Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Validus Holdings (NYSE:VR)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

Jon Levenson - Senior Vice President

Jeff Consolino - President, Chief Financial Officer and Principal Accounting Officer

E. Noonan - Chairman, Chief Executive Officer, Member of Executive Committee, Member of Finance Committee, Member of Risk Committee and Chief Executive Officer of the Validus Group

Analysts

Jay Cohen - BofA Merrill Lynch

Ian Gutterman - Adage Capital

Amit Kumar - Macquarie Research

Matthew Carletti - JMP Securities LLC

Joshua Shanker - Deutsche Bank AG

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Validus Holdings, Ltd. Earnings Conference Call. My name is Brian, and I will be your operator for today's conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. [Operator Instructions] I would like to now introduce Mr. Jon Levenson, Executive Vice President of Validus Holdings. Please proceed, sir.

Jon Levenson

Thank you. Good morning, and welcome to the Validus Holdings Conference Call for the quarter ended June 30, 2011.

After the market closed yesterday, we issued an earnings press release and financial supplement, which are available on our website located at validusholdings.com. Today's call is being simultaneously webcast and will be available for replay until August 11, 2011. Details are provided on our website. Leading today's call are Validus' Chairman and Chief Executive Officer, Ed Noonan; and Validus' President and Chief Financial Officer, Jeff Consolino.

Before we begin, I would like to remind you that some comments made during this call may be deemed forward-looking statements as defined within the U.S. federal securities laws. These statements address matters that involve risks and uncertainties, many of which are beyond the company's control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and therefore, you should not place undue reliance on any such statements.

More details about these risks and uncertainties can be found in the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, both as filed with the U.S. Securities and Exchange Commission. Management will also refer to some non-GAAP financial measures when describing the company's performance. These items are reconciled and explained in our earnings release and financial supplements.

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

E. Noonan

Well, thank you, John, and good morning. We appreciate everybody taking the time to join us today. I have one very firm request I wanted to make. We're obviously in a midst of an acquisition, and we will not be taking questions on that topic this morning, so as not to distract from our performance in the quarter.

We've read all the goofy things being said about us. But having been done this road before, we know that the level of hysteria from the other side is primarily a way to try and change the topic from price. So we'll leave the M&A discussion out of the call.

Our pieces remains unchanged, however. In the classes we write, scale leads to outperformance. And any class that can't generate strong underwriting profits will never be a part of our portfolio. We saw the benefits of our current leading position strongly in the quarter and believe that by acquiring Transatlantic, we can press our advantages without changing our commitment to strong underwriting profits and aggressive capital management.

We're really pleased with our results for the quarter. Earnings were solid in the light of the Cat activity. The pricing trends in our markets are all flashing green for us, and Validus' position as a leader in the catastrophe market allowed us to grow our Cat business by 20% in the quarter and outperform the market on risk-adjusted pricing. Despite the catastrophe activity in the quarter, we were able to grow our book value, including dividends, by 2.7%. We generated $110 million in net income, an 83.2% combined ratio and an annualized return on average equity of 13.1%.

We noted last quarter that we believe we're in the sweet spot of the market, and that's proving very much to be the case. Profits continued to perform well in '11 and overall rate levels have now turned positive for the syndicate. In the U.S. Cat market, we generally agree with the major brokers' assessment of pricing in the Cat market, but we clearly outperformed their indications of rate movement. Our risk-adjusted capacity pricing was up by 12.0% at the June and July renewals. We were able to achieve better-than-market pricing on a significant number of programs as a result of 2 critical factors.

The first is our capacity. The ability to put down big lines to solve client problems when placements can't get done allowed us to write a number of shortfall covers at above-market pricing. The second factor is our analytical tools and VCAPS, which allows us to price, allocate capital, track aggregates and optimize the portfolio on real time. VCAPS gives us the ability to close creative alternatives on the spot. When brokers need to complete a placement, the combination of our size and responsiveness gives us the ability to write business on our terms that most of them in the market are unable to do.

We also launched our new sidecar, AlphaCat Re 2011, during the quarter with $185 million in capital of which Validus contributed $50 million. This facility is focused on retrocession and high-return single-limit program. We are outpacing our expectations having used roughly 65% of the capacity today, generating $43 million in premium.

We also did significant risk-hedging during the quarter. In addition to our 9% worldwide quota share on capacity risk, we put in place a U.S. wind and quake program that attaches at about the 1 in 13-year return level and exhausted about 1 in 35-year.

We spent a great deal of time shaping our exposure curve, and this program works extremely well for us. Consequently, we're going to the U.S. wind season with our books better protected than ever before, both in the amount of protection and where it falls on our exposure curve. The bottom line is that even with our growth that we've seen in the Cat portfolio, through our optimization work, we have reduced our 1 in 100-year PML by 17% year-over-year.

Finally, there was no slippage in our reserves for first quarter event, and our tornado loss -- our tornado loss reserves remain within the preannounced range. We know that big events have big variability in outcome and our conservatism in reserving continues to serve us well.

So with that, I'll turn the call over to our President and CFO, Jeff Consolino, who will discuss our financial results in more detail. And then I'll come back to provide more color on our operations during the quarter.

Jeff Consolino

Thank you very much, Ed. I'm pleased to see so many familiar names out into our call today, especially given how busy a day it is for earnings. We heard the requests of our friends in the analyst community that we release earnings earlier in the reporting cycle, and it's our intention to be earlier in the lineup going forward.

We said at the close of the first quarter that we had a very strong balance sheet, and believe that the quarter's results across the industries enhance our competitive position. As Ed mentioned, with the positive changes in the market, we're back to growing our business. Since the company was founded, our objective is then to provide leadership in our targeted lines of business. The formation of our special purpose reinsurance sidecar entity, AlphaCat Re 2011, or AC Re 2011 as I'll refer to it in my comments, is one important manifestation of the strategy. You'll see that the formation of AC Re 2011 introduces non-controlling interest onto our June 30, 2011, balance sheet and into our June 30 quarterly income statement.

AC Re 2011 contributed meaningfully in the quarter to the growth in our client franchise and our growth in gross premiums written. It will also contribute fee income to our bottom line as the portfolio is earned and as underwriting profits are generated. With that as the backdrop, I'll now provide a brief financial review of the second quarter, both our results of operations and our financial position.

Net income to Validus common shareholders for the quarter was $109.9 million. This is $1.05 per diluted common share. Net operating income to Validus common shareholders was $81.8 million or $0.78 per diluted share. We have preannounced the potential impact of U.S. tornadoes, Cat 46 and Cat 48, on June 23. We've recorded our loss estimates for these 2 events in line with our preannounced range at $68.8 million net of reinstatement premium in the quarter.

Diluted book value per common share at quarter end was $31.91. During the quarter, we paid a $0.25 per share dividend. After considering this dividend, the effect of this quarter on our shareholder's financial net worth is $0.84 per share. This is a 2.7% increase from the March 31 level of $31.32.

To speak in more detail about the quarter's results of operations, our gross premiums written were $605.4 million in the second quarter of 2011. This was an increase of 17.1% or $88.5 million over the previous year's quarter. Of this $88.5 million increase in consolidated gross premiums written, the Validus Re segment grew by $57.3 million or 20.2% over the prior year's quarter. The property line for Validus Re grew by $61.5 million in the quarter. AC Re 2011 is consolidated in our financial results, and it contributed $42.6 million in gross premiums written through June 30.

The Validus Re also had $23.8 million of increase in catastrophe excess of loss premiums outside of AlphaCat Re 2011. Gross premiums in the Talbot segment increased by $23.2 million or 9.1% to $276.9 million. In the quarter, ceded reinsurance premiums rose by $64.6 million over the prior year to $132.3 million.

Commenting on this by segment, starting with Talbot. Talbot purchases a comprehensive reinsurance program year in and year out. Ceded reinsurance premium for Talbot in the second quarter of 2011 was $47.3 million as compared to $47.7 million a year ago. And Talbot segment retention ratio, net premium written to gross written premium, is static at 82.9% in the second quarter of 2011 as compared to 81.2% for the year-ago quarter.

Validus Re had ceded premium of $98.2 million in the second quarter. This is a $57.0 million increase year-over-year. We have a 9% quota share on Validus Re Worldwide Cat loss. This incepted to January 1 and in the second quarter of 2011 resulted in a ceded premium of $19.0 million.

In addition, we ceded $60.4 million for the program that covers U.S. wind and earthquake risk, with coverage 85%, $300 million, excess of $300 million. This is nearly 3x the cover we purchased in the previous year's quarter and contributed to the reduction in PML utilization that Ed referred to earlier.

We purchased a cover with an objective to position the company to grow substantially per a major U.S. loss. Our quarterly combined ratio was 83.2%, including a loss ratio of 48.7%.

Favorable development in the quarter was $25.7 million. This benefited our loss ratio by 6.0 percentage points. We did not experience any drag in the quarter from first quarter loss events. Notable catastrophe losses in the quarter yielded 21.2 percentage points on the loss ratio. Therefore, our accident year loss ratio, excluding tax, is 33.5% in the second quarter of 2011 as compared to 39.7% for the second quarter of 2010.

Turning to the balance sheet. Our gross IBNR at quarter end is at $1.22 billion, and our net IBNR at $1.12 billion. IBNR is 51% of our net loss reserve.

We believe we've taken appropriate steps to position our investment portfolio for the future. Our consolidated investment portfolio is $6.16 billion at June 30, 2011.

In the quarter, our net investment income was $26.5 million. This has a quarterly annualized effective yield of 1.76%. Net investment income is $26.5 million in this quarter compared to $30.0 million sequentially in the first quarter of 2011. The duration of our investment portfolio continues to shorten. At the end of the quarter, we reached 1.57 years, down from 1.83 years as of March 31, 2011. We shortened the duration of our investment portfolio to protect ourselves against anticipated rising interest rates in the future, and also in anticipation of consolidating our investment portfolio with a longer duration later in the year.

In the quarter, we realized $11.5 million in investment gains, and our unrealized gains in the income statement with $18.5 million.

Our total stockholders' equity at June 30, 2011, is $3.54 billion, and our total capitalization at June 30, 2011, is $4.1 billion.

Debt-to-capital at quarter end was 6.1%, and debt and hybrid together as a percent of capital were 13.2%. Our financial leverage remains very low, and we have a substantial capital margin above our targeted risk appetite.

Now that I'm done with those financial comments, I'd like to return the call to Ed Noonan.

E. Noonan

Thank you, Jeff. Validus Re had a strong premium growth in the quarter, as Jeff mentioned, as result of rate increases in our catastrophe and marine and energy classes. We're a leader in both lines, and our market position is a significant advantage at inflection points like this.

The Cat portfolio is benefiting from rate increases internationally to the extent of 50% to 80% or higher in Japan and Australia and by 12.0% in the U.S.

A few comments on the Asian market first. As I mentioned in the past, our view is that the market is underpricing extreme event risk in these territories by about 50%. With the increases we're seeing, rates still have a way to go to reach our benchmark in the aggregate, but we're seeing more programs and layers that are adequately priced in nature. That being said, we've not seen rates reach a level that causes us to commit significantly more aggregate to these territories.

One observation I would offer is that in light of loss activity in these territories, we expected to see strong prices upon across the entire market, which we did with a couple of notable exceptions. We once again saw the large European reinsurance, dampen the market rates and retention increases by deploying very large capacity too aggressively. That capacity could generate significantly better returns if deployed properly. It puts me in mind of the expression that some people never miss an opportunity to miss an opportunity.

In the U.S. market, we saw strong rate increases in Florida at 06/01, and generally strong rate increases in the entire market at 07/01. Validus Re grew gross written premium by 20%, reflecting our leadership position in the catastrophe business.

There was a large gap between buyer and reinsurer expectations at the start of the renewal season, which led to a larger-than-normal number of shortfall covers. By the end of May, we were able to write shortfall covers at up to 25% higher prices than the underlying marketplace cover. As I mentioned earlier, being a leader in the market with major capacity and responsiveness is a very significant competitive advantage. We're bullish on the catastrophe business for a few other reasons. The retromarket has reduced significantly and prices have risen meaningfully in this sector. Index products have also followed the market upward.

Coupled with model change and the amounts of losses in the market, we see robust trading positions through 2012.

Net premium written was up more modestly, as Jeff described, as a result of the record session and other hedges we have put in place going into wind season.

We don't see the market yet pricing from model change. Our sense is that for both reinsurers in the season, there will be a phase-in period. As a result, we expect that this will continue to be a driver of upward rate movement through 2012.

Our Marine book is benefiting from rate increases in the offshore energy market. Deepwater Horizon is still resonating in the market and the Gryphon loss is now approaching $1 billion. We saw rate increases in the 30% to 60% range for offshore energy treaty accounts. Nonenergy-related business was up low single digits. This is another segment that will continue to see strong rate increase through 2012. And given our leadership position in the class in both Validus and Talbot, we see strong upside for the next 18 months.

There was minimal rate movement in our other specialty classes in Validus Re: Aviation, terrorism, aerospace. While ceding companies push for broader terms, I think the market potentially held its ground.

The final word on Validus Re is a 63.2% combined ratio with reserve leases coming only from normal IBNR burn-off on our attritional loss ratio. It was another excellent quarter for Validus, particularly in light of the loss activity in the market.

Turning to Talbot. Despite the event losses in the market, Talbot was able to report a combined ratio of 99.6% and net income of $18 million in the quarter. Talbot results were affected by energy losses in the U.S. tornadoes and an offshore loss in the Gulf of Mexico. Results were assisted by $13.4 million in favorable development, again, related to just the normal burn-off of IBNR in our book.

Earlier in the year, we were watching carefully as events unfolded in the Middle East, as we're one of the world's largest terrorism reinsurers. Today, we've seen very little loss activity, and most of what we've seen are just simple fire losses on property policies to Western interests in the region. Our terrorism book was also untouched by the terrible events in Oslo last week. We had a single policy in risk with less than $50,000 in exposure within 250 meters of the blast. Interestingly, this was a small location on a very, very large schedule for a well-known global organization. Because we code and track every location on the policy, we're able to monitor our exposures down to street address, which we believe is an essential part of risk management in the terrorism class.

In general, the activity around the world has served to put an end to rate decreases in the terrorism market. We're now seeing positive rate movement in the majority of classes we write in Talbot and a 3% overall increase for the year-to-date. The trend line is higher and we expect to see rate increase continue to grow throughout the year.

Talbot is seeing the strongest rate increases in energy, both on and offshore, and international property. We start from a base of relative rate adequacy, but instead of shrinking the book as was our plan for the year, we're now seeing rate-driven growth.

The mood in London is rather sober as the market is aware that the next event will be a capital loss for many syndicates rather than just an earnings event. As a result, we see good pricing discipline continuing and rate increase activity building. Rate decreases have essentially stopped in all of our classes.

In terms of market dynamics in London, we expect to see reinsurance cost increases for Lloyd's Syndicate, many loans experienced leakage on their New Zealand and Japanese earthquake losses. And frankly, buyers in the markets are expecting rate increases. Talbot is the lead underwriter on about 40% of their business, which is our target. And so we're growing more bullish about the prospects for short-term classes in our London business. Talbot has been a top quartile performer for their entire history with an excellent team of experienced underwriters who know exactly how to capitalize on market dislocation. Like Validus Re, Talbot's portfolio has extensive reinsurance protection in place as we head into wind season.

So in closing, despite the losses in the market, we had a very solid quarter and pricing in the market is continuing to come our way. We continue to consolidate our leadership position in catastrophe risk with our growth in Validus Re and the addition of our AlphaCat Re 2011 sidecar. Our conservative event reserving allowed us to avoid the claims leakage many companies are reporting, and our portfolio is extremely well positioned heading into hurricane season.

So with that, I'd be happy to stop and take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Josh Shanker of Deutsche Bank.

Joshua Shanker - Deutsche Bank AG

I'd like to talk about that Cat cover you guys bought a little bit. Understand what triggers it and the thoughts behind increasing your protection this year compared to what you've done in previous years?

E. Noonan

Yes, Josh, it's Ed. I'll be happy to take you into more detail. It's a county-weighted index product. The county weightings are tailored to our portfolio. So whilst it's an index product, it lines up with our portfolio as closely as you possibly can. And we spent a lot of time in the analysis of it and feel very good about it. I mean, the reason for it is simple, with the losses that have taken place in the global market, we feel like we're one loss away from a tipping point. And in that event, our view is that with our market positioning and our size, we want to be the guys open for business the next day, writing everything at much higher prices. And so, for us, it feels like a pretty fair trade to protect the portfolio better heading into the U.S. wind season given the potential upside on the other end of it.

Joshua Shanker - Deutsche Bank AG

Well, and you think you've got an attractive price, what does that say about the price of other competitors in the market or retropricing versus reinsurance pricing? If you think that's a fair trade-off, does that suggest the market is still offering Cat protection very cheaply?

E. Noonan

Joshua, I'm not -- no, I don't think the market is offering Cat protection cheaply at all. I mean, I think it's idiosyncratic because you're dealing with a product that is very granular to our portfolio. And I don't know that I would describe it as -- I wouldn't equate it to a normal retro rate online thinking -- we spent months on this. I mean, we started working on it -- it may have even been late last year and put it in place early in the quarter. So it may have been put in place before the full level of rate activity has taken place, has come online. But I think, frankly, we think it's pretty fairly priced. It fits our portfolio attractively. As I mentioned, we're fairly obsessed with optimizing our Cat portfolio. We spend tremendous amounts of analytical firepower and mental energy on doing that. And this particular product does a great job of helping us optimize the portfolio because it's weighted by county. So I don't think that how that fits against our portfolio is necessary a reflection -- necessarily a reflection of the overall pricing in the market. As a say, I think it's idiosyncratic.

And in terms of the going forward, will there be any opportunities for you to buy more cover into the end of the year? Or you're satisfied at this point?

E. Noonan

Well, I think the answer to that is probably there won't be much out there. We're not actively seeking to buy protection, but I would just say that we price everything that comes into the market. And if there's somebody selling coverage out there, we price it and look at how it affects our portfolio and whether we think the relative pricing is appropriate or not. And when we see deals that fit our portfolio uniquely, whether as a consequence of pricing it looks extremely attractive, we don't hesitate to buy it. It's one of the reasons why our Asian losses were so low in addition to being underweighted in our underwriting, we felt as though because of our view of extreme event risk in Asia that the market was underpricing protection for it. And that obviously worked tremendously to our favor. We covered about $150 million from index products in the first half of the year. So I wouldn't rule that out, but I don't think that there's much activity out there. I don't see a whole lot of new products coming to market, yes, maybe I guess some Cat in the box type deals when the wind is blowing, but we tend not to take those too seriously. But other than that, I wouldn't expect to see this. We don't have any strategy for additional purchase.

Jeff Consolino

The only thing I would add to that, Josh, would be going back to 2009 when we had a chance to look within the IPC portfolio, before actually closing on the deal, there were certain deals in it that we didn't then really wanted to assume. So we went out and sold outwards what they had found inwards. That neutralized it, but...

Joshua Shanker - Deutsche Bank AG

This product is accumulation of losses or single-event trigger?

E. Noonan

Single event.

Operator

And your next question comes from the line of Amit Kumar of Macquarie.

Amit Kumar - Macquarie Research

Just staying on the topic, if I understand this correctly, is there one counterparty? Or are there a group of counterparties in this unique product?

E. Noonan

I would describe it as really one counterparty on behalf of a pool of investors.

Amit Kumar - Macquarie Research

And the other question I have is sort of a big picture question. You talked about the U.S. pricing, on average, being up 12%. Some of the companies in your group have in fact talked about keeping powder dry for 01/01/2012 and they expect the momentum to last irrespective of whatever happens in the hurricane season. I would be curious to hear your views of 01/01/2012.

E. Noonan

Amit, I mean, generally, we've never been part of the dry powder camp. We think you have to assemble a portfolio across the entire market. And if you say I'm not going to write at 07/01 because I think there's that opportunities coming at 01/01, that may make sense, but you also don't have the chance to write a balanced portfolio and move towards optimization because you've just let out all the 07/01 cover. Our view is that we've accomplished the same thing by effectively hedging our risk so that at 01/01/2012, we're in great shape if the wind blows. So I do expect to see rate increases continue at least on level with where they are at 01/01. I do expect to continue to see brokerage struggling with price discovery a bit because of this model changing issue. It really will vary on when seasons adopt, when and if reinsurers adopt and I think that will play out over time. So my expectation is that we will continue to see good rate activity on line with what we saw at 06/01 and 07/01. And if the wind blows in the U.S. this summer all better off. I really do think we're at a tipping point if we see any significant activity in the U.S. market.

Jeff Consolino

It has still been a great time not being part of the keep your powder dry club. That would imply that we would need to forgo business at midyear in order to write a portfolio at January 1. I think what been trying to stress in that is we've come through the last 4, 5 quarters with our balance sheet in great shape. And at a relative basis, our balance sheet is looking better and better than those companies who have been more affected. We would need to cut back at June 1 or July 1 to write more in January 1, you can see that we're well inside of our targeted risk appetite and also possess substantial capital with our bars, with our modeled or rating agency standards as well.

Amit Kumar - Macquarie Research

Just one other question and I will requeue. There was an uptick in G&A, did you address that in the opening or did I miss that?

E. Noonan

No, we didn't address it in our prepared comments. The uptick in G&A is across, so it's the Validus Re and the Talbot segment. And when you get into it, you'll see that there was a reduction in the corporate segment. Some of this is just refining our allocations in corporate to the various segments. But that's a neutral on a consolidated basis. Call it $8 million of increase year-over-year, about $2 million of that is FX because Talbot expenses are denominated in sterling, that we used about $6 million for either a greater level of staff comps or a greater level of professional fees. On the staff comps, we continue to add that in response to regulatory and other initiatives like Solvency II and professional fees would be associated with the establishment of AlphaCat Re 2011 or some other endeavors that we've been pursuing. So those are the reasons for the variance in that.

Operator

And your next question comes from the line of Jay Cohen of Bank of America.

Jay Cohen - BofA Merrill Lynch

A couple of quick questions. The retro-purchase, what's the duration of that contract?

Jeff Consolino

A 12-month cover, Jay. So it will earn over 12 months.

Jay Cohen - BofA Merrill Lynch

Second question. The financing cost on a consecutive quarter basis went up. I think I understand that, but if you could explain why that happened?

Jeff Consolino

The major component is associated with the establishment of AC Re.

Jay Cohen - BofA Merrill Lynch

So it's a one-time increase?

Jeff Consolino

The majority of that is associated with the establishment of a facility, but I don't want to say it's one-time, but it's unique to the quarter, yes.

Jay Cohen - BofA Merrill Lynch

Okay. And I guess, another numbers question, the consecutive quarter drop in investment income, is that potentially fully explained by reduced duration, lower short-term rates? Or is there anything else unusual that is affecting that number?

Jeff Consolino

The unusual thing is the very low level of interest rates. And we've moved our portfolio to be shorter, and so that's having a greater effect on us than somebody who would have a longer portfolio. The explicit trade-off we're making, Jay, is to give up investment income in order to protect ourselves against the eventuality of rates going up. You look, for example at a 2-year treasury, which right on this -- on the curve that we watch more closely. It's 82 basis points the beginning of the quarter, 46 basis points at the end of the quarter, that's a 36-basis-point move. In the time, when we established the company in 2005, where the 2-year was north of 4, a 36 basis point move is virtually nothing. But you can see here that really 36 basis points from a starting point of 82 is a huge percentage. Just don't like the odds of extending out at this point because rates can't go below 0 on a nominal basis. And just like we're protecting our balance sheet, to protect ourselves for any opportunity to grow the business further by say the -- with retro, viewing it also as a way of protecting our capital and making sure if there is an unexpected uptick in rates, rather than having to deal with the capital implications, just keep on going.

Jay Cohen - BofA Merrill Lynch

It could come in handy if there's a big issuer that defaults or gets downgraded in the next week or so.

E. Noonan

Is that a forecast, Jay?

Jay Cohen - BofA Merrill Lynch

Absolutely not. And then one last question. I know you guys don't want to talk about the potential transaction that's out there, but this is more of a numbers question, should we expect to see just some added expense in the third quarter associated with this? And if so, if you can give us some numbers, just for modeling purposes.

Jeff Consolino

We have a Format 4 [ph] on file that would indicate that there's $5 million of professional fees that we've incurred to date in the quarter.

Operator

And your next question comes from the line of Matt Carletti of JMP Securities.

Matthew Carletti - JMP Securities LLC

Amit snagged my question on the market, so I'll just have a numbers question for Jeff. The attritional loss ratio in the quarter was a bit lower than at least we've seen in recent past. Was there any benefit to that number from the RDE [ph], which I guess would be a release from last quarter, because anything prior to that would be prior year, but anything from last quarter would be still this accident year.

Jeff Consolino

There was no benefit in the quarter from RDE. I guess, if you want to think about the reason why the attritional loss ratio is low, it's related to what I had said earlier, which is we continue to see very favorable experience on attritional losses with respect to our IBNR development without the attrition catching up with it. But this is still low level of claims within the attritional areas. If you go back, though, Matt, and have a look in the year-ago quarter, there would be some RDE impact on that. So that's not nearly the full amount of the difference.

Operator

And your next question comes from the line of Ian Gutterman of Adage Capital.

Ian Gutterman - Adage Capital

First, just to confirm, was there any sort of the additional book IBNR for the U.S. events this quarter?

Jeff Consolino

I'm sorry, I couldn't hear you. Could you repeat that question?

Ian Gutterman - Adage Capital

Sure. Was there any of the sort of additional IBNR like we've seen in the past 3 quarters Cat events? Was there any of that put up for the U.S. events this quarter?

Jeff Consolino

No, there was no additional provision on the second quarter events. With the tornadoes being much more discrete, and our adjustment easily understood.

Ian Gutterman - Adage Capital

I just wanted to make sure, and then can you walk me through a bit the accounting on the sidecar? I assume the gross net premium equals gross premium. And on premium, I'm guessing is a quarter of what the gross premium was. Is that all right and what about -- is it booked to a 0 loss ratio because it had no event so far and where is the minority interest show up? I'm just trying to understand how it works with the financials?

Jeff Consolino

First I'd like to say you're making me very happy to want to talk about the accounting. The decision we made was we consolidate AC Re 2011, even though we only have $50 million part of $185 million at the capital. And how we reached that conclusion is not a Standard 46 analysis like we would have gone through with the non-consolidation of petrol. It is because of the particular aspects of Bermuda that many of the other investors are holding nonvoting shares. So have the majority of the voting stock, which is a bright line test for consolidation in our judgment. When you look at the supplement, you'll see on the balance sheet and the income statements, noncontrolling interest. The balance sheet noncontrolling interests represent the amount of the capital that is attributable to the third-party investors. And so that's a pretty straightforward number. If you look at the income statement, likewise we've added a new line item we've never had before called net income attributable to noncontrolling interest, this quarter was only $594,000. And you have to recognize the business was active commencing June 1, which is one month away from quarter end. So whereas we wrote $43 million of gross premium income, which would be net earns over 12 months, and we basically only had one out of 12 months of earnings. And so that will be more fully recognized in the second quarter. And Ed made a comment earlier about united capacity we had utilized in the facility. That comment was to date rather than the quarter. You should expect to see some additional write-ins in AC Re coming through in Q3 related to 07/01 and other post-June 30 findings.

Ian Gutterman - Adage Capital

And then because this is high layer, it's essentially going to be 0 loss ratio unless we have an event? That there's not an attritional load to it?

Jeff Consolino

Yes, with AC Re 2011 or the other AlphaCat business we've done for own accounting, that's all that is run loss for Re so far. And it would be -- business there would be designed to be. I want to say a loss Re, but what I really mean by that is the outcome is like we either loss Re or loss impact if there's no attrition in it.

E. Noonan

And the one thing I would say, it is retrocessionally far but it's really not by nature high layer stuff. It tends to be more high rate on line stuff. And Jeff's point is correct, there's no attritional to it because it's Cat excess loss business. But I wouldn't think of it as high layer business.

Ian Gutterman - Adage Capital

And then my last question, different topic. The additional retro you buy in the quarter, I'm just trying to think through, when you buy something of that lower return period, that almost seems like financing to me. And especially if you're talking about it being, sort of, giving you the opportunity to take advantage of a market turn. Normally, when I think about that context, we talk about either issuing debt or issuing equity to take advantage of a market turn. So when you did this, did you evaluate it versus a traditional capital raise? And if so, can you talk about what the cost of capital on this would be versus if you did some debt, let's say, or did some equity?

E. Noonan

I'll let Jeff talk about the comparison versus financing in that. But I would say that in comparison to traditional retro that we bought in the past, this attachment is a bit lower, but not world lower. It's not like you bought down in the money. The attachment points are low, but that's really a function of where it fits into our portfolio. And so it wasn't a desire to completely de-risk the business going into wind season, it really just comes down to what attachment points and exhaustion points do the best job of optimizing the returns in our portfolio.

Ian Gutterman - Adage Capital

I guess where I'm confused a little bit, Ed, is when you're buying to a 1 in 13, I assume most of what you write is well above that, right? So it's almost like -- it kind of almost feels MGA-ish [ph], you're writing business just to cede it at that point up to that level of protection. You know what I mean? It almost seems more financing, like that...

E. Noonan

I understand. I mean, the issue there is I agree with your kind of general statement there, but the issue still comes back to -- but how does this affect our portfolio in terms of reducing volatility and improving expected profitability? And those are the key measures for it. So we're not buying -- we're not writing business to turn around and cede it out. It's just at this moment in time, we did have the desire to make sure that we were protected so that if there's events in North Atlantic this year, that we're kind of king of the hill after the wind stops blowing. And second, we're able to structure a transaction that really just works very well on our portfolio, that those layers of attachment and exhaustion.

Ian Gutterman - Adage Capital

I mean, Jeff, can you give me some sense -- I guess I would assume, maybe I'm wrong here, but the cost of that would have been, say, a mid-teens return on equity for whoever brought or provided it for you, and you could raise debt in the single digits, what am I missing?

Jeff Consolino

Yes, I think as we measure it, it's probably double digits but not into the teens in terms of the cost. And we're not looking at this as permanent. The idea of raising equity, I think, would be well off the table the same kind of analysis that you're laying out which pertains to AC Re analysis. And in terms of raising debt, rather keep our debt capacity for other things.

Operator

And our next question is a follow-up question from Amit Kumar.

Amit Kumar - Macquarie Research

Just 2 clean-up questions. First of all, regarding the platform failure, the flow tail loss, can you just expand on that a bit?

E. Noonan

Yes, I can. We've had a number of questions about it. They've kind of a bit of a unique structure. It's basically a submersible hotel for -- a platform in rig workers. And fortunately there was no loss of life involved but we've written off, we've taken a -- assumed the total loss on the rig itself and some additional amount for the removal of wreckage. It's not a huge loss, I think it's about $160 million market loss. And we've just -- with the removal of wreckage probably gets up closer to around $210 million. And Talbot had somewhere around a 5% line, I think it might have been a 3.7%, 5% line on it, but that's it. Actually, nothing wrong with the rig, just one of the air manifolds was punctured and it sunk.

Amit Kumar - Macquarie Research

That's interesting. The only other question I had is on the reserve releases. In terms of the trend line out there, anything out of the ordinary on the sort of the non-Cat reserve trends, especially coming out of Talbot?

E. Noonan

No. Actually, Talbot continues to see very consistent trends. Their IBNR is burning off very much as expected. It's a very well-reserved business. But now the trends are pretty consistent with what we've seen over the 4 years we've owned them.

Jeff Consolino

Obviously, Amit, when you have a chance to further go through supplement. You'll see how that's split out between property, marine and specialty. And it's been favorable across all lines. The majority account is out at the specialty area and there we're just seeing a very low level of attrition in a lot of those classes.

Operator

And I would now like to turn the call back over to management for any closing remarks as there are no more questions in the queue at this time.

E. Noonan

Thank you very much. I appreciate everybody making the time to join us. I know it's a very busy morning. We're feeling very good about the operation, very good about how we stand going into wind season and really feel like from a market perspective, the things we do, where rates are ascending and ascending at pretty good rate on a number of classes. So we're rather bullish as we look out through 2012. So look forward to catching up with you next quarter. Bye now.

Operator

Ladies and gentlemen, thank you for your attendance today. You may now disconnect your lines as this call has now ended. Thank you, and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Validus Holdings' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts