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Validus Holdings, Ltd. (NYSE:VR)

1Q 2012 Earnings Call

April 27, 2012 9:00 a.m. ET

Executives

Jon Levenson – Executive Vice President

Ed Noonan – Chairman and Chief Executive Officer

Jeff Consolino – President and Chief Financial Officer

Analysts

Amit Kumar - Macquarie

Josh Shanker - Deutsche Bank

Matthew Heimermann - JP Morgan

Jay Cohen - Bank of America Merrill Lynch

Michael Nannizzi - Goldman Sachs

Brian Meredith - UBS

Ron Bobman - Capital Returns

Meyer Shields - Stifel Nicolaus

Operator

Good day, ladies and gentlemen, and welcome to the Validus Holdings, Ltd. First Quarter 2012 Conference Call. My name is Dominique and I’ll be your coordinator for today. (Operator instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to Mr. Jon Levenson, Executive Vice President. Please proceed, sir.

Jon Levenson

Thank you. Good morning and welcome to the Validus Holdings conference call for the quarter ended March 31, 2012. After the market closed yesterday, we issued an earnings press release and financial supplement, which are available on our website at validusholdings.com.

Today’s call is being simultaneously webcast and will be available for replay until May 11, 2012. 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 certain 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 are filed with the U.S. Securities and Exchange Commission.

Management will also refer to certain non-GAAP financial measures when describing the company’s performance. These items are reconciled and explained in our earnings release and financial supplement.

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

Ed Noonan

Thanks, Jon. Good morning and thank you all for taking the time to join us today. This was a good quarter for Validus as we generated net income of $124 million, operating income of $93 million and annualized growth in diluted book value per share of 15.1%. We recorded losses of $63 million related to the sinking of the Costa Concordia and $21 million related to U.S. tornadoes.

Both Talbot and Validus generated strong underwriting income in the quarter and we continue to operate in a favorable rate environment for all of our major classes. We also continued our growth in managed catastrophe risk during the quarter with formation of PaCRe, a new $500 million reinsurer that will be managed by our AlphaCat subsidiary.

With that, I’ll turn the call over to Jeff and we’ll be back to give you more color on our operations following his description of our financial results.

Jeff Consolino

Thank you, Ed. Thank you all for joining the call this morning. Good to see so many familiar names up on our screen. Before we get started on the results of operations and financial position for the quarter, I want to make some reference to changes we’ve made in our disclosure package effective with this first quarter of 2012. Effective with this quarter we’ve refined our segment reporting. You’ll see in our earnings release and in our investor supplement that we sub-divided the previous Validus Re segment into Validus Re and AlphaCat. This has no effect on the Talbot segment.

If you look at our consolidated segment income statement on Page 12 and 35 in our investor supplement, you’ll see that we present, still, a Validus Re consolidated income statement, which is the summation of Validus Re sub-segment and the AlphaCat sub-segment. This is because when we prepare consolidated Validus Re financial statements, these segments are consolidated within the Validus Re legal entity.

For those of you who wish to measure financial models, you can break what you used to have as Validus Re into these two constituent parts. For those of you who prefer to analyze their business just on Validus Re and Talbot segments, we still provide you with the means to do so. You can call this Validus Re classic. However, effective with the second quarter, we’ll be consolidated PaCRe into the AlphaCat sub-segment, which will add substantially to the (inaudible) AlphaCat. So any work done on your models in advance for second quarter earnings will presumably be well worth it.

For this quarter the main earnings drivers for the AlphaCat segment are fees generated from this activities managing third party capital and the 22.3% equity method income in AlphaCat Re 2011’s earnings. To analyze this component, you’d need to use the 100% AlphaCat Re 2011 income statement. We’ve provided you with this on Page 35 of the supplement, along with the balance sheet on Page 34.

Next quarter we’ll do the same for PaCRe. You’ll need to add the unrealized investment gains or losses for PaCRe as another potentially significant source of earnings for AlphaCat. This would net of a 90% non-controlling interest in the $500 million PaCRe capital base.

For those of you who want to move from modeling our company on a Validus classic basis to our new segmentation, we’ve also furnished an 8-K last evening showing the re-segmentation by quarter for all of 2011.

Now turning to the quarter, our first quarter net income was $124.2 million. This is record high first quarter net income for us and welcome break from the 2011 and 2010 first quarters which were so significantly affected by the earthquakes in Chile, New Zealand and Japan. As we disclosed in our capsule January 1 renewal information contained within our fourth quarter 2011 earnings press release, we continue to grow into what we see as an attractive pricing environment.

Total gross managed premiums written, which includes premiums written on behalf of AC Re 2011 were $911.2 million for the quarter. With the deconsolidation AC Re 2011 from this quarter’s income statement, you’ll hear us start talking about managed gross premiums written to reflect the amount of business we underwrite on behalf of our sources of capital.

Net income to Validus’ common shareholders for the quarter was $124.2 million and this was $1.18 per diluted common share. Net operating income to Validus’ common shareholders was $92.9 million or $0.88 per diluted share.

Diluted book value per share at quarter end was $33.25. Which after considering the $0.25 per share dividend in the quarter, increased by 3.8% from the quarter's starting point of $32.28 per share. This is an annualized growth rate of 15.1% in diluted book value per share plus accumulated dividends.

Speaking in more detail to the quarter's results of operations, in the first quarter of 2012, managed growth premiums written increased by 7.2% to $911.2 million. This is an increase of $61.3 million over the prior year's quarter, dollar terms. Of this increase in managed growth premiums, AC Re 2011 contributed $73.9 million. The Talbot segment grew by $30.2 million or 11.5% over the previous year's quarter to $293.3 million. This is partially offset by a decrease of 6.2% in the Validus Re segment.

Our quarterly combined ratio was 84.6% including a loss ratio of 51.4%. During the quarter we incurred two notable loss events. The aforementioned cost to Concordia, and tornado losses catalogued as CAT67. We've recorded losses on cost to Concordia of $63.1 million, net of reinstatement premiums, in line with our (inaudible) range of $50 million to $65 million. Total net loss and loss expense for these two events, before considering the effect of reinstatement premiums, represent 21.9 percentage points on our quarterly loss ratio.

Favorable development in the quarter was $30.4 million. This benefitted our loss ratio by 6.7 percentage points. Our gross IBNR at quarter end stands at $1.20 billion, and our net IBNR at $1.08 billion. In the quarter, we allocated $13.0 million dollars from the 2011 reserve for potential development on events, the Tohoku and Christchurch earthquakes. Our IBNR now stands at 47.0% of our $2.30 billion net loss reserve.

Before closing on our financial results, I will comment briefly on quarterly investment returns and our balance sheet. Our consolidated investment portfolio stood at $6.25 billion as of March 31st, 2012. Net investment income in the quarter was $27.8 million for a quarterly annualized effective yield of 1.81%. This compares to 1.84% in the fourth quarter of 2011.

In the quarter, we realized $7.5 million in investment gains, and had $20.7 million in unrealized investment gain. The positioning of our investment portfolio remains consistent with a short duration of 1.63 years as of March 31st.

Our total stockholder's equity at March 31st has risen to $3.54 billion. Our total capitalization is $4.08 billion. Our financial leverage remains very well. And capital at quarter end was 6.1%, and total leverage including hybrid was 13.2%.

We selectively repurchased shares in the first quarter of 2012, repurchasing 372,560 shares at an average price of $30.35 per share.

At April 1st, we have a substantial capital margin above our target in risk [unclear]. Our analysis of our capital position and the opportunities available for the remainder of the year lead us to conclude that we have sufficient capital to complete in 2012 the remaining $371 million under our existing share repurchase capital return program and still have the capital buffer and the flexibility to pursue the market opportunities which may present themselves in the remainder of 2012.

Therefore, we expect to become more active in capital management for the balance of 2012 subject of course to market conditions and maintaining appropriate capital ratios.

This concludes my financial remarks and I'd like to return the call to Ed Noonan.

Ed Noonan

Thanks, Jeff. I will start by giving you more detail on Talbot, our Lloyd's syndicate.

Talbot's 92.6% combined ratio and 11.5% year-on-year growth is a reflection of it's continuing success in executing on its strategy of writing a broad number of short-tail classes, leaving a significant portion of its business and reserving very prudently. Pricing in the Lloyd's market varies widely by class. Overall, the syndicate saw a 3.4% rate increase in the quarter. The energy segment saw rate increases of 10% for offshore risks and 16.6% for onshore energy accounts.

The energy market has had a tough few years and it needs significant rate increase to re-establish it's footing. While the market is moving, we are guarded optimistic as some of the major players in the energy class are not yet pushing rates as hard as we believe is warranted.

We saw a 9.6% rate increase in our aviation re-insurance accounts while rates in our Aviation Insurance portfolio increased by 6.1%. The Aviation Insurance market remains competitive and we have shifted our portfolio mix significantly in the last year with reduced reliance on the large global airline fleet where pricing is most competitive.

Our War in Terrorism account saw rate decreases in the 3% to 5% range. This business is highly sought after, particularly by new entrants. Our position as the lead market gives us significant advantage and we continue to find attractive opportunities without over concentration in the largest cities.

Losses do occur in these classes, but our underwriting approach has allowed us to miss the majority of events that have taken place. In short, Talbot continues to go from strength to strength.

Turning to Validus Re, a 72% combined ratio despite the cost of Concordia loss is an excellent outcome. Japan was the main event of April 1, and pricing in the market was very strong. Overall, Japanese earthquake rates have increased 80% to 100% over the two renewals following last year's earthquake. We now see ROEs in the mid to high-teens across the market.

While pricing has improved, the combination of superior client data and geoscience team's view of increased near-term seismicity following last year's quake caused us to shift our portfolio meaningfully. While we deployed about the same amount of aggregate, we shifted some from earthquake to wind covers. And we do sell lines on some of the major residential programs while increasing our lines on more commercial risk-oriented portfolios.

We believe our data and modeling give us excellent insight into the Japanese market, and we are increasingly be sought out for our analytical data as a lead and quoting market.

April 1 also saw a small number of large European programs renew where pricing was generally flat.

Competition in the global markets is an interesting point. With one of the two big European reinsurers showing very good price discipline and the other seemingly more market share driven.

As we look ahead in the U.S., we expect to see continued rate increases in the Florida renewals. There is incremental demand in the market, although we would not foresee capacity shortfalls. Although we write a limited number of Florida company programs, it's an important market to us, and one where we provide significant capacity. We have aggregate capacity remaining should rates become very attractive. This is also a market where a number of our AlphaCat facilities currently have meaningful portfolios.

All in, we're in a well-rated environment with leadership positions where we seek to matter, and we feel very good about our portfolio.

With that, I'll ask Jeff to provide some commentary on AlphaCat, and then, we'll be happy to take any questions you might have.

Jeff Consolino

As I remarked earlier, this is the first quarter in which we reported AlphaCat as a separate sub segment. We've now accumulated significant experience managing third party capital across multiple structures.

We initiated our AlphaCat trade name in 2009, when we commenced incubating the AlphaCat Diversified Fund with our own internal capital. As of today, the AlphaCat Diversified Fund has a three-year track record, remains solely as an internal fund dedicated to insurance-linked securities and collateralized reinsurance.

AlphaCat Re 2011 now has total capital of $290.9 million. It has a business plan focused on high return property catastrophe reinsurance and retro. PaCRe, which has initial capital of $500 million, is designed to provide additional top layer capacity for our ceding clients. We are pleased that sophisticated third party investors have chosen to entrust their capital to us.

We believe that offering investors the origination relationships, underwriting track record, and analytical resources resident with our Validus Re underwriters and Validus research professionals is a superior value proposition. We continue to receive interest in expanding these third party relationships and will explore the opportunities that present themselves.

Happily, for those on the call, this Validus expertise is also on sale every day in the stock market, and at a discount to net assets.

Ed Noonan

Well, thank you, Jeff. With that, we'll be happy to take any questions that you might have.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Amit Kumar of Macquarie.

Amit Kumar - Macquarie

Thanks and good morning. Maybe just going back to the discussion on PaCRe. Now AlphaCat was writing low attachment point retro products like reinstatement risks. When you mentioned, you know, some ceding clients, is this ex-U.S., is it global? Maybe just give a bit more color on PaCRe.

Jeff Consolino

PaCRe has a mandate to write high attachment point, remote risk. Amit, it's going to write a limited portfolio of aggregate, and rather than concentrating on building geographic spread at the expense of margin, its focus will be writing the most attractively priced risks after considering rate online, expected loss, and expected return on capital.

Amit Kumar - Macquarie

Okay. And in terms of I guess your ownership, $50 million, $500 million, is that the total capital backing? How should we think about the premiums? What is the sort of the upper band in terms of how much you can actually write? Let's say if 6/1 is better in terms of pricing conditions.

Ed Noonan

Amit, this is Ed. We think, actually, we could deploy the entire capacity this year, and given the pricing environment we see. We're putting out a limited amount of aggregate in the company, roughly about $170 million. So, we've already authorized on a number of programs, and we expect the pricing, as I mentioned earlier, in Florida to be attractive, although top layer risks in Florida may not hit this bar us. That's yet to be seen.

But, in general, if you think about top layer risks, you're talking about low rate online business, but extremely removed from loss, and in total, only $170 million of aggregate being committed.

Amit Kumar - Macquarie

Got it. And then just one sort of final question, and I'll re-queue. If you sort of add PaCRe and AlphaCat and your expectations at 6/1, and sort of overlay that on your PMLs, how different will your PMLs look after the 6/1 renewal versus right now?

Ed Noonan

It's an interesting question because, as I mentioned, if Florida rates become particularly attractive--I mean they are attractive to begin with, but if they become extremely attractive, we do have aggregate available and would be happy to put it out there. In kind of a ceteris paribus world, I would say that, you know, we have the capacity available in AlphaCat to renew its in force portfolio. And we would expect a significant portion of that to want to renew. Validus certainly is positioned to renew its in force portfolio.

And so, those two issues probably shouldn't lead to any material change in our PML. Because the PML numbers you see today contemplate the full-year portfolio, including the Florida business. So it's really only the incremental business that we might take on in the event that Florida became a particularly attractive market to us. And that's a little bit to tell until we get closer to 6/1.

Amit Kumar - Macquarie

So I guess I should just add the aggregates to the current PML, and that should give me the number, right?

Ed Noonan

No, you wouldn't add aggregates to the current PML. You know the PML associated with the, say, PaCRe business would be really a very small percentage of the aggregates. You could add the aggregates to our current in force aggregates to come up with a total aggregate, but I can't give you a particular measure of PML at this point in time because we don't know what the relative attractiveness of Florida will be, where in the curve that attractiveness will fall; and, therefore, what additional capacity we'd put out and at what attachment points.

Amit Kumar - Macquarie

Okay. Thanks for the answers.

Jeff Consolino

Okay.

Operator

Your next question comes from the line of Josh Shanker of Deutsche Bank

Jeff Consolino

Hello, Josh.

Ed Noonan

Hi, Josh.

Josh Shanker - Deutsche Bank

How are you doing?

Jeff Consolino

Nice to hear from you.

Josh Shanker - Deutsche Bank

Good hearing from you, too. So, you know, I guess I'm still in the working through this whole quarter. In aggregate aren't property cap rates better than they were one year ago? Wouldn't I expect to see companies taking up their exposure and increasing their premium compared to a year ago or did last year teach a lesson to you a little bit, and so you are changing how you feel about the business?

Ed Noonan

No. Last year, actually, the lesson that we learned is, you know, it was correct thinking not to pursue underpriced secondary territory business. In terms of over aggregate and PML, if you go back to our first quarter call with model change and loss activity in the U.S. last year, we felt that rates needed to go up 15% or so. And so, we actually were willing to shed risk to get the proper rate.

And as a result, we reduced our aggregates and our PMLs in the U.S., but we did get 15.7% rate increase in the U.S. So, the market average was somewhere between 12% and 13%, which at least on the surface would indicate that people didn't take the same profit-intensive view that we had. So that kind of accounts for our view of it.

In terms of why people may or may not take up their risk, I think it's easy to understate the impact of model change on many, many companies. It is, both for ceding companies and reinsurers, a very significant event. We think it will have an ongoing impact on available capacity and how people deploy it. We won't see that overnight in the market, but over the passage of time, probably the next 12 months or so, we expect it to continue to exert a significant influence on available capacity.

Josh Shanker - Deutsche Bank

So there wasn't more of the same business that you wrote this for? You wrote as much as you could find, you just couldn't find that much of it?

Jeff Consolino

Yeah, that's right. The business that hit our return criteria, we were happy to write. The business that didn't, we typically reduced our lines and in many cases, very meaningfully.

Josh Shanker - Deutsche Bank

So are AlphaCat Re and the new, I guess, PaCRe, how are we referring to that . . .

Jeff Consolino

We are referring to it as PaCRe.

Josh Shanker - Deutsche Bank

As PaCRe. Did that perchance cut into your ability to write enough attractive business on your own book? Had you not had those sidecars could you have gotten more business at the rates that you like?

Ed Noonan

The answer to that is, yes, we could have gotten more business at good rates, but not business that fits against the desired shape of our overall portfolio within Validus Re. You know, our underwriters' job is to spend all day long shaping that portfolio, continually moving it towards the optimal. So taking on significant retrocession business, loan attachment reinstatement, premium terms, etc., while the pricing is very attractive, it doesn't fit the portfolio shape that we look for in Validus Re that we think generates the optimal risk return tradeoff long-term for the Validus Re portfolio.

Jeff Consolino

Josh, one way to think about this is with the AlphaCat sidecar, that's a collateralized entity. The collateralized market is distinct from the rated market that Validus Re has operated in. Validus Re's mission is to concentrate on companies that are first tier insurance buyers who we think you can build a long-term business around because they are year-in and year-out buyers.

You can track that with Re 2011. It's concentrating on retro. It's concentrating on high rate online property business. A lot of this is business that we chose not to write in the aftermath of acquiring ITC because at that point, we didn't like the rate. And those types of customers often are customers that are opportunistic buyers and won't stick with you through a cycle.

So AlphaCat Re 2011, by its terms, is an entity that is designed to write the business while that markets opportunity exists, and it will go away when it no longer exists.

With PaCRe, we have a philosophy at Validus Re of eliminating the total aggregate that we write, and so there's only so much very high layer, low rate online business that we can take on without pairings out as reasonability to earn an appropriate return on its capital. PaCRe is companion facility to Validus Re, which is going to be engaged in line splitting so Validus Re will put down capacity on a program in an upper layer.

And PaCRe will participate on a side-by-side basis that lets us provide more high layer capacity to our customers and still be able to adhere to the kind of aggregate that we have for Validus Re, so it's complimentary to us in that regard. I hope that gives you some sense of how they fit together. We had not in our past been a big writer of retro. We could have taken the tact of not having the sidecar and bulking up on retro for Validus Re, but we just didn't expect that that would stick with us over the long term.

Unidentified Analyst

No, that's very, very well understood. Thank you. And do you have any thoughts on the Everglades recap bond and how it effects mid-year renewals?

Ed Noonan

In general, we're seeing increase demand in Florida It's not a gold rush but there is incremental demand in the market with the shrinking of the tickle layer and other changes in FHCF. The citizen bond clearly was well received in the market. I would say that we're probably not quite as bullish on that bond, mostly over concerns about underlying data quality and the ability to properly model the risk inherited.

But I think it didn't soak up reinsurance capacity per se because obviously most cap bond buyers aren't reinsurers. So it did probably take a bit of the pressure off of the increase demand in the market. But on a net-net basis we still see incremental additional demand in the Florida market for 6/1, although we're not anticipating capacity shortfalls, Florida tends to pay very well for the risk and so we expect that the reinsurance market and the buyers should be in an equal agreement position.

Josh Shanker - Deutsche Bank

Well, I appreciate all the answers and good luck with the season as it approaches.

Ed Noonan

Thank you very much.

Operator

Your next question comes from the line of Matthew Heimermann of JP Morgan.

Matthew Heimermann - JP Morgan

Hi, good morning, everybody.

Jeff Consolino

Good morning, Matt.

Ed Noonan

Hi, Matt.

Matthew Heimermann - JP Morgan

Hi. A couple of questions. First was, Jeff, can you just clarify your comment on buybacks. I guess I didn't hear, I wasn't sure if I heard the intent was to complete by then end of the year or you just simply were saying you have the capacity to do so, but was still wait and see.

Jeff Consolino

It's our intent to complete by the end of the year. Caveat it only by the usual market conditions, etc., etc.

Matthew Heimermann - JP Morgan

Okay. Fair enough. And then just is it, from a tactical perspective it's obviously a lot of, that's a significant dollar amount, but is it still fair to think about that we should probably heavily wait that second half when we think about timing?

Jeff Consolino

It's really dependent Matt on prevailing stock prices and what we see as the opportunities, so I'm afraid I can't really commit to what it is.

Matthew Heimermann - JP Morgan

Well, I guess I was just trying to balance out with the usual risk caveat.

Jeff Consolino

Right.

Matthew Heimermann - JP Morgan

We'd be curious, too, just when you think about the renewal strategy, or just maybe it's not strategy but it's your view at risk at 1/1. Is your sense that as we get to 6/1, 7/1, not withstanding the comments you made about where you think the market is, that there's likely to be less business leakage than we saw at 1/1?

Ed Noonan

Yeah, I think that's right Matt. Matter of fact, I think we said that on the first quarter, that there are upcoming renewals for the rest of the year. Florida got hit with rate increases pretty hard last year. The 7/1 saw the rate increase so they're in a different category than the January 1s and so we wouldn't anticipate to see leakage in the 6/1, 7/1 portfolio depending on market conditions.

Our sense at this point in time is that we're in a pretty good pricing environment and with other reinsurers beginning to reduce their capacity in the marketplace, I don't anticipate that changing. So we would expect to see at least renewing the portfolio we have to a significant extent, if not growing.

Matthew Heimermann - JP Morgan

All right. And then you've been pretty balanced in terms of, including on this call, in terms of growth at 6/1, 7/1, just kind of saying it depends on where the market ends up, but is that really a question of where the market ends up in terms of pricing or where the market ends up in terms of capacity?

Ed Noonan

Well, I think they're interrelated. If there's any constraints on capacity, if in fact I'm wrong and there's not enough capacity for the Florida market, pricing will become attractive and we'd probably be more inclined to put more aggregate at risk.

We're not anticipating capacity shortfalls, but if that were to be the case, that certainly would be an environment that we'd thrive in. We do have the aggregate available to deploy and there's nothing like a bit of a shortage to cause us to kind of salivate over the business opportunities.

Matthew Heimermann - JP Morgan

Okay. And then just in terms of how, you give us your PMLs, but I'd be curious with some of the changes we've seen in the production figures Validus down, property remained up on Talbot. Just curious how the usage of PML is changing between the two organizations, if that's material at all.

Ed Noonan

No, it's not material at all. Actually validness consumes the vast, vast majority of our PML, as it should. Talbot clearly has property exposure and some pretty exposure, as well, but Talbot reinsures their business independently. That reduces their PML. They write a relatively small portfolio to begin with of catastrophe exposed businesses that reduces their PML, and particularly from the North American market.

We have a very good direct and facultative team in London but we're not big fans of D&F for U.S. business out of London. And so despite the fact that we've got a very good team, we've never been particularly aggressive about that business. In fact, we've shrunk it materially since acquiring the syndicate. The vast majority of the PML is used at Validus Re. It always has been that way and I would expect it to always be that way.

Matthew Heimermann - JP Morgan

All right. Fair enough. Thanks much.

Jeff Consolino

Okay.

Operator

Your next question comes from the line of Jay Cohen of Bank of America Merrill Lynch.

Jay Cohen - Bank of America Merrill Lynch

Thanks, and good morning everyone.

Ed Noonan

Hey, Jay.

Jeff Consolino

Hello, Jay.

Jay Cohen - Bank of America Merrill Lynch

A couple questions. One is, and you may have had this in the release somewhere, I just didn't see it, but the overhead expense within Validus Re had jumped up quite a bit, and I'm wondering what's behind that?

Jeff Consolino

Jay, I think you're probably looking year-over-year, but even in the quarter-over-quarter, it is up. You might have noticed that last year wasn't a terrific year for financial results for the industry. If you look at our proxy you'll see that incentive compensation was down meaningfully in 2011. That has a significant impact on the overall G&A and the G&A ratios.

At this point, we're on track and so we're accruing incentive compensation at targeted levels. So, I would think, Jay, that this quarter is more representative of what you are going to see for the quarters of 2012.

Jay Cohen - Bank of America Merrill Lynch

Okay.

Jeff Consolino

I mean, but subject of course to anything that might occur in terms of underwriting results.

Jay Cohen - Bank of America Merrill Lynch

Got it. That makes sense. Secondly, you had mentioned that some of the, call it, non-specific reserves from the events from 2011 were allocated to certain case reserves for events. If you look at the amount of those non-specific reserves I assume that didn't change, other than the shifting?

Jeff Consolino

Jay, when you say non-specific I assume you're referring to what we call the reserve for potential development on events, or RDE. Is that correct?

Jay Cohen - Bank of America Merrill Lynch

Correct.

Jeff Consolino

Yeah. So, we associated $13 million of that with Tohuku and Christ Church in this quarter. That leaves $18.6 million still for the 2010 RDE, and leaves $65.0 million still for the 2011 RDE.

Ed Noonan

No other change other than what was allocated, Jay.

Jay Cohen - Bank of America Merrill Lynch

Perfect. That's great. Thank you.

Jeff Consolino

Yeah, the total stands at $83.6 million as of quarter end.

Operator

Your next question comes from the line of Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Thanks. Jeff, I was wondering if you could kind of walk us through how to think about AlphaCat and PaCRe just from a kind of an earnings perspective in terms of asset management as part of the business model, or fees as part of the business model, versus underwriting generated income, just trying to get an idea of how those structures are different, whether it's the risk they write in and how the return profiles or business models from each of them is a little different and just a quick follow-up. Thank you.

Ed Noonan

Thank you for asking. What we said about PaCRe is we thought that it was a great opportunity to combine the attractive long-term returns available from an excellent hedge fund manager with the uncorrelated returns that come from thoughtful and remote participation in catastrophe risk by combining uncorrelated sources of return.

In theory you get to redraw the efficient frontier and generate a high return and level of risk that you would otherwise be from just a straight hedge fund strategy. We think an investor in PaCRe, and we are an investor in PaCRe, would probably generate somewhere in the order of 150 or 200 basis points or return excess of a hedge fund strategy by adding the participation in catastrophe risk.

And, so, if you were thinking about how to amend your model we, obviously, don't have a long track record of investing in hedge fund, but I would start with a estimate of what hedge fund return would be for a given quarter and then add a margin to show the incremental return characteristics associated with putting some catastrophe risk on top of that and that's when you get to that so, it's $500 million times whatever the return assumption is and 90% would go back out to the non-controlling interest.

Michael Nannizzi - Goldman Sachs

And does that... and then is there a fee that you...Validus collects for the Cat management aspect in addition to that part of... in addition to your role as an investor in the structure?

Ed Noonan

There is, we will receive a profit based commission based on the underwriting results that we generate for PaCRe and so depending on the overall profitability of PaCRe's underwriting we would receive a profit paid commission for that.

Michael Nannizzi - Goldman Sachs

I got you. Okay, great. And so, just in terms of difference so, PaCRe is more remote risk, AlphaCat will remain a collateralized structure that will be more retro and more capital intensive risk.

Ed Noonan

Yeah, high rate online property.

Michael Nannizzi - Goldman Sachs

Okay. So, the two should be in relatively different spectrums with AlphaCat having more a potential business profile overlap with the business you write at Validus Re?

Jeff Consolino

That's correct. We go to great lengths to make sure that each entity that we have; writing business has a distinct mission, the unifying theme of course, as all this we believe helps customers. And all of this is incremental value that our underwriters can bring to the market when talking to their seeding clients and those client/brokers.

Ed Noonan

Yeah, I would probably add that our original AlphaCat operation, which clearly still exists in the first portfolio, is an insurance linked securities portfolio, and it gives us yet a third window into the marketplace, buying and trading Cat bonds and ILWs. And so, we think that we're assembling the full panoply of risk appetite related business in different AlphaCat funds. So essentially whatever an investor's interest is, we ought to be able to match up with that in AlphaCat, and do it in a very efficient way using Validus' underwriting expertise and our technical research and analytical team.

Michael Nannizzi - Goldman Sachs

How scalable is the Pac Re business smaller versus an Alpha Cat. At some point, if you build more of these structures, does it require more infrastructure at Validus or is this something that you feel that you have enough capacity to continue to do again or with others, without adding meaningfully to your own infrastructure?

Jeff Consolino

Mike, we think that this is very scalable. Of course, as you build the number of contracts you're managing, you will add incrementally to support staff and people that process that business. So, our growth there should be incremental positive for Bermuda, where we're taking on more people. But, if you go back to IPC, and think about that, we took over a large Cat portfolio.

We didn't add to our high value employee base, which is the underwriters and the other people that manage our Validus Re insurance business. So, all of these entities give our underwriters more choice of product, more solutions to their customers. But, we don't feel we need to add underwriters or other people. This is just flexibility to leverage the platform we have.

Ed Noonan

You know, Mike, there's a lot of interest in this type of facility. What we offer is a bit different than the standard model. We offer extraordinary speed to market, pretty high certainty of the ability to generate the income that matches up to the investor appetite. And we do it at an extremely low cost basis relative to, say for example, starting up a company and hiring management, having to give them stock, and things like that. So you can imagine, it's generated a lot of interest. We've taken some inbound calls on it, and we think the idea is replicatable, and wouldn't hesitate to do it.

Michael Nannizzi - Goldman Sachs

Okay. Great. On the share account, I'm just trying to understand the share account picked up 4Q to 1Q. It looks like it was related to the accounting for the delusion of the warrants, and I was just trying to understand what happened there. Thank you so much for all of your answers. I really appreciate it.

Jeff Consolino

And, Mike, I would point you to Page 11 and 35 on the supplement, which goes through decomposition. Our weighted average shares in the quarter are 105 million.

Michael Nannizzi - Goldman Sachs

Okay, good. Thank you.

Operator

Your next question comes from the line of Brian Meredith of UBS.

Brian Meredith - UBS

Hey, good morning.

Ed Noonan

Hi, Brian.

Jeff Consolino

Good morning, Brian.

Brian Meredith - UBS

Two quick ones here for you. The first one, and I may have missed it. My apologies. But the other revenue line was pretty high in the quarter, 8.9 million. What was that?

Jeff Consolino

The other income line is largely going to reflect income generated from AlphaCat.

Brian Meredith - UBS

Okay. So is that something we should expect maybe on a first quarter it's generally higher because it's much higher than the last year? Or is it because of disrupt in any activity?

Jeff Consolino

Well, last year you remember we didn't have AC Re 2011 in the first quarter.

Brian Meredith - UBS

Got you.

Jeff Consolino

We weren't generating any either origination fees of profit related fees for AC Re 2011.

Brian Meredith - UBS

Okay. So that number is a decent number going forward then? Or should get better?

Jeff Consolino

It all depends on the growth and expansion of our third party capital under management.

Brian Meredith - UBS

Got you. Excellent. And then last one, just curious, I noticed that your [Zole] aggregates actually went up for U.S. hurricane yet PMLs went down. Anything to read into that?

Ed Noonan

No, not a whole lot. The overall shift was fairly minor and really represents for the part just where we shifted attachment points on business we took on. Higher aggregate but lower PMLs suggests you're up higher on the curve which is the case. We've just added some business that was higher attachment point.

Brian Meredith - UBS

Great. Thanks y'all].

Jeff Consolino

Okay. Thank you.

Operator

Your next question comes from the line of Ron Bobman of Capital Returns.

Ron Bobman - Capital Returns

Hi. Some of my questions have been answered by your riveting prepared remarks.

Jeff Consolino

Operator, is there a chance we can delete this question from the queue?

Ed Noonan

That was a joke operator. Please let Mr. Bobman proceed.

Ron Bobman - Capital Returns

I had a couple of question about PaCRe. It would seem to me that the majority of our return will come from the investment side of value creation. And I was wondering what is the investment strategy? Is it going to mirror one of Paulson’s other products? what is the fees that are being paid? I assume that they are also going sort of have a carry or a profit share? Could you just elaborate on that please.

Jeff Consolino

Yeah, sure. First, Paulson is the investment manager for PaCRe. As of this moment PaCRe's funds are invested in three separate Paulson funds. However, the nature of our agreement with Paulson gives Paulson wide latitude to allocate those funds in which ever manner they see fit and just like with Validus Re's management of PaCRe where they give us wide latitude to manage the catastrophe portfolio, these agreements are long-term in nature, but be terminated by either party should performance on our part or their part prove to be disappointing. Of course, we don't expect that to be the case. As for the fees on the on the Paulson funds that's not really anything we're going to comment on.

Ron Bobman - Capital Returns

Would you go as far as saying they're consistent with his other…the fees he charges his other party capital or...

Ed Noonan

It would probably constitute commenting on them, Ron, but I think we prefer not.

Ron Bobman - Capital Returns

I assume you get a daily look at the performance of the AUM.

Jeff Consolino

We have the information access in every investor in the Paulson funds has.

Ron Bobman - Capital Returns

Oh, okay. That sounds stale. And does PaCRe have any employees or is it virtual in the sense it's got a contract with Paulson, it's got a contract with Validus?

Jeff Consolino

PaCRe has no employees. Its officers are officers of Validus Re Insurance and it's affiliated Bermuda companies. It does have a separate Board including some non-Validus, non-Paulson directors, but other than that, as Ed said, it's a very efficient way for us to bring more capacity to the market without having to build up the staff that you'd associate with a $500 million reinsurance company.

Ron Bobman - Capital Returns

Great. Thanks for the help. I appreciate it.

Ed Noonan

Thanks, Ron.

Operator

You have a follow-up question from the line of Amit Kumar of Macquarie.

Amit Kumar - Macquarie

Hey.

Jeff Consolino

Welcome back.

Amit Kumar - Macquarie

Hey, just two quick questions, just going back to the sidecars typically there is some level of loss which triggers a capital call and I couldn't figure that out. What loss would trigger a capital call from Pac and AlphaCat?

Jeff Consolino

There are no obligations in either entity. And PaCRe, of course, we have (inaudible) is not a sidecar, it's actually a real Class 4 Bermuda reinsurance company, but there are no shareholder obligations to have capital infused. There is in each entity constituent documents, a delineation of how additional capital would be added. And for AlphaCat Re 2011 we've already seen that function through the additional capital infused in the quarter of 2011.

But for the sidecar it goes around delivery by us of the underwriting business plan outlining the opportunities, the rates, the returns and the opportunity to deploy capital. And then it's up the participant to either choose to put in more capital or not. PaCRe as an entity has typical charter and bylaw provisions that govern under which circumstances capital can be added?

Ed Noonan

Amit, there isn't a capital call based on loss or depletion of capital required in either facility. If you think about AlphaCat Re, it's a collateralized reinsurer. And so the capital associated with the risk is, you know, collateralized right up front, so there isn't any potential for a capital shortfall there. Although as Jeff mentioned, we or investors could always choose to add more capital to the facility.

In the case of PaCRe, the amount of aggregate we are putting out is roughly a third of the capital. And so, you know, in the event that the end of the world happened, and we had to pay out of every contract that was written fully, two thirds of the capital in the company would still remain. And so, there isn't a loss scenario that would give rise to the need for capital call.

Amit Kumar - Macquarie

Got it. And then, I guess just one clarification on PaCRe regarding the seed ins. Now one other company which does something like this has the seed in providing some sort of stop loss reinsurance arrangement. I presume there is no such arrangement in place here, right, on PaCRe?

Jeff Consolino

This is all on balance sheet capital, Amit.

Amit Kumar - Macquarie

Got it.

Jeff Consolino

So, Validus Re is through an affiliated entity managing PaCRe, but it's not providing any intercompany reinsurance. Although I did say it's splitting lines with it, so there is no business PaCRe will be on that Validus Re is not on also, so that we have alignment between the two organizations.

Amit Kumar - Macquarie

Got it. That's very helpful. Thanks.

Operator

Your next question comes from the line of Meyer Shields of Stifel Nicolaus.

Jeff Consolino

Hello, Meyer.

Meyer Shields - Stifel Nicolaus

Pardon me, thank you for the call. I wanted to get a little bit to the PML page. I was hoping that you could quantify or describe just the inflationary aspect of the current PMLs? In other words, when we compare this year to last year, and we ignore modeling changes, just in terms of, I guess, average severity, what inflation rate is implicit in the PMLs.

Ed Noonan

Meyer, so that varies by company as you can imagine. Our PML curve is the aggregation of the underlying data provided to us by ceding companies, and so you can imagine that it varies around each zone around the U.S., and frankly, around the world. In some zones you see modest inflations, and other zones it's been flatter, in fact, deflating over the last couple of years. And so, it really does vary by zone and country.

Meyer Shields - Stifel Nicolaus

Okay. But in the aggregate then it doesn't sound like there is anything too extreme.

Jeff Consolino

No. No. Not at all. Not at all.

Meyer Shields - Stifel Nicolaus

Okay. Thank you.

Jeff Consolino

We do as part of our analysis and pricing, we do factor in inflation underlying values on an annual basis and have our own data checks against that to make sure that it's being captured appropriately.

Meyer Shields - Stifel Nicolaus

Okay. Great. Thank you very much.

Jeff Consolino

Okay.

Operator

This ends today's question-and-answer session. I would now like to hand the call back over to management.

Jeff Consolino

Well, thank you very much. I appreciate everybody taking the time to join us today. It feels like a rather nice, quiet quarter course. Things are going well. We are in a great pricing environment to most of what we do. And we are feeling pretty bullish about the rest of the year. So we'll look forward to updating you at the end of the second quarter. Bye now.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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