting with risks attaching no earlier than January 1, 2006. It has been reported that among the last 20 years, 2006 has produced the third-lowest level of insured losses, after 1997 and 1988. As of March 31, 2007, we have not experienced any catastrophe events such as those experienced by the industry in 2004 and 2005 and the events of September 11, 2001, and as a result we cannot provide assurances as to how our business model or risk controls would respond to such events. There is limited historical financial and operating information available to help you evaluate our past performance or make a decision about an investment in our common shares. As a recently formed company, we face substantial business and financial risks and may suffer significant losses. As a result of these risks, it is possible that we may not be successful in the continued implementation of our business strategy or completing the development of the infrastructure necessary to run our business. In addition, particularly as a recently-formed company, our business strategy may change and may be affected by acquisition, joint venture or other business, investment and/or growth opportunities that may, in the future, become available to us or that we may pursue.
	•	Claims arising from unpredictable and severe catastrophic events could adversely affect our financial condition or results of operations.   Our reinsurance operations expose us to claims arising out of unpredictable natural and other catastrophic events, such as hurricanes, windstorms, tsunamis, severe winter weather, earthquakes, floods, fires, explosions, acts of terrorism and other natural and man-made disasters. One or more catastrophic or other events could result in claims that substantially exceed our expectations.

	•	We depend on our ratings by A.M. Best Company.   Our financial strength rating could be revised downward, which could affect our standing among brokers and customers and cause our premiums and earnings to decrease. Brokers negotiate contracts of reinsurance between a primary insurer and reinsurer, on behalf of the primary insurer. Third-party rating agencies, such as A.M. Best Company, assess and rate the financial strength of insurers and reinsurers based upon criteria established by the rating agencies, which criteria are subject to change. Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. Insurers and intermediaries use these ratings as one measure by which to assess the financial strength and quality of insurers and reinsurers. These ratings are often a key factor in the decision by an insured or intermediary of whether to place business with a particular insurance or reinsurance provider. Our initial financial strength rating of A-, which was affirmed by A.M. Best on March 7, 2007, is subject to periodic review, and may be revised downward or revoked at the sole discretion of A.M. Best in response to a variety of factors, including a minimum capital adequacy ratio, management, earnings, capitalization and risk profile.

		the transaction, our integration plan and our risk-adjusted capital position upon completion of the acquisition and completion of this Offering.

	•	The reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions.   The reinsurance business historically has been characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity as well as periods when shortages of capacity permit favorable premium rates and policy terms and conditions, and as a result we may experience significant fluctuations in operating results.

The Offering

 

Issuer		Validus Holdings, Ltd.

 

Common shares offered by us		13,415,501 common shares.

 

Common shares offered by the selling shareholders		2,245,462 common shares.

 

Common shares to be outstanding immediately after this Offering		71,916,517 common shares(1).

 

Use of proceeds		We estimate that the net proceeds to us from this Offering will be approximately $311.3 million ($346.6 million if the underwriters exercise in full their option to purchase additional common shares), based upon an assumed initial public offering price of $25.00 per common share, representing the midpoint of the offering range set forth on the cover of this prospectus, and after deducting the underwriters’ discount and fees and expenses of this Offering. We will use $188.9 million of the net proceeds to repay borrowings and to pay accrued interest under our unsecured credit facility, which we incurred on July 2, 2007 to fund a portion of the cash purchase price for our acquisition of Talbot and associated expenses (see “Description of Certain Indebtedness — Credit Facilities,” “Acquisition of Talbot,” “Selected Financial Information of Talbot Holdings Ltd.” and “Unaudited Condensed Consolidated Pro Forma Financial Information”). The interest rate set on our credit facility borrowings on July 2, 2007 was 6.0% per annum. We intend to use the remainder of the net proceeds to further capitalize Validus Re to support the future growth of our reinsurance operations and for general corporate purposes, which will include a $3.0 million payment to Aquiline in connection with the termination of our Advisory Agreement with them.

		We will not receive any proceeds from the sale of common shares by the selling shareholders.

Dividend policy		We intend to pay quarterly cash dividends on our common shares at an initial rate of $0.125 per common share payable in the first full fiscal quarter ending after the date hereof. The timing and amount of any cash dividends, however, will be at the discretion of our Board of Directors and will depend upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory, rating agency and contractual constraints or restrictions and any other factors that our Board of Directors deems relevant. See “Dividend Policy,” “Business — Regulation” and “Description of Share Capital — Dividends.”

Voting rights		Shareholders have one vote for each voting common share held by them and are entitled to vote at all meetings of shareholders. However, there are provisions in our Bye-laws that reduce the voting rights of common shares that are owned, directly, indirectly or by attribution, by a person or group to the extent that such person or group holds more than 9.09% of the aggregate voting power of all common shares entitled to vote on a matter.
NYSE symbol		Our common shares have been approved for listing on the New York Stock Exchange under the symbol “VR,” subject to official notice of issuance.

	•	assumes no exercise of the underwriters’ over-allotment option;

	•	assumes an initial public offering price of $25.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and

	•	reflects the 1.75 for one reverse stock split of our outstanding common shares which was approved by our shareholders at our Annual General Meeting on March 1, 2007 and effective immediately thereafter.

(1)		Of these shares, 52,145,095 are voting common shares and 19,771,422 are non-voting common shares. All of the common shares offered hereby are voting common shares.

		The shares to be outstanding after the Offering do not include:

		• Restricted shares, and stock options to acquire common shares, aggregating 3,390,840 voting common shares, held by certain of our employees.

		• 1,861,915 common shares issued to certain Talbot employees in the Talbot acquisition, which are subject to forfeiture if the recipient’s employment terminates under certain circumstances.

		• 8,711,729 common shares that may be issued as a result of the exercise of the warrants described under “Description of Share Capital — Warrants”, which include 256,409 additional warrants which were issued in respect of the Talbot acquisition as a result of a particular anti-dilution provision in the existing warrants, which provision terminates upon consummation of this Offering.

		• $15.0 million in restricted shares to be issued to Validus management at the time of the Offering at the initial public offering price (the “IPO Grant”). Based upon an assumed initial public offering price of $25.00 per common share, representing the mid-point of the offering range set forth on the cover of this prospectus, the IPO Grant would represent 600,000 shares (see “Management — Executive Compensation — Compensation Discussion and Analysis — IPO Grants”).

	Unvested restricted shares are not considered to be outstanding in the above table but do accumulate dividends and may be voted. See “Capitalization” and note 7(b) to our Consolidated Financial Statements (unaudited).

		Three months ended March 31,								Year ended				Period ended
		2007				2006				December 31, 2006				December 31, 2005
		(Unaudited)				(Unaudited)
		(Dollars in thousands, except share and per share amounts)
Revenues
Gross premiums written		$	378,070			$	248,205			$	540,789			$	—
Reinsurance premiums ceded			(30,958	)			(8,238	)			(63,696	)			—
Net premiums written			347,112				239,967				477,093				—
Change in unearned premiums			(235,620	)			(197,559	)			(170,579	)			—
Net premiums earned			111,492				42,408				306,514				—
Net investment income			18,497				10,912				58,021				2,032
Net realized gains (losses) on investments			46				(386	)			(1,102	)			39
Net unrealized gains on investments(1)			1,643				—				—				—
Foreign exchange gains (losses)			1,389				(4	)			2,157				—
Total revenues			133,067				52,930				365,590				2,071
Expenses
Losses and loss expenses			46,487				24,337				91,323				—
Policy acquisition costs			12,219				5,500				36,072				—
General and administrative expenses(2)			13,172				7,633				46,232				2,657
Finance expenses			4,441				705				8,789				—
Fair value of warrants issued			—				77				77				49,122
Total expenses			76,319				38,252				182,493				51,779
Net income (loss)			56,748				14,678				183,097				(49,708	)
Comprehensive income (loss)
Unrealized gains arising during the period(1)			—				(3,880	)			(332	)			144
Adjustment for reclassification of losses realized in income			—				386				1,102				(39	)
Comprehensive income (loss)		$	56,748			$	11,184			$	183,867			$	(49,603	)
Earnings per share (3)
Weighted average number of common shares and common share equivalents outstanding
Basic			58,482,601				58,460,716				58,477,130				58,423,174
Diluted			60,215,392				58,509,519				58,874,567				58,423,174
Basic earnings per share		$	0.97			$	0.25			$	3.13			$	(0.85	)
Diluted earnings per share		$	0.94			$	0.25			$	3.11			$	(0.85	)
Selected financial ratios
Losses and loss expenses ratio(4)			41.7%				57.4%				29.8%				—%
Policy acquisition cost ratio(5)			11.0%				13.0%				11.8%				—%
General and administrative expense ratio(6)			11.8%				18.0%				15.1%				—%
Expense ratio(7)			22.8%				31.0%				26.9%				—%
Combined ratio(8)			64.5%				88.4%				56.7%				—%
Return on average equity(9)			18.6%				5.8%				17.0%				NM

NM		Not meaningful.

		As of March 31, 2007								As of December 31,
						As				2006				2005
		Actual				adjusted(10)				Actual				Actual
		(Dollars in thousands, except per share amounts)
Summary Balance Sheet Data:
Investments at fair value		$	1,439,303			$	1,957,471			$	1,376,387			$	610,800
Cash and cash equivalents			88,317				582,467				63,643				398,488
Total assets			2,012,485				3,759,500				1,646,423				1,014,453
Unearned premiums			433,263				745,454				178,824				—
Reserve for losses and loss expenses			111,555				842,058				77,363				—
Junior Subordinated Deferrable Debentures			150,000				350,000				150,000				—
Total shareholders’ equity			1,251,216				1,559,894				1,192,523				999,806
Book value per common share(11)(13)		$	21.39			$	21.69			$	20.39			$	17.11
Diluted book value per common share(12)(13)			20.56				20.49				19.73				16.93

(1)		The Company has early adopted FAS 157 and FAS 159 as of January 1, 2007 and elected the fair value option on all securities previously accounted for as available-for-sale. Unrealized gains and losses on available-for-sale investments at December 31, 2006 of $875,000, previously included in accumulated other comprehensive income, were treated as a cumulative-effect adjustment as of January 1, 2007. The cumulative-effect adjustment will transfer the balance of unrealized gains and losses from accumulated other comprehensive income to retained earnings and will have no impact on the results of operations for the annual or interim periods beginning January 1, 2007. The Company’s investments were accounted for as trading for the annual or interim periods beginning January 1, 2007 and as such all unrealized gains and losses are included in net income.

(2)		General and administrative expenses for the three months ended March 31, 2007 and 2006, the year ended December 31, 2006 and the period ended December 31, 2005 include $250,000, $250,000, $1,000,000 and $0, respectively, related to our Advisory Agreement with Aquiline. Our Advisory Agreement with Aquiline will terminate upon completion of this Offering, in connection with which we will record general and administrative expense of $3.0 million in the third quarter of the current year.

(3)		Stock options which carry an average exercise price of $17.50 per option are anti-dilutive and consequently are not included in weighted average diluted shares outstanding. SFAS No. 123R requires that any unrecognized stock-based compensation expense that will be recorded in future periods be included as proceeds for purposes of treasury stock repurchases, which is applied against the unvested restricted shares balance. On March 1, 2007 we effected a 1.75 for one reverse stock split of our outstanding common shares. The stock split does not affect our financial statements other than to the extent it decreases the number of outstanding shares and correspondingly increases per share information for all periods presented.
(4)		Calculated by dividing losses and loss expenses by net premiums earned.
(5)		Calculated by dividing policy acquisition costs by net premiums earned.
(6)		Calculated by dividing general and administrative expenses by net premiums earned.
(7)		Calculated by combining the policy acquisition cost ratio and the general and administrative expense ratio.
(8)		Calculated by combining the loss ratio , the policy acquisition cost ratio and the general and administrative expense ratio.
(9)		Return on average equity is calculated by dividing the net income for the period by the average shareholders’ equity during the period. Quarterly average shareholders’ equity is the annualized average of the beginning and ending shareholders’ equity balances. Annual average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances.

(10)		The “As Adjusted” column reflects unaudited pro forma consolidated financial data giving effect to the Talbot acquisition and the Offering as if they occurred at March 31, 2007. See “Unaudited Condensed Consolidated Pro Forma Financial Information.” In the “As Adjusted” column, the calculation of basic and diluted book value per share reflects payment of total fees and expenses, including underwriting discounts and commissions, currently estimated at $24.1 million. The “As Adjusted” column gives effect to this Offering of our common shares at an assumed public offering price of $25.00 per share (the midpoint of the price range set forth on the cover page of this prospectus) and the application of the net proceeds thereof, as described under “Use of Proceeds.”

(11)		Book value per common share is defined as total shareholders’ equity divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities.
(12)		Diluted book value per common share is calculated based on total shareholders’ equity plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares, options and warrants outstanding (assuming their exercise).

(13)		The following table presents book value per common share and diluted book value per common share and share equivalent at prices consistent with the price range set forth on the cover page of this prospectus, in $0.50 increments.

Price per				Book value per				Diluted book value
share				common share				per common share
$	24.00			$	21.52			$	20.34
	24.50				21.60				20.41
	25.00				21.69				20.49
	25.50				21.78				20.56
	26.00				21.86				20.63

										Talbot
		Historical				Historical				Holdings Ltd.				Pro Forma				Pro Forma
		Validus				Talbot				accounting				Purchase				Finance				Pro Forma
		Holdings, Ltd.				Holdings Ltd.				adjustments				adjustments				adjustments				Consolidated
		(Dollars in thousands, except share and per share amounts)
Revenues
Gross premiums written		$	540,789			$	648,652			$	—			$	(8,675	)		$	—			$	1,180,766
Reinsurance premiums ceded			(63,696	)			(140,490	)			—				8,675				—				(195,511	)
Net premiums written			477,093				508,162				—				—				—				985,255
Change in unearned premiums			(170,579	)			(37,588	)			—				—				—				(208,167	)
Net premiums earned			306,514				470,574				—				—				—				777,088
Net investment income			58,021				32,746				—				—				—				90,767
Net realized losses on investments			(1,102	)			(6,279	)			—				—				—				(7,381	)
Other income			—				4,583				—				—				—				4,583
Foreign exchange gains			2,157				511				—				—				—				2,668
Total revenues			365,590				502,135				—				—				—				867,725
Expenses
Losses and loss expenses			91,323				183,050				(2,920	)			—				—				271,453
Policy acquisition costs			36,072				115,518				—				—				—				151,590
General and administrative expenses			46,232				79,383				3,363				19,846				—				148,824
Finance expenses			8,789				986				—				—				17,360				27,135
Fair value of warrants issued			77				—				—				—				—				77
Total expenses			(182,493	)			(378,937	)			(443	)			(19,846	)			(17,360	)			(599,079	)
Income before taxes			183,097				123,198				(443	)			(19,846	)			(17,360	)			268,646
Income tax credit			—				566				—				1,354				—				1,920
Net Income		$	183,097			$	123,764			$	(443	)		$	(18,492	)		$	(17,360	)		$	270,566
Earnings per share
Basic earnings per share		$	3.13																			$	3.76
Diluted earnings per share		$	3.11																			$	3.74
Weighted average number of common shares and common share equivalents outstanding
Basic			58,477,130												—				13,433,916				71,911,046
Diluted			58,874,567												128,363				13,433,916				72,436,846

										Talbot
		Historical				Historical				Holdings Ltd.				Pro Forma				Pro Forma
		Validus				Talbot				accounting				Purchase				Finance				Pro Forma
		Holdings, Ltd.				Holdings Ltd.				adjustments				adjustments				adjustments				Consolidated
Revenues
Gross premiums written		$	378,070			$	198,805			$	—			$	(12,363	)		$	—			$	564,512
Reinsurance premiums ceded			(30,958	)			(91,067	)			—				12,363				—				(109,662	)
Net premiums written			347,112				107,738				—				—				—				454,850
Change in unearned premiums			(235,620	)			23,037				—				—				—				(212,583	)
Net premiums earned			111,492				130,775				—				—				—				242,267
Net investment income			18,497				9,703				—				——				—				28,200
Net realized losses on investments			46				(1,322	)			—				—				—				(1,276	)
Net unrealized (losses) gains on investments			1,643				—				—				—				—				1,643
Other income			—				943				—				—				—				943
Foreign exchange gains			1,389				(168	)			—				—				—				1,221
Total revenues			133,067				139,931				—				—				—				272,998
Expenses
Losses and loss expenses			46,487				68,585				(858	)			—				—				114,214
Policy acquisition costs			12,219				30,047				—				—				—				42,266
General and administrative expenses			13,172				21,191				1,837				3,426				—				39,626
Finance expenses			4,441				165				—				—				4,340				8,946
Fair value of warrants issued			—				—				—				—				—				—
Total expenses			(76,319	)			(119,988	)			(979	)			(3,426	)			(4,340	)			(205,052	)
Income before taxes			56,748				19,943				(979	)			(3,426	)			(4,340	)			67,946
Income tax (charge) credit			—				(1,005	)			—				338				—				(667	)
Net Income		$	56,748			$	18,938			$	(979	)		$	(3,088	)		$	(4,340	)		$	67,279
Earnings per share
Basic earnings per share		$	0.97																			$	0.94
Diluted earnings per share		$	0.94																			$	0.91
Weighted average number of common shares and common share equivalents outstanding
Basic			58,482,601												—				13,433,916				71,916,517
Diluted			60,215,392												500,847				13,433,916				74,150,155

										Talbot
		Historical				Historical				Holdings Ltd.				Pro Forma				Pro Forma
		Validus				Talbot				accounting				Purchase				Finance				Pro Forma
		Holdings, Ltd.				Holdings Ltd.				adjustments				adjustments				adjustments				Consolidated
Assets
Fixed maturities, at fair value		$	1,089,167			$	197,485			$	—			$	—			$	—			$	1,286,652
Short-term investments, at fair value			350,136				317,628				2,003				—				—				669,767
Cash and cash equivalents			88,317				371,825				(2,003	)			(382,350	)			506,678				582,467
Total investments and cash			1,527,620				886,938				—				(382,350	)			506,678				2,538,886
Receivables			—				77,735				(77,735	)			—				—				—
Accrued premium income			—				143,406				(143,406	)			—				—				—
Premiums receivable			356,294				—				221,141				(8,316	)			—				569,119
Deferred acquisition costs			66,694				61,516				(3,264	)			—				—				124,946
Prepaid reinsurance premiums			27,064				71,717				—				(9,314	)			—				89,467
Securities lending collateral			16,258				—				—				—				—				16,258
Loss reserves recoverable			450				204,675				—				—				—				205,125
Accrued investment income			7,683				6,188				—				—				—				13,871
Current taxes recoverable			—				276				—				6,541				—				6,817
Goodwill and other intangible assets			—				—				—				176,949				—				176,949
Other assets			10,422				7,314				—				—				2,000				19,736
Total assets		$	2,012,485			$	1,459,765			$	(3,264	)		$	(216,490	)		$	508,678			$	3,761,174
Liabilities
Unearned premiums		$	433,263			$	321,505			$	—			$	(9,314	)		$	—			$	745,454
Reserve for losses and loss expense			111,555				730,503				—				—				—				842,058
Reinsurance balances payable			25,708				113,363				—				(8,316	)			—				130,755
Current taxation			—				1,610				—				—				—				1,610
Deferred taxation			—				15,052				—				2,466				—				17,518
Securities lending payable			16,258				—				—				—				—				16,258
Net payable for investments purchased			17,209				—				—				—				—				17,209
Accounts payable and accrued expenses			7,276				70,731				—				2,411				—				80,418
Debentures payable			150,000				—				—				—				200,000				350,000
Total liabilities			761,269				1,252,764				—				(12,753	)			200,000				2,201,280
Redeemable preference shares			—				81,376				—				(81,376	)			—				—
Shareholders’ equity
Ordinary shares			10,234				100				—				(100	)			2,351				12,585
Treasury shares			—				(613	)			—				613				—				—
Additional paid-in capital			1,049,970				5,214				—				(5,214	)			309,327				1,359,297
Accumulated other comprehensive (loss) income			—				(16	)			—				16				—				—
Retained earnings (deficit)			191,012				120,940				(3,264	)			(117,676	)			(3,000	)			188,012
Total shareholders’ equity			1,251,216				125,625				(3,264	)			(122,361	)			308,678				1,559,894
Total liabilities and shareholders’ equity		$	2,012,485			$	1,459,765			$	(3,264	)		$	(216,490	)		$	508,678			$	3,761,174
Book value per share
Book value per share		$	21.39																			$	21.69
Diluted book value per share		$	20.56																			$	20.49
Common shares outstanding			58,482,601												—				13,433,916				71,916,517
Common shares and common share equivalents outstanding			70,328,761												2,118,324				13,433,916				85,881,001

 

An investment in our common shares involves a number of risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our common shares. Additional risks not presently known to us or which we currently deem immaterial may also adversely affect our business or results of operations and/or the value of our common shares. Any of the risks described below could have a significant or material adverse effect on our results of operations or financial condition and result in a corresponding decline in the market price of our common shares. You could lose all or part of your investment.

 

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this prospectus. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Risks Related to Our Company

 

We have a limited operating history and our historical financial results do not accurately indicate our future performance.

 

We were formed in October 2005 and were fully operational by December 2005. We, therefore, have a limited operating and financial history. We then began underwriting with risks attaching no earlier than January 1, 2006. It has been reported that among the last 20 years, 2006 has produced the third-lowest level of insured losses, after 1997 and 1988. As of March 31, 2007, we have not experienced any catastrophe events such as those experienced by the industry in 2004 and 2005 and the events of September 11, 2001, and as a result, we cannot provide assurances as to how our business model or risk controls would respond to such events. There is limited historical financial and operating information available to help you evaluate our past performance or make a decision about an investment in our common shares. As a recently formed company, we face substantial business and financial risks and may suffer significant losses. As a result of these risks, it is possible that we may not be successful in the continued implementation of our business strategy or completing the development of the infrastructure necessary to run our business.

 

In addition, particularly as a recently formed company, our business strategy may change and may be affected by acquisition, joint venture or other business, investment and/or growth opportunities that may, in the future, become available to us or that we may pursue. In the future, we may pursue investments in or acquisitions of companies complementary to our business. There can be no assurance that any such investments or acquisitions will occur, or if such investments or acquisitions do occur, that they will be on terms favorable to us.

 

Claims on policies written under our short-tail insurance lines that arise from unpredictable and severe catastrophic events could adversely affect our financial condition or results of operations.

 

Substantially all of our gross premiums written to date are in short-tail lines, which means we could become liable for a significant amount of losses in a brief period. Short-tail policies expose us to claims arising out of unpredictable natural and other catastrophic events, such as hurricanes, windstorms, tsunamis, severe winter weather, earthquakes, floods, fires, explosions, acts of terrorism and other natural and man-made disasters. Many observers believe that the Atlantic basin is in the active phase of a multi-decade cycle in which conditions in the ocean and atmosphere, including warmer-than-average sea-surface temperatures and low wind shear, enhance hurricane activity. This increase in the number and intensity of tropical storms and hurricanes can span multiple decades (approximately 20 to 30 years). These conditions may translate to a greater potential for hurricanes to make landfall in the U.S. at higher intensities over the next five years. The frequency and severity of catastrophes are inherently unpredictable.

 

The extent of losses from catastrophes is a function of both the number and severity of the insured events and the total amount of insured exposure in the areas affected. Increases in the value and concentrations of insured property, the effects of inflation and changes in cyclical weather patterns may increase the severity

of claims from catastrophic events in the future. Claims from catastrophic events could reduce our earnings and cause substantial volatility in our results of operations for any fiscal quarter or year, which could adversely affect our financial condition, possibly to the extent of eliminating our shareholders’ equity. Our ability to write new reinsurance policies could also be affected as a result of corresponding reductions in our capital.

 

Underwriting is inherently a matter of judgment, involving important assumptions about matters that are unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more catastrophic or other events could result in claims that substantially exceed our expectations and which would become due in a short period of time, which could materially adversely effect our financial condition, liquidity or results of operations.

 

We depend on ratings by A.M. Best Company. Our financial strength rating is under review with negative implications, and could be revised downward, which could affect our standing among brokers and customers, cause our premiums and earnings to decrease and limit our ability to pay dividends on the common shares.

 

Third-party rating agencies, such as A.M. Best Company, assess and rate the financial strength of reinsurers based upon criteria established by the rating agencies, which criteria are subject to change. The financial strength ratings assigned by rating agencies to insurance and reinsurance companies represent independent opinions of financial strength and ability to meet policyholder obligations and are not directed toward the protection of investors. Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. Insurers and intermediaries use these ratings as one measure by which to assess the financial strength and quality of insurers and reinsurers. These ratings are often a key factor in the decision by an insured or intermediary of whether to place business with a particular insurance or reinsurance provider. These ratings are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold our common shares. On March 7, 2007, A.M. Best Company affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of Validus Reinsurance, Ltd. Concurrently, A.M. Best Company assigned an issuer credit rating of “bbb-” to Validus Holdings, Ltd.

 

In December 2005, A.M. Best assigned a financial strength rating of “A−” (Excellent) to us. A.M. Best financial strength ratings currently range from “A++” (Superior) to “F” (In Liquidation) and include 15 separate ratings categories, of which “A−” (Excellent) is the fourth highest ratings category. A.M. Best publications indicate that an “A−” (Excellent) financial strength rating is assigned to companies that, in A.M. Best’s opinion, have demonstrated excellent overall performance when compared to the standards established by A.M. Best and have demonstrated a strong ability to meet their obligations to policyholders. Our financial strength rating is subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best in response to a variety of factors. Such factors include, but are not limited to, a minimum capital adequacy ratio, management, earnings, capitalization and risk profile. Although we may seek additional financial strength ratings from other nationally recognized statistical ratings organizations, there can be no assurance that we will be able to obtain or maintain any particular insurance rating.

 

On May 16, 2007, A.M. Best placed the financial strength ratings of Validus Reinsurance, Ltd. and Validus Holdings, Ltd. under review with negative implications. According to A.M. Best, this review status is attributable to the execution risk inherent with financing a transaction such as the Talbot acquisition. The ratings will remain under review pending A.M. Best’s review of the transaction, our integration plan and our risk-adjusted capital position upon completion of the acquisition and completion of this Offering.

 

If our financial strength rating is reduced from its current level by A.M. Best, our competitive position in the reinsurance industry would suffer, and it would be more difficult for us to market our products. A downgrade could result in a significant reduction in the number of reinsurance contracts we write and in a substantial loss of business as our customers, and brokers that place such business, move to other competitors with higher financial strength ratings. The substantial majority of reinsurance contracts issued through reinsurance brokers contains provisions permitting the ceding company to cancel such contracts in the event of a downgrade of the reinsurer by A.M. Best below “A−” (Excellent). Consequently, you should assume that substantially all of our business could be affected by a downgrade of our A.M. Best rating.

 

It is increasingly common for our reinsurance contracts to contain terms that would allow the ceding companies to cancel the contract for the remaining portion of our period of obligation if our financial strength rating is downgraded below “A−” (Excellent) by A.M. Best. We cannot predict in advance the extent to which this cancellation right would be exercised, if at all, or what effect any such cancellations would have on our financial condition or future operations, but such effect could be material.

 

The indenture governing our Junior Subordinated Deferrable Debentures would restrict us from declaring or paying dividends on our common shares if we are downgraded by A.M. Best to a financial strength rating of “B” (Fair) or below or if A.M. Best withdraws its financial strength rating on any of our material insurance subsidiaries.

 

A downgrade of the Company’s A.M. Best financial strength rating below “B++” (Fair) would also constitute an event of default under our credit facilities. Either of these events could, among other things, reduce the Company’s financial flexibility.

 

If our risk management and loss limitation methods fail to adequately manage our exposure to losses from catastrophic events, our financial condition and results of operations could be adversely affected.

 

We manage our exposure to catastrophic losses by analyzing the probability and severity of the occurrence of catastrophic events and the impact of such events on our overall reinsurance and investment portfolio. We use various tools to analyze and manage the reinsurance exposures we assume from ceding companies and risks from a catastrophic event that could have an adverse effect on our investment portfolio. VCAPS, our proprietary risk modeling software, enables us to assess the adequacy of risk pricing and to monitor our overall exposure to risk in correlated geographic zones. VCAPS is new and relatively untested and we cannot assure you the models and assumptions used by the software will accurately predict losses. Further, we cannot assure you that it is free of defects in the modeling logic or in the software code. In addition, we have not sought copyright or other legal protection for VCAPS.

 

In addition, much of the information that we enter into our risk modeling software is based on third-party data that we cannot assure to be reliable, as well as estimates and assumptions that are dependent on many variables, such as assumptions about building material and labor demand surge , storm surge, the expenses of settling claims, which are known as loss adjustment expenses , insurance-to-value and storm intensity. Accordingly, if the estimates and assumptions that we enter into our proprietary risk model are incorrect, or if our proprietary risk model proves to be an inaccurate forecasting tool, the losses we might incur from an actual catastrophe could be materially higher than our expectation of losses generated from modeled catastrophe scenarios, and our financial condition and results of operations could be adversely affected.

 

We also seek to limit our loss exposure through loss limitation provisions in our policies, such as limitations on the amount of losses that can be claimed under a policy, limitations or exclusions from coverage and provisions relating to choice of forum, which are intended to assure that our policies are legally interpreted as we intend. We cannot assure you that these contractual provisions will be enforceable in the manner we expect or that disputes relating to coverage will be resolved in our favor. If the loss limitation provisions in our policies are not enforceable or disputes arise concerning the application of such provisions, the losses we might incur from a catastrophic event could be materially higher than our expectations, and our financial condition and results of operations could be adversely affected.

 

The reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates and policy terms and conditions, which could materially adversely affect our financial condition and results of operations.

 

The reinsurance industry has historically been cyclical. Reinsurers have experienced significant fluctuations in operating results due to competition, frequency of occurrence or severity of catastrophic events, levels of underwriting capacity, underwriting results of primary insurers, general economic conditions and other factors. The supply of reinsurance is related to prevailing prices, the level of insured losses and the level of industry surplus which, in turn, may fluctuate, including in response to changes in rates of return on investments being earned in the reinsurance industry.

 

The reinsurance pricing cycle has historically been a market phenomenon, driven by supply and demand rather than by the actual cost of coverage. The upward phase of a cycle is often triggered when a major event forces insurers and reinsurers to make large claim payments, thereby drawing down capital. This, combined with increased demand for insurance against the risk associated with the event, pushes prices upwards. Over time, insurers’ and reinsurers’ capital is replenished with the higher revenues. At the same time, new entrants flock to the industry seeking a part of the profitable business. This combination prompts a long slide in prices — the downward cycle — until a major insured event restarts the upward phase. As a result, the reinsurance business has been characterized by periods of intense competition on price and policy terms due to excessive underwriting capacity, which is the percentage of surplus or the dollar amount of exposure that a reinsurer is willing to place at risk, as well as periods when shortages of capacity permit favorable premium rates and policy terms and conditions.

 

Premium levels may be adversely affected by a number of factors which fluctuate and may contribute to price declines generally in the reinsurance industry. For example, as premium levels for many products have increased subsequent to the significant natural catastrophes of 2004 and 2005, the supply of reinsurance has increased and is likely to increase further, either as a result of capital provided by new entrants or by the commitment of additional capital by existing reinsurers. In addition, some of the prior upward cycles were initiated following each of Hurricane Andrew in 1992 and the events of September 11, 2001. Although it is difficult to assess the current stage of a cycle, continued increases in the supply of reinsurance may have consequences for the reinsurance industry generally and for us, including fewer contracts written, lower premium rates, increased expenses for customer acquisition and retention, and less favorable policy terms and conditions. We have noted, for instance, beginning with the January 2007 renewal season, an increase in the amount of available underwriting capacity for U.S. property catastrophe risks. As a consequence, we have also noted greater competition for participation in reinsurance programs. This has not adversely affected the rates we receive for our reinsurance or our overall gross premiums written to date, however, there can be no assurance that rates and premiums will not be affected in the future. Furthermore, the State of Florida has instituted a law that, in part, increases the amount of reinsurance available to primary insurers from the Florida Hurricane Catastrophe Fund. See “Risk Factors — Risks Related to Laws and Regulations Applicable to Us — Recent legislation in the State of Florida may reduce the amount of private market reinsurance required in Florida, where we write a significant amount of business. This change in law could have a negative impact on our business.”

 

The cyclical trends in the industry and the industry’s profitability can also be affected significantly by volatile and unpredictable developments, such as natural disasters (such as catastrophic hurricanes, windstorms, tornados, earthquakes and floods), courts granting large awards for certain damages, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds and primary insurance companies. We expect to experience the effects of cyclicality, which could materially adversely affect our financial condition and results of operations.

 

If we underestimate our reserve for losses and loss expenses, our financial condition and results of operations could be adversely affected.

 

Our success depends on our ability to accurately assess the risks associated with the businesses and properties that we reinsure. If unpredictable catastrophic events occur, or if we fail to adequately manage our exposure to losses or fail to adequately estimate our reserve requirements, our actual losses and loss expenses may deviate, perhaps substantially, from our reserve estimates.

 

We estimate the risks associated with our outstanding obligations, including the risk embedded within our unearned premiums. To do this, we establish reserves for losses and loss expenses (or loss reserves ), which are liabilities that we record to reflect the estimated costs of claim payment and the related expenses that we will ultimately be required to pay in respect of premiums written and include case reserves and incurred but not reported (“IBNR”) reserves. However, under U.S. GAAP, we are not permitted to establish reserves for losses with respect to our property catastrophe reinsurance until an event which gives rise to a claim occurs. As a result, only reserves applicable to losses incurred up to the reporting date may be set aside

on our financial statements, with no allowance for the provision of loss reserves to account for possible other future losses with respect to our catastrophe-exposed reinsurance. Case reserves are reserves established with respect to specific individual reported claims. IBNR reserves are reserves for estimated losses that we have incurred but that have not yet been reported to us. Property catastrophe reinsurance covers insurance companies’ exposures to an accumulation of property and related losses from separate policies, typically relating to natural disasters or other catastrophic events.

 

Our reserve estimates do not represent an exact calculation of liability. Rather, they are estimates of what we expect the ultimate settlement and administration of claims will cost. These estimates are based upon actuarial and statistical projections and on our assessment of currently available data, predictions of future developments and estimates of future trends and other variable factors such as inflation. Establishing an appropriate level of our loss reserve estimates is an inherently uncertain process. It is likely that the ultimate liability will be greater or less than these estimates and that, at times, this variance will be material. Our reserve estimates are refined continually as experience develops and claims are reported and settled. Establishing an appropriate level for our reserve estimates is an inherently uncertain process. In addition, as we operate solely through intermediaries, reserving for our business can involve added uncertainty arising from our dependence on information from ceding companies which, in addition to the risk of receiving inaccurate information involves an inherent time lag between reporting information from the primary insurer to us. Additionally, ceding companies employ differing reserving practices which adds further uncertainty to the establishment of our reserves. Moreover, these uncertainties are greater for reinsurers like us than for reinsurers with a longer operating history, because we do not yet have an established loss history. The lack of historical information for the Company has necessitated the use of industry loss emergence patterns in deriving IBNR. Loss emergence patterns are development patterns used to project current reported or paid loss amounts to their ultimate settlement value or amount. Further, expected losses and loss ratios are typically developed using vendor and proprietary computer models and these expected loss ratios are a material component in the calculation deriving IBNR. Actual loss ratios will deviate from expected loss ratios and ultimate loss ratios will be greater or less than expected loss ratios. Because of these uncertainties, it is possible that our estimates for reserves at any given time could prove inadequate.

 

To the extent we determine that actual losses and loss adjustment expenses from events which have occurred exceed our expectations and the loss reserves reflected in our financial statements, we will be required to reflect these changes in the current period. This could cause a sudden and material increase in our liabilities and a reduction in our profitability, including operating losses and reduction of capital, which could materially restrict our ability to write new business and adversely affect our financial condition and results of operations and potentially our A.M. Best rating.

 

We rely on key personnel and the loss of their services may adversely affect us. Our operating location may be an impediment to attracting and retaining experienced personnel.

 

Various aspects of our business depend on the services and skills of key personnel of the Company. We believe there are only a limited number of available qualified executives in the business lines in which we compete. We rely substantially upon the services of Edward J. Noonan, our Chief Executive Officer and Chairman of our Board of Directors; George P. Reeth, our President and the Deputy Chairman of our Board of Directors; Jeff Consolino, our Chief Financial Officer; Stuart W. Mercer, our Chief Risk Officer; and Conan M. Ward, our Chief Underwriting Officer, among other key employees. Although we are not aware of any planned departures, the loss of any of their services or the services of other members of our management team or any difficulty in attracting and retaining other talented personnel could impede the further implementation of our business strategy, reduce our revenues and decrease our operational effectiveness. Although we have an employment agreement with each of the above named executives, there is a possibility that these employment agreements may not be enforceable in the event any of these employees leave. The employment agreements for each of the above-named executives provide that the terms of the agreement will continue until the 12-month anniversary of either party giving notice of termination, and will terminate immediately upon the Company giving notice of termination for cause. We do not currently maintain key man life insurance policies with respect to them or any of our other employees.

 

Our operating location may be an impediment to attracting and retaining experienced personnel. Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Our success may depend in part on the continued services of key employees in Bermuda. A work permit may be granted or renewed upon demonstrating that, after proper public advertisement, no Bermudian (or spouse of a Bermudian or a holder of a permanent resident’s certificate or holder of a working resident’s certificate) is available who meets the minimum standards reasonably required by the employer. The Bermuda government’s policy places a six-year term limit on individuals with work permits, subject to certain exemptions for key employees. A work permit is issued with an expiry date (up to five years) and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. If work permits are not obtained, or are not renewed, for our principal employees, we would lose their services, which could materially affect our business. Work permits are currently required for 24 of our Bermuda employees, all of whom have obtained three- or five-year work permits.

 

We may require additional capital or credit in the future, which may not be available or only available on unfavorable terms.

 

We monitor our capital adequacy on a regular basis. The capital requirements of our business depend on many factors, including our premiums written, loss reserves, investment portfolio composition and risk exposures, as well as satisfying regulatory and rating agency capital requirements. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. To the extent that our existing capital is insufficient to fund our future operating requirements and/or cover claim losses, we may need to raise additional funds through financings or limit our growth. Any equity or debt financing, if available at all, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our outstanding securities. If we are not able to obtain adequate capital, our business, results of operations and financial condition could be adversely affected.

 

In addition, as an alien reinsurer (not licensed in the United States), we are required to post collateral security with respect to any reinsurance liabilities that we assume from ceding insurers domiciled in the United States in order for U.S. ceding companies to obtain full statutory and regulatory credit for our reinsurance. Other jurisdictions and non-U.S. ceding insurers may have similar collateral requirements. Under applicable statutory provisions, these security arrangements may be in the form of letters of credit, reinsurance trusts maintained by trustees or funds-withheld arrangements where assets are held by the ceding company . We intend to satisfy such statutory requirements by providing to primary insurers letters of credit issued under our credit facilities. To the extent that we are required to post additional security in the future, we may require additional letter of credit capacity and we cannot assure you that we will be able to obtain such additional capacity or arrange for other types of security on commercially acceptable terms or on terms as favorable as under our current letter of credit facilities. See “Description of Certain Indebtedness — Credit Facilities.” Our inability to provide collateral satisfying the statutory and regulatory guidelines applicable to primary insurers would have a material effect on our ability to provide reinsurance to third parties and negatively affect our financial position and results of operations.

 

Security arrangements may subject our assets to security interests and/or require that a portion of our assets be pledged to, or otherwise held by, third parties. Although the investment income derived from our assets while held in trust typically accrues to our benefit, the investment of these assets is governed by the investment regulations of the state of domicile of the ceding insurer.

 

Competition for business in our industry is intense, and if we are unable to compete effectively, we may not be able to gain market share and our business may be materially adversely affected.

 

The reinsurance industry is highly competitive. We face intense competition, based upon (among other things) global capacity, product breadth, reputation and experience with respect to particular lines of business, relationships with reinsurance intermediaries, capital and perceived financial strength (including independent rating agencies’ ratings), innovation, quality of service and price. We compete with major global

insurance and reinsurance companies and underwriting syndicates, many of which have extensive experience in reinsurance and may have greater financial, marketing and employee resources available to them than us. Other financial institutions, such as banks and hedge funds, now offer products and services similar to our products and services through alternative capital markets products that are structured to provide protections similar to those provided by reinsurers. These products, such as catastrophe-linked bonds, compete with our products. In the future, underwriting capacity will continue to enter the market from these identified competitors and perhaps other sources. After the events of September 11, 2001, and then again following the three major hurricanes of 2005 (Katrina, Rita and Wilma), new capital flowed into Bermuda, and much of these new proceeds went to a variety of Bermuda-based start-up companies. The full extent and effect of this additional capital on the reinsurance market will not be known for some time and market conditions could become less favorable. Increased competition could result in fewer submissions and lower rates, which could have an adverse effect on our growth and profitability. If we are unable to compete effectively against these competitors, we may not be able to gain market share.

 

In addition, insureds have been retaining a greater proportion of their risk portfolios than previously, and industrial and commercial companies have been increasingly relying upon their own subsidiary insurance companies, known as captive insurance companies, self-insurance pools, risk retention groups, mutual insurance companies and other mechanisms for funding their risks, rather than risk transferring insurance. This has put downward pressure on insurance premiums.

 

Loss of business from one or more major reinsurance brokers could adversely affect us.

 

We market our reinsurance on a worldwide basis primarily through reinsurance brokers, and we depend on a small number of reinsurance brokers for a large portion of our revenues. For the three months ended March 31, 2007, our business was primarily sourced from the following brokers: Guy Carpenter & Co. (37.1%), Benfield Group Ltd. (18.4%), Willis Re Inc. (17.1%) and Aon Re Inc. (15.1%). These four brokers provided a total of 87.7% of our gross premiums written for the three months ended March 31, 2007. Loss of all or a substantial portion of the business provided by one or more of these brokers could adversely affect our business.

 

We assume a degree of credit risk associated with substantially all of our reinsurance brokers.

 

In accordance with industry practice, we frequently pay amounts owed on claims under our policies to reinsurance brokers and the brokers, in turn, pay these amounts over to the ceding insurers and reinsurers that have reinsured a portion of their liabilities with us. In some jurisdictions, if a broker fails to make such a payment, we might remain liable to the ceding insurer or reinsurer for the deficiency notwithstanding the broker’s obligation to make such payment. Conversely, in certain jurisdictions, when the ceding insurer or reinsurer pays premiums for these policies to reinsurance brokers for payment to us, these premiums are considered to have been paid and the ceding insurer or reinsurer will no longer be liable to us for these premiums, whether or not we have actually received them. Consequently, we assume a degree of credit risk associated with substantially all of our brokers.

 

Our success depends on our ability to establish and maintain effective operating procedures and internal controls. Failure to detect control issues and any instances of fraud could adversely affect us.

 

Our success is dependent upon our ability to establish and maintain operating procedures and internal controls (including the timely and successful implementation of information technology systems and programs) to effectively support our business and our regulatory and reporting requirements. We may not be successful in such efforts. Even if and when implemented, as a result of the inherent limitations in all control systems, no evaluation of controls can provide full assurance that all control issues and instances of fraud, if any, within the Company will be detected.

 

We may be unable to purchase retrocessional reinsurance in the future, and if we successfully purchase retrocessional reinsurance, we may be unable to collect, which could adversely affect our business, financial condition and results of operations.

 

We purchase retrocessional reinsurance , including that provided by Petrel Re, in order that we may offer cedants greater capacity, and to mitigate the effect of large and multiple losses upon our financial condition. Retrocessional reinsurance is a transaction whereby a reinsurer cedes to another reinsurer (the “retrocessionaire”) all or part of the reinsurance it has assumed. A reinsurer’s insolvency or inability or refusal to make timely payments under the terms of its reinsurance agreement with us could have an adverse effect on us because we remain liable to our client. From time to time, market conditions have limited, and in some cases have prevented, reinsurers from obtaining the types and amounts of retrocessional reinsurance that they consider adequate for their business needs. Accordingly, we may not be able to obtain our desired amounts of retrocessional reinsurance or negotiate terms that we deem appropriate or acceptable or obtain retrocessional reinsurance from entities with satisfactory creditworthiness.

 

Our investment portfolio may suffer reduced returns or losses which could adversely affect our results of operations and financial condition. Any increase in interest rates or volatility in the equity and debt markets could result in significant losses in the fair value of our investment portfolio which, commencing in 2007, would reduce our net income.

 

Our operating results depend in part on the performance of our investment portfolio, which currently consists of fixed maturity securities, as well as the ability of our investment managers to effectively implement our investment strategy. Our Board of Directors, including our Finance Committee, oversees our investment strategy, and in consultation with BlackRock Financial Management, Inc. and Goldman Sachs Asset Management, our portfolio advisors, has established investment guidelines. The investment guidelines dictate the portfolio’s overall objective, benchmark portfolio, eligible securities, duration, limitations on the use of derivatives and inclusion of foreign securities, diversification requirements and average portfolio rating. The Board periodically reviews these guidelines in light of our investment goals and consequently they may change at any time.

 

The investment income derived from our invested assets was $18.5 million or 32.6% of our net income for the three months ended March 31, 2007. The investment income derived from our invested assets was $58.0 million, or 31.7% of our net income, for the year ended December 31, 2006. While we follow a conservative investment strategy designed to emphasize the preservation of invested assets and to provide sufficient liquidity for the prompt payment of claims, we will nevertheless be subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. Our investment performance may vary substantially over time, and we cannot assure you that we will achieve our investment objectives. Unlike more established reinsurance companies with longer operating histories, the Company has a limited performance record to which investors can refer. See “Business — Investments.”

 

Investment results will also be affected by general economic conditions, market volatility, interest rate fluctuations, liquidity and credit risks beyond our control. In addition, our need for liquidity may result in investment returns below our expectations. Also, with respect to certain of our investments, we are subject to prepayment or reinvestment risk. In particular, our fixed income portfolio is subject to reinvestment risk, and as at March 31, 2007, 52.9% of the fixed income portfolio is comprised of mortgage backed and asset backed securities which are subject to prepayment risk. Although we attempt to manage the risks of investing in a changing interest rate environment, a significant increase in interest rates could result in significant losses, realized or unrealized, in the fair value of our investment portfolio and, consequently, could have an adverse affect on our results of operations.

 

As of January 1, 2007, we have adopted Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (FAS 157) and elected Statement of Financial Accounting Standards No. 159 “the Fair Value Option for Financial Assets and Liabilities; Including an Amendment of FASB Statement No 115” (FAS 159) for our entire FAS 115 portfolio, previously accounted for as available-for-sale. Unrealized gains and losses on available-for-sale investments at December 31, 2006 of $875,000 previously included in the accumulated other comprehensive income, were treated as a cumulative-effect adjustment as of January 1,

2007. The cumulative-effect adjustment will transfer the balance of unrealized gains and losses from accumulated other comprehensive income to retained earnings and will have no impact on the results of operations for the annual or interim periods beginning January 1, 2007. The Company’s investments will be accounted for as trading for the annual or interim periods beginning January 1, 2007 and, as such, all unrealized gains and losses will be included in Net Income on the Statement of Operations. Including unrealized gains and losses in Net Income may have the effect of increasing the volatility of our earnings.

 

The movement in foreign currency exchange rates could adversely affect our operating results because we enter into reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar and we maintain a portion of our investments and liabilities in currencies other than the U.S. dollar.

 

The U.S. dollar is our reporting currency. We enter into reinsurance contracts where the premiums receivable and losses payable are denominated in currencies other than the U.S. dollar. In addition, we maintain a portion of our investments and liabilities in currencies other than the U.S. dollar. Premiums received in non-U.S. currencies are generally converted into U.S. dollars at the time of receipt. When we incur a liability in a non-U.S. currency, we carry such liability on our books in the original currency. These liabilities are converted from the non-U.S. currency to U.S. dollars at the time of payment. We will therefore realize foreign currency exchange gains or losses as we ultimately receive premiums and settle claims required to be paid in foreign currencies. At March 31, 2007, 8.7% of our premiums receivable, none of our investments and 9.5% of our reserves for losses and loss expenses were in foreign currencies. At December 31, 2006, 7.7% of our premiums receivable, none of our investments and 2.4% of our reserves for losses and loss expenses were in foreign currencies.

 

To the extent that we do not seek to hedge our foreign currency risk, the impact of a movement in foreign currency exchange rates could adversely affect our operating results.

 

We are a new company and the information technology systems necessary to run our business have not been fully tested. In addition, VCAPS, our proprietary modeling in software, is new and is relatively untested. A defect in any of these systems could adversely affect our financial condition or results of operations.

 

The performance of our information technology systems is critical to our business and reputation and our ability to process transactions and provide high quality customer service. Such systems are and will continue to be a very important part of our underwriting process. We make use of commercially available catastrophe models, licensing the models of all three major vendors, and we enhance the output from these models with our proprietary software, VCAPS. We cannot be certain that we will be able to replace these service providers or consultants, if necessary, without slowing our underwriting response time, or that our proprietary technology, once established, will operate as intended. A defect or error in our information technology systems could result in a loss or delay of revenues, higher than expected loss levels, diversion of management resources, harm to our reputation or an increase in costs. VCAPS is new and we cannot assure you the models and assumptions used by the software will accurately predict losses. Further, we cannot assure you that it is free of defects in the modeling logic or in the software code. In addition, we have not sought copyright or other legal protection for VCAPS. Further, to date, we have limited back-up and disaster recovery for our information technology systems.

 

The preparation of our financial statements will require us to make many estimates and judgments, which are even more difficult than those made in a mature company, and which, if inaccurate, could cause volatility in our results.

 

The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. Management believes the item that requires the most subjective and complex estimates is the reserve for losses and loss expenses. Due to the Company’s short operating history, loss experience is limited and reliable evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of claims outstanding and average losses per claim will necessarily take many years to develop. Following a major

catastrophic event, the possibility of future litigation or legislative change that may affect interpretation of policy terms further increases the degree of uncertainty in the reserving process. The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different than the reserves initially established. Changes to prior year reserves will affect current underwriting results by increasing net income if the prior year reserves prove to be redundant or by decreasing net income if the prior year reserves prove to be insufficient. The Company expects volatility in results in periods in which significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have occurred and are expected to give rise to a claim. As a result, the Company is not allowed to record contingency reserves to account for expected future losses. The Company anticipates that claims arising from future events will require the establishment of substantial reserves from time to time.

 

An inability to implement, for the fiscal year ending December 31, 2008, the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely and satisfactory manner could cause the price of our common shares to fall.

 

We are presently evaluating our existing internal controls with respect to the standards adopted by the Public Company Accounting Oversight Board. We cannot be certain at this time that we will be able to successfully and satisfactorily complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 by the time that we are required to file our Annual Report on Form 10-K for the year ending December 31, 2008, which is the first time that our management and our external auditors will be required to deliver reports on our internal controls and procedures in accordance with the Sarbanes-Oxley Act of 2002. Uncertainty as to our ability to comply with such requirements or any material weaknesses uncovered as a result of such procedures could have a material adverse effect on the trading price of our common shares. In addition, we may incur increased costs associated with such procedures or a diversion of internal resources necessary to prepare for or comply with such requirements.

 

Risks Related to our Acquisition of Talbot Holdings Ltd.

 

There can be no assurance that we will realize the expected benefits of the Talbot acquisition in the anticipated time or at all.

 

In order to realize the benefits of the Talbot acquisition, our and Talbot’s management will be required to devote considerable effort to projects such as upgrading and integrating financial, actuarial, underwriting and other systems and preparing financial reports on a timely basis, whether for a public company or otherwise, and no assurances can be given as to the impact these efforts may have upon our operations. In addition, no assurances can be given as to how much business Talbot will be permitted by Lloyd’s to write in 2008 and subsequent years nor as to the viability or cost of the capital structure we may use as a substitute for the external capital and reinsurance utilized by Talbot in 2007 and prior underwriting years.

 

Risks Relating to Lloyd’s and Other U.K. Regulatory Matters

 

The regulation of Lloyd’s members by Lloyd’s and of Lloyd’s by the U.K. Financial Services Administration (“FSA”) and under European Directives and other local laws may result in intervention that could have a significant negative impact on Talbot.

 

Talbot operates in a regulated industry. Its underwriting activities are regulated by the FSA and franchised by Lloyd’s. The FSA has substantial powers of intervention in relation to the Lloyd’s managing agents (such as Talbot Underwriting Limited) which it regulates, including the power to remove their authorization to manage Lloyd’s syndicates. In addition, the Lloyd’s Franchise Board requires annual approval of Syndicate 1183’s business plan, including a maximum underwriting capacity, and may require changes to any business plan presented to it or additional capital to be provided to support underwriting (known as Funds

at Lloyd’s or “FAL”). An adverse determination in any of these cases could lead to a change in business strategy which may have an adverse effect on Talbot’s financial condition and operating results.

 

European Directives affect the regulation governing the carrying on of insurance business in the United Kingdom. A new Directive covering the prudential supervision of insurance companies is being developed to replace the existing insurance Directives. The proposed “Solvency II” insurance Directive is presently under consultation and is unlikely to come into force before 2009. Likewise, a new reinsurance Directive was adopted on 17 October 2005, which is likely to be fully implemented in the U.K. by the end of 2007. There can be no assurance that future legislation will not have an adverse effect on Talbot.

 

Additionally, Lloyd’s worldwide insurance and reinsurance business is subject to local regulation. Changes in such regulation may have an adverse effect on Lloyd’s generally and on Talbot.

 

Should Lloyd’s Council decide additional levies are required to support the New Central Fund, this could adversely affect Talbot.

 

The New Central Fund, which is funded by annual contributions and loans from Lloyd’s members, acts as a policyholders’ protection fund to make payments where any Lloyd’s member has failed to pay, or is unable to pay, valid claims. The Lloyd’s Council may resolve to make payments from the New Central Fund for the advancement and protection of policyholders, which could lead to additional or special contributions being payable by Lloyd’s members, including Talbot. This, in turn, could adversely affect Talbot.

 

Lloyd’s 1992 and prior liabilities.

 

Notwithstanding the “firebreak” introduced when Lloyd’s implemented the Reconstruction and Renewal Plan in 1996, Lloyd’s members, including Talbot subsidiaries, remain indirectly exposed in a number of ways to 1992 and prior business reinsured by Equitas, including through the application of overseas deposits and the New Central Fund.

 

Lloyd’s currently has a number of contingent liabilities in respect of risks under certain policies allocated to 1992 or prior Years of Account. If the statutory transfer of business from Equitas to National Indemnity Company (NICO) is not implemented, and the limit of the NICO retrocession cover proves to be insufficient and as a consequence Equitas is unable to pay the 1992 and prior liabilities in full, Lloyd’s will be liable to meet any shortfall arising in respect of those policies. The New Central Fund, which can, subject to Lloyd’s regulations, issue calls on current underwriting members of Lloyd’s (which will include Talbot subsidiaries), may be applied for these purposes. Lloyd’s also has contingent liabilities under indemnities in respect of claims against certain persons and from residual litigation with Lloyd’s members who have not accepted the settlement offer.

 

The failure of Lloyd’s to satisfy the FSA’s annual solvency test could result in limitations on Talbot’s ability to underwrite or its ability to commence legal proceedings against Lloyd’s.

 

The FSA requires Lloyd’s to satisfy an annual solvency test. The solvency requirement in essence measures whether Lloyd’s has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and in run-off. If Lloyd’s fails to satisfy the test in any year, the FSA may require Lloyd’s to cease trading and/or its members to cease or reduce underwriting. In the event of Lloyd’s failing to meet any solvency requirement, either the Society of Lloyd’s or the FSA may apply to the court for a Lloyd’s Market Reorganisation Order (“LMRO”). On the making of an order a “reorganisation controller” is appointed, and for its duration, a moratorium is imposed preventing any proceedings or legal process from being commenced or continued against any party that is the subject of such an order, which, if made, would apply to the market as a whole, including members, former members, managing agents, members’ agents, Lloyd’s brokers, approved run-off companies and managing general agents unless individual parties are specifically excluded.

A downgrade in Lloyd’s ratings would have an adverse effect on Syndicate 1183’s standing among brokers and customers and cause its premiums and earnings to decrease.

 

The ability of Lloyd’s syndicates to trade in certain classes of business at current levels is dependent on the maintenance of a satisfactory credit rating issued by an accredited rating agency. The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies, A.M. Best, Standard & Poor’s and Fitch Ratings. Syndicate 1183 benefits from Lloyd’s current ratings and would be adversely affected if the current ratings were downgraded from their present levels.

 

An increase in the charges paid by Talbot to participate in the Lloyd’s market could adversely affect Talbot’s financial and operating results.

 

Lloyd’s imposes a number of charges on businesses operating in the Lloyd’s market, including, for example, annual subscriptions and central fund contributions for members and policy signing charges. The bases and amounts of charges may be varied by Lloyd’s and could adversely affect Talbot.

 

An increase in the level or type of deposits required by U.S. Situs Trust Deeds to be maintained by Lloyd’s could result in Syndicate 1183 being required to make a cash call which could adversely affect Talbot’s financial performance.

 

The U.S. Situs Trust Deeds require syndicates transacting certain types of business in the United States to maintain minimum deposits as protection for U.S. policyholders. These deposits represent the syndicates’ estimates of unpaid claims liabilities (less premiums receivable) relating to this business, adjusted for provisions for potential bad debt on premiums earned but not received and for any anticipated profit on unearned premiums. No credit is generally allowed for potential reinsurance recoveries. The New York Insurance Department and the U.S. National Association of Insurance Commissioners currently require funding of 30% of gross liabilities in relation to insurance business classified as “Surplus Lines.” The “Credit for Reinsurance” trust fund is usually required to be funded at 100% of gross liabilities. The funds contained within the deposits are not ordinarily available to meet trading expenses. U.S. regulators may increase the level of funding required or change the requirements as to the nature of funding. Accordingly, in the event of a major claim arising in the United States, for example from a major catastrophe, syndicates participating in such U.S. business may be required to make cash calls on their members to meet claims payments and deposit funding obligations. This could adversely affect Talbot.

 

Risks Related to Taxation

 

We may be subject to U.S. tax.

 

We are organized under the laws of Bermuda and presently intend to structure our activities to minimize the risk that we would be considered engaged in a U.S. trade or business. No definitive standards, however, are provided by the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations or court decisions regarding activities that constitute the conduct of a U.S. trade or business. Because that determination is essentially factual, we cannot assure you that the Internal Revenue Service (the “IRS”) will not contend that we are engaged in a U.S. trade or business. If we were found to be so engaged, we would be subject to U.S. corporate income and branch profits tax on our earnings that are effectively connected to such U.S. trade or business.

 

If Validus Re is entitled to the benefits of the income tax treaty between the U.S. and Bermuda (the “Bermuda Treaty”), it would not be subject to U.S. income tax on any income protected by the Bermuda Treaty unless that income is attributable to a permanent establishment in the U.S. The treaty clearly applies to premium income, but may be construed as not protecting other income such as investment income. If Validus Re were found to be engaged in a trade or business in the U.S. and were entitled to the benefits of the treaty in general, but the treaty were found not to protect investment income, a portion of Validus Re’s investment income could be subject to U.S. tax. See “Certain Tax Considerations — U.S. Taxation — Taxation of Validus and its Subsidiaries.”

 

U.S. persons who hold common shares may be subject to U.S. income taxation at ordinary income rates on our undistributed earnings and profits.

 

Controlled Foreign Corporation Status.   Validus should not be a controlled foreign corporation (“CFC”) immediately following the Offering because its organizational documents provide that if the common shares owned, directly, indirectly or by attribution, by any person would otherwise represent more than 9.09% of the aggregate voting power of all Validus’s common shares, the voting rights attached to those common shares will be reduced so that such person may not exercise and is not attributed more than 9.09% of the total voting power of the common shares. We cannot assure you, however, that the provisions of the Organizational Documents will operate as intended and that Validus will not be considered a CFC. If Validus were considered a CFC, any shareholder that is a U.S. person that owns directly, indirectly or by attribution, 10% or more of the voting power of Validus may be subject to current U.S. income taxation at ordinary income tax rates on all or a portion of Validus’s undistributed earnings and profits attributable to Validus Re’s insurance and reinsurance income, including underwriting and investment income. Any gain realized on sale of common shares by such 10% shareholder may also be taxed as a dividend to the extent of Validus’s earnings and profits attributed to such shares during the period that the shareholder held the shares and while Validus was a CFC (with certain adjustments). See “Certain Tax Considerations — U.S. Taxation — Taxation of Shareholders — CFC Provisions.”

 

Related Person Insurance Income.   If the related person insurance income (“RPII”) of any of Validus’s non-U.S. insurance subsidiaries were to equal or exceed 20% of that subsidiary’s gross insurance income in any taxable year, and U.S. persons were treated as owning 25% or more of the subsidiary’s stock, by vote or value, a U.S. person who directly or indirectly owns any common shares on the last day of such taxable year on which the 25% threshold is met would be required to include in income for U.S. federal income tax purposes that person’s ratable share of that subsidiary’s RPII for the taxable year. The amount includible in income is determined as if the RPII were distributed proportionately to U.S. holders on that date, regardless of whether that income is distributed. The amount of RPII includible in income is limited by such shareholder’s share of the subsidiary’s current-year earnings and profits, and possibly reduced by the shareholder’s share of prior year deficits in earnings and profits. The amount of RPII earned by a subsidiary will depend on several factors, including the identity of persons directly or indirectly insured or reinsured by that subsidiary. Although we do not believe that the 20% threshold will be met for our non-U.S. insurance subsidiaries, some of the factors that might affect that determination in any period may be beyond our control. Consequently, we cannot assure you that we will not exceed the RPII threshold in any taxable year.

 

If a U.S. person disposes of shares in a non-U.S. insurance corporation that had RPII (even if the 20% threshold was not met) and the 25% threshold is met at any time during the five-year period ending on the date of disposition, and the U.S. person owned any shares at such time, any gain from the disposition will generally be treated as a dividend to the extent of the holder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the holder owned the shares (possibly whether or not those earnings and profits are attributable to RPII). In addition, the shareholder will be required to comply with specified reporting requirements, regardless of the amount of shares owned. We believe that those rules should not apply to a disposition of common shares because Validus is not itself directly engaged in the insurance business. We cannot assure you, however, that the IRS will not successfully assert that those rules apply to a disposition of common shares. See “Certain Tax Considerations — U.S. Taxation — Taxation of Shareholders — RPII Provisions.”

 

U.S. persons who hold common shares will be subject to adverse tax consequences if Validus is considered a passive foreign investment company for U.S. federal income tax purposes.

 

If Validus is considered a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes, a U.S. holder who owns common shares will be subject to adverse tax consequences, including a greater tax liability than might otherwise apply and an interest charge on certain taxes that are deferred as a result of Validus’s non-U.S. status. We currently do not expect that Validus will be a PFIC for U.S. federal income tax purposes in the current taxable year or the foreseeable future because, through Validus Re, it intends to be predominantly engaged in the active conduct of a global reinsurance business. We cannot assure