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TMCNet:  VALIDUS HOLDINGS LTD - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 15, 2013]

VALIDUS HOLDINGS LTD - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following is a discussion and analysis of the Company's consolidated results of operations for the three months ended December 31, 2012 and 2011 and for years ended December 31, 2012, 2011 and 2010 and the Company's consolidated financial condition, liquidity and capital resources at December 31, 2012 and 2011. This discussion and analysis should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto included elsewhere within this filing.


For a variety of reasons, the Company's historical financial results may not accurately indicate future performance. See "Cautionary Note Regarding Forward-Looking Statements." The Risk Factors set forth in Item 1A above present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

52-------------------------------------------------------------------------------- Table of Contents Executive Overview The Company conducts its operations worldwide through three operating segments which have been determined under U.S. GAAP segment reporting, Validus Re, Talbot and AlphaCat. The Company, provides reinsurance, insurance and insurance linked securities fund management. Validus Re is a Bermuda based reinsurer focused on short tail lines of reinsurance. Talbot is the Bermuda parent of the specialty insurance group primarily operating within the Lloyd's insurance market through Syndicate 1183. AlphaCat is a Bermuda based investment adviser, managing third-party capital in insurance linked securities and other investments in the property catastrophe reinsurance space.

The Company's strategy has been to concentrate primarily on short-tail risks, which has been an area where management believes current prices and terms provide an attractive risk adjusted return and the management team has proven expertise. The Company's profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.

On April 2, 2012, the Company capitalized PaCRe, a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance.

PaCRe was funded with $500.0 million of contributed capital. Validus invested $50.0 million in PaCRe's common equity. The Company will underwrite business for PaCRe, for which it will be paid a profit commission based on PaCRe's underwriting results. As Validus Re holds a majority of PaCRe's outstanding voting rights, the financial statements of PaCRe are included in the consolidated financial statements for the Company. The portion of PaCRe's earnings attributable to third party investors for the year ended December 31, 2012 is recorded in the consolidated Statements of Comprehensive Income as "Net loss (income) attributable to noncontrolling interest." On May 29, 2012, the Company announced that it has joined with other investors in capitalizing AlphaCat Re 2012. AlphaCat Re 2012 is a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies.

AlphaCat Re 2012 was funded with $70.0 million of equity capital. The Company will underwrite business for AlphaCat Re 2012, for which it will be paid a commission for originating the business and a profit commission based on underwriting results. Validus Re has an equity interest and voting rights in AlphaCat Re 2012 which is below 50%, therefore the investment in AlphaCat Re 2012 is included as an equity method investment in the consolidated financial statements of the Company.

On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone, strengthening the Company's leading property catastrophe reinsurance and short-tail specialty insurance platform. For segmental reporting purposes, the results of Flagstone's operations since the acquisition date have been included within the Validus Re segment in the consolidated financial statements.

On December 17, 2012, the Company joined with other investors in capitalizing AlphaCat 2013, a new special purpose vehicle formed for the purpose of investing in collateralized reinsurance. AlphaCat 2013 was funded with $230.0 million of contributed capital. Validus Re has an equity interest and voting rights in AlphaCat 2013 which is below 50%, therefore the investment in AlphaCat 2013 is included as an equity method investment in the consolidated financial statements of the Company.

On December 17, 2012, the Company also received $219.4 million of third party subscriptions for AlphaCat Insurance Linked Securities ("ILS") Funds.

Written premiums are a function of the number and type of contracts written and the prevailing market prices. Renewal dates for reinsurance business tend to be concentrated at the beginning of quarters, with the timing of premiums written varying by line of business. Most property catastrophe business incepts January 1, April 1, June 1 and July 1 with an annual policy, while most insurance and specialty lines renewals are more evenly spread throughout the year. Written premiums are generally highest in the first quarter and lowest during the fourth quarter of the year. Gross premiums written for pro rata programs are initially recorded as estimates and are then adjusted as actual results become known. Pro rata reinsurance is a type of reinsurance whereby the reinsurer indemnifies the policyholder against a predetermined portion of losses in return for a proportional share of the direct premiums. Premiums are then generally earned over a 24 month period and paid in monthly or quarterly installments.

The following are the primary lines in which the Company conducts business: Property: Validus Re underwrites property catastrophe reinsurance, property per risk reinsurance and property pro rata reinsurance. Property catastrophe includes reinsurance for insurance companies' exposures to an accumulation of property and related losses from separate policies, typically relating to natural disasters or other catastrophic events. Property per risk provides reinsurance for insurance companies' excess retention on individual property and related risks, such as highly-valued buildings. In property pro rata contracts the reinsurer shares the premiums as well as the losses and expenses in an agreed proportion with 53-------------------------------------------------------------------------------- Table of Contents the cedant. AlphaCat underwrites property catastrophe reinsurance. Talbot primarily writes direct and facultative property insurance, lineslips and binding authorities and property treaty. The business written is principally onshore energy, commercial and industrial insurance. The business is short-tail with premiums generally earned within one year and claims generally paid within two years.

Marine: The Company underwrites insurance and reinsurance on marine risks covering damage to or losses of marine vessels or cargo, yachts and marinas, third-party liability for marine accidents and physical loss and liability from principally offshore energy properties. Talbot underwrites both marine treaty reinsurance and insurance on a direct and facultative basis. Validus Re underwrites marine reinsurance on an excess of loss basis, and to a lesser extent, on a pro rata basis.

Specialty: The Company underwrites other specialty lines with very limited exposure correlation with its property, marine and energy portfolios. Validus Re underwrites other lines of business depending on an evaluation of pricing and market conditions, which include aerospace, terrorism, life and accident & health and workers' compensation catastrophe. With the exception of the aerospace line of business, which has a meaningful portion of its gross premiums written volume on a proportional basis, Validus Re's other specialty lines are primarily written on an excess of loss basis. Talbot underwrites war, political risks, political violence, financial institutions, contingency, accident and health, and aviation. Most of the Talbot specialty business is written on a direct or facultative basis or through a binding authority or coverholder in conjunction with a significant aviation treaty account.

Income from the Company's investment portfolio primarily comprises interest income on fixed maturity investments net of investment expenses and net realized/unrealized gains/losses on investments. A significant portion of the Company's contracts provide short-tail coverage for damages resulting mainly from natural and man-made catastrophes, which means that the Company could become liable for a significant amount of losses on short notice. Accordingly, the Company has structured its investment portfolio to preserve capital and maintain a high level of liquidity, which means that the large majority of the Company's investment portfolio consists of short-term fixed maturity investments. The Company's fixed income investments are classified as trading.

Under U.S. GAAP, these securities are carried at fair value, and unrealized gains and losses are included in net income in the Company's Consolidated Statements of Comprehensive Income.

The Company's expenses consist primarily of losses and loss expenses, acquisition costs, general and administrative expenses, and finance expenses related to debentures, senior notes and our credit facilities.

Losses and loss expenses are a function of the amount and type of insurance and reinsurance contracts written and of the loss experience of the underlying risks. Reserves for losses and loss expenses include a component for outstanding case reserves for claims which have been reported and a component for losses incurred but not reported. The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, may result in losses and loss expenses materially different than the reserve initially established.

Changes to prior year loss reserves will affect current underwriting results by increasing net income if a portion of the prior year reserves prove to be redundant or decreasing net income if the prior year reserves prove to be insufficient. Adjustments resulting from new information will be reflected in income in the period in which they become known. The Company's ability to estimate losses and loss expenses accurately, and the resulting impact on contract pricing, is a critical factor in determining profitability.

Since most of the lines of business underwritten have large aggregate exposures to natural and man-made catastrophes, the Company expects that claims experience will often be the result of irregular and significant events. The occurrence of claims from catastrophic events is likely to result in substantial volatility in, and could potentially have a material adverse effect on, the Company's financial condition, results of operations, and ability to write new business.

The business written by Talbot helps to mitigate these risks by providing us with significant benefits in terms of product line and geographic diversification.

Acquisition costs consist principally of brokerage expenses and commissions which are driven by contract terms on reinsurance contracts written, and are normally a specific percentage of premiums. Under certain contracts, cedants may also receive profit commissions which will vary depending on the loss experience on the contract. Acquisition costs are presented net of commissions or fees received on any ceded premium.

General and administrative expenses are generally comprised of expenses which do not vary with the amount of premiums written or losses incurred. Applicable expenses include salaries and benefits, professional fees, office expenses, risk management, and stock compensation expenses. Stock compensation expenses include costs related to the Company's long-term incentive plan, under which restricted stock are granted to certain employees.

Business Outlook and Trends We underwrite global specialty property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company's financial condition and results and ability to write new business. This volatility affects results for the 54-------------------------------------------------------------------------------- Table of Contents period in which the loss occurs because U.S. accounting principles do not permit reinsurers to reserve for such catastrophic events until they occur.

Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these trends when pricing contracts.

Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry's capacity to write new business diminishes. At the same time, management believes that there is a heightened awareness of exposure to natural catastrophes on the part of cedants, rating agencies and catastrophe modeling firms, resulting in an increase in the demand for reinsurance protection. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening on rates on most lines. During 2010 there was an increased level of catastrophe activity, principally the Chilean earthquake and the Deepwater Horizon events but the Company continued to see increased competition and decreased premium rates in most classes of business.

During the January 2011 renewal season, Validus Re increased gross premiums written on its U.S. Cat XOL lines and decreased gross premiums written in the proportional lines. In addition, Validus Re decreased gross premiums written in the International Property lines as market conditions dictated. In the aftermath of 2010's Deepwater Horizon loss, Validus Re saw additional opportunities and rate increases in the marine lines. Within its specialty lines, Validus Re increased gross premiums written in the terrorism lines among other sub-classes.

Until the third quarter of 2011, premiums within Talbot remained relatively stable, then significant price increases were seen across offshore energy, onshore energy and property classes. Most other classes also experienced low level rate increases as the Lloyd's market responded to the year's highly publicized catastrophes (including the Christchurch earthquake, Brisbane floods, Tohuku earthquake and the Thailand floods) together with high frequency risk losses. These increases were offset by some pricing pressure remaining in places, resulting in an overall price increase at a whole account level of 3.1% for the year.

During the January 2012 renewal season, the Validus Re segment showed rate improvement relative to 2011. This improvement was largely due to the large catastrophe loss activity during 2011. During the first quarter of 2012, Talbot experienced rate increases in loss affected lines without seeing a systemic rise in rates across all lines. During the July 2012 renewal period, the Validus Re segment experienced rate improvements in the U.S. property lines while European and Latin American property rates were unchanged. The Talbot segment experienced a rate increase of 2.7% against a planned rate movement of 2% across the portfolio, with marine treaty, property and energy related lines outperforming the plan.

During the January 2013 renewal season, the Validus Re and AlphaCat segments underwrote $655.7 million in gross premiums written, an increase of 12.7% from the prior year period. This increase is driven primarily by an increase in gross premiums written in the specialty lines. This renewal data does not include Talbot's operations as its business is distributed relatively evenly throughout the year.

Financial Measures The Company believes the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for shareholders: Annualized return on average equity represents the level of net income available to shareholders generated from the average shareholders' equity during the period. Annualized return on average equity is calculated by dividing the net income available to Validus for the period by the average shareholders' equity available to Validus during the period. Average shareholders' equity is the average of the beginning, ending and intervening quarter end shareholders' equity balances. The Company's objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow revenue only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.

Three Months Ended Years Ended December 31, December 31, 2012 2011 2012 2011 2010Annualized return on average equity (9.5 )% 3.2 % 11.3 % 0.6 % 10.8 % The decrease in annualized return on average equity was driven primarily by a decrease in net income available to Validus for the three months ended December 31, 2012. Net income available to Validus for the three months ended December 31, 2012 decreased by $118.0 million, or 432.0% compared to the three months ended December 31, 2011 due primarily to losses incurred 55-------------------------------------------------------------------------------- Table of Contents on Hurricane Sandy. Net income available to Validus for the year ended December 31, 2012 increased by $387.1 million, compared to the year ended December 31, 2011 due primarily to the decreased impact of notable loss events for the year ended December 31, 2012 as compared to the year ended December 31, 2011.

Diluted book value per common share is considered by management to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per common share after dividends paid, increased by $2.94, or 9.1%, from $32.28 at December 31, 2011 to $35.22 at December 31, 2012. The increase was due to the income generated during the year ended December 31, 2012. Diluted book value per common share is a Non-GAAP financial measure. The most comparable U.S. GAAP financial measure is book value per common share. 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). A reconciliation of diluted book value per common share to book value per common share is presented below in the section entitled "Other Non-GAAP Financial Measures." Cash dividends per common share are an integral part of the value created for shareholders. The Company declared quarterly cash dividends of $0.25 per common share and common share equivalent in each of the four quarters of 2012. On February 6, 2013, the Company announced an increase in the quarterly cash dividend to $0.30 per common share and $0.30 per common share equivalent for which each outstanding warrant is exercisable, payable on March 29, 2013 to holders of record on March 15, 2013. In addition, the Company announced a special dividend in the amount of $2.00 per common share and $2.00 per common share equivalent for which each outstanding warrant is exercisable, payable on February 26, 2013 to shareholders and warrant holders of record as of February 19, 2013.

Underwriting income measures the performance of the Company's core underwriting function, excluding revenues and expenses such as net investment income (loss), other income, finance expenses, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses), gain on bargain purchase, net of expenses and transaction expenses. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company's core insurance and reinsurance operations. Underwriting loss for the three months ended December 31, 2012 was $(113.1) million and underwriting income for the three months ended December 31, 2011 was $12.8 million. Underwriting income for the year ended December 31, 2012 and 2011 was $248.7 million and $11.8 million, respectively. Underwriting income is a Non-GAAP financial measure as described in detail and reconciled to net income in the section below entitled "Underwriting (Loss) Income." Critical Accounting Policies and Estimates The Company's consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as at the balance sheet date and the reported amounts of revenues and expenses during the reporting period.

Management believes the following accounting policies are critical to the Company's financial reporting as the application of these policies requires management to make significant judgments. Management believes the items that require the most subjective and complex estimates are (1) reserve for losses and loss expenses, (2) premiums, (3) reinsurance premiums ceded and reinsurance recoverable and (4) investment valuation.

Reserve for Losses and Loss Expenses Description: We believe that the most significant accounting judgment made by management is our estimate of reserve for losses and loss expenses. The Company establishes its reserve for losses and loss expenses to cover the estimated remaining liability incurred for both reported claims ("case reserves") and unreported amounts ("incurred but not reported" or "IBNR reserves"). For insurance and reinsurance business, the IBNR reserves include provision for loss incidents that have occurred but have not yet been reported to the Company as well as for future variation in case reserves (where the claim has been reported but the ultimate cost is not yet known). The provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR at the aggregated line of business level. Additional individual claim IBNR amounts are sometimes calculated for larger claims within our insurance and reinsurance businesses.Within the reinsurance business, the portion of total IBNR related to future variation on known claims is calculated at the individual claim level in some instances (either as an additional case reserve or individual claim IBNR). Within the insurance business, the provision for future variation in current case reserves is generally calculated using actuarial estimates of total IBNR, while individual claim IBNR amounts are sometimes calculated for larger claims. For AlphaCat, Talbot and Validus Re, IBNR is established separately for certain large or catastrophe losses and smaller "attritional" losses. The Company has procedures in place to aggregate large or catastrophe losses on a consolidated basis for financial reporting and disclosure purposes. For disclosure purposes, only those loss events which aggregate to over $15.0 million on a consolidated basis are disclosed separately and included in the reserve for notable loss events and reserve for development 56-------------------------------------------------------------------------------- Table of Contents on events tables. Notable loss events are first determined at the respective operating segments based on segment thresholds and are then aggregated and disclosed if it is determined that they reach the consolidated threshold for notable loss disclosure.

For all lines of business, the Company's reserve for losses and loss adjustment expenses and loss reserves recoverable consist of three categories: (1) case reserves, (2) in certain circumstances, additional case reserves (ACR), and (3) IBNR reserves. The reserves and recoverables for attritional and large or catastrophe losses are established on an annual and interim basis as follows: 1.Case reserves: Case reserves generally are analyzed and established by each segment's claims department on all lines, making use of third party input where appropriate (including, for the reinsurance business, reports of losses from ceding companies). For insurance business where Talbot is not the lead underwriter on the business, the case reserves are established by the lead underwriter and validated by the central Lloyd's market claims bureau, with a sample reviewed by Talbot.

2.ACR reserves: ACRs are established for AlphaCat and Validus Re business by our claims department in cases where we believe the case reserves reported by the cedant require adjustment. ACRs supplement case reserves based on information obtained through ceding company audits or other sources. ACRs are not generally used at Talbot as claim volumes are generally greater and thus the potential for future variation in case reserve estimates on known claims often can be analyzed at an aggregate level using historical data.

3.IBNR reserves: a.Large or catastrophe events-IBNR reserves are established for all lines based on each segment's estimates for known loss events for which not all claims have been reported to the Company. In establishing such IBNR reserves, the Company accumulates loss information from modeling agencies, where possible, publicly available sources and information contained in client reports and estimates. The loss information is applied to the Company's book of in-force contracts to establish an estimate of the Company's ultimate exposure to the loss event. For some large loss events, the Company estimates an ultimate loss expectation for the individual event. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the IBNR estimate for these individual large claims or catastrophe events. The size of event for which the Company establishes a separate ultimate loss estimate may vary based on an assessment of the materiality of the event, as well as on other factors.

b.Attritional losses-IBNR reserves are established using some combination of the actuarial methods described above, including the Chain Ladder method, the Generalized Cape Cod method and the Bornhuetter-Ferguson method. In situations where limited historic development data is available and/or the year being analyzed is more recent (less mature), the expected loss method and the Bornhuetter-Ferguson method are more commonly used. Under all methods used at AlphaCat, Talbot and Validus Re, an ultimate loss amount is established. Paid losses, case reserves and any additional case reserves are then deducted from the ultimate loss to ascertain the attritional IBNR reserves.

For all sources of IBNR, net reserves are estimated by first estimating gross IBNR reserves, then estimating reinsurance recoverables on IBNR.

Judgments and Uncertainties: Loss reserve estimates for insurance and reinsurance business are not precise in that they deal with the inherent uncertainty in the outcome of insurance and reinsurance claims made on the Company, many of which have not yet been reported to the Company. Estimating loss reserves requires management to make assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices, potential changes in the legal environment and other factors. These estimates and judgments are based on numerous factors, and may be revised over time as additional experience or other data becomes available, as new or improved methodologies are developed or as current laws change.

As predominantly a broker market insurer and reinsurer, the Company must rely on loss information reported to us by brokers from clients, where such information is often incomplete or changing. The quality and type of information received varies by client and by the nature of the business, insurance or reinsurance.

In the insurance business, for risks that the Company leads, the Company receives from brokers details of potential claims, on the basis of which the Company's loss adjusters make estimates of the likely ultimate outcome of the claims. In determining these reserves, the Company takes into account a number of factors including the facts and circumstances of the individual claim, the nature of the coverage and historical information about its experience on similar types of claims. For insurance business where another company is the lead, the case reserves are established by the lead underwriter and validated centrally by the Lloyd's market claims bureau, with a sample reviewed by the Company. The sum of the individual claim estimates for lead and follow business constitutes the case reserves.

57-------------------------------------------------------------------------------- Table of Contents For reinsurance business, the Company typically receives from brokers details of paid losses and estimated case reserves recorded by the ceding company. In addition to this, the ceding company's estimated provision for IBNR losses is sometimes also available, although this in itself introduces additional uncertainty owing to the differing and typically unknown reserving practices of ceding companies.

There will also be a time lag between a loss occurring and it being reported, first by the original claimant to its insurer, via the insurance broker, and for reinsurance business, subsequently from the insurer to the reinsurer via the reinsurance broker.

The Company writes a mix of predominantly short-tail business, both insurance and reinsurance. The combination of low claim frequency and high claim severity that is characteristic of much of this short-tail business makes the available data more volatile and less reliable for predicting ultimate losses. For example, in property lines, there can be additional uncertainty in loss estimation related to large catastrophe events, whether natural or man-made.

With wind events, such as hurricanes, the damage assessment process may take more than a year. The cost of claims is also subject to volatility due to supply shortages for construction materials and labor. In the case of earthquakes, the damage assessment process may take longer as buildings are discovered to have structural weaknesses not initially detected.

The Company also writes longer tail insurance lines of business, predominantly financial institutions ($35.8 million of gross premiums written on a claims made basis) and marine and energy liabilities ($60.3 million of gross premiums substantially written on a losses occurring basis) for the year ended December 31, 2012. These longer tail lines represent 8.9% of Talbot's gross premiums written for the year ended December 31, 2012. For marine and energy liability, the time from the occurrence of a claim to its first report to the Company can also be years. For both marine and energy liability and financial institutions, the subsequent time between reporting of a claim and its settlement can be years. In these intervening periods between occurrence, reporting and settlement, additional facts regarding individual claims and trends often will become known and current laws and case law may change, affecting the ultimate value of the claim.

Taken together, these issues add considerable uncertainty to the process of estimating ultimate losses, hence loss reserves, and this uncertainty is increased for reinsurance business compared with insurance business due to the additional parties in the chain of reporting from the original claimant to the reinsurer.

As a result of the uncertainties described above, the Company must estimate IBNR reserves, which consist of a provision for future development on known loss events, as well as a provision for claims which have occurred but which have not yet been reported to us by clients. Because of the degree of reliance that is necessarily placed on brokers and (re)insured companies for claims reporting, the associated time lag, the low frequency/high severity nature of much of the business underwritten, the rapidly emerging and changing nature of facts and circumstances surrounding large events and, for reinsurance business, the varying reserving practices among ceding companies as described above, reserve estimates are highly dependent on management's judgment and are subject to uncertainty.

The Company strives to take account of these uncertainties in the judgments and assumptions made when establishing loss reserves, but it is not possible to eliminate the uncertainties. As a result, there is a risk that the Company's actual losses may be higher or lower than the reserves booked.

For the Company's insurance business written by Talbot, where a longer reserving history exists, the Company examines the development of its own historical paid and incurred losses to identify trends, which it then incorporates into the reserving process where it deems appropriate.

For the Company's reinsurance business, especially that written by Validus Re where the Company relies more heavily on information provided by clients in order to assist it in estimating reserves, the Company performs certain processes in order to help assess the completeness and accuracy of such information as follows: 1.In addition to information received from clients on reported claims, the Company also uses information on the patterns of client loss reporting and loss settlements from previous events in order to estimate the Company's ultimate liability related to these events; 2.The Company uses reinsurance industry information in order to perform consistency checks on the data provided by ceding companies and to identify trends in loss reporting and settlement activity. Where it deems appropriate, the Company incorporates such information in establishing reinsurance reserves; and 3.For both insurance and reinsurance business, the Company supplements the loss information received from clients with loss estimates developed by market share techniques and third party catastrophe models when such information is available.

58-------------------------------------------------------------------------------- Table of Contents Although there is normally a lag in receiving reinsurance data from cedants, the Company currently has no backlog related to the processing of assumed reinsurance information. The Company actively manages its relationships with brokers and clients and considers existing disputes with counterparties to be in the normal course of business.

As described above, the reserve for losses and loss expenses includes both a component for outstanding case reserves for claims which have been reported and a component for IBNR reserves. IBNR reserves are the difference between ultimate losses and reported losses, where reported losses are the sum of paid losses and outstanding case reserves. Ultimate losses are estimated by management using various actuarial methods, including exposure-based and loss-based methods, as well as other qualitative assessments regarding claim trends.

The Company uses a reserving methodology that establishes a point estimate for ultimate losses. The point estimate represents management's best estimate of ultimate losses and loss expenses. The Company does not select a range as part of its loss reserving process. The extent of reliance on management judgment in the reserving process differs depending on the circumstances surrounding the estimations, including the volume and credibility of data, the perceived relevance of historical data to future conditions, the stability or level of stability in the Company's operational processes for handling losses (including claims practices and systems) and other factors. The Company reviews its reserving assumptions and methodologies on a quarterly basis. Two of the most critical assumptions in establishing reserves are loss emergence patterns and expected loss ratios. Loss emergence patterns are critical to the reserving process as they can be one key indicator of the ultimate liability. A pattern of reported loss emergence which is different from expectations may indicate a change in the loss climate and may thus influence the estimate of future payments that should be reflected in reserves. Expected loss ratios are a primary component in the Company's calculation of estimated ultimate losses for business at an early stage in its development.

Loss emergence patterns for the business written by Talbot are generally derived from Talbot's own historic loss development triangulations, supplemented in some instances by Lloyd's market data. For the business written by Validus Re, where its own historic loss development triangulations are currently more limited, greater use is made of market data including reinsurance industry data available from organizations such as statistical bureaus and consulting firms, where appropriate. Expected loss ratios are estimated in a variety of ways, largely dependent upon the data available. Wherever it deems appropriate, management incorporates the Company's own loss experience in establishing initial expected loss ratios and reserves. This is particularly true for the business written by Talbot where a longer reserving history exists and expected losses and loss ratios consider, among other things, rate increases and changes in terms and conditions that have been observed in the market. For reinsurance business, expected losses and loss ratios are typically developed using vendor and proprietary computer models. The information used in these models is collected by underwriters and actuaries during the initial pricing of the business.

The Company has large catastrophe event ultimate loss reserve estimation procedures for the investigation, analysis, and estimation of ultimate losses resulting from large catastrophe events. The determination regarding which events follow these procedures is made by members of senior management from relevant departments within the Company. The procedures are designed to facilitate the communication of information between various relevant functions and provide an efficient approach to determining the estimated loss for the event.

In developing estimates for large catastrophe events, the Company considers various sources of information including: specific loss estimates reported by our cedants and policyholders, ceding company and overall insurance industry loss estimates reported by our brokers and by claims reporting services, proprietary and third party vendor models and internal data regarding insured or reinsured exposures related to the geographical location of the event. Use of these various sources enables management to estimate the ultimate loss for known events with a higher degree of accuracy and timeliness than if the Company relied solely on one data source. Indicated ultimate loss estimates for catastrophe events are compiled by a committee of management, and these indicated ultimate losses are incorporated into the process of selecting management's best estimate of reserves.

As with large catastrophe events, the Company separately estimates ultimate losses for certain large claims using a number of methods, including estimation based on vendor models, analyses of specific industry occurrences and facts, as well as information from cedants and policyholders on individual contract involvements.

During 2010 and 2011, given the complexity and severity of notable loss events, an explicit reserve for potential development on 2010 and 2011 notable loss events (RDE) was included within the Company's IBNR reserving process. As uncertainties surrounding initial estimates on notable loss events develop, it is expected that this reserve will be allocated to specific notable loss events.

No RDE was established for 2012 notable losses.

The requirement for a reserve for potential development on notable loss events in a quarter is a function of (a) the number of significant events occurring in that quarter and (b) the complexity and volatility of those events. Complexity and volatility factors considered are as follows: •Contract complexity; • Nature and number of perils arising from an event; 59-------------------------------------------------------------------------------- Table of Contents • Limits and sub limits exposed; • Quality, timing and flow of information received from each loss; • Timing of receipt of information to the Company; • Information regarding retrocessional covers; • Assumptions, both explicit and implicit, regarding future paid and reported loss development patterns; • Frequency and severity trends; • Claims settlement practices; and • Potential changes in the legal environment.

Each of these factors may lead to associated volatility for each notable loss event as well as consideration of the total reserve for loss events in the aggregate. Consequently, all of these factors are considered in the aggregate for the events occurring in the quarter, recognizing that it is more likely that one or some of the events may deteriorate significantly, rather than all deteriorating proportionately. The establishment of each quarter's requirement for a reserve for potential development on notable loss events takes place as part of the quarterly evaluation of the Company's overall reserve requirements.

It is not directly linked in isolation to any one significant/notable loss in the quarter. The reserve for potential development on notable loss events is evaluated by our in-house actuaries as part of their normal process in setting of indicated reserves for the quarter. In ensuing quarters the senior management and the in-house actuaries revisit and re-estimate certain events previously considered in the catastrophe loss event process as well as events that have subsequently emerged in the current quarter. To the extent that there has been adverse development on a notable loss event, if there is RDE remaining from that accident year, an allocation from the respective accident year RDE will be made to the notable loss event. If there is no remaining RDE relating to the accident year of the loss, then adverse development will be recorded for the notable loss event.

Changes to the reserve for potential development on notable loss events will be considered in light of changes to previous loss estimates from notable losses in this re-estimation process.To the extent that there are continued complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year, as illustrated in the RDE roll forward table below.

Management's loss estimates are subject to annual corroborative review by independent external actuaries using generally accepted actuarial techniques and other analytical and qualitative methods.

The Company's reserving methodology was not changed materially in the year ended December 31, 2012 from the methodology used in the year ended December 31, 2011 for either Validus Re, AlphaCat or Talbot. Management's best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2012 were $3,517.6 million and $440.0 million, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2012.

As at December 31, 2012 Total Gross Reserve for Gross Case Gross Losses and (Dollars in thousands) Reserves IBNR Loss Expenses Validus Re $ 1,009,434 $ 1,113,461 $ 2,122,895 AlphaCat 5,000 - 5,000 Talbot 760,149 720,158 1,480,307 Eliminations (55,485 ) (35,144 ) (90,629 ) Total $ 1,719,098 $ 1,798,475 $ 3,517,573 Management's best estimate of the gross reserve for losses and loss expenses and loss reserves recoverable at December 31, 2011 were $2,631.1 million and $372.5 million, respectively. The following table sets forth a breakdown between gross case reserves and gross IBNR by segment at December 31, 2011.

As at December 31, 2011 Total Gross Reserve for Gross Case Gross Losses and (Dollars in thousands) Reserves IBNR Loss Expenses Validus Re $ 765,299 $ 585,550 $ 1,350,849 AlphaCat - 10,000 10,000 Talbot 703,965 673,596 1,377,561 Eliminations (54,822 ) (52,445 ) (107,267 ) Total $ 1,414,442 $ 1,216,701 $ 2,631,143 60-------------------------------------------------------------------------------- Table of Contents To the extent insurance and reinsurance industry data is relied upon to aid in establishing reserve estimates, there is a risk that the data may not match the Company's risk profile or that the industry's reserving practices overall differ from those of the Company and its clients. In addition, reserving can prove especially difficult should a significant loss event take place near the end of an accounting period, particularly if it involves a catastrophic event. These factors further contribute to 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 from the reserves initially established. Changes to prior year reserves will affect current period underwriting income by increasing income if the prior year ultimate losses are reduced or decreasing income if the prior year ultimate losses are increased. The Company expects volatility in results in periods when significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have both 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 in future periods.

Effect if Actual Results Differ From Assumptions: Given the risks and uncertainties associated with the process for estimating reserves for losses and loss expenses, management has performed an evaluation of the potential variability in loss reserves and the impact this variability may have on reported results, financial condition and liquidity. Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.

Management's best estimate of the net reserve for losses and loss expenses at December 31, 2012 is $3,077.6 million. The following tables show the effect on estimated net reserves for losses and loss expenses as of December 31, 2012 of a change in two of the most critical assumptions in establishing reserves: (1) loss emergence patterns, accelerated or decelerated by three and six months; and (2) expected loss ratios varied by plus or minus five and ten percent.

Management believes that a reasonably likely scenario is represented by such a standard, as used by some professional actuaries as part of their review of an insurer's or reinsurer's reserves. Utilizing this standard as a guide, management has selected these variances to determine reasonably likely scenarios of variability in the loss emergence and loss ratio assumptions. These scenarios consider normal levels of catastrophe events. Loss reserves may vary beyond these scenarios in periods of heightened or reduced claim activity. The reserves resulting from the changes in the assumptions are not additive and should be considered separately. The following tables vary the assumptions employed therein independently. In addition, the tables below do not adjust any parameters other than the ones described above. Specifically, reinsurance collectability was not explicitly stressed as part of the calculations below.

61-------------------------------------------------------------------------------- Table of Contents Net reserve for losses and loss expenses at December 31, 2012-Sensitivity to loss emergence patterns Reserve for losses and loss Change in assumption expenses (Dollars in thousands) Six month acceleration $ 2,661,432 Three month acceleration 2,855,922 No change (selected) 3,077,606 Three month deceleration 3,325,264 Six month deceleration 3,598,079 Net reserve for losses and loss expenses at December 31, 2012-Sensitivity to expected loss expenses Reserve for losses and loss Change in assumption expenses (Dollars in thousands) 10% favorable $ 2,959,320 5% favorable 3,018,463 No change (selected) 3,077,606 5% unfavorable 3,136,749 10% unfavorable 3,195,892 The most significant variance in the above scenarios, six month deceleration in loss emergence patterns, would have the effect of increasing losses and loss expenses by $520.5 million.

Management believes that the reserve for losses and loss expenses is sufficient to cover expected claims incurred before the evaluation date on the basis of the methodologies and judgments used to support its estimates. However, there can be no assurance that actual payments will not vary significantly from total reserves. The reserve for losses and loss expenses and the methodology of estimating such reserve are regularly reviewed and updated as new information becomes known. Any resulting adjustments are reflected in income in the period in which they become known.

Premiums Description: For insurance business, written premium estimates are determined from the business plan estimates of premiums by class, the aggregate of underwriters' estimates on a policy-by-policy basis, and projections of ultimate premiums using generally accepted actuarial methods. In particular, direct insurance premiums are recognized in accordance with the type of contract written.

The majority of our insurance premium is accepted on a direct open market or facultative basis. We receive a premium which is identified in the policy and recorded as unearned premium on the inception date of the contract. This premium will typically adjust only if the underlying insured values adjust. We actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable.

Judgments and Uncertainties: For business written on a facultative basis, although a premium estimate is not contractually stated for the amount of business to be written under any particular facility, an initial estimate of the expected premium written is received from the coverholder via the broker. Our estimate of premium is derived by reference to one or more of the following: the historical premium volume experienced by any facility; historical premium volume of similar facilities; the estimates provided by the broker; and industry information on the underlying business. We actively monitor the development of actual reported premium against the estimates made; where actual reported premiums deviate from the estimate, we carry out an analysis to determine the cause and may, if necessary, adjust the estimated premiums. In the year ended December 31, 2012, premiums written on a facultative basis accounted for approximately $357.2 million of total gross premiums written at Talbot.

For contracts written on a losses occurring basis or claims made basis, premium income is generally earned proportionately over the expected risk period, usually 12 months. For all other contracts, comprising contracts written on a risks attaching basis, premiums are generally earned over a 24 month period due to the fact that some of the underlying exposures may attach towards the end of the contract, and such underlying exposures generally have a 12 month coverage period. The portion of the premium 62-------------------------------------------------------------------------------- Table of Contents related to the unexpired portion of the policy at the end of any reporting period is presented on the consolidated balance sheet as unearned premiums.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Gross Gross Gross Gross Gross Gross Written Written Written Written Written Written (Dollars in thousands) Premiums Premiums (%) Premiums Premiums (%) Premiums Premiums (%) Proportional $ 333,469 15.4 % $ 267,378 12.6 % $ 260,149 13.1 % Non-proportional 1,832,971 84.6 % 1,857,313 87.4 % 1,730,417 86.9 % Total $ 2,166,440 100.0 % $ 2,124,691 100.0 % $ 1,990,566 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

For reinsurance business where the assumed reinsurance premium is written on an excess of loss or on a pro rata basis, reinsurance contracts are generally written prior to the time the underlying direct policies are written by cedants and accordingly cedants must estimate such premiums when purchasing reinsurance coverage. For excess of loss contracts, the deposit premium is defined in the contract. The deposit premium is based on the client's estimated premiums, and this estimate is the amount recorded as written premium in the period the risk incepts. In the majority of cases, these contracts are adjustable at the end of the contract period to reflect the changes in underlying risks during the contract period. Subsequent adjustments, based on reports by the clients of actual premium, are recorded in the period in which the cedant reports are received, which would normally be reported within six months to one year subsequent to the expiration of the contract. For pro rata reinsurance contracts, an estimate of written premium is recorded in the period in which the risk incepts. The written premiums estimate is based on the pro rata cession percentage, on information provided by ceding companies and on management's judgment. Management critically evaluates the information provided by ceding companies based on experience with the cedant, broker and the underlying book of business.

Throughout the term of the policy, periodic review of the estimated premium takes place based on the latest information available, which may include actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management's professional judgment, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. If necessary, subsequent adjustments are recorded at the time of review.

On a quarterly basis, the Company evaluates the appropriateness of these premium estimates based on the latest information available, which may include actual reported premium to date, the latest premium estimates as provided by cedants and brokers, historical experience, management's professional judgment, information obtained during the underwriting renewal process, as well as an assessment of relevant economic conditions. Past experience may not be indicative of how future premium estimates develop. The Company believes that reasonably likely changes in assumptions made in the estimation process would not have a significant impact on gross premiums written as recorded.

Where contract terms on excess of loss contracts require the mandatory reinstatement of coverage after a client's loss, the mandatory reinstatement premiums are recorded as written and earned premiums when the loss event occurs.

Management includes an assessment of the creditworthiness of cedants in the review process above, primarily based on market knowledge, reports from rating agencies, the timeliness of cedants' payments and the status of current balances owing. Based on this assessment, management believes that as at December 31, 2012 no provision for doubtful accounts is necessary for receivables from cedants.

Reinsurance Premiums Ceded and Reinsurance Recoverables Description: As discussed in Item 1 "Business-Underwriting Risk Management," the Company primarily uses ceded reinsurance for risk mitigation purposes.

Talbot purchases reinsurance on an excess of loss and a proportional basis together with a relatively small amount of facultative reinsurance and ILWs.

Validus Re purchases reinsurance on an excess of loss and a proportional basis together with ILW coverage.

Judgments and Uncertainties: For excess of loss business, the amount of premium payable is usually contractually documented at inception and management judgment is only necessary in respect of any loss-related elements of the premium, for example reinstatement or adjustment premiums, and loss-related commissions. The full premium is recorded at inception and if the contract is purchased on a "losses occurring " basis, the premium is earned on a straight line basis over the life of the contract. If the policy is purchased on a "risks attaching " basis, the premium is earned in line with the inwards gross premiums to which the risk attaching relates. After the contract has expired, a No Claims Bonus may be received for certain policies, and this is recorded as a reinsurance premium adjustment in the period in which it can be reasonably determined.

63-------------------------------------------------------------------------------- Table of Contents Reinsurance receivable and reinsurance recoverable balances include amounts owed to us in respect of paid and unpaid ceded losses and loss expenses, respectively. The balances are presented net of a reserve for non-recoverability. As at December 31, 2012, reinsurance recoverable balances were $440.0 million and paid losses recoverable balances were $46.4 million. In establishing our reinsurance recoverable balances, significant judgment is exercised by management in determining the amount of unpaid losses and loss expenses to be ceded as well as our ability to cede losses and loss expenses under our reinsurance contracts.

Our ceded unpaid losses and loss expense consists of two elements, those for reported losses and those for losses incurred but not reported ("IBNR"). Ceded amounts for IBNR are developed as part of our loss reserving process.

Consequently, the estimation of ceded unpaid losses and loss expenses is subject to similar risks and uncertainties in the estimation of gross IBNR (see "Reserve for Losses and Loss Expenses" above). As at December 31, 2012, ceded IBNR recoverable balances were $185.3 million.

Although our reinsurance receivable and reinsurance recoverable balances are derived from our determination of contractual provisions, the recoverability of such amounts may ultimately differ due to the potential for a reinsurer to become financially impaired or insolvent or for a contractual dispute over contract language or coverage. Consequently, we review our reinsurance recoverable balances on a regular basis to determine if there is a need to establish a provision for non-recoverability. In performing this review, we use judgment in assessing the credit worthiness of our reinsurers and the contractual provisions of our reinsurance agreements. As at December 31, 2012, we had a provision for non-recoverability of $6.6 million. In the event that the credit worthiness of our reinsurers were to deteriorate, actual uncollectible amounts could be significantly greater than our provision for non-recoverability.

The Company uses a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer and default factors used to determine the portion of a reinsurer's balance deemed to be uncollectible. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions.

Effect if Actual Results Differ from Assumptions: At December 31, 2012, the use of different assumptions within the model could have an effect on the provision for uncollectible reinsurance reflected in the Company's consolidated financial statements. To the extent the creditworthiness of the Company's reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than the Company's provision.

Investment Valuation Description: Consistent with U.S. GAAP, the Company recognizes fixed maturity and short-term investments at their fair value in the consolidated balance sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also established a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level ("Level 1") and unobservable inputs being the lowest level ("Level 3"). Generally, the degree of judgment used in measuring the fair value of financial instruments inversely correlates with the availability of observable inputs. All of the Company's fixed maturity and short-term investment fair value measurements have either quoted market prices or other observable inputs.

Judgments and Uncertainties:The Company's external investment accounting service provider receives prices from independent pricing sources to measure the fair values of its fixed maturity investments. These independent pricing sources are prioritized with respect to reliability to ensure that only the highest priority pricing inputs are used. The independent pricing sources are received via automated feeds from indices, pricing and broker-dealers services. Pricing is also obtained from other external investment managers. This information is applied consistently across all portfolios. The Company's external investment accounting service provider confirms and documents all prices received from broker-dealers on a daily basis for quality control and audit purposes.

In addition to internal controls, management relies on the effectiveness of the valuation controls in place at the Company's external investment accounting service provider (supported by a SSAE 16 Report) in conjunction with regular discussion and analysis of the investment portfolio's structure and performance.

To date, management has not noted any issues or discrepancies related to investment valuation.

Other investments consist of hedge funds, a fund of hedge funds, private equity investments and a deferred compensation trust held in mutual funds. The hedge funds were valued at $538.5 million at December 31, 2012. The hedge funds consist of an investment in four Paulson & Co. managed funds and three investment funds assumed from the Flagstone Acquisition. The Paulson & Co. Inc.

funds' administrator provides monthly reported Net Asset Values ("NAVs") with a one-month delay in its valuation. As a result, the funds' administrator's November 30, 2012 NAV was used as a partial basis for fair value measurement in the 64-------------------------------------------------------------------------------- Table of Contents Company's December 31, 2012 balance sheet. The fund manager provides an estimate of the NAV at December 31, 2012 based on estimated performance. The Company adjusts fair value to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. As this valuation technique incorporates both observable and significant unobservable inputs, the Paulson hedge funds are classified as Level 3 assets. To determine the reasonableness of the estimated NAV, the Company assesses the variance between the fund manager's estimated NAV and the fund administrator's NAV. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. These managed hedge funds are subject to quarterly liquidity.

The Flagstone investment funds and private equity investments' monthly reported NAV is provided with a one-month or one-quarter delay in its valuation. As a result, the November 30, 2012 NAV or the September 30, 2012 NAV was used as a basis for fair value measurement in the Company's December 31, 2012 balance sheet. As this valuation technique incorporates both observable and significant unobservable inputs, the investments funds and private equity investments are classified as Level 3 assets.

The fund of hedge funds includes a side pocket valued at $4.1 million at December 31, 2012. While a redemption request has been submitted, the timing of receipt of proceeds on the side pocket is unknown. The fund's administrator provides a monthly reported NAV with a one-month delay in its valuation. As a result, the fund administrator's November 30, 2012 NAV was used as a basis for fair value measurement in the Company's December 31, 2012 balance sheet. The fund manager provides an estimate of the fund NAV at December 31, 2012 based on the estimated performance provided from the underlying third-party funds. To determine the reasonableness of the NAV, the Company compares the one-month delayed fund administrator's NAV to the fund manager's estimated NAV that incorporates relevant valuation sources on a timely basis. Material variances are recorded in the current reporting period while immaterial variances are recorded in the following reporting period. As this valuation technique incorporates both observable and significant unobservable inputs, the fund of hedge funds is classified as a Level 3 asset.

Effect if Actual Results Differ from Assumptions: Refer to Item 7A.

"Quantitative and Qualitative Disclosures About Market Risk" for further discussion of interest rate risk and a sensitivity analysis of the impact of interest rate variances on the valuation of the Company's fixed maturity and short-term investments.

Segment Reporting Management has determined that the Company operates in three reportable segments. These segments are its significant operating subsidiaries, Validus Re, AlphaCat and Talbot. For segmental reporting purposes, the results of Flagstone's operations since the acquisition date have been included within the Validus Re segment in the consolidated financial statements.

Results of Operations The Company commenced operations on December 16, 2005. The Company's fiscal year ends on December 31. Financial statements are prepared in accordance with U.S. GAAP and relevant SEC guidance.

The following table presents results of operations for the three months ended December 31, 2012 and 2011 and years ended December 31, 2012, 2011 and 2010: 65-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, Years Ended December 31, (Dollars in thousands) 2012 (a) 2011 2012 (a) 2011 2010 Gross premiums written $ 311,847 $ 278,279 $ 2,166,440 $ 2,124,691 1,990,566 Reinsurance premiums ceded (35,659 ) (16,489 ) (307,506 ) (289,241 ) (229,482 ) Net premiums written 276,188 261,790 1,858,934 1,835,450 1,761,084 Change in unearned premiums 223,098 226,556 14,282 (33,307 ) 39 Net premiums earned 499,286 488,346 1,873,216 1,802,143 1,761,123 Losses and loss expenses 458,310 334,829 999,446 1,244,401 987,586 Policy acquisition costs 81,814 81,253 334,698 314,184 292,899 General and administrative expenses 65,095 52,253 263,652 197,497 209,290 Share compensation expenses 7,126 7,237 26,709 34,296 28,911 Total underwriting deductions 612,345 475,572 1,624,505 1,790,378 1,518,686 Underwriting (loss) income (b) (113,059 ) 12,774 248,711 11,765 242,437 Net investment income 28,802 28,080 107,936 112,296 134,103 Other income 187 3,517 22,396 5,718 5,219 Finance expenses (14,510 ) (13,520 ) (53,857 ) (54,817 ) (55,870 ) Operating (loss) income before taxes and (loss) income from operating affilites (b) (98,580 ) 30,851 325,186 74,962 325,889 Tax (expense) benefit (615 ) 226 (2,501 ) (824 ) (3,126 ) (Loss) income from operating affiliates (614 ) - 12,580 - - Net operating (loss) income (b) (99,809 ) 31,077 335,265 74,138 322,763 Gain on bargain purchase, net of expenses (c) 21,485 - 17,701 - - Net realized (losses) gains on investments (4,516 ) 5,355 18,233 28,532 32,498 Net unrealized (losses) gains on investments (35,857 ) 2,159 17,585 (19,991 ) 45,952 (Loss) from investment affiliate (406 ) - (964 ) - - Foreign exchange gains (losses) 1,181 266 4,798 (22,124 ) 1,351 Transaction expenses (d) - (3,850 ) - (17,433 ) - Net (loss) income (117,922 ) 35,007 392,618 43,122 402,564 Net loss (income) attributable to noncontrolling interest 27,206 (7,683 ) 15,820 (21,793 ) - Net (loss) income (attributable) available to Validus $ (90,716 ) $ 27,324 $ 408,438 $ 21,329 $ 402,564 Selected ratios: Net premiums written / Gross premiums written 88.6 % 94.1 % 85.8 % 86.4 % 88.5 % Losses and loss expenses 91.8 % 68.6 % 53.4 % 69.1 % 56.1 % Policy acquisition costs 16.4 % 16.6 % 17.9 % 17.4 % 16.6 % General and administrative expenses (e) 14.5 % 12.2 % 15.5 % 12.9 % 13.5 % Expense ratio 30.9 % 28.8 % 33.4 % 30.3 % 30.1 % Combined ratio 122.7 % 97.4 % 86.8 % 99.4 % 86.2 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

Reconciliations of these measures to the most comparable U.S. GAAP financial measure, are presented in the section below entitled "Underwriting Income." (c) The gain on bargain purchase, net of expenses, arises from the acquisition of Flagstone on November 30, 2012 and is net of transaction related expenses.

(d) The transaction expenses relate to costs incurred in connection with the Company's proposed acquisition of Transatlantic. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

(e) The general and administrative expense ratio includes share compensation expenses.

66-------------------------------------------------------------------------------- Table of Contents Three Months Ended Years Ended December 31, December 31, (Dollars in thousands) 2012 (a) 2011 2012 (a) 2011 2010 Validus Re Gross premiums written $ 79,233 $ 55,851 $ 1,131,959 $ 1,114,493 $ 1,089,443 Reinsurance premiums ceded (7,074 ) (49 ) (144,578 ) (150,718 ) (63,147 ) Net premiums written 72,159 55,802 987,381 963,775 1,026,296 Change in unearned premiums 213,105 196,679 35,890 2,150 13,822 Net premiums earned 285,264 252,481 1,023,271 965,925 1,040,118 Losses and loss expenses 331,130 215,903 575,416 749,305 601,610 Policy acquisition costs 40,703 39,227 154,362 154,582 159,527 General and administrative expenses 14,716 11,716 63,048 44,663 45,613 Share compensation expenses 1,849 2,191 7,763 9,309 7,181 Total underwriting deductions 388,398 269,037 800,589 957,859 813,931 Underwriting (loss) income (b) (103,134 ) (16,556 ) 222,682 8,066 226,187 AlphaCat Gross premiums written $ (4 ) $ (1,323 ) $ 21,603 $ 75,727 $ 11,796 Reinsurance premiums ceded - - - - - Net premiums written (4 ) (1,323 ) 21,603 75,727 11,796 Change in unearned premiums 5,895 27,834 (3,937 ) (9,761 ) (714 ) Net premiums earned 5,891 26,511 17,666 65,966 11,082 Losses and loss expenses - 10,000 - 10,000 - Policy acquisition costs 589 3,331 1,774 7,946 1,072 General and administrative expenses 2,011 6,807 7,532 10,929 5,327 Share compensation expenses 84 33 279 107 594 Total underwriting deductions 2,684 20,171 9,585 28,982 6,993 Underwriting income (b) 3,207 6,340 8,081 36,984 4,089 Legal Entity adjustments Gross premiums written $ 7 $ - $ 7 $ - $ - Reinsurance premiums ceded - - - - - Net premiums written 7 - 7 - - Change in unearned premiums (3,833 ) - (3,833 ) - - Net premiums earned (3,826 ) - (3,826 ) - - Losses and loss expenses - - - - - Policy acquisition costs (365 ) (1,093 ) (390 ) (2,394 ) -General and administrative expenses 1,673 (5,438 ) 5,130 (1,658 ) 15,927 Share compensation expenses 115 196 561 982 80 Total underwriting deductions 1,423 (6,335 ) 5,301 (3,070 ) 16,007 Underwriting (loss) income (b) (5,249 ) 6,335 (9,127 ) 3,070 (16,007 ) Talbot Gross premiums written $ 241,100 $ 235,242 $ 1,078,636 $ 1,014,122 $ 981,073 Reinsurance premiums ceded (37,067 ) (27,931 ) (228,686 ) (218,174 ) (258,081 ) Net premiums written 204,033 207,311 849,950 795,948 722,992 Change in unearned premiums 4,098 2,043 (17,671 ) (25,696 ) (13,069 ) Net premiums earned 208,131 209,354 832,279 770,252 709,923 Losses and loss expenses 127,180 108,926 424,030 485,096 385,976 Policy acquisition costs 41,745 41,160 183,926 157,334 143,769 General and administrative expenses 32,371 29,676 133,281 112,072 107,557 Share compensation expenses 2,442 1,934 7,789 8,582 6,923 Total underwriting deductions 203,738 181,696 749,026 763,084 644,225 Underwriting income (b) 4,393 27,658 83,253 7,168 65,698 Corporate & Eliminations Gross premiums written $ (8,489 ) $ (11,491 ) $ (65,765 ) $ (79,651 ) $ (91,746 ) Reinsurance premiums ceded 8,482 11,491 65,758 79,651 91,746 Net premiums written (7 ) - (7 ) - - Change in unearned premiums 3,833 - 3,833 - - Net premiums earned 3,826 - 3,826 - - Losses and loss expenses - - - - - Policy acquisition costs (858 ) (1,372 ) (4,974 ) (3,284 ) (11,469 ) General and administrative expenses 14,324 9,492 54,661 31,491 34,866 Share compensation expenses 2,636 2,883 10,317 15,316 14,133 Total underwriting deductions 16,102 11,003 60,004 43,523 37,530 Underwriting (loss) (b) (12,276 ) (11,003 ) (56,178 ) (43,523 ) (37,530 ) Total underwriting (loss) income (b) $ (113,059 ) $ 12,774 $ 248,711 $ 11,765 $ 242,437 67 -------------------------------------------------------------------------------- Table of Contents (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income." Three Months Ended December 31, 2012 compared to Three Months Ended December 31, 2011 Net loss attributable to Validus for the three months ended December 31, 2012 was $(90.7) million compared to net income available to Validus of $27.3 million for the three months ended December 31, 2011, a decrease of $118.0 million or 432.0%.

The primary factors driving the net loss attributable to Validus were: • Decrease in underwriting income of $125.8 million primarily due to: • A $123.5 million increase in loss and loss expenses; • A $12.8 million increase in general and administrative expenses; and • Offset by a $10.9 million increase in net premiums earned.

• Unfavorable movements in net realized and unrealized losses on investments of $9.9 million and $38.0 million, respectively.

The above items were partially offset by the following factors: • Gain on bargain purchase, net of expenses and transaction expenses of $21.5 million; and • Net loss attributable to noncontrolling interest which resulted in an increase to net income attributable to Validus of $34.9 million.

The change in net income available to Validus for the three months ended December 31, 2012 of $118.0 million as compared to the three months ended December 31, 2011 is described in the following table: Three Months Ended December 31, 2012 Increase (Decrease) Over the Three Months Ended December 31, 2011 (a) Corporate and (Dollars in thousands) Validus Re (a) AlphaCat Talbot Eliminations (b) Total Notable losses-(increase) in net loss and loss expenses (c) $ (259,639 ) $ - $ (47,249 ) $ - $ (306,888 ) Less: Notable losses-increase in net reinstatement premium (c) 33,177 - 4,540 - 37,717 Other underwriting income (loss) 139,884 (3,133 ) 19,444 (12,857 ) 143,338 Underwriting (loss) income (d) (86,578 ) (3,133 ) (23,265 ) (12,857 ) (125,833 ) Net investment income (535 ) 528 (1,132 ) 1,861 722 Other income (2,311 ) (5,076 ) (1,291 ) 5,348 (3,330 ) Finance expenses (462 ) (1,043 ) 75 440 (990 ) Operating (loss) income before taxes and (loss) from operating affiliates (89,886 ) (8,724 ) (25,613 ) (5,208 ) (129,431 ) Tax (expense) benefit (152 ) - (1,776 ) 1,087 (841 ) (Loss) from operating affiliates - (614 ) - - (614 ) Net operating (loss) income (90,038 ) (9,338 ) (27,389 ) (4,121 ) (130,886 ) Gain on bargain purchase, net of expenses - - - 21,485 21,485 Net realized (losses) on investments (9,367 ) - (504 ) - (9,871 ) Net unrealized (losses) gains on investments (4,266 ) (31,819 ) (1,932 ) 1 (38,016 ) (Loss) from investment affiliate (406 ) - - - (406 ) Foreign exchange gains (losses) 413 136 749 (383 ) 915 Transaction expenses - - - 3,850 3,850 Net (loss) income (103,664 ) (41,021 ) (29,076 ) 20,832 (152,929 ) Net loss (income) attributable to noncontrolling interest - 34,889 - - 34,889 Net (loss) income (attributable) available to Validus $ (103,664 ) $ (6,132 ) $ (29,076 ) $ 20,832 $ (118,040 ) (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) The Corporate and Eliminations column includes legal entity adjustments.

(c) Notable losses for the three months ended December 31, 2012 include: Hurricane Sandy. Notable losses for the three months ended December 31, 2011 include: the Thai floods and excludes the reserve for potential development on 2011 notable loss events. The AlphaCat segment's non-consolidated 68-------------------------------------------------------------------------------- Table of Contents affiliates incurred loss and loss expenses of $8.4 million related to Hurricane Sandy for the three months ended December 31, 2012. These losses are not included in the table above as the entities are accounted for as investments in operating affiliates.

(d) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income." Gross Premiums Written Gross premiums written for the three months ended December 31, 2012 were $311.8 million compared to $278.3 million for the three months ended December 31, 2011, an increase of $33.6 million or 12.1%. The property and marine lines increased by $37.4 million and $5.1 million, respectively, while the specialty lines decreased by $8.9 million. Details of gross premiums written by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 (a) 2011 Gross Premiums Gross Premiums Gross Premiums Gross Premiums (Dollars in thousands) Written Written (%) Written Written (%) % Change Property $ 110,561 35.4 % $ 73,200 26.3 % 51.0 % Marine 89,394 28.7 % 84,247 30.3 % 6.1 % Specialty 111,892 35.9 % 120,832 43.4 % (7.4 )% Total $ 311,847 100.0 % $ 278,279 100.0 % 12.1 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re gross premiums written for the three months ended December 31, 2012 were $79.2 million compared to $55.9 million for the three months ended December 31, 2011, an increase of $23.4 million or 41.9%. Details of Validus Re gross premiums written by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 (a) 2011 Gross Premiums Gross Premiums Gross Premiums Gross Premiums (Dollars in thousands) Written Written (%) Written Written (%) % Change Property $ 54,878 69.2 % $ 34,053 61.0 % 61.2 % Marine 8,621 10.9 % 9,742 17.4 % (11.5 )% Specialty 15,734 19.9 % 12,056 21.6 % 30.5 % Total $ 79,233 100.0 % $ 55,851 100.0 % 41.9 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The increase in gross premiums written in the property lines of $20.8 million was due primarily to an increase in reinstatement premiums of $28.0 million primarily due to Hurricane Sandy and a $7.4 million increase in premiums relating to the Flagstone acquisition, slightly offset by a decrease in per risk excess of loss treaties of $5.1 million. The decrease in gross premiums written of $1.1 million in the marine lines was due primarily to a $6.8 million decrease in premium adjustments on proportional treaties, partially offset by an increase in reinstatement premiums of $4.1 million primarily on Hurricane Sandy. The increase in gross premiums written in the specialty lines of $3.7 million was due primarily to a $3.1 million increase in premiums relating to the Flagstone acquisition and a $2.5 million increase in per risk excess of loss treaties and premium adjustments on proportional treaties, slightly offset by a $2.2 million decrease in premium adjustments relating to non-proportional treaties.

Gross premiums written under the quota share, surplus treaty and excess of loss contracts with Talbot for the three months ended December 31, 2012 were $8.5 million compared to $11.5 million for the three months ended December 31, 2011, a decrease of by $3.0 million as compared to the three months ended December 31, 2011. These reinsurance transactions with Talbot are eliminated upon consolidation.

AlphaCat. AlphaCat gross premiums written for the three months ended December 31, 2012 were $0.0 million compared to $(1.3) million for the three months ended December 31, 2011, an increase of $1.3 million or 99.7%. The AlphaCat segment generally does not write premiums in the fourth quarter.

The increase in gross premiums written in the property lines of $1.3 million was due primarily to the change in accounting treatment for AlphaCat Re 2011 which occurred as at December 31, 2011, when the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated Balance Sheet of the 69-------------------------------------------------------------------------------- Table of Contents Company. AlphaCat Re 2011 was consolidated in 2011 whereas in 2012, AlphaCat Re 2011 is accounted for as an equity method operating affiliate.

Managed gross premiums written from our non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the three months ended December 31, 2012 were $0.0 million compared to $(1.4) million for the three months ended December 31, 2011, an increase of $1.3 million or 97.3%. Gross premiums written from our consolidated AlphaCat entities for the three months ended December 31, 2012 were $0.0 million compared to $0.1 million for the three months ended December 31, 2011, a decrease of $0.1 million or 106.5%.

Talbot. Talbot gross premiums written for the three months ended December 31, 2012 were $241.1 million compared to $235.2 million for the three months ended December 31, 2011, an increase of $5.9 million or 2.5%. The $241.1 million of gross premiums written translated at 2011 rates of exchange would have been $240.9 million during the three months ended December 31, 2012, giving an effective increase of $5.7 million or 2.4%. Details of Talbot gross premiums written by line of business are provided below.

Three Months Ended December 31, 2012 Three Months Ended December 31, 2011 (Dollars in thousands) Gross Premiums Written Gross Premiums Written (%) Gross Premiums Written Gross Premiums Written (%) % Change Property $ 62,258 25.8 % $ 51,793 22.0 % 20.2 % Marine 81,540 33.8 % 74,235 31.6 % 9.8 % Specialty 97,302 40.4 % 109,214 46.4 % (10.9 )% Total $ 241,100 100.0 % $ 235,242 100.0 % 2.5 % The increase in gross premiums written in the property lines of $10.5 million was due primarily to a $6.4 million increase in premiums written in the direct property lines and a $4.2 million increase in the construction lines, partially offset by a $1.0 million decrease in property treaty lines. The increase in gross premiums written in the marine lines of $7.3 million was due primarily to a $5.1 million increase in premiums written in the cargo lines and a $5.1 million increase in the other treaty lines, $3.5 million of which relates to reinstatement premiums on Hurricane Sandy. These were partially offset by a $2.5 million decrease in yachts lines. The decrease in gross premiums written in the specialty lines of $11.9 million was due primarily to a $12.2 million decrease in premiums written in the direct aviation and aviation treaty lines. This decrease primarily relates to a premium reassessment of $8.2 million which has no net earned impact on the direct aviation and aviation treaty lines. In addition, there was a $2.9 million decrease in the war lines, partially offset by a $3.7 million increase in the political violence lines.

Reinsurance Premiums Ceded Reinsurance premiums ceded for the three months ended December 31, 2012 were $35.7 million compared to $16.5 million for the three months ended December 31, 2011, an increase of $19.2 million or 116.3%. Details of reinsurance premiums ceded by line of business are provided below.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Reinsurance Reinsurance Reinsurance Premiums Reinsurance Premiums (Dollars in thousands) Premiums Ceded Ceded (%) Premiums Ceded Ceded (%) % Change Property $ 19,644 55.1 % $ 11,979 72.7 % 64.0 % Marine 4,890 13.7 % (1,363 ) (8.3 )% 458.8 % Specialty 11,125 31.2 % 5,873 35.6 % 89.4 % Total $ 35,659 100.0 % $ 16,489 100.0 % 116.3 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re reinsurance premiums ceded for the three months ended December 31, 2012 were $7.1 million compared to $0.0 million for the three months ended December 31, 2011, an increase of $7.0 million. Details of Validus Re reinsurance premiums ceded by line of business are provided below.

70-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Reinsurance Reinsurance Reinsurance Premiums Premiums (Dollars in thousands) Premiums Ceded Ceded (%) Reinsurance Premiums Ceded Ceded (%) % Change Property $ 4,275 60.5 % $ 980 2,000.0 % 336.2 % Marine 2,803 39.6 % (931 ) (1,900.0 )% 401.1 % Specialty (4 ) (0.1 )% - - % NM Total $ 7,074 100.0 % $ 49 100.0 % NM (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

NM: Not meaningful Reinsurance premiums ceded in the property lines increased by $3.3 million, due primarily to increases in ceded reinstatement premiums and non-proportional coverage of $2.2 million and $1.4 million, respectively. The increase in reinsurance premiums of $3.7 million ceded in the marine lines was primarily due to a $1.4 million increase in non-proportional coverage and $1.3 million of adjustments to coverage from prior periods.

AlphaCat. AlphaCat did not cede reinsurance premiums for the three months ended December 31, 2012 and 2011.

Talbot. Talbot reinsurance premiums ceded for the three months ended December 31, 2012 were $37.1 million compared to $27.9 million for the three months ended December 31, 2011, an increase of $9.1 million or 32.7%. Details of Talbot reinsurance premiums ceded by line of business are provided below.

Three Months Ended December 31, 2012 Three Months Ended December 31, 2011 Reinsurance Reinsurance Reinsurance Reinsurance Premiums Ceded (Dollars in thousands) Premiums Ceded Premiums Ceded (%) Premiums Ceded (%) % Change Property $ 21,940 59.2 % $ 22,322 79.9 % (1.7 )% Marine 2,854 7.7 % (702 ) (2.5 )% 506.6 % Specialty 12,273 33.1 % 6,311 22.6 % 94.5 % Total $ 37,067 100.0 % $ 27,931 100.0 % 32.7 % The increase in reinsurance premiums ceded in the marine lines of $3.6 million was due primarily to a $5.5 million increase in premiums ceded in the marine energy and cargo lines, $5.2 million of which relates to reinstatement premiums, partially offset by a $2.1 million decrease in other marine lines. The increase in reinsurance premiums ceded in the specialty lines of $6.0 million was due primarily to a $3.0 million increase in premiums ceded in the war, political risk and violence lines and a $2.0 million increase in financial institution lines, mainly due to higher reinstatement premiums and prior period adjustments.

Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re for the three months ended December 31, 2012 were $8.5 million compared to $11.5 million for the three months ended December 31, 2011, a decrease of $3.0 million. These reinsurance agreements with Validus Re are eliminated upon consolidation.

Net Premiums Written Net premiums written for the three months ended December 31, 2012 were $276.2 million compared to $261.8 million for the three months ended December 31, 2011, an increase of $14.4 million or 5.5%. The ratios of net premiums written to gross premiums written for the three months ended December 31, 2012 and 2011 were 88.6% and 94.1%, respectively. Details of net premiums written by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 (a) 2011 Net Premiums Net Premiums Net Premiums Net Premiums (Dollars in thousands) Written Written (%) Written Written (%) % Change Property $ 90,917 32.9 % $ 61,221 23.4 % 48.5 % Marine 84,504 30.6 % 85,610 32.7 % (1.3 )% Specialty 100,767 36.5 % 114,959 43.9 % (12.3 )% Total $ 276,188 100.0 % $ 261,790 100.0 % 5.5 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

71-------------------------------------------------------------------------------- Table of Contents Validus Re. Validus Re net premiums written for the three months ended December 31, 2012 were $72.2 million compared to $55.8 million for the three months ended December 31, 2011, an increase of $16.4 million or 29.3%. Details of Validus Re net premiums written by line of business are provided below.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Net Premiums Net Premiums Net Premiums (Dollars in thousands) Written Written (%) Net Premiums Written Written (%) % Change Property $ 50,603 70.1 % $ 33,073 59.3 % 53.0 % Marine 5,818 8.1 % 10,673 19.1 % (45.5 )% Specialty 15,738 21.8 % 12,056 21.6 % 30.5 % Total $ 72,159 100.0 % $ 55,802 100.0 % 29.3 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The increase in Validus Re net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 91.1% and 99.9% for the three months ended December 31, 2012 and 2011, respectively.

AlphaCat. AlphaCat net premiums written for the three months ended December 31, 2012 were $0.0 million compared to $(1.3) million for the three months ended December 31, 2011, an increase of $1.3 million or 99.7%.

The increase in AlphaCat net premiums written was driven by the factors highlighted above in respect of gross premiums written. The ratios of net premiums written to gross premiums written were 100.0% for the three months ended December 31, 2012 and 2011.

Talbot. Talbot net premiums written for the three months ended December 31, 2012 were $204.0 million compared to $207.3 million for the three months ended December 31, 2011, a decrease of $3.3 million or 1.6%. Details of Talbot net premiums written by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 2011 Net Premiums Net Premiums Net Premiums Net Premiums (Dollars in thousands) Written Written (%) Written Written (%) % Change Property $ 40,318 19.8 % $ 29,471 14.2 % 36.8 % Marine 78,686 38.5 % 74,937 36.1 % 5.0 % Specialty 85,029 41.7 % 102,903 49.7 % (17.4 )% Total $ 204,033 100.0 % $ 207,311 100.0 % (1.6 )% The decrease in net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written for the three months ended December 31, 2012 and 2011 were 84.6% and 88.1%, respectively.

Net Change in Unearned Premiums Net change in unearned premiums for the three months ended December 31, 2012 was $223.1 million compared to $226.6 million for the three months ended December 31, 2011, a decrease of $3.5 million or 1.5%.

72-------------------------------------------------------------------------------- Table of Contents Three Months Ended Three Months Ended December 31, 2012 (a) December 31, 2011 Net Change in Net Change in Unearned Unearned (Dollars in thousands) Premiums Premiums % Change Change in gross unearned premium $ 140,243 $ 286,211 (51.0 )% Less change due to Flagstone acquisition 139,389 - NM Deconsolidation of AlphaCat Re 2011 - (9,405 ) NM Net change in gross unearned premium 279,632 276,806 1.0 % Change in prepaid reinsurance premium (45,195 ) (50,250 ) (10.1 )% Less change due to Flagstone acquisition (11,339 ) - NM Net change in prepaid reinsurance premiums (56,534 ) (50,250 ) 12.5 % Net change in unearned premium $ 223,098 $ 226,556 (1.5 )% (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

NM: Not meaningful Validus Re. Validus Re's net change in unearned premiums for the three months ended December 31, 2012 was $213.1 million compared to $196.7 million for the three months ended December 31, 2011, an increase of $16.4 million or 8.4%.

Three Months Ended Three Months Ended December 31, 2012 (a) December 31, 2011 Net Change in Net Change in Unearned Unearned (Dollars in thousands) Premiums Premiums % Change Change in gross unearned premium $ 110,621 $ 228,747 (51.6 )% Less change due to Flagstone acquisition 139,389 - NM Deconsolidation of AlphaCatRe 2011 - (9,405 ) NM Net change in gross unearned premium 250,010 219,342 14.0 % Change in prepaid reinsurance premium (25,566 ) (22,663 ) (12.8 )% Less change due to Flagstone acquisition (11,339 ) - NM Net change in prepaid reinsurance premiums (36,905 ) (22,663 ) (62.8 )% Net change in unearned premium $ 213,105 $ 196,679 8.4 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

NM: Not meaningful Validus Re net change in unearned premiums has increased for the three months ended December 31, 2012 due to the earnings pattern of gross premiums written and reinsurance premiums ceded.

AlphaCat. AlphaCat's net change in unearned premiums for the three months ended December 31, 2012 was $5.9 million compared to $27.8 million for the three months ended December 31, 2011, a decrease of $21.9 million or 78.8%.

Three Months Ended Three Months Ended December 31, 2012 December 31, 2011 Net Change in Unearned Net Change in Unearned (Dollars in thousands) Premiums Premiums % Change Change in gross unearned premiums $ 5,895 $ 27,834 (78.8 )% Net change in unearned premiums $ 5,895 $ 27,834 (78.8 )% AlphaCat net change in unearned premiums has decreased for the three months ended December 31, 2012 due primarily to the deconsolidation of AlphaCat Re 2011 and the earnings pattern of gross premiums written.

73-------------------------------------------------------------------------------- Table of Contents Talbot. Talbot's net change in unearned premiums for the three months ended December 31, 2012 was $4.1 million compared to $2.0 million for the three months ended December 31, 2011, an increase of $2.1 million or 100.6%.

Three Months Ended Three Months Ended December 31, 2012 December 31, 2011 Net Change in Unearned Net Change in Unearned (Dollars in thousands) Premiums Premiums % Change Change in gross unearned premiums $ 23,727 $ 29,630 (19.9 )% Change in prepaid reinsurance premiums (19,629 ) (27,587 ) 28.8 % Net change in unearned premiums $ 4,098 $ 2,043 100.6 % Talbot's net change in unearned premium has increased for the three months ended December 31, 2012 due to the earnings pattern of gross premiums written and reinsurance premiums ceded.

Net Premiums Earned Net premiums earned for the three months ended December 31, 2012 were $499.3 million compared to $488.3 million for the three months ended December 31, 2011, an increase of $10.9 million or 2.2%. Details of net premiums earned by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 (a) 2011 Net Premiums Net Premiums Net Premiums Net Premiums (Dollars in thousands) Earned Earned (%) Earned Earned (%) % Change Property $ 250,480 50.2 % $ 236,671 48.5 % 5.8 % Marine 146,744 29.4 % 146,953 30.1 % (0.1 )% Specialty 102,062 20.4 % 104,722 21.4 % (2.5 )% Total $ 499,286 100.0 % $ 488,346 100.0 % 2.2 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re net premiums earned for three months ended December 31, 2012 were $285.3 million compared to $252.5 million for the three months ended December 31, 2011, an increase of $32.8 million or 13.0%. Details of Validus Re net premiums earned by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 (a) 2011 Net Premiums Net Premiums Net Premiums Net Premiums (Dollars in thousands) Earned Earned (%) Earned Earned (%) % Change Property $ 198,002 69.4 % $ 169,052 67.0 % 17.1 % Marine 60,163 21.1 % 57,524 22.8 % 4.6 % Specialty 27,099 9.5 % 25,905 10.2 % 4.6 % Total $ 285,264 100.0 % $ 252,481 100.0 % 13.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The overall increase in net premiums earned was due primarily to the increase in reinstatement premiums relating to Hurricane Sandy and an increase in net premiums earned relating to the acquisition of Flagstone. The increase in premiums earned in the property lines of $29.0 million is due primarily to the increase in earned reinstatement premiums of $25.7 million relating primarily to Hurricane Sandy and a $20.9 million increase in premiums earned relating to the acquisition of Flagstone. These items are partially offset by a $10.3 million decrease in intercompany premiums with Talbot which are eliminated upon consolidation and a $6.0 million decrease in assumed earned premium.The increase in premiums earned in the marine lines of $2.6 million is due primarily to an increase in earned reinstatement premiums of $3.1 million relating primarily to Hurricane Sandy and a $1.6 million premiums earned relating to the Flagstone acquisition, partially offset by a $3.6 million decrease in premium adjustments on proportional business. These increases are consistent with the relevant pattern of net premiums written influencing the earned premiums for the three months ended December 31, 2012 compared to the three months ended December 31, 2011.

AlphaCat. AlphaCat net premiums earned for the three months ended December 31, 2012 were $5.9 million compared to $26.5 million for the three months ended December 31, 2011, a decrease of $20.6 million or 77.8%. Details of AlphaCat net premiums earned by line of business are provided below.

74-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, 2012 Three Months Ended December 31, 2011 Net Premiums Net Premiums (Dollars in thousands) Net Premiums Earned Earned (%) Net Premiums Earned Earned (%) % Change Property $ 5,891 100.0 % $ 26,511 100.0 % (77.8 )% Total $ 5,891 100.0 % $ 26,511 100.0 % (77.8 )% The decrease in net premiums earned is consistent with the relevant pattern of net premiums written and the deconsolidation of AlphaCatRe 2011, influencing the earned premiums for the three months ended December 31, 2012 compared to the three months ended December 31, 2011.

Talbot. Talbot net premiums earned for the three months ended December 31, 2012 were $208.1 million compared to $209.4 million for the three months ended December 31, 2011, a decrease of $1.2 million or 0.6%. Details of Talbot net premiums earned by line of business are provided below.

Three Months Ended December 31, Three Months Ended December 31, 2012 2011 Net Premiums Net Premiums Net Premiums Net Premiums (Dollars in thousands) Earned Earned (%) Earned Earned (%) % Change Property $ 46,587 22.4 % $ 41,108 19.6 % 13.3 % Marine 86,581 41.6 % 89,429 42.8 % (3.2 )% Specialty 74,963 36.0 % 78,817 37.6 % (4.9 )% Total $ 208,131 100.0 % $ 209,354 100.0 % (0.6 )% The decrease in net premiums earned is consistent with the relevant patterns of net premiums written influencing the earned premiums for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011.

Losses and Loss Expenses Losses and loss expenses for the three months ended December 31, 2012 were $458.3 million compared to $334.8 million for the three months ended December 31, 2011, an increase of $123.5 million or 36.9%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the three months ended December 31, 2012 and 2011 were 91.8% and 68.6%, respectively. Details of loss ratios by line of business are provided below.

Three Months Three Months Percentage Ended December Ended December Point Change 31, 2012 (a) 31, 2011 Property 126.0 % 90.0 % 36.0 Marine 76.2 % 53.0 % 23.2 Specialty 30.2 % 42.0 % (11.8 ) All lines 91.8 % 68.6 % 23.2 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

For the three months ended December 31, 2012, the Company incurred $361.0 million of losses from notable loss events, which represented 72.3 percentage points of the overall loss ratio. Net of $36.4 million of reinstatement premiums, the effect of these events on net income was a decrease of $324.6 million. For the three months ended December 31, 2011, the Company incurred $54.1 million of losses from notable loss events, which represented 11.1 percentage points of the overall loss ratio, excluding the reserve for potential development on notable loss events. Including the impact of $(1.3) million of reinstatement premiums, the effect of these events on net income was a decrease of $55.5 million. The Company's loss ratio, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development for the three months ended December 31, 2012 and 2011 was 31.0% and 50.3%, respectively.

75-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, 2012 (b) (Dollars in thousands) Fourth Quarter 2012 Notable Loss Events (a) (b) Validus Re (b) Talbot Total Net Losses Net Losses Net Losses (Dollars in and Loss and Loss and Loss thousands) Description Expenses(c) % of NPE Expenses(c) % of NPE Expenses(c) % of NPE Hurricane Sandy (d) Windstorm $ 282,603 99.1 % $ 78,433 37.7 % $ 361,036 72.3 % Total $ 282,603 99.1 % $ 78,433 37.7 % $ 361,036 72.3 % Three Months Ended December 31, 2011 (Dollars in thousands) Fourth Quarter 2011 Notable Loss Events (a) Validus Re Talbot Total Net Losses Net Losses Net Losses (Dollars in and Loss and Loss and Loss thousands) Description Expenses(c) % of NPE Expenses(c) % of NPE Expenses(c) % of NPE Thailand Multiple floods flooding events $ 22,964 9.1 % $ 31,184 14.9 % $ 54,148 11.1 % Total $ 22,964 9.1 % $ 31,184 14.9 % $ 54,148 11.1 % (a) These notable loss event amounts exclude the reserve for potential development on 2011 notable loss events and are based on management's estimates following a review of the Company's potential exposure and discussions with certain clients and brokers. Given the magnitude and recent occurrence of these events in relation to the corresponding period end date, and other uncertainties inherent in loss estimation, meaningful uncertainty exists at the relevant reporting date regarding losses from these events and the Company's actual ultimate net losses from these events can vary materially from these estimates.

(b) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(c) Net of reinsurance but not of reinstatement premiums. Total reinstatement premiums were $36.4 million and $(1.3) million for the three months ended December 31, 2012 and December 31, 2011, respectively.

(d) The AlphaCat segment's non-consolidated affiliates incurred loss and loss expenses of $8.4 million related to Hurricane Sandy for the three months ended December 31, 2012. These losses are not included in the table above as the entities are accounted for as investments in operating affiliates.

76-------------------------------------------------------------------------------- Table of Contents Details of loss ratios by line of business and period of occurrence are provided below.

Three Months Ended December 31, Percentage 2012 (a) 2011 Point Change Property-current period-excluding items below 21.0 % 46.9 % (25.9 ) Property-current period-notable losses 113.2 % 20.3 % 92.9 Property-current period-reserve for potential development on notable loss events 0.0 % 30.8 % (30.8 ) Property-change in prior accident years (8.2 )% (8.0 )% (0.2 ) Property-loss ratio 126.0 % 90.0 % 36.0 Marine-current period-excluding items below 42.8 % 53.8 % (11.0 ) Marine-current period-notable losses 47.5 % 2.9 % 44.6 Marine-current period-reserve for potential development on notable loss events 0.0 % 3.4 % (3.4 ) Marine-change in prior accident years (14.1 )% (7.1 )% (7.0 ) Marine-loss ratio 76.2 % 53.0 % 23.2 Specialty-current period-excluding items below 38.2 % 53.0 % (14.8 ) Specialty-current period-notable losses 7.7 % 1.8 % 5.9 Specialty-change in prior accident years (15.7 )% (12.8 )% (2.9 ) Specialty-loss ratio 30.2 % 42.0 % (11.8 ) All lines-current period-excluding items below 31.0 % 50.3 % (19.3 ) All lines-current period-notable losses 72.3 % 11.1 % 61.2 All lines-current period-reserve for potential development on notable loss events 0.0 % 16.0 % (16.0 ) All lines-change in prior accident years (11.5 )% (8.8 )% (2.7 ) All lines-loss ratio 91.8 % 68.6 % 23.2 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re losses and loss expenses for the three months ended December 31, 2012 were $331.1 million compared to $215.9 million for the three months ended December 31, 2011, an increase of $115.2 million or 53.4%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 116.1% and 85.5% for the three months ended December 31, 2012 and 2011, respectively. For the three months ended December 31, 2012, Validus Re incurred losses of $350.9 million related to current year losses and $19.8 million of favorable loss reserve development relating to prior accident years. For three months ended December 31, 2012, favorable loss reserve development on prior accident years benefited the Validus Re loss ratio by 6.9 percentage points. For the three months ended December 31, 2011, Validus Re incurred losses of $223.0 million related to current year losses and $7.1 million of favorable loss reserve development relating to prior accident years. For the three months ended December 31, 2011, favorable loss reserve development on prior years benefited the Validus Re loss ratio by 2.8 percentage points.

For the three months ended December 31, 2012, Validus Re incurred $282.6 million of losses from notable loss events, which represented 99.1 percentage points of the overall loss ratio. Net of $34.8 million of reinstatement premiums, the effect of these events on net income was a decrease of $247.8 million. For the three months ended December 31, 2011, Validus Re incurred $23.0 million of losses from notable loss events, which represented 9.1 percentage points of the overall loss ratio, excluding the reserve for potential development on notable loss events. Net of reinstatement premiums of $1.6 million, the effect of these events on Validus Re segment income was a decrease of $21.4 million. Validus Re segment loss ratios excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development for the three months ended December 31, 2012 and 2011 were 23.9% and 48.3%, respectively. Details of Validus Re loss ratios by line of business and period of occurrence are provided below.

77-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, Percentage 2012 (a) 2011 Point Change Property-current period excluding items below 18.7 % 39.3 % (20.6 ) Property-current period-notable losses 120.2 % 11.7 % 108.5 Property-current period-reserves for potential development on notable loss events 0.0 % 43.2 % (43.2 ) Property-change in prior accident years (3.2 )% (2.8 )% (0.4 ) Property-loss ratio 135.7 % 91.4 % 44.3 Marine-current period excluding items below 39.3 % 62.5 % (23.2 ) Marine-current period-notable losses 72.3 % 5.6 % 66.7 Marine-current period-reserves for potential development on notable loss events 0.0 % 8.7 % (8.7 ) Marine-change in prior accident years (7.0 )% (0.5 )% (6.5 ) Marine-loss ratio 104.6 % 76.3 % 28.3 Specialty-current period excluding items below 28.4 % 75.6 % (47.2 ) Specialty-current period-notable losses 4.2 % 0.0 % 4.2 Specialty-change in prior accident years (34.4 )% (8.1 )% (26.3 ) Specialty-loss ratio (1.8 )% 67.5 % (69.3 ) All lines-current period excluding items below 23.9 % 48.3 % (24.4 ) All lines-current period-notable losses 99.1 % 9.1 % 90.0 All lines-current period-reserves for potential development on notable loss events 0.0 % 30.9 % (30.9 ) All lines-change in prior accident years (6.9 )% (2.8 )% (4.1 ) All lines-loss ratio 116.1 % 85.5 % 30.6 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

For the three months ended December 31, 2012, Validus Re property lines losses and loss expenses included $274.9 million related to current year losses and $6.3 million of favorable loss reserve development relating to prior accident years. The favorable loss reserve development was due to a decrease in loss estimates on prior year notable loss events, as well as a reduction in loss estimates on attritional losses. For the three months ended December 31, 2011, Validus Re property lines losses and loss expenses included $159.3 million related to current year losses and $4.7 million of favorable loss reserve development relating to prior accident years.

For the three months ended December 31, 2012, Validus Re property lines incurred $237.9 million of losses from notable loss events, which represented 120.2 percentage points of the property lines loss ratio. Net of $29.5 million of reinstatement premiums, the effect of these events on net income was a decrease of $208.4 million. For the three months ended December 31, 2011, Validus Re property lines incurred $19.8 million of losses from notable loss events, which represented 11.7 percentage points of the property lines loss ratio, excluding reserve for potential development on notable loss events. Validus Re property lines loss ratios, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development, for the three months ended December 31, 2012 and 2011 were 18.7% and 39.3%, respectively.

For the three months ended December 31, 2012, Validus Re marine lines losses and loss expenses included $67.2 million related to current year losses and $4.2 million of favorable loss reserve development relating to prior accident years.

The favorable loss reserve development was due primarily to a reduction in loss estimates on attritional losses, which was partially offset by an increase in prior year notable loss events. For the three months ended December 31, 2011, Validus Re marine lines losses and loss expenses included $44.2 million related to current year losses and $0.3 million of favorable loss reserve development relating to prior accident years.

For the three months ended December 31, 2012, Validus Re marine lines incurred $43.5 million of losses from notable loss events, which represented 72.3 percentage points of the marine lines loss ratio. Net of $5.2 million of reinstatement premiums, the effect of these events on net income was a decrease of $38.3 million. For the three months ended December 31, 2011, Validus Re marine lines incurred $3.2 million of losses from notable loss events, which represented 5.6 percentage points of the marine 78-------------------------------------------------------------------------------- Table of Contents lines loss ratio, excluding reserve for potential development on notable loss events. Validus Re marine lines loss ratios, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development, for the three months ended December 31, 2012 and 2011 were 39.3% and 62.5%, respectively.

For the three months ended December 31, 2012, Validus Re specialty lines losses and loss expenses included $8.8 million related to current year losses and $9.3 million of favorable loss reserve development relating to prior accident years.

The favorable loss reserve development was due primarily to a reduction in loss estimates on attritional losses. For the three months ended December 31, 2011, Validus Re specialty lines losses and loss expenses included $19.6 million related to current year losses and $2.1 million of favorable loss reserve development relating to prior accident years.

For the three months ended December 31, 2012 and 2011, Validus Re specialty lines incurred $1.1 million of losses from notable loss events which represented 4.2 percentage points of the specialty lines loss ratio. Validus Re specialty lines loss ratios, excluding prior year loss reserve development, for the three months ended December 31, 2012 and 2011 were 28.4% and 75.6%, respectively.

The net negative financial impact from Hurricane Sandy to Flagstone for the year ended December 31, 2012 was $39.1 million. The financial impact to Flagstone did not impact Validus' results of operations in the fourth quarter 2012 as the loss event took place prior to the date of Validus' acquisition of Flagstone which was completed on November 30, 2012.

AlphaCat. AlphaCat contributed $nil to the losses and loss expenses for the three months ended December 31, 2012 compared to $10.0 million for the three months ended December 31, 2011, a decrease of $10.0 million or 100.0%. The loss ratio defined as losses and loss expenses divided by net premiums earned, was nil% and 37.7% for the three months ended December 31, 2012 and 2011, respectively. For the three months ended December 31, 2012, AlphaCat Re 2011 and AlphaCat Re 2012 incurred Hurricane Sandy net losses of $25.0 million and $7.5 million, respectively. The AlphaCat segment's portion of incurred losses and loss expenses related to Hurricane Sandy was $8.4 million for the year ended December 31, 2012 and are included in 'income from operating affiliates'.

Talbot. Talbot losses and loss expenses for the three months ended December 31, 2012 were $127.2 million compared to $108.9 million for the three months ended December 31, 2011, an increase of $18.3 million or 16.8%. The loss ratio defined as losses and loss expenses divided by net premiums earned, was 61.1% and 52.0% for the three months ended December 31, 2012 and 2011, respectively. For the three months ended December 31, 2012, Talbot incurred losses of $164.6 million related to current year losses and $37.4 million of favorable loss reserve development relating to prior accident years. For the three months ended December 31, 2012, favorable loss reserve development on prior accident years benefited the Talbot loss ratio by 18.0 percentage points. For the three months ended December 31, 2011, Talbot incurred losses of $144.6 million related to current year losses and $35.7 million in favorable loss reserve development relating to prior accident years. For the three months ended December 31, 2011, favorable loss reserve development on prior accident years benefited the Talbot loss ratio by 17.0 percentage points.

For the three months ended December 31, 2012, Talbot incurred $78.4 million of losses from notable loss events, which represented 37.7 percentage points of the overall loss ratio. Net of $1.6 million of reinstatement premiums, the effect of these events on net income was a decrease of $76.8 million. For the three months ended December 31, 2011, Talbot incurred $31.2 million of losses from notable loss events, which represented 14.9 percentage points of the overall loss ratio.

Talbot loss ratios, excluding notable loss events and prior year loss reserve development, for the three months ended December 31, 2012 and 2011 were 41.4% and 54.1%, respectively. Details of Talbot loss ratios by line of business and period of occurrence are provided below.

79-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, Percentage 2012 2011 Point Change Property-current period excluding items below 33.5 % 83.8 % (50.3 ) Property-current period-notable losses 97.8 % 68.9 % 28.9 Property-change in prior accident years (30.5 )% (34.8 )% 4.3 Property-loss ratio 100.8 % 117.9 % (17.1 ) Marine-current period excluding items below 45.3 % 48.2 % (2.9 ) Marine-current period-notable losses 30.2 % 1.1 % 29.1 Marine-change in prior accident years (19.0 )% (11.3 )% (7.7 ) Marine-loss ratio 56.5 % 38.0 % 18.5 Specialty-current period excluding items below 41.8 % 45.6 % (3.8 ) Specialty-current period-notable losses 8.9 % 2.3 % 6.6 Specialty-change in prior accident years (8.9 )% (14.3 )% 5.4 Specialty-loss ratio 41.8 % 33.6 % 8.2 All lines-current period excluding items below 41.4 % 54.1 % (12.7 ) All lines-current period-notable losses 37.7 % 14.9 % 22.8 All lines-change in prior accident years (18.0 )% (17.0 )% (1.0 ) All lines-loss ratio 61.1 % 52.0 % 9.1 For the three months ended December 31, 2012, Talbot property lines losses and loss expenses included $61.2 million related to current year losses and $14.2 million of favorable loss reserve development relating to prior accident years.

The prior year favorable loss reserve development was due to lower than expected claims development on attritional and large losses. For the three months ended December 31, 2011, Talbot property lines losses and loss expenses included $62.8 million related to current year losses and $14.3 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was attributable to lower than expected claims development on large losses.

For the three months ended December 31, 2012, Talbot property lines incurred $45.6 million of losses from notable loss events, which represented 97.8 percentage points of the property lines loss ratio. Net of $1.2 million of reinstatement premiums, the effect of these events on net income was a decrease of $44.3 million. For the three months ended December 31, 2011, Talbot's property lines incurred $28.3 million of losses from notable loss events, which represented 68.9 percentage points of the property lines loss ratio. Talbot property line loss ratio, excluding notable loss events and prior year loss reserve development for the three months ended December 31, 2012 and 2011 were 33.5% and 83.8%, respectively.

For the three months ended December 31, 2012, Talbot marine lines losses and loss expenses included $65.4 million related to current year losses and $16.5 million of favorable loss reserve development relating to prior accident years.

The prior year favorable loss reserve development was due primarily to lower than expected claims development on attritional losses. For the three months ended December 31, 2011, Talbot marine lines losses and loss expenses included $44.1 million related to current year losses and $10.1 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was primarily due to favorable development on attritional losses.

For the three months ended December 31, 2012, Talbot marine lines incurred $26.2 million of losses from notable loss events, which represented 30.2 percentage points of the marine lines loss ratio. Net of $0.9 million of reinstatement premiums, the effect of these events on net income was a decrease of $25.2 million. For the three months ended December 31, 2011, Talbot's marine lines incurred $1.0 million of losses from notable loss events, which represented 1.1 percentage points of the marine lines loss ratio. Talbot marine lines loss ratios, excluding notable loss events and prior year loss reserve development for the three months ended December 31, 2012 and 2011 were 45.3% and 48.2%, respectively.

For the three months ended December 31, 2012, Talbot specialty lines losses and loss expenses included $38.0 million relating to current year losses and $6.7 million of favorable loss reserve development relating to prior accident years.

The prior year favorable loss reserve development was attributable to lower than expected claims development on attritional losses. For the three months ended December 31, 2011, Talbot specialty lines losses and loss expenses included $37.8 million relating to current year losses and $11.3 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was primarily due to favorable development on attritional losses.

80-------------------------------------------------------------------------------- Table of Contents For the three months ended December 31, 2012, Talbot specialty lines incurred $6.7 million of losses from notable loss events, which represented 8.9 percentage points of the specialty lines loss ratio. Net of $(0.5) million of reinstatement premiums, the effect of these events on net income was a decrease of $7.2 million. For the three months ended December 31, 2011, Talbot's specialty lines incurred $1.9 million of losses from notable loss events, which represented 2.3 percentage points of the specialty lines loss ratio. Talbot specialty lines loss ratios, excluding notable loss events and prior year loss reserve development for the three months ended December 31, 2012 and 2011 were 41.8% and 45.6%, respectively.

Reserves for Losses and Loss Expenses At December 31, 2012 and 2011, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates as discussed above. The Company did not make any significant changes in assumptions or methodology used in its reserving process for the year ended December 31, 2012.

As at December 31, 2012 Gross Case Total Gross Reserve for (Dollars in thousands) Reserves Gross IBNR Losses and Loss Expenses Property $ 930,553 $ 892,227 $ 1,822,780 Marine 522,907 477,948 1,000,855 Specialty 265,638 428,300 693,938 Total $ 1,719,098 $ 1,798,475 $ 3,517,573 As at December 31, 2012 Net Case Total Net Reserve for (Dollars in thousands) Reserves Net IBNR Losses and Loss Expenses Property $ 768,722 $ 803,182 $ 1,571,904 Marine 465,080 438,009 903,089 Specialty 230,584 372,029 602,613 Total $ 1,464,386 $ 1,613,220 $ 3,077,606 The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the three months ended December 31, 2012: Three Months Ended December 31, 2012 Validus Re (Dollars in thousands) Segment AlphaCat Segment Talbot Segment Eliminations Total Gross reserves at period beginning $ 1,216,560 $ 10,000 $ 1,422,568 $ (86,524 ) $ 2,562,604 Losses recoverable (38,371 ) - (365,405 ) 86,524 (317,252 ) Net reserves at period beginning 1,178,189 10,000 1,057,163 - 2,245,352 Net reserves acquired in Flagstone acquisition 639,641 - - - 639,641 Incurred losses-current year 350,926 - 164,605 - 515,531 Change in prior accident years (19,796 ) - (37,425 ) - (57,221 ) Incurred losses 331,130 - 127,180 - 458,310 Foreign exchange (1,804 ) - 2,747 - 943 Paid losses (172,907 ) (5,000 ) (88,733 ) - (266,640 ) Net reserves at period end 1,974,249 5,000 1,098,357 - 3,077,606 Losses recoverable 148,646 - 381,950 (90,629 ) 439,967 Gross reserves at period end $ 2,122,895 $ 5,000 $ 1,480,307 $ (90,629 ) $ 3,517,573 The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the three months ended December 31, 2012, favorable loss reserve development on prior accident years was $57.2 million of which, $19.8 million of the favorable loss reserve development related to the Validus Re segment and $37.4 million related to the Talbot segment. Favorable loss reserve development benefited the Company's loss ratio by 11.5 percentage points for the three months ended December 31, 2012.

For the three months ended December 31, 2011, favorable loss reserve development 81-------------------------------------------------------------------------------- Table of Contents on prior accident years was $42.8 million, of which, $7.1 million related to the Validus Re segment and $35.7 million related to the Talbot segment. Favorable loss reserve development benefited the Company's loss ratio by 8.8 percentage points for the three months ended December 31, 2011.

Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for recent notable loss events. The Company's actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review are reserved for in the reserve for potential development on notable loss events. The reserve for potential development on notable loss events (or "RDE") is included as part of the Company's overall reserve requirement as defined and disclosed in the Critical Accounting Policies and Estimates section above. As at September 30, 2012, the reserve for potential development on 2010 and 2011 notable loss events was $nil and $51.3 million, respectively. During the three months ended December 31, 2012, the Company increased certain loss estimates and allocated $9.1 million of 2011 RDE to the Christchurch earthquake, the Thailand floods and the Gryphon Alpha mooring failure. As at December 31, 2012, the reserve for potential development on 2010 and 2011 notable loss events was $nil and $42.2 million, respectively. No RDE was established for 2012 notable losses.

Policy Acquisition Costs Policy acquisition costs for the three months ended December 31, 2012 were $81.8 million compared to $81.3 million for the three months ended December 31, 2011, an increase of $0.6 million or 0.7%. Policy acquisition costs as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 16.4% and 16.6%, respectively. The changes in policy acquisition costs are due to the factors provided below.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Policy Policy Policy Policy Acquisition Acquisition Acquisition Acquisition Acquisition (Dollars in thousands) Acquisition Costs Costs (%) Cost Ratio Costs Costs (%) Cost Ratio % Change Property $ 29,237 35.8 % 11.7 % $ 26,753 32.9 % 11.3 % 9.3 % Marine 29,429 36.0 % 20.1 % 31,603 38.9 % 21.5 % (6.9 )% Specialty 23,148 28.3 % 22.7 % 22,897 28.2 % 21.9 % 1.1 % Total $ 81,814 100.1 % 16.4 % $ 81,253 100.0 % 16.6 % 0.7 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re policy acquisition costs for the three months ended December 31, 2012 were $40.7 million compared to $39.2 million for the three months ended December 31, 2011, an increase of $1.5 million or 3.8%.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Policy Policy Policy Policy Acquisition Acquisition Acquisition Acquisition Acquisition (Dollars in thousands) Acquisition Costs Costs (%) Cost Ratio Costs Costs (%) Cost Ratio % Change Property $ 25,820 63.4 % 13.0 % $ 24,734 63.0 % 14.6 % 4.4 % Marine 10,526 25.9 % 17.5 % 11,165 28.5 % 19.4 % (5.7 )% Specialty 4,357 10.7 % 16.1 % 3,328 8.5 % 12.8 % 30.9 % Total $ 40,703 100.0 % 14.3 % $ 39,227 100.0 % 15.5 % 3.8 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Policy acquisition costs include brokerage, commission and excise tax, are generally driven by contract terms, are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Items such as ceded premium, earned premium adjustments and reinstatement premiums that are recognized in the period have an effect on the policy acquisition costs ratio.

Validus Re policy acquisition costs as a percent of net premiums earned (the policy acquisition cost ratio) for the three months ended December 31, 2012 and 2011 were 14.3% and 15.5%, respectively. The policy acquisition cost ratio on the specialty line has increased by 3.3 percentage points due to certain large proportional contracts that have higher policy acquisition cost ratios.

82-------------------------------------------------------------------------------- Table of Contents AlphaCat. AlphaCat policy acquisition costs for the three months ended December 31, 2012 were $0.6 million compared to $3.3 million for the three months ended December 31, 2011, a decrease of $2.7 million or 82.3%.

Three Months Ended December 31, 2012 Three Months Ended December 31, 2011 Policy Policy Policy Policy Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition (Dollars in thousands) Costs Costs (%) Cost Ratio Costs Costs (%) Cost Ratio % Change Property $ 589 100.0 % 10.0 % $ 3,331 100.0 % 12.6 % (82.3 )% Total $ 589 100.0 % 10.0 % $ 3,331 100.0 % 12.6 % (82.3 )% Policy acquisition costs as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 10.0% and 12.6%, respectively.

Talbot. Talbot policy acquisition costs for the three months ended December 31, 2012 were $41.7 million compared to $41.2 million for the three months ended December 31, 2011, an increase of $0.6 million or 1.4%.

Three Months Ended December 31, 2012 Three Months Ended December 31, 2011 Policy Policy Policy Policy Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition (Dollars in thousands) Costs Costs (%) Cost Ratio Costs Costs (%) Cost Ratio % Change Property $ 4,648 11.1 % 10.0 % $ 1,053 2.5 % 2.6 % 341.4 % Marine 18,269 43.8 % 21.1 % 20,523 49.9 % 22.9 % (11.0 )% Specialty 18,828 45.1 % 25.1 % 19,584 47.6 % 24.8 % (3.9 )% Total $ 41,745 100.0 % 20.1 % $ 41,160 100.0 % 19.7 % 1.4 % Policy acquisition costs as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 20.1% and 19.7%, respectively. The policy acquisition ratio on the property line increased by 7.4 percentage points primarily due to a decrease in the ceding acquisition rates on the onshore energy lines.

General and Administrative Expenses General and administrative expenses for the three months ended December 31, 2012 were $65.1 million compared to $52.3 million for the three months ended December 31, 2011, an increase of $12.8 million or 24.6%.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 General and General and General and General and Administrative Administrative Administrative Administrative (Dollars in thousands) Expenses Expenses (%) Expenses Expenses (%) % Change Validus Re $ 14,716 22.6 % $ 11,716 22.4 % 25.6 % AlphaCat 2,011 3.1 % 6,807 13.0 % (70.5 )% Talbot 32,371 49.7 % 29,676 56.8 % 9.1 % Corporate & Eliminations(b) 15,997 24.6 % 4,054 7.8 % 294.6 % Total $ 65,095 100.0 % $ 52,253 100.0 % 24.6 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Corporate and Eliminations includes legal entity adjustments General and administrative expenses of $65.1 million in the three months ended December 31, 2012 represents 13.0 percentage points of the expense ratio. Share compensation expense is discussed in the following section.

Validus Re. Validus Re general and administrative expenses for the three months ended December 31, 2012 were $14.7 million compared to $11.7 million for the three months ended December 31, 2011, an increase of $3.0 million or 25.6%.

General and administrative expenses have increased primarily due to the Company consolidating the general and administrative expenses as a result of the acquisition of Flagstone. General and administrative expenses include salaries and benefits, professional fees, rent and office expenses. Validus Re general and administrative expenses as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 5.2% and 4.6%, respectively.

AlphaCat. AlphaCat general and administrative expenses for the three months ended December 31, 2012 were $2.0 million as compared to $6.8 million for the three months ended December 31, 2011, a decrease of $4.8 million or 70.5%.

General and administrative expenses have decreased primarily due to the deconsolidation of AlphaCat Re 2011 as at December 31, 2011.

83-------------------------------------------------------------------------------- Table of Contents AlphaCat's general and administrative expenses as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 34.1% and 25.7%, respectively. The AlphaCat segment's general and administrative ratio has been impacted by the reduction in net premiums earned as a greater proportion of the segment's revenues are generated in equity earnings from operating affiliates which is not included in the ratio calculation.

Talbot. Talbot general and administrative expenses for the three months ended December 31, 2012 were $32.4 million compared to $29.7 million for the three months ended December 31, 2011, an increase of $2.7 million or 9.1%. General and administrative expenses have increased primarily due to an increase in performance bonus expense for the three months ended December 31, 2012 as compared to the three months ended December 31, 2011. Talbot's general and administrative expenses as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 15.6% and 14.2%, respectively.

Corporate & Eliminations. Corporate general and administrative expenses for the three months ended December 31, 2012 were $16.0 million compared to $4.1 million for the three months ended December 31, 2011, an increase of $11.9 million or 294.6%. General and administrative expenses have increased primarily due to an increase in performance bonus expense as well as a decrease in eliminations between segments. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.

Share Compensation Expenses Share compensation expenses for the three months ended December 31, 2012 were $7.1 million compared to $7.2 million for the three months ended December 31, 2011, a decrease of $0.1 million or 1.5%. This expense is non-cash and has no net effect on total shareholders' equity, as it is balanced by an increase in additional paid-in capital.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Share Share Share Compensation Compensation Share Compensation Compensation (Dollars in thousands) Expenses Expenses (%) Expenses Expenses (%) % Change Validus Re $ 1,849 25.9 % $ 2,191 30.3 % (15.6 )% AlphaCat 84 1.2 % 33 0.5 % 154.5 % Talbot 2,442 34.3 % 1,934 26.7 % 26.3 % Corporate & Eliminations (b) 2,751 38.6 % 3,079 42.5 % (10.7 )% Total $ 7,126 100.0 % $ 7,237 100.0 % (1.5 )% (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Corporate and Eliminations includes legal entity adjustments.

Share compensation expenses of $7.1 million in the three months ended December 31, 2012 represents 1.5 percentage points of the general and administrative expense ratio.

Validus Re. Validus Re share compensation expenses for the three months ended December 31, 2012 were $1.8 million compared to $2.2 million for the three months ended December 31, 2011, a decrease of $0.3 million or 15.6%. Share compensation expense as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 0.6% and 0.9%, respectively.

AlphaCat. AlphaCat share compensation expense as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 1.5% and 0.1%, respectively.

Talbot. Talbot share compensation expenses for the three months ended December 31, 2012 was $2.4 million compared to $1.9 million for the three months ended December 31, 2011, an increase of $0.5 million or 26.3%. Share compensation expense as a percent of net premiums earned for the three months ended December 31, 2012 and 2011 were 1.1% and 0.9%, respectively.

Corporate & Eliminations. Corporate share compensation expenses for the three months ended December 31, 2012 were $2.8 million compared to $3.1 million for the three months ended December 31, 2011, a decrease of $0.3 million or 10.7%.

Selected Ratios The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The net loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing policy acquisition costs combined with general and administrative expenses (including share compensation expenses) 84-------------------------------------------------------------------------------- Table of Contents by net premiums earned. The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the three months ended December 31, 2012 and 2011.

Three Months Ended December Three Months Ended Percentage 31, 2012 (a) December 31, 2011 Point Change Consolidated Losses and loss expense ratio 91.8 % 68.6 % 23.2 Policy acquisition cost ratio 16.4 % 16.6 % (0.2 ) General and administrative expense ratio (b) 14.5 % 12.2 % 2.3 Expense ratio 30.9 % 28.8 % 2.1 Combined ratio 122.7 % 97.4 % 25.3 Validus Re Losses and loss expense ratio 116.1 % 85.5 % 30.6 Policy acquisition cost ratio 14.3 % 15.5 % (1.2 ) General and administrative expense ratio (b) 5.8 % 5.5 % 0.3 Expense ratio 20.1 % 21.0 % (0.9 ) Combined ratio 136.2 % 106.5 % 29.7 AlphaCat Losses and loss expense ratio 0.0 % 37.7 % (37.7 ) Policy acquisition cost ratio 10.0 % 12.6 % (2.6 ) General and administrative expense ratio (b) 35.6 % 25.8 % 9.8 Expense ratio 45.6 % 38.4 % 7.2 Combined ratio 45.6 % 76.1 % (30.5 ) Talbot Losses and loss expense ratio 61.1 % 52.0 % 9.1 Policy acquisition cost ratio 20.1 % 19.7 % 0.4 General and administrative expense ratio (b) 16.7 % 15.1 % 1.6 Expense ratio 36.8 % 34.8 % 2.0 Combined ratio 97.9 % 86.8 % 11.1 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Includes general and administrative expenses and share compensation expenses.

General and administrative expense ratios for the three months ended December 31, 2012 and 2011 were 14.5% and 12.2%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.

Three Months Ended December 31, 2012 (a) Three Months Ended December 31, 2011 Expenses as % of Expenses as % of (Dollars in thousands) Expenses Net Earned Premiums Expenses Net Earned Premiums General and administrative expenses $ 65,095 13.0 % $ 52,253 10.7 % Share compensation expenses 7,126 1.5 % 7,237 1.5 % Total $ 72,221 14.5 % $ 59,490 12.2 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Underwriting (Loss) Income Underwriting loss for the three months ended December 31, 2012 was $(113.1) million compared to income of $12.8 million for the three months ended December 31, 2011, a decrease of $125.8 million, or 985.1%.

85-------------------------------------------------------------------------------- Table of Contents Three Months Ended Three Months Ended (Dollars in thousands) December 31, 2012 (a) % of Sub-total December 31, 2011 % of Sub-total % Change Validus Re $ (103,134 ) 108.0 % $ (16,556 ) (94.9 )% (522.9 )% AlphaCat 3,207 (3.4 )% 6,340 36.3 % (49.4 )% Talbot 4,393 (4.6 )% 27,658 158.6 % (84.1 )% Sub-total (95,534 ) 100.0 % 17,442 100.0 % (647.7 )% Corporate & Eliminations (b) (17,525 ) (4,668 ) (275.4 )% Total $ (113,059 ) $ 12,774 (985.1 )% (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Corporate and Eliminations include legal entity adjustments.

The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP financial measure. Underwriting income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income (Loss) line items, as illustrated below.

Three Months Ended Three Months Ended (Dollars in thousands) December 31, 2012 (a) December 31, 2011 Underwriting (loss) income $ (113,059 ) $ 12,774 Net investment income 28,802 28,080 Other income 187 3,517 Finance expenses (14,510 ) (13,520 ) Net realized (losses) gains on investments (4,516 ) 5,355 Net unrealized (losses) gains on investments (35,857 ) 2,159 Gain on bargain purchase, net of expenses 21,485 - Transaction expenses - (3,850 ) (Loss) from investment affiliate (406 ) - Foreign exchange gains 1,181 266 Tax (expense) benefit (615 ) 226 (Loss) from operating affiliates (614 ) - Net (loss) income $ (117,922 ) $ 35,007 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Underwriting income indicates the performance of the Company's core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company's core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company's pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company's underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.

The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of underwriting income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its underwriting business and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company's results of operations in a manner similar to how management analyzes the Company's underlying business performance. The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company 86-------------------------------------------------------------------------------- Table of Contents request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the total annual incentive compensation.

Underwriting income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of underwriting income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides more prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of underwriting income to net income.

Net Investment Income Net investment income for the three months ended December 31, 2012 was $28.8 million compared to $28.1 million for the three months ended December 31, 2011, an increase of $0.7 million or 2.6%. Net investment income increased due to the Flagstone acquisition. Net investment income is comprised of accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the three months ended December 31, 2012 and 2011 are as provided below.

Three Months Ended Three Months Ended (Dollars in thousands) December 31, 2012 (a) December 31, 2011 % Change Fixed maturities and short-term investments $ 26,487 $ 27,740 (4.5 )% Other investments 2,790 - NM Cash and cash equivalents 1,723 2,153 (20.0 )% Securities lending income 5 27 (81.5 )% Total gross investment income 31,005 29,920 3.6 % Investment expenses (2,203 ) (1,840 ) (19.7 )% Net investment income $ 28,802 $ 28,080 2.6 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

NM: Not meaningful Annualized investment yield is calculated by dividing net investment income (excluding other investments) by the average balance of the assets managed by our portfolio managers (excluding other investments). Average assets is the average of the beginning, ending and intervening quarter end asset balances.

Percentages for the quarter periods are annualized. The Company's annualized effective investment yield was 1.53% and 1.84% for the three months ended December 31, 2012 and 2011 respectively, and the average duration of the portfolio at December 31, 2012 was 1.34 years (December 31, 2011-1.63 years).

The annualized effective investment yield decreased for the three months ended December 31, 2012 due to the consolidation of the Flagstone investment portfolio which included $1,060.4 million in cash and short term investments, or 72.4% of Flagstone's total investments and cash as at December 31, 2012. Excluding the effect of the consolidation of the Flagstone investment portfolio, the annualized effective investment yield would have been 1.69% for the three months ended December 31, 2012. Overall yield has decreased due to falling yields on fixed maturity investments.

Other Income Other income for the three months ended December 31, 2012 was $0.2 million compared to $3.5 million for the three months ended December 31, 2011, a decrease of $3.3 million or 94.7%. The decrease was due primarily to a reduction in Talbot third party income and the deconsolidation of AlphaCat Re 2011 as at December 31, 2011. AlphaCat Re 2011 was a consolidated subsidiary during the three months ended December 31, 2011. The balance sheet of AlphaCat Re 2011 was deconsolidated as at December 31, 2011.

Finance Expenses Finance expenses for the three months ended December 31, 2012 were $14.5 million compared to $13.5 million for the three months ended December 31, 2011, an increase of $1.0 million or 7.3%. Finance expenses also include the amortization of debt offering costs and discounts, and fees related to our credit facilities.

87-------------------------------------------------------------------------------- Table of Contents Three Months Ended December 31, (Dollars in thousands) 2012 (a) 2011 % Change 2006 Junior Subordinated Deferrable Debentures $ 2,235 $ 1,496 49.4 % 2007 Junior Subordinated Deferrable Debentures 1,850 3,029 (38.9 )% 2010 Senior Notes due 2040 5,596 5,597 0.0 % Flagstone 2006 Junior Subordinated Deferrable Interest Notes 459 - NM Flagstone 2007 Junior Subordinated Deferrable Interest Notes 327 - NM Credit facilities 1,469 1,671 (12.1 )% Bank charges 138 218 22.9 % AlphaCat Re 2011 fees (b) - 1,497 (100.0 )% AlphaCat ILS Funds fees (c) 2,432 - NM Talbot FAL Facility 4 12 (66.7 )% Finance expenses $ 14,510 $ 13,520 7.3 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Includes preferred share dividends and finance expenses attributable to AlphaCat Re 2011.

(c) Includes finance expenses incurred by AlphaCat Managers, Ltd. in relation to the AlphaCat ILS funds and fund-raising for AlphaCat 2013.

NM: Not Meaningful The increase in finance expenses of $1.0 million for the three months ended December 31, 2012 was due primarily to placements fees incurred by AlphaCat for its investments in ILS Funds of $2.4 million, partially offset by a $1.5 million decrease in the preferred dividends and finance expenses attributable to AlphaCat Re 2011.

Tax (Expense) Benefit Tax expense for the three months ended December 31, 2012 was $(0.6) million compared to a benefit of $0.2 million for the three months ended December 31, 2011, an increase in expense of $0.8 million. The increase was primarily due to higher profit commission, UK taxable profit and Canadian tax charge, partially offset by a higher bonus deduction.

The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from those taxes until March 31, 2035.

Within the segment information contained in the Financial Statements, gross premiums written allocated to the territory of coverage exposure are presented for the periods indicated. Gross premiums written allocated to the United States are written primarily through Validus Reinsurance, Ltd., a Bermuda Registered Reinsurance Company. As noted, under current Bermuda law, the Company is not taxed on any Bermuda income and therefore the premium disclosed in the segment information does not correlate to pre-tax income generated in the United States.

(Loss) Income From Operating Affiliates Loss from operating affiliates for the three months ended December 31, 2012 was $(0.6) million, compared to $nil for the three months ended December 31, 2011, a decrease of $(0.6) million. For the three months ended December 31, 2012, loss from operating affiliates of $(0.6) million relates to equity losses relating to AlphaCat Re 2011 and AlphaCat Re 2012.

In the second quarter of 2011, AlphaCat Re 2011 was included in the consolidated results of the Company, therefore there was no comparative information for the three months ended December 31, 2011. As at December 31, 2012, the Company owned 22.3% of AlphaCat Re 2011, therefore loss from operating affiliates reflects the Company's share of AlphaCat Re 2011's net loss for the three months ended December 31, 2012.

AlphaCat Re 2012 was formed on May 29, 2012 therefore there was no comparative information for the three months ended December 31, 2011. As at December 31, 2012, the Company owned 37.9% of AlphaCat Re 2012, therefore loss from operating affiliates reflects the Company's share of AlphaCat Re 2012's net loss for the three months ended December 31, 2012.

88-------------------------------------------------------------------------------- Table of Contents Gain on Bargain Purchase, Net of Expenses On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone. Pursuant to the Merger Agreement, the Company acquired all of Flagstone's outstanding common shares in exchange for the Company's common shares and cash. The purchase price paid by the Company was $646.0 million for net assets acquired of $695.7 million. The Company expensed as incurred $2.0 million of transaction expenses, $20.2 million of termination expenses and $6.0 million for amortization of intangibles related to the acquisition for the three months ended December 31, 2012, resulting in a gain on bargain purchase of $21.5 million. Transaction expenses are comprised of primarily legal and corporate advisory services.

Net Realized (Losses) Gains on Investments Net realized losses on investments for the three months ended December 31, 2012 were $(4.5) million compared to gains of $5.4 million for the three months ended December 31, 2011, a decrease of $9.9 million or 184.3%.

Net Unrealized (Losses) Gains on Investments Net unrealized losses on fixed maturities and short term investments for the three months ended December 31, 2012 were $(3.1) million compared to gains of $1.9 million for the three months ended December 31, 2011, a decrease of $5.0 million or 263.2%.

Net unrealized losses on other investments for the three months ended December 31, 2012 were $(32.8) million compared to gains of $0.3 million for the three months ended December 31, 2011. Net unrealized losses for the three months ended December 31, 2012 were driven primarily by a $(31.3) million unrealized loss relating to the Paulson & Co. hedge fund investments held by PaCRe. The amount of net unrealized losses attributable to noncontrolling interest was $(28.2) million for the three months ended December 31, 2012, leaving a net impact to the Company of $(3.1) million.

Net unrealized gains (losses) on investments are recorded as a component of net income. The Company has adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance sheet date. Consistent with these standards, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

Loss From Investment Affiliate The loss from investment affiliate for the three months ended December 31, 2012 was $(0.4) million compared to $nil for the three months ended December 31, 2011, a decrease of $(0.4) million. The loss from investment affiliate relates to the loss incurred in the Company's investment in the Aquiline Financial Services Fund II L.P. for the three months ended December 31, 2012. As at December 31, 2011, the investment in the Aquiline Financial Services Fund II L.P was included in other investments.

Foreign Exchange Gains Foreign exchange gains for the three months ended December 31, 2012 were $1.2 million compared to $0.3 million for the three months ended December 31, 2011, a favorable movement of $0.9 million or 344.0%. For the three months ended December 31, 2012, Validus Re recognized foreign exchange gains of $0.2 million and Talbot recognized foreign exchange gains of $1.2 million.

For the three months ended December 31, 2012, Validus Re segment foreign exchange gains were $0.2 million compared to foreign exchange losses of $(0.2) million for the three months ended December 31, 2011, a favorable movement of $0.4 million or 196.7%. Validus Re currently hedges foreign currency exposure by balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-USD currencies.

Consequently, Validus Re aims to have a limited exposure to foreign exchange fluctuations.

For the three months ended December 31, 2012, Talbot segment foreign exchange gains were $1.2 million compared to $0.4 million for the three months ended December 31, 2011, a favorable movement of $0.7 million or 168.7%. The favorable movement in Talbot foreign exchange was due primarily to a $0.6 million gain due to the revaluation of assets held in Euros and other currencies.

As at December 31, 2012, Talbot's balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $107.4 million and $21.5 million, respectively. These balances consisted of British pound sterling and Canadian dollars of $78.0 million and $7.9 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic exchange rates. All of Talbot's other balance sheet items are classified as monetary items and are translated at period end exchange rates. Additional foreign exchange gains (losses) may be incurred on the translation of net unearned premiums and deferred acquisition costs arising from insurance and reinsurance premiums written in future periods.

89-------------------------------------------------------------------------------- Table of Contents Net Loss (Income) Attributable to Noncontrolling Interest On April 2, 2012, the Company capitalized PaCRe, a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. PaCRe was funded with $500.0 million of contributed capital. Validus invested $50.0 million in PaCRe's common equity and therefore owns 10.0% of PaCRe. The net loss attributable to noncontrolling interest of $27.2 million for the three months ended December 31, 2012 was calculated as 90.0% of the net loss in PaCRe for the quarter.

On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. Validus Re has an equity interest in AlphaCat Re 2011 and Validus Re held a majority of AlphaCat Re 2011's outstanding voting rights up to December 23, 2011 when AlphaCat Re 2011 completed a secondary offering of its common shares to third party investors, along with a partial sale of Validus Re common shares to one of the third party investors. As a result of these transactions, the Company's outstanding voting rights decreased to 43.7%. As a result of the Company's voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and the remaining investment in AlphaCat Re 2011 is treated as an equity method investment as at December 31, 2012. For the three months ended December 31, 2011, the Company recorded $(7.7) million in net income attributable to noncontrolling interest relating to AlphaCat Re 2011.

Transaction Expenses During the three months ended December 31, 2012, the Company incurred $nil in transaction expenses compared to $3.9 million for the three months ended December 31, 2011. For the three months ended December 31, 2011, the Company incurred transaction expenses related to its proposed acquisition of Transatlantic Holdings, Inc. ("Transatlantic"). The transaction expenses related to the November 30, 2012 acquisition of Flagstone are netted against the gain on bargain purchase. Refer to the section above entitled "Gain on Bargain Purchase, Net of Expenses." Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

90-------------------------------------------------------------------------------- Table of Contents The following table presents results of operations for the three months ended December 31, 2012 and 2011 and years ended December 31, 2012, 2011 and 2010: Three Months Ended December 31, Years Ended December 31, (Dollars in thousands) 2012 (a) 2011 2012 (a) 2011 2010 Gross premiums written $ 311,847 $ 278,279 $ 2,166,440 $ 2,124,691 1,990,566 Reinsurance premiums ceded (35,659 ) (16,489 ) (307,506 ) (289,241 ) (229,482 ) Net premiums written 276,188 261,790 1,858,934 1,835,450 1,761,084 Change in unearned premiums 223,098 226,556 14,282 (33,307 ) 39 Net premiums earned 499,286 488,346 1,873,216 1,802,143 1,761,123 Losses and loss expenses 458,310 334,829 999,446 1,244,401 987,586 Policy acquisition costs 81,814 81,253 334,698 314,184 292,899 General and administrative expenses 65,095 52,253 263,652 197,497 209,290 Share compensation expenses 7,126 7,237 26,709 34,296 28,911 Total underwriting deductions 612,345 475,572 1,624,505 1,790,378 1,518,686 Underwriting (loss) income (b) (113,059 ) 12,774 248,711 11,765 242,437 Net investment income 28,802 28,080 107,936 112,296 134,103 Other income 187 3,517 22,396 5,718 5,219 Finance expenses (14,510 ) (13,520 ) (53,857 ) (54,817 ) (55,870 ) Operating (loss) income before taxes and (loss) income from oprating affiliates (b) (98,580 ) 30,851 325,186 74,962 325,889 Tax (expense) benefit (615 ) 226 (2,501 ) (824 ) (3,126 ) (Loss) income from operating affiliates (614 ) - 12,580 - - Net operating (loss) income (b) (99,809 ) 31,077 335,265 74,138 322,763 Gain on bargain purchase, net of expenses (c) 21,485 - 17,701 - - Net realized (losses) gains on investments (4,516 ) 5,355 18,233 28,532 32,498 Net unrealized (losses) gains on investments (35,857 ) 2,159 17,585 (19,991 ) 45,952 (Loss) from investment affiliate (406 ) - (964 ) - - Foreign exchange gains (losses) 1,181 266 4,798 (22,124 ) 1,351 Transaction expenses (d) - (3,850 ) - (17,433 ) - Net (loss) income (117,922 ) 35,007 392,618 43,122 402,564 Net loss (income) attributable to noncontrolling interest 27,206 (7,683 ) 15,820 (21,793 ) - Net (loss) income (attributable) available to Validus $ (90,716 ) $ 27,324 $ 408,438 $ 21,329 $ 402,564 Selected ratios: Net premiums written / Gross premiums written 88.6 % 94.1 % 85.8 % 86.4 % 88.5 % Losses and loss expenses 91.8 % 68.6 % 53.4 % 69.1 % 56.1 % Policy acquisition costs 16.4 % 16.6 % 17.9 % 17.4 % 16.6 % General and administrative expenses (e) 14.5 % 12.2 % 15.5 % 12.9 % 13.5 % Expense ratio 30.9 % 28.8 % 33.4 % 30.3 % 30.1 % Combined ratio 122.7 % 97.4 % 86.8 % 99.4 % 86.2 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

Reconciliations of these measures to the most comparable U.S. GAAP financial measure, are presented in the section below entitled "Underwriting Income" (c) The gain on bargain purchase, net of expenses, arises from the acquisition of Flagstone Reinsurance Holdings S.A. on November 30, 2012 and is net of transaction related expenses.

(d) The transaction expenses relate to costs incurred in connection with the Company's proposed acquisition of Transatlantic. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

(e) The general and administrative expense ratio includes share compensation expenses.

91-------------------------------------------------------------------------------- Table of Contents Three Months Ended Years Ended December 31, December 31, (Dollars in thousands) 2012 (a) 2011 2012 (a) 2011 2010 Validus Re Gross premiums written $ 79,233 $ 55,851 $ 1,131,959 $ 1,114,493 $ 1,089,443 Reinsurance premiums ceded (7,074 ) (49 ) (144,578 ) (150,718 ) (63,147 ) Net premiums written 72,159 55,802 987,381 963,775 1,026,296 Change in unearned premiums 213,105 196,679 35,890 2,150 13,822 Net premiums earned 285,264 252,481 1,023,271 965,925 1,040,118 Losses and loss expenses 331,130 215,903 575,416 749,305 601,610 Policy acquisition costs 40,703 39,227 154,362 154,582 159,527 General and administrative expenses 14,716 11,716 63,048 44,663 45,613 Share compensation expenses 1,849 2,191 7,763 9,309 7,181 Total underwriting deductions 388,398 269,037 800,589 957,859 813,931 Underwriting (loss) income (b) (103,134 ) (16,556 ) 222,682 8,066 226,187 AlphaCat Gross premiums written $ (4 ) $ (1,323 ) $ 21,603 $ 75,727 $ 11,796 Reinsurance premiums ceded - - - - - Net premiums written (4 ) (1,323 ) 21,603 75,727 11,796 Change in unearned premiums 5,895 27,834 (3,937 ) (9,761 ) (714 ) Net premiums earned 5,891 26,511 17,666 65,966 11,082 Losses and loss expenses - 10,000 - 10,000 - Policy acquisition costs 589 3,331 1,774 7,946 1,072 General and administrative expenses 2,011 6,807 7,532 10,929 5,327 Share compensation expenses 84 33 279 107 594 Total underwriting deductions 2,684 20,171 9,585 28,982 6,993 Underwriting income (b) 3,207 6,340 8,081 36,984 4,089 Legal Entity adjustments Gross premiums written $ 7 $ - $ 7 $ - $ - Reinsurance premiums ceded - - - - - Net premiums written 7 - 7 - - Change in unearned premiums (3,833 ) - (3,833 ) - - Net premiums earned (3,826 ) - (3,826 ) - - Losses and loss expenses - - - - - Policy acquisition costs $ (365 ) $ (1,093 ) $ (390 ) $ (2,394 ) $ - General and administrative expenses 1,673 (5,438 ) 5,130 (1,658 ) 15,927 Share compensation expenses 115 196 561 982 80 Total underwriting deductions 1,423 (6,335 ) 5,301 (3,070 ) 16,007 Underwriting (loss) income(b) (5,249 ) 6,335 (9,127 ) 3,070 (16,007 ) Talbot Gross premiums written $ 241,100 $ 235,242 $ 1,078,636 $ 1,014,122 $ 981,073 Reinsurance premiums ceded (37,067 ) (27,931 ) (228,686 ) (218,174 ) (258,081 ) Net premiums written 204,033 207,311 849,950 795,948 722,992 Change in unearned premiums 4,098 2,043 (17,671 ) (25,696 ) (13,069 ) Net premiums earned 208,131 209,354 832,279 770,252 709,923 Losses and loss expenses 127,180 108,926 424,030 485,096 385,976 Policy acquisition costs 41,745 41,160 183,926 157,334 143,769 General and administrative expenses 32,371 29,676 133,281 112,072 107,557 Share compensation expenses 2,442 1,934 7,789 8,582 6,923 Total underwriting deductions 203,738 181,696 749,026 763,084 644,225 Underwriting income (b) 4,393 27,658 83,253 7,168 65,698 Corporate & Eliminations Gross premiums written $ (8,489 ) $ (11,491 ) $ (65,765 ) $ (79,651 ) $ (91,746 ) Reinsurance premiums ceded 8,482 11,491 65,758 79,651 91,746 Net premiums written (7 ) - (7 ) - - Change in unearned premiums 3,833 - 3,833 - - Net premiums earned 3,826 - 3,826 - - Losses and loss expenses - - - - - Policy acquisition costs (858 ) (1,372 ) (4,974 ) (3,284 ) (11,469 ) General and administrative expenses 14,324 9,492 54,661 31,491 34,866 Share compensation expenses 2,636 2,883 10,317 15,316 14,133 Total underwriting deductions 16,102 11,003 60,004 43,523 37,530 Underwriting (loss) (b) (12,276 ) (11,003 ) (56,178 ) (43,523 ) (37,530 ) Total underwriting (loss) income (b) $ (113,059 ) $ 12,774 $ 248,711 $ 11,765 $ 242,437 92 -------------------------------------------------------------------------------- Table of Contents (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income." Year Ended December 31, 2012 compared to Year Ended December 31, 2011 Net income available to Validus for the year ended December 31, 2012 was $408.4 million compared to $21.3 million for the year ended December 31, 2011, an increase of $387.1 million. The primary factors driving the increase in net income were: • Increase in underwriting income of $236.9 million due primarily to: • A $245.0 million decrease in loss and loss expenses and a $71.1 million increase in net premiums earned; • Offset by the following factors: A $20.5 million increase in policy acquisition costs; and A $66.2 million increase in general and administrative expenses, partially offset by a $7.6 million decrease in share compensation expenses; • Increases in other income of $16.7 million and income from operating affiliates of $12.6 million; • Increase in net unrealized gains on investments and foreign exchange of $37.6 million and $26.9 million, respectively; • Decrease in transaction expenses of $17.4 million ($nil in the current year) and a $17.7 million gain on bargain purchase, net of expenses; and • Net loss attributable to controlling interest which resulted in an increase to net income attributable to Validus of $37.6 million.

The above items were partially offset by the following factors: • Unfavorable movement in net investment income and net realized gains on investments of $4.4 million and $10.3 million, respectively.

The change in net income available to Validus for the year ended December 31, 2012 of $387.1 million as compared to the year ended December 31, 2011 is described in the following table: 93-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Decrease (increase) overthe year ended December 31, 2011 Corporate and (Dollars in thousands) Validus Re (a) AlphaCat Talbot Eliminations(b) Total Notable losses-decrease in net losses and loss expenses (c) $ 72,055 $ - $ 61,240 $ - $ 133,295 Less: Notable losses- increase in net reinstatement premiums (c) 6,932 - 5,898 - 12,830 Other underwriting (loss) income 135,629 (28,903 ) 8,947 (24,852 ) 90,821 Underwriting income (loss) (d) 214,616 (28,903 ) 76,085 (24,852 ) 236,946 Net investment income (4,521 ) 503 (4,070 ) 3,728 (4,360 ) Other income (2,305 ) 11,763 (1,452 ) 8,672 16,678 Finance expenses (1,166 ) 598 65 1,463 960 Operating income (loss) before taxes and income from operating affiliates 206,624 (16,039 ) 70,628 (10,989 ) 250,224 Tax (expense) (150 ) - (1,578 ) 51 (1,677 ) Income from operating affiliates - 12,580 - - 12,580 Net operating income (loss) 206,474 (3,459 ) 69,050 (10,938 ) 261,127 Gain on bargain purchase, net of expenses - - - 17,701 17,701 Net realized gains on investments (9,112 ) (315 ) (872 ) - (10,299 ) Net unrealized gains (losses) on investments 49,731 (18,168 ) 6,013 - 37,576 (Loss) from investment affiliate (964 ) - - - (964 ) Foreign exchange gains (losses) 22,188 508 4,715 (489 ) 26,922 Transaction expenses - - - 17,433 17,433 Net income (loss) 268,317 (21,434 ) 78,906 23,707 349,496 Net loss (income) attributable to noncontrolling interest - 37,613 - - 37,613 Net income (loss) available (attributable) to Validus $ 268,317 $ 16,179 $ 78,906 $ 23,707 $ 387,109 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) The Corporate and Eliminations column includes legal entity adjustments.

(c) Notable losses for the year ended December 31, 2012 include: Costa Concordia, Cat 67, U.S. drought, Hurricane Isaac and Hurricane Sandy. Notable losses for the year ended December 31, 2011 include: Tohoku earthquake, Gryphon Alpha mooring failure, Christchurch earthquake, Brisbane floods, CNRL Horizon, Cat 46, Cat 48, Jupiter 1, Danish floods, Hurricane Irene and the Thai floods.

Excludes the reserve for potential development on 2011 notable loss events.

(d) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income".

Gross Premiums Written Gross premiums written for the year ended December 31, 2012 were $2,166.4 million compared to $2,124.7 million for the year ended December 31, 2011, an increase of $41.7 million or 2.0%. The marine and specialty lines increased by $79.4 million and $1.3 million, respectively, while the property lines decreased by $39.0 million. Details of gross premiums written by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Gross Gross Gross Gross Gross Gross (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 1,060,297 48.9 % $ 1,099,303 51.7 % $ 1,037,061 52.1 % Marine 649,421 30.0 % 569,981 26.9 % 525,307 26.4 % Specialty 456,722 21.1 % 455,407 21.4 % 428,198 21.5 % Total $ 2,166,440 100.0 % $ 2,124,691 100.0 % $ 1,990,566 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

94-------------------------------------------------------------------------------- Table of Contents Validus Re. Validus Re gross premiums written for the year ended December 31, 2012 were $1,132.0 million compared to $1,114.5 million for the year ended December 31, 2011, an increase of $17.5 million or 1.6%. Details of Validus Re gross premiums written by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Gross Gross Gross Gross Gross Gross (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 771,617 68.2 % $ 786,937 70.6 % $ 778,794 71.5 % Marine 257,469 22.7 % 232,401 20.9 % 227,135 20.8 % Specialty 102,873 9.1 % 95,155 8.5 % 83,514 7.7 % Total $ 1,131,959 100.0 % $ 1,114,493 100.0 % $ 1,089,443 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The decrease in gross premiums written in the property lines of $15.3 million was due primarily to a $25.8 million decrease in renewing premiums written on proportional and per risk excess of loss treaties relating to reduced participation on several large contracts not meeting the Company's underwriting requirements and a $12.4 million decrease in intercompany premiums written with Talbot. These were partially offset by a $9.3 million increase in new business written in the Singapore branch, a $9.1 million increase in premium adjustments and catastrophe excess of loss business and a $7.4 million increase in premiums relating to the Flagstone acquisition. The increase in gross premiums written of $25.1 million in the marine lines was due to a $24.6 million increase in reinstatement premiums primarily relating to the Costa Concordia event and a $2.8 million increase in premium adjustments on proportional business, slightly offset by a $3.8 million decrease in premiums on new business incepting during the period. The increase in gross premiums written of $7.7 million in the specialty lines was due primarily to a $6.0 million increase in premium adjustments on proportional business, a $3.1 million increase in premiums relating to the Flagstone acquisition and a $2.8 million increase in new business written in the Singapore branch. These were slightly offset by a $2.1 million decrease in premiums on new business incepting during the period and a $2.0 million decrease in intercompany premiums written with Talbot.

Gross premiums written under the quota share, surplus treaty and excess of loss contracts between Validus Re and Talbot for the year ended December 31, 2012 decreased by $14.4 million as compared to the year ended December 31, 2011.

These reinsurance agreements with Talbot are eliminated upon consolidation.

AlphaCat. AlphaCat gross premiums written for the year ended December 31, 2012 were $21.6 million compared to $75.7 million for the year ended December 31, 2011 , a decrease of $54.1 million or 71.5%. Details of AlphaCat gross premiums written by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 Gross Premiums Gross Premiums Gross Premiums Gross Premiums Gross Premiums Gross Premiums (Dollars in thousands) Written Written (%) Written Written (%) Written Written (%) Property 21,603 100.0 % 75,727 100.0 % 11,796 100.0 % Total 21,603 100.0 % 75,727 100.0 % 11,796 100.0 % The decrease in gross premiums written in the property lines of $54.1 million was due primarily to the deconsolidation of AlphaCat Re 2011 which occurred as at December 31, 2011, when the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated Balance Sheet of the Company. AlphaCat Re 2011 was consolidated in 2011 until December 31, 2011 whereas in 2012, AlphaCat Re 2011 is accounted for as an equity method operating affiliate. Therefore the comparative renewals are not reflected in gross premiums written in 2012, but are included in gross managed premiums, a comparable measure.

Managed gross premiums written from our non-consolidated affiliates, AlphaCat Re 2011and AlphaCat Re 2012, for the year ended December 31, 2012 were $126.5 million compared to $60.0 million for the year ended December 31, 2011, an increase of $66.5 million or 110.8%. Gross premiums written from our consolidated AlphaCat entities for the year ended December 31, 2012 were $21.6 million compared to $15.7 million for the year ended December 31, 2011, an increase of $5.9 million or 37.5% .

Gross premiums written with Talbot for the year ended December 31, 2012 increased by $0.5 million as compared to the year ended December 31, 2011. These reinsurance agreements with Talbot are eliminated upon consolidation.

95-------------------------------------------------------------------------------- Table of Contents Talbot. Talbot gross premiums written for the year ended December 31, 2012 were $1,078.6 million compared to $1,014.1 million for the year ended December 31, 2011, an increase of $64.5 million or 6.4%. The $1,078.6 million of gross premiums written translated at 2011 rates of exchange would have been $1,081.7 million for the year ended December 31, 2012, giving an effective increase of $67.6 million or 6.7%. Details of Talbot gross premiums written by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 Gross Gross Gross Gross Gross Gross (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Written Written (%) Written Written(%) Written Written (%) Property $ 324,910 30.1 % $ 306,317 30.2 % $ 314,769 32.1 % Marine 396,207 36.7 % 341,821 33.7 % 315,102 32.1 % Specialty 357,519 33.2 % 365,984 36.1 % 351,202 35.8 % Total $ 1,078,636 100.0 % $ 1,014,122 100.0 % $ 981,073 100.0 % The increase in gross premiums written in the property lines of $18.6 million was due primarily to a $16.1 million increase in the direct property lines and a $9.1 million increase in the construction lines, partially offset by an $8.3 million decrease in the property treaty lines. During the nine months ended September 30, 2012, Talbot reassessed commission costs on underwriting years 2007 and prior, related to business on the marine class. This resulted in a $14.8 million increase in gross premiums written and earned premium, offset by an equal increase on policy acquisition costs for the marine class, resulting in no net impact. The increase in gross premiums written in the marine lines of $54.4 million was due primarily to a $14.8 million increase in premium adjustments, described above, a $29.9 million increase in premium adjustments in the cargo and offshore energy lines, an $8.0 million increase in premiums written in the marine energy and liability lines and a $4.9 million increase in other treaty lines mainly driven by reinstatement premiums on Hurricane Sandy.

These increases were slightly offset by a $2.3 million decrease in premiums written in the hull lines. The decrease in gross premiums written in the specialty lines of $8.5 million was due primarily to a $15.1 million decrease in premiums written in direct aviation and aviation treaty lines. This decrease primarily relates to a premium reassessment of $8.2 million which has no net earned impact on the direct aviation and aviation treaty lines. In addition, there was a $1.7 million decrease in financial institutions lines, partially offset by a $9.3 million increase in political risk lines.

Reinsurance Premiums Ceded Reinsurance premiums ceded for the year ended December 31, 2012 were $307.5 million compared to $289.2 million for the year ended December 31, 2011, an increase of $18.3 million, or 6.3%. The marine and specialty lines increased by $14.0 million and $7.2 million, respectively, while the property lines decreased by $3.0 million. Details of reinsurance premiums ceded by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Ceded Ceded (%) Ceded Ceded (%) Ceded Ceded (%) Property $ 206,000 67.0 % $ 208,968 72.2 % $ 123,383 53.7 % Marine 46,853 15.2 % 32,847 11.4 % 38,701 16.9 % Specialty 54,653 17.8 % 47,426 16.4 % 67,398 29.4 % Total $ 307,506 100.0 % $ 289,241 100.0 % $ 229,482 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re reinsurance premiums ceded for the year ended December 31, 2012 were $144.6 million compared to $150.7 million for the year ended December 31, 2011, a decrease of $6.1 million, or 4.1%. Details of Validus Re reinsurance premiums ceded by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Ceded Ceded (%) Ceded Ceded (%) Ceded Ceded (%) Property $ 123,610 85.5 % $ 136,369 90.5 % $ 45,536 72.2 % Marine 20,397 14.1 % 13,848 9.2 % 17,643 27.9 % Specialty 571 0.4 % 501 0.3 % (32 ) (0.1 )% Total $ 144,578 100.0 % $ 150,718 100.0 % $ 63,147 100.0 % 96-------------------------------------------------------------------------------- Table of Contents (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Reinsurance premiums ceded in the property lines decreased by $12.8 million, due primarily to a $7.9 million decrease in non-proportional retrocessional coverage, a $3.3 million decrease in adjustments from prior periods and a $2.1 million decrease in proportional retrocessional coverage. These were slightly offset by a $0.7 million increase in ceded reinstatement premiums. The reduction in both non-proportional and proportional retrocessional coverage is a result of comparatively higher purchases of this coverage in the three months ended March 31, 2011 prior to, and following, the notable loss events of that quarter.

The increase in reinsurance premiums ceded in the marine lines of $6.5 million was due primarily to a $6.0 million increase in non-proportional coverage incepting in the year.

AlphaCat. AlphaCat did not cede reinsurance premiums during the year ended December 31, 2012 and 2011.

Talbot. Talbot reinsurance premiums ceded for the year ended December 31, 2012 were $228.7 million compared to $218.2 million for the year ended December 31, 2011, an increase of $10.5 million or 4.8%. Details of Talbot reinsurance premiums ceded by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance Reinsurance (Dollars in Premiums Premiums Premiums Premiums Premiums Premiums thousands) Ceded Ceded (%) Ceded Ceded (%) Ceded Ceded (%) Property $ 140,223 61.3 % $ 142,277 65.2 % $ 146,145 56.6 % Marine 30,711 13.4 % 23,240 10.7 % 37,988 14.7 % Specialty 57,752 25.3 % 52,657 24.1 % 73,948 28.7 % Total $ 228,686 100.0 % $ 218,174 100.0 % $ 258,081 100.0 % The decrease in reinsurance premiums ceded in the property lines of $2.1 million was due primarily to a $4.1 million decrease in premium ceded in the onshore energy lines and a $2.3 million decrease in property treaty lines, partially offset by a $3.1 million increase in the direct property lines. The increase in reinsurance premiums ceded in the marine lines of $7.5 million was primarily due to an increase in premiums ceded in the energy lines of $5.6 million driven primarily by an increase in reinstatement premiums and prior period adjustments.

The increase in reinsurance premiums ceded in the specialty lines of $5.1 million was primarily due to a $4.3 million increase in excess of loss coverage and reinstatement premiums on aviation direct lines.

Reinsurance premiums ceded under the quota share, surplus treaty and excess of loss contracts with Validus Re and AlphaCat for the year ended December 31, 2012 were $65.8 million compared to $79.7 million for the year ended December 31, 2011, a decrease of $13.9 million. These reinsurance agreements with Validus Re and AlphaCat are eliminated upon consolidation.

Net Premiums Written Net premiums written for the year ended December 31, 2012 were $1,858.9 million compared to $1,835.5 million for the year ended December 31, 2011, an increase of $23.5 million, or 1.3%. The ratios of net premiums written to gross premiums written for the year ended December 31, 2012 and 2011 were 85.8% and 86.4%, respectively. Details of net premiums written by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 854,297 46.0 % $ 890,335 48.5 % $ 913,678 51.9 % Marine 602,568 32.4 % 537,134 29.3 % 486,606 27.6 % Specialty 402,069 21.6 % 407,981 22.2 % 360,800 20.5 %Total $ 1,858,934 100.0 % $ 1,835,450 100.0 % $ 1,761,084 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re net premiums written for the year ended December 31, 2012 were $987.4 million compared to $963.8 million for the year ended December 31, 2011, an increase of $23.6 million or 2.4%. Details of Validus Re net premiums written by line of business are provided below.

97-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 648,007 65.6 % $ 650,568 67.5 % $ 733,258 71.5 % Marine 237,072 24.0 % 218,553 22.7 % 209,492 20.4 % Specialty 102,302 10.4 % 94,654 9.8 % 83,546 8.1 % Total $ 987,381 100.0 % $ 963,775 100.0 % $ 1,026,296 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The increase in Validus Re net premiums written was driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written were 87.2% and 86.5% for the year ended December 31, 2012 and 2011, respectively.

AlphaCat. AlphaCat net premiums written for the year ended December 31, 2012 were $21.6 million compared to $75.7 million for the year ended December 31, 2011, a decrease of $54.1 million or 71.5%. Details of AlphaCat net premiums written by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 21,603 100.0 % $ 75,727 100.0 % $ 11,796 100.0 % Total $ 21,603 100.0 % $ 75,727 100.0 % $ 11,796 100.0 % The decrease in AlphaCat net premiums written was driven by the factors highlighted above in respect of gross premiums written. The ratios of net premiums written to gross premiums written were 100.0% for the year ended December 31, 2012 and 2011.

Talbot. Talbot net premiums written for the year ended December 31, 2012 were $850.0 million compared to $795.9 million for the year ended December 31, 2011, an increase of $54.0 million or 6.8%. Details of Talbot net premiums written by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Written Written (%) Written Written (%) Written Written (%) Property $ 184,687 21.7 % $ 164,040 20.6 % $ 168,624 23.4 % Marine 365,496 43.0 % 318,581 40.0 % 277,114 38.3 % Specialty 299,767 35.3 % 313,327 39.4 % 277,254 38.3 % Total $ 849,950 100.0 % $ 795,948 100.0 % $ 722,992 100.0 % The increase in Talbot net premiums written was driven by the factors highlighted above in respect of gross premiums written and reinsurance premiums ceded. The ratios of net premiums written to gross premiums written for the year ended December 31, 2012 and 2011 were 78.8% and 78.5%, respectively.

Net Change in Unearned Premiums Net change in unearned premiums for the year ended December 31, 2012 was $14.3 million compared to $(33.3) million for the year ended December 31, 2011, an increase of $47.6 million or 142.9%.

98-------------------------------------------------------------------------------- Table of Contents Year Ended December Year Ended December Year Ended December 31, 2012 (a) 31, 2011 31, 2010 Net Change in Net Change in Net Change in Unearned Unearned Unearned (Dollars in thousands) Premiums Premiums Premiums Change in gross unearned premium $ (121,980 ) $ (43,866 ) $ (12,079 ) Less change due to Flagstone acquisition 139,389 - - Deconsolidation of AlphaCat Re 2011 - (9,405 ) - Net change in gross unearned premium 17,409 (53,271 ) (12,079 ) Change in prepaid reinsurance premium 8,212 19,964 12,118 Less change due to Flagstone acquisition (11,339 ) - - Net change in prepaid reinsurance premium (3,127 ) 19,964 12,118 Net change in unearned premium $ 14,282 $ (33,307 ) $ 39 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re net change in unearned premiums for the year ended December 31, 2012 was $35.9 million compared to $2.2 million for the year ended December 31, 2011, an increase of $33.7 million, or 1,569.3%.

Year Ended December Year Ended December Year Ended December 31, 2012(a) 31, 2011 31, 2010 Net Change in Net Change in Net Change in Unearned Unearned Unearned (Dollars in thousands) Premiums Premiums Premiums Change in gross unearned premium $ (104,420 ) $ (7,771 ) $ 16,277 Less change due to Flagstone acquisition 139,389 - - Deconsolidation of AlphaCat Re 2011 - (9,405 ) - Net change in gross unearned premium 34,969 (17,176 ) 16,277 Change in prepaid reinsurance premium 12,260 19,326 (2,455 ) Less change due to Flagstone acquisition (11,339 ) - - Net change in prepaid reinsurance premium 921 19,326 (2,455 ) Net change in unearned premium $ 35,890 $ 2,150 $ 13,822 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re net change in unearned premiums has increased for the year ended December 31, 2012 due to the earnings pattern of gross premiums written and reinsurance premiums ceded during the year ended December 31, 2012 as compared to the year ended December 31, 2011.

AlphaCat. AlphaCat net change in unearned premiums for the year ended December 31, 2012 was $(3.9) million compared to $(9.8) million for the year ended December 31, 2011, an increase of $5.8 million or 59.7%.

Year Ended December Year Ended December Year Ended December 31, 31, 2012 31, 2011 2010 Net Change in Net Change in Net Change in Unearned Unearned Unearned (Dollars in thousands) Premiums Premiums Premiums Change in gross unearned premium $ (3,937 ) $ (9,761 ) $ (714 ) Net change in unearned premium $ (3,937 ) $ (9,761 ) $ (714 ) AlphaCat net change in unearned premiums has increased for the year ended December 31, 2012 due primarily to the deconsolidation of AlphaCat Re 2011 and the earnings pattern of gross premiums written and reinsurance premiums ceded during the year ended December 31, 2012 as compared to year ended December 31, 2011.

99-------------------------------------------------------------------------------- Table of Contents Talbot. Talbot net change in unearned premiums for the year ended December 31, 2012 was $(17.7) million compared to $(25.7) million for the year ended December 31, 2011, an increase of $8.0 million or 31.2%.

Year Ended Year Ended Year Ended December 31, 2012 December 31, 2011 December 31, 2010 Net Change in NetChange in Net Change in Unearned Unearned Unearned (Dollars in thousands) Premiums Premiums Premiums Change in gross unearned premium $ (13,623 ) $ (26,334 ) $ (27,642 ) Change in prepaid reinsurance premium (4,048 ) 638 14,573 Net change in unearned premium $ (17,671 ) $ (25,696 ) $ (13,069 ) Talbot net change in unearned premiums has increased for the year ended December 31, 2012 due to the earnings pattern of gross premiums written and reinsurance premiums ceded during the year ended December 31, 2012 as compared to the year ended December 31, 2011.

Net Premiums Earned Net premiums earned for the year ended December 31, 2012 were $1,873.2 million compared to $1,802.1 million for the year ended December 31, 2011, an increase of $71.1 million or 3.9%. Details of net premiums earned by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Earned Earned (%) Earned Earned (%) Earned Earned (%) Property $ 866,365 46.3 % $ 891,448 49.5 % $ 923,370 52.4 % Marine 609,012 32.5 % 517,376 28.7 % 445,426 25.3 % Specialty 397,839 21.2 % 393,319 21.8 % 392,327 22.3 % Total $ 1,873,216 100.0 % $ 1,802,143 100.0 % $ 1,761,123 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re net premiums earned for the year ended December 31, 2012 were $1,023.3 million compared to $965.9 million for the year ended December 31, 2011, an increase of $57.3 million or 5.9%. Details of Validus Re net premiums earned by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Earned Earned (%) Earned Earned (%) Earned Earned (%) Property $ 673,928 65.9 % $ 664,244 68.8 % $ 754,583 72.5 % Marine 254,092 24.8 % 211,344 21.9 % 176,601 17.0 % Specialty 95,251 9.3 % 90,337 9.3 % 108,934 10.5 % Total $ 1,023,271 100.0 % $ 965,925 100.0 % $ 1,040,118 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The increase in net premiums earned is consistent with the relevant pattern of net premiums written influencing the earned premiums for the year ended December 31, 2012 compared to the year ended December 31, 2011.

AlphaCat. AlphaCat net premiums earned for the year ended December 31, 2012 were $17.7 million compared to $66.0 million for the year ended December 31, 2011, a decrease of $48.3 million or 73.2%. Details of AlphaCat net premiums earned by line of business are provided below.

100-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Earned Earned (%) Earned Earned (%) Earned Earned (%) Property $ 17,666 100.0 % $ 65,966 100.0 % $ 11,082 100.0 % Total $ 17,666 100.0 % $ 65,966 100.0 % $ 11,082 100.0 % The decrease in net premiums earned is consistent with the relevant pattern of net premiums written influencing the earned premiums for the year ended December 31, 2012 compared to the year ended December 31, 2011 and the deconsolidation of AlphaCat Re 2011.

Talbot. Talbot net premiums earned for the year ended December 31, 2012 were $832.3 million compared to $770.3 million for the year ended December 31, 2011, an increase of $62.0 million or 8.1%. Details of Talbot net premiums earned by line of business are provided below.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 (Dollars in Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums Net Premiums thousands) Earned Earned (%) Earned Earned (%) Earned Earned (%) Property $ 174,771 21.0 % $ 161,238 21.0 % $ 157,705 22.2 % Marine 354,920 42.6 % 306,032 39.7 % 268,825 37.9 % Specialty 302,588 36.4 % 302,982 39.3 % 283,393 39.9 % Total $ 832,279 100.0 % $ 770,252 100.0 % $ 709,923 100.0 % During the nine months ended September 30, 2012, Talbot reassessed commission costs on underwriting years 2007 and prior, related to business on the marine class. This resulted in a $14.8 million increase in gross premiums written and earned premium, offset by an equal increase on policy acquisition costs for the marine class, resulting in no net impact. Increases in previously written premium income also contributed to an increase in net premiums earned of $34.1 million, driven mainly by energy, cargo, other treaty and marine energy and liability classes, offset by small decreases in other classes.

The increase in net premiums earned is consistent with the relevant patterns of net premiums written influencing the earned premiums for the year ended December 31, 2012, as compared to the year ended December 31, 2011.

Losses and Loss Expenses Losses and loss expenses for the year ended December 31, 2012 were $999.4 million compared to $1,244.4 million for the year ended December 31, 2011, a decrease of $245.0 million or 19.7%. The loss ratios, defined as losses and loss expenses divided by net premiums earned, for the year ended December 31, 2012 and 2011 were 53.4% and 69.1%, respectively. Details of loss ratios by line of business are provided below.

Year Ended Year Ended Year Ended December 31, December 31, 2011 December 31, 2010 2012 (a) Property 54.7 % 87.1 % 60.5 % Marine 60.1 % 61.7 % 50.3 % Specialty 40.0 % 37.8 % 52.2 % All lines 53.4 % 69.1 % 56.1 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

101-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 (a) 2011 2010Property-current period-excluding items below 25.5 % 28.2 % 21.7 % Property-current period-notable losses 37.5 % 58.7 % 45.7 % Property-current period-reserve for potential development on notable loss events 0.0 % 8.2 % 0.9 % Property-change in prior accident years (8.3 )% (8.0 )% (7.8 )% Property-loss ratio 54.7 % 87.1 % 60.5 % Marine-current period-excluding items below 44.6 % 48.4 % 44.9 % Marine-current period-notable losses 23.9 % 20.3 % 15.5 % Marine-current period-reserve for potential development on notable loss events 0.0 % 1.0 % 5.6 % Marine-change in prior accident years (8.4 )% (8.0 )% (15.7 )% Marine-loss ratio 60.1 % 61.7 % 50.3 % Specialty-current period-excluding items below 45.4 % 47.3 % 45.7 % Specialty-current period-notable losses (b) 7.6 % 1.5 % 10.1 % Specialty-current period-reserve for potential development on notable loss events 0.0 % 0.0 % 0.0 % Specialty-change in prior accident years (b) (13.0 )% (11.0 )% (3.6 )% Specialty-loss ratio 40.0 % 37.8 % 52.2 % All lines-current period-excluding items below 36.0 % 38.3 % 33.0 % All lines-current period-notable losses (b) 26.7 % 35.2 % 30.1 % All lines-current period-reserve for potential development on notable loss events 0.0 % 4.3 % 1.9 % All lines-change in prior accident years (b) (9.3 )% (8.7 )% (8.9 )% All lines-loss ratio 53.4 % 69.1 % 56.1 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) The financial institution loss occurred in a prior period but developed over the notable loss threshold in the three months ended December 31, 2010. In 2010, this loss was included in the change in prior year development and excluded as a notable loss as presented above.

Validus Re. Validus Re losses and loss expenses for the year ended December 31, 2012 were $575.4 million compared to $749.3 million for the year ended December 31, 2011, a decrease of $173.9 million or 23.2%. The loss ratio, defined as losses and loss expenses divided by net premiums earned, was 56.2% and 77.6% for the year ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, Validus Re incurred losses of $648.0 million related to current year losses and $72.6 million of favorable loss reserve development relating to prior accident years. For the year ended December 31, 2012, favorable loss reserve development on prior accident years benefited the Validus Re loss ratio by 7.1 percentage points. For the year ended December 31, 2011, Validus Re incurred losses of $817.9 million related to current year losses and $68.6 million of favorable loss reserve development relating to prior accident years. For the year ended December 31, 2011, favorable loss reserve development relating to prior accident years benefited the Validus Re loss ratio by 7.1 percentage points.

For the year ended December 31, 2012, Validus Re incurred $402.7 million of losses from notable loss events, which represented 39.4 percentage points of the loss ratio. Net of reinstatement premiums of $60.8 million, the effect of these events on Validus Re segment income was a decrease of $342.0 million. For the year ended December 31, 2011, Validus Re incurred $474.8 million of losses from notable loss events, which represented 49.2 percentage points of the loss ratio, excluding reserve for potential development on notable loss events. Net of reinstatement premiums of $53.8 million, the effect of these events on Validus Re segment income was a decrease of $420.9 million. Validus Re segment loss ratios excluding, notable loss events, reserve for potential development on notable loss events and prior year loss reserve development for the year ended December 31, 2012 and 2011 were 23.9% and 27.4%, respectively. Details of Validus Re loss ratios by line of business and period of occurrence are provided below.

102-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 (a) 2011 (b) 2010 (b) Property-current period excluding items below 18.5 % 21.0 % 16.6 % Property-current period-notable losses 41.1 % 61.1 % 46.5 % Property-current period-reserve for potential development on notable loss events 0.0 % 11.0 % 1.1 % Property-change in prior accident years (6.8 )% (7.4 )% (6.6 )% Property-loss ratio 52.8 % 85.7 % 57.6 % Marine-current period excluding items below 36.3 % 44.0 % 36.5 % Marine-current period-notable losses 40.3 % 32.7 % 29.1 % Marine-current period-reserve for potential development on notable loss events 0.0 % 2.4 % 14.2 % Marine-change in prior accident years (4.4 )% (4.8 )% (10.0 )% Marine-loss ratio 72.2 % 74.3 % 69.8 % Specialty-current period excluding items below 29.9 % 36.3 % 19.2 % Specialty-current period-notable losses 24.3 % 0.0 % 23.7 % Specialty-current period-reserve for potential development on notable loss events 0.0 % 0.0 % 0.0 % Specialty-change in prior accident years (16.3 )% (10.4 )% (2.9 )% Specialty-loss ratio 37.9 % 25.9 % 40.0 % All lines-current period excluding items below 23.9 % 27.4 % 20.3 % All lines-current period-notable losses 39.4 % 49.2 % 41.1 % All lines-current period-reserve for potential development on notable loss events 0.0 % 8.1 % 3.2 % All lines-change in prior accident years (7.1 )% (7.1 )% (6.8 )% All lines-loss ratio 56.2 % 77.6 % 57.8 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) The prior year ratios have been represented to exclude the impact of the AlphaCat segment premiums.

For the year ended December 31, 2012, Validus Re property lines losses and loss expenses included $401.5 million related to current year losses and $45.7 million of favorable loss reserve development relating to prior accident years.

The favorable loss reserve development was due primarily to a reduction in loss estimates on attritional losses. This movement was largely offset by an increase in loss estimates on prior year notable loss events, which led to a movement in the reserve for potential development on notable loss events during the year ended December 31, 2012. For the year ended December 31, 2011, Validus Re property lines losses and loss expenses included $618.0 million related to current year losses and $49.0 million of favorable loss reserve development relating to prior accident years. This favorable development was primarily due to a reduction in the loss estimates on certain large loss events and favorable development on attritional losses and various smaller loss events.

For the year ended December 31, 2012, Validus Re property lines incurred $277.1 million of losses from notable loss events, which represented 41.1 percentage points of the property lines loss ratio. Net of $33.0 million in reinstatement premiums, the effect of these events on net income was a decrease of $244.1 million. For the year ended December 31, 2011, Validus Re property lines incurred $405.6 million of losses from notable loss events, which represented 61.1 percentage points of the property lines loss ratio. Validus Re property lines loss ratios, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development, for the year ended December 31, 2012 and 2011 were 18.5% and 21.0%, respectively.

For the year ended December 31, 2012, Validus Re marine lines losses and loss expenses included $194.8 million related to current year losses and $11.3 million of favorable loss reserve development relating to prior accident years.

The favorable loss reserve development is due primarily to a reduction in loss estimates on attritional losses, which was partially offset by an increase in prior year notable loss events. For the year ended December 31, 2011, Validus Re marine lines losses and loss expenses included $167.2 million related to current year losses and $10.2 million of favorable loss reserve development relating to prior accident years. This favorable development was due primarily to favorable development on large loss events and attritional losses and various smaller loss events.

103-------------------------------------------------------------------------------- Table of Contents For the year ended December 31, 2012, Validus Re marine lines incurred $102.5 million of losses from notable loss events, which represented 40.3 percentage points of the loss ratio. Net of $27.8 million in reinstatement premiums, the effect of these events on net income was a decrease of $74.7 million. For the year ended December 31, 2011, Validus Re marine lines incurred $69.2 million of losses from notable loss events, which represented 32.7 percentage points of the marine lines loss ratio, excluding reserve for potential development on notable loss events. Validus Re marine lines loss ratios, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development, for the year ended December 31, 2012 and 2011 were 36.3% and 44.0%, respectively.

For the year ended December 31, 2012, Validus Re specialty lines losses and loss expenses included $51.6 million related to current year losses and $15.5 million of favorable loss reserve development relating to prior accident years. The favorable loss reserve development was due primarily to a reduction in loss estimates on attritional losses. For the year ended December 31, 2011, Validus Re specialty lines losses and loss expenses included $32.7 million related to current year losses and $9.4 million of favorable loss reserve development relating to prior accident years. This favorable development was attributable to favorable development on attritional losses partially offset by adverse development on large loss events.

For the year ended December 31, 2012, Validus Re specialty lines incurred $23.2 million of losses from notable loss events which represented 24.3 percentage points of the loss ratio.Validus Re specialty lines loss ratios, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development, for the year ended December 31, 2012 and 2011 were 29.9% and 36.3%, respectively.

The net negative financial impact from Hurricane Sandy to Flagstone for the year ended December 31, 2012 was $39.1 million. The financial impact to Flagstone did not impact Validus' results of operations in the fourth quarter 2012 as the loss event took place prior to the date of Validus' acquisition of Flagstone which was completed on November 30, 2012.

AlphaCat. AlphaCat contributed $nil to the losses and loss expenses for the year ended December 31, 2012 compared to $10.0 million for the year ended December 31, 2011, a decrease of $10.0 million or 100.0%. The loss ratio defined as losses and loss expenses divided by net premiums earned, was nil% and 15.2% for the year ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, AlphaCat Re 2011 and AlphaCat Re 2012 incurred Hurricane Sandy losses of $25.0 million and $7.5 million, respectively. The AlphaCat segment's portion of incurred losses and loss expenses related to Hurricane Sandy was $8.4 million for the year ended December 31, 2012 and are included in income from operating affiliates.

Talbot. Talbot losses and loss expenses for the year ended December 31, 2012 were $424.0 million compared to $485.1 million for the year ended December 31, 2011, a decrease of $61.1 million or 12.6%. The loss ratio defined as losses and loss expenses divided by net premiums earned, was 50.9% and 63.0% for the year ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, Talbot incurred losses of $526.4 million related to current year losses and $102.4 million of favorable loss reserve development relating to prior accident years. For the year ended December 31, 2012, favorable loss reserve development on prior accident years benefited the Talbot loss ratio by 12.3 percentage points. For the year ended December 31, 2011, Talbot incurred losses of $572.6 million related to current year losses and $87.5 million in favorable loss reserve development relating to prior accident years. For the year ended December 31, 2011, favorable loss reserve development on prior accident years benefited the Talbot loss ratio by 11.4 percentage points.

For the year ended December 31, 2012, Talbot incurred $97.8 million of losses from notable loss events, which represented 11.8 percentage points of the loss ratio. Including the impact of reinstatement premiums of $(3.3) million, the effect of these events on Talbot segment income was a decrease of $101.1 million. For the year ended December 31, 2011, Talbot incurred $159.1 million of losses from notable loss events, which represented 20.7 percentage points of the Talbot loss ratio. Talbot loss ratios, excluding notable loss events and prior year loss reserve development, for the year ended December 31, 2012 and 2011 were 51.4% and 53.7%, respectively. Details of Talbot loss ratios by line of business and period of occurrence are provided below.

104-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 2011 2010 Property-current period excluding items below 55.6 % 63.6 % 47.5 % Property-current period-notable losses 27.2 % 72.8 % 45.3 % Property-change in prior accident years (15.0 )% (13.7 )% (14.2 )% Property-loss ratio 67.8 % 122.7 % 78.6 % Marine-current period excluding items below 50.5 % 51.5 % 50.5 % Marine-current period-notable losses 12.2 % 11.7 % 6.6 % Marine-change in prior accident years (11.3 )% (10.2 )% (19.5 )% Marine-loss ratio 51.4 % 53.0 % 37.6 % Specialty-current period excluding items below 50.3 % 50.6 % 55.8 % Specialty-current period-notable losses (a) 2.3 % 1.9 % 4.9 % Specialty-change in prior accident years (a) (11.9 )% (11.2 )% (3.9 )% Specialty-loss ratio 40.7 % 41.3 % 56.8 % All lines-current period excluding items below 51.4 % 53.7 % 52.0 % All lines-current period-notable losses (a) 11.8 % 20.7 % 14.5 % All lines-change in prior accident years (a) (12.3 )% (11.4 )% (12.1 )% All lines-loss ratio 50.9 % 63.0 % 54.4 % (a) The financial institution loss occurred in a prior period but developed over the notable loss threshold in the three months ended December 31, 2010. In 2010, this loss was included in the change in prior year development and excluded as a notable loss as presented above.

For the year ended December 31, 2012, Talbot property lines losses and loss expenses include $144.7 million related to current year losses and $26.3 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was due to favorable experience on attritional losses. For the year ended December 31, 2011, Talbot property lines losses and loss expenses included $220.0 million related to current year losses and $22.2 million of favorable loss reserve development relating to prior accident years. This favorable development was attributable to lower than expected development on large losses as well as favorable development on attritional losses.

For the year ended December 31, 2012, Talbot property lines incurred $47.5 million of losses from notable loss events, which represented 27.2 percentage points of the property lines loss ratio. Net of reinstatement premiums of $1.2 million, the effect of these events on net income was a decrease of $46.2 million. For the year ended December 31, 2011, Talbot's property lines incurred $117.5 million of losses from notable loss events, which represented 72.8 percentage points of the property lines loss ratio. Talbot property lines loss ratio, excluding notable loss events and prior year loss reserve development for the year ended December 31, 2012 and 2011 were 55.6% and 63.6%, respectively.

For the year ended December 31, 2012, Talbot marine lines losses and loss expenses included $222.4 million related to current year losses and $40.1 million of favorable loss reserve development relating to prior accident years.

The prior year favorable loss reserve development was due primarily to favorable development on attritional losses. For the year ended December 31, 2011, Talbot marine lines losses and loss expenses included $193.5 million related to current year losses and $31.4 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was due to favorable development on attritional losses.

For the year ended December 31, 2012, Talbot marine lines incurred $43.3 million of losses from notable loss events, which represented 12.2 percentage points of the marine lines loss ratio. Net of reinstatement premiums of $(3.0) million, the effect of these events on net income was a decrease of $46.3 million. For the year ended December 31, 2011, Talbot's marine lines incurred $35.8 million of losses from notable loss events, which represented 11.7 percentage points of the marine lines loss ratio. Talbot marine lines loss ratios, excluding notable loss events and prior year loss reserve development, for the year ended December 31, 2012 and 2011 were 50.5% and 51.5%, respectively.

For the year ended December 31, 2012, Talbot specialty lines losses and loss expenses included $159.3 million relating to current year losses and $36.1 million of favorable loss reserve development relating to prior accident years.

The prior year favorable reserve development was due primarily to favorable development on attritional losses. For the year ended December 31, 2011, Talbot specialty lines losses and loss expenses included $159.1 million relating to current year losses and $34.0 million of favorable loss reserve development relating to prior accident years. The prior year favorable loss reserve development was due to favorable development on attritional losses.

105-------------------------------------------------------------------------------- Table of Contents For the year ended December 31, 2012, Talbot specialty lines incurred $7.1 million losses from notable loss events, which represented 2.3 percentage points of the specialty lines loss ratio. Net of reinstatement premiums of $(1.5) million, the effect of these events on net income was a decrease of $8.5 million. For the year ended December 31, 2011, Talbot's specialty lines incurred $5.8 million of losses from notable loss events, which represented 1.9 percentage points of the specialty lines loss ratio. Talbot specialty lines loss ratios, excluding notable loss events and prior year loss reserve development for the year ended December 31, 2012 and 2011 were 50.3% and 50.6%, respectively.

Reserves for Losses and Loss Expenses At December 31, 2012 and 2011, gross and net reserves for losses and loss expenses were estimated using the methodology as outlined in the Critical Accounting Policies and Estimates above.

As at December 31, 2012 Total Gross Reserve for Gross Case Losses and Loss (Dollars in thousands) Reserves Gross IBNR Expenses Property $ 930,553 $ 892,227 $ 1,822,780 Marine 522,907 477,948 1,000,855 Specialty 265,638 428,300 693,938 Total $ 1,719,098 $ 1,798,475 $ 3,517,573 As at December 31, 2012 Total Net Reserve for (Dollars in thousands) Net Case Reserves Net IBNR Losses and Loss Expenses Property $ 768,722 $ 803,182 $ 1,571,904 Marine 465,080 438,009 903,089 Specialty 230,584 372,029 602,613 Total $ 1,464,386 $ 1,613,220 $ 3,077,606 The following table sets forth a reconciliation of gross and net reserves for losses and loss expenses by segment for the year ended December 31, 2012.

Year Ended December 31, 2012 Validus Re (Dollars in thousands) Segment AlphaCat Segment Talbot Segment Eliminations Total Gross reserves at period beginning $ 1,350,849 $ 10,000 $ 1,377,561 $ (107,267 ) $ 2,631,143 Losses recoverable (95,509 ) - (384,243 ) 107,267 (372,485 ) Net reserves at period beginning 1,255,340 10,000 993,318 - 2,258,658 Net reserves acquired in purchase of Flagstone 639,641 - - - 639,641 Incurred losses-current year 647,977 - 526,438 - 1,174,415 Change in prior accident years (72,561 ) - (102,408 ) - (174,969 ) Incurred losses 575,416 - 424,030 - 999,446 Foreign exchange 4,203 - 11,678 - 15,881 Paid losses (500,351 ) (5,000 ) (330,669 ) - (836,020 ) Net reserves at period end 1,974,249 5,000 1,098,357 - 3,077,606 Losses recoverable 148,646 - 381,950 (90,629 ) 439,967 Gross reserves at period end $ 2,122,895 $ 5,000 $ 1,480,307 $ (90,629 ) $ 3,517,573 The amount of recorded reserves represents management's best estimate of expected losses and loss expenses on premiums earned. For the year ended December 31, 2012, favorable loss reserve development on prior accident years was $175.0 million of which, $72.6 million related to the Validus Re segment and $102.4 million related to the Talbot segment. Favorable loss reserve development benefited the Company's loss ratio by 9.3 percentage points for the year ended December 31, 2012. For the year ended December 31, 2011, favorable loss reserve development on prior accident years was $156.1 million, of which, $68.6 million 106-------------------------------------------------------------------------------- Table of Contents related to the Validus Re segment and $87.5 million related to the Talbot segment. Favorable loss reserve development benefited the Company's loss ratio by 8.7 percentage points for the year ended December 31, 2011.

For the year ended December 31, 2012, the Company incurred $500.6 million of losses from notable loss events, which represented 26.7 percentage points of the loss ratio. Net of $57.5 million of reinstatement premiums, the effect of these events on net income was a decrease of $443.0 million. For the year ended December 31, 2011, the Company incurred $633.9 million of losses from notable loss events, which represented 35.2 percentage points of the loss ratio, excluding the reserve for potential development on notable loss events. Net of $44.7 million of reinstatement premiums, the effect of these events on net income was a decrease of $589.2 million. The Company's loss ratio, excluding notable loss events, reserve for potential development on notable loss events and prior year loss reserve development for the year ended December 31, 2012 and 2011 was 36.0% and 38.3%, respectively.

Management of insurance and reinsurance companies use significant judgment in the estimation of reserves for losses and loss expenses. Given the magnitude of recent loss events and other uncertainties inherent in loss estimation, meaningful uncertainty remains regarding the estimation for recent notable loss events. The Company's actual ultimate net loss may vary materially from these estimates. Ultimate losses for notable loss events are estimated through detailed review of contracts which are identified by the Company as potentially exposed to the specific notable loss event. However, there can be no assurance that the ultimate loss amount estimated for a specific contract will be accurate, or that all contracts with exposure to a specific notable loss event will be identified in a timely manner. Potential losses in excess of the estimated ultimate loss assigned to a contract on the basis of a specific review, or loss amounts from contracts not specifically included in the detailed review are reserved for in the reserve for potential development on notable loss events. The reserve for potential development on notable loss events (or "RDE") is included as part of the Company's overall reserve requirement as defined and disclosed in the Critical Accounting Policies and Estimates section above.

As of December 31, 2011 the reserve for potential development on 2010 and 2011 notable loss events was $18.6 million and $78.0 million, respectively. During the year ended December 31, 2012, the Company increased certain loss estimates and allocated $82.4 million of the 2010 and 2011 reserve to the Deepwater Horizon, Danish flood, Thailand floods, Tohoku earthquake, Christchurch earthquake and the Gryphon Alpha mooring failure. The Company also increased the reserve for potential development on 2011 notable loss events by $27.9 million.

The 2011 notable loss events, principally the Tohoku earthquake, the Christchurch earthquake, the Thailand floods and the Gryphon Alpha continued to experience adverse development as shown in the reserves for notable loss events roll forward table. Contract complexity, the nature and number of perils arising from these events, limits and sub limits exposed, the quality, flow and timing of information received by the Company, information regarding retrocessional covers, assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices and potential changes in the legal environment continue to lead to complexity and volatility in the ultimate loss estimates for these events. Given the potential that one or some of the 2011 notable loss events eligible for potential allocation from the 2011 RDE may experience adverse development, rather than all deteriorating proportionately, an addition to the 2011 RDE of $27.9 million was made. As at December 31, 2012, the reserve for potential development on 2010 and 2011 notable loss events was $nil and $42.2 million, respectively. No RDE was established for 2012 notable losses.

For disclosure purposes, only those notable loss events which had an initial consolidated ultimate loss estimate above $15.0 million are disclosed separately and included in the reserve for notable loss events and reserve for development on events tables. To the extent that there are continued complexity and volatility factors relating to notable loss events in the aggregate, additions to the RDE may be established for a specific accident year, as illustrated in the RDE roll forward table. The Company increased the consolidated threshold for disclosure for notable losses effective January 1, 2011, from $5.0 million to $15.0 million.

107-------------------------------------------------------------------------------- Table of Contents RESERVES FOR NOTABLE LOSS EVENTS - (Dollars in thousands) 2010 NOTABLE LOSS EVENTS Year Ended December 31, 2010 Year Ended December 31, 2011 Year Ended December 31, 2012 Development Closing Development Closing Development Closing Initial (Favorable) / Allocations Estimate (c) (Favorable) / Allocations Estimate (c) (Favorable) / Allocations Estimate (c) Notable Loss Estimate (a) Unfavorable (b) of RDE (f) 31-Dec-10 Unfavorable (b) of RDE (f) 31-Dec-11 Unfavorable (b) of RDE (f) 31-Dec-12 Chilean earthquake $ 293,116 $ 2,548 $ 19,242 $ 314,906 $ (14,449 ) $ - $ 300,457 $ (15,172 ) $ - $ 285,285 Deepwater Horizon (e) 44,101 737 - 44,838 3 14,769 59,610 13,529 18,617 91,756 New Zealand earthquake 28,685 1,167 16,614 46,466 (297 ) - 46,169 3,026 - 49,195 Queensland floods 25,000 - - 25,000 (17,966 ) - 7,034 (3,700 ) - 3,334 Melbourne hailstorm 18,200 2,644 - 20,844 293 - 21,137 - - 21,137 Windstorm Xynthia 12,558 (11,177 ) - 1,381 (220 ) - 1,161 - - 1,161 Political violence loss 12,500 - - 12,500 2,195 - 14,695 - - 14,695 Aban Pearl 10,500 20 - 10,520 272 - 10,792 - - 10,792 Satellite failure 8,786 - - 8,786 (810 ) - 7,976 - - 7,976 Perth hailstorm 8,390 - - 8,390 1,063 - 9,453 - - 9,453 Oklahoma windstorm 7,677 29 - 7,706 (841 ) - 6,865 1 - 6,866 Bangkok riots 7,500 4,159 - 11,659 1,055 - 12,714 (203 ) - 12,511 Hurricane Karl 6,313 - - 6,313 - - 6,313 (4,320 ) - 1,993 Financial institutions loss 5,487 - - 5,487 95 - 5,582 - - 5,582 Political risk loss 5,000 349 - 5,349 (3,828 ) - 1,521 - - 1,521 Total 2010 Notable Loss Events $ 493,813 $ 476 $ 35,856 $ 530,145 $ (33,435 ) $ 14,769 $ 511,479 $ (6,839 ) $ 18,617 $ 523,257 Closing Closing Closing Paid Loss Reserve (d) Paid Loss Reserve (d) Paid Loss Reserve (d) Notable Loss (Recovery) 31-Dec-10 (Recovery) 31-Dec-11 (Recovery) 31-Dec-12 Chilean earthquake $ 120,549 $ 194,357 $ 103,847 $ 76,061 $ 25,380 $ 35,509 Deepwater Horizon (e) 45,152 (314 ) (34,881 ) 49,339 14,458 67,027 New Zealand earthquake - 46,466 1,254 44,915 12,182 35,759 Queensland floods - 25,000 - 7,034 112 3,222 Melbourne hailstorm 7,163 13,681 11,611 2,363 1,290 1,073 Windstorm Xynthia 111 1,270 369 681 53 628 Political violence loss - 12,500 - 14,695 - 14,695 Aban Pearl 7,346 3,174 2,418 1,028 165 863 Satellite failure 5,206 3,580 2,234 536 82 454 Perth hailstorm 5,339 3,051 3,751 363 134 229 Oklahoma windstorm 4,054 3,652 2,047 764 79 686 Bangkok riots (1 ) 11,660 7,500 5,215 - 5,012 Hurricane Karl - 6,313 - 6,313 1,637 356 Financial institutions loss 57 5,430 3,039 2,486 174 2,312 Political risk loss 7 5,342 1,514 - - - Total 2010 Notable Loss Events $ 194,983 $ 335,162 $ 104,703 $ 211,793 $ 55,746 $ 167,825 108-------------------------------------------------------------------------------- Table of Contents RESERVES FOR NOTABLE LOSS EVENTS - (Dollars in thousands) - CONTINUED 2011 NOTABLE LOSS EVENTS Year Ended December 31, 2011 Year Ended December 31, 2012 Development Closing Development Closing Initial (Favorable) / Allocations Estimate (c) (Favorable) / Allocations Estimate (c) Notable Loss Estimate (a) Unfavorable (b) of RDE 31-Dec-11 Unfavorable (b) of RDE 31-Dec12 Tohoku earthquake $ 148,926 $ 37,963 $ 29,788 $ 216,677 $ (6,652 ) $ 16,342 $ 226,367 Thailand floods 54,148 - - 54,148 10,704 14,262 79,114 Gryphon Alpha 52,434 9,151 - 61,585 874 5,355 67,814 Cat 46 43,806 18,553 - 62,359 $ 118 - 62,477Christchurch earthquake 41,881 16,854 20,212 78,947 (495 ) 20,121 98,573 Hurricane Irene 32,451 3 - 32,454 (10,788 ) - 21,666 Cat 48 31,481 9,190 - 40,671 5,612 - 46,283 Brisbane floods 31,023 4,848 - 35,871 (1,394 ) - 34,477 CNRL Horizon (g) 19,500 (8,706 ) - 10,794 558 - 11,352 Danish flood 19,429 5,987 - 25,416 2,566 7,665 35,647 Jupiter 1 15,008 (73 ) - 14,935 (166 ) - 14,769 Total 2011 Notable Loss Events $ 490,087 $ 93,770 $ 50,000 $ 633,857 $ 937 $ 63,745 $ 698,539 Closing Closing Paid Loss Reserve (d) Paid Loss Reserve (d) Notable Loss (Recovery) 31-Dec-11 (Recovery) 31-Dec-12 Tohoku earthquake $ 59,100 $ 157,577 $ 94,011 $ 73,256 Thailand floods 1,748 52,400 13,017 64,349 Gryphon Alpha 8,686 52,899 19,487 39,641 Cat 46 51,429 10,930 1,700 9,348 Christchurch earthquake (42 ) 78,989 5,708 92,907 Hurricane Irene 8,669 23,785 3,743 9,254 Cat 48 19,934 20,737 14,032 12,317 Brisbane floods 16,151 19,720 10,998 7,328 CNRL Horizon (g) 5,600 5,194 5,746 6 Danish flood 7,872 17,544 15,099 12,676 Jupiter 1 14,342 593 245 182 Total 2011 Notable Loss Events $ 193,489 $ 440,368 $ 183,786 $ 321,264 109-------------------------------------------------------------------------------- Table of Contents RESERVES FOR NOTABLE LOSS EVENTS - (Dollars in thousands) CONTINUED 2012 NOTABLE LOSS EVENTS Year Ended December 31, 2012 Development Closing Initial (Favorable) / Allocations Estimate (c) Notable Loss Estimate (a) Unfavorable (b) of RDE 30-Dec-12 Hurricane Sandy $ 361,036 $ - $ - $ 361,036 Costa Concordia 76,197 (2,061 ) - 74,136 Cat 67 22,713 5,377 - 28,090 U.S. drought 22,021 - - 22,021 Hurricane Isaac 15,209 67 - 15,276 Total 2012 Notable Loss Events $ 497,176 $ 3,383 $ - $ 500,559 Year Ended December 31, 2012 Closing Reserve (d) Notable Loss Paid Loss 31-Dec-12 Hurricane Sandy $ 38,515 $ 322,521 Costa Concordia 13,040 61,096 Cat 67 13,432 14,658 U.S. drought 12,346 9,675 Hurricane Isaac 313 14,963 Total 2012 Notable Loss Events $ 77,646 $ 422,913 (a) Includes paid losses, case reserves and IBNR reserves.

(b) Development other than allocation of RDE.

(c) Excludes impact of movements in foreign exchange rates.

(d) Closing Reserve for the period equals Closing Estimate for the period less cumulative Paid Losses.

(e) Net movement in 2011 impacted by recognition of recoveries under retrocessional contracts.

(f) As at December 31, 2012, the Company has allocated all of the 2010 RDE.

(g) As at December 31, 2012, the Company has concluded that CNRL Horizon and Jupiter 1 no longer remains eligible for potential allocations from the 2011 RDE.

110-------------------------------------------------------------------------------- Table of Contents RESERVE FOR DEVELOPMENT ON EVENTS Reserve for Reserve for Reserve for Total Reserve potential potential potential for potential development on development on development on development on 2010 notable 2011 notable 2012 notable loss notable loss loss events loss events events events (dollars in (dollars in (dollars in (dollars in thousands) thousands) thousands) thousands) As at December 31, 2009 $ - $ - Reserve for potential development additions 69,242 69,242 Reserve for potential development allocations (a) (35,856 ) (35,856 ) Reserve for potential development releases - - As at December 31, 2010 (b) $ 33,386 $ - $ - $ 33,386 Reserve for potential development additions - 128,000 128,000 Reserve for potential development allocations (a) (14,769 ) (50,000 ) (64,769 ) Reserve for potential development releases - - - As at December 31, 2011 (b) $ 18,617 $ 78,000 $ - $ 96,617 Reserve for potential development additions (c) - 27,926 - 27,926 Reserve for potential development allocations (a) (18,617 ) (63,746 ) - (82,363 ) Reserve for potential development releases - - - - As at December 31, 2012 (b) $ - $ 42,180 $ - $ 42,180 (a) During the year ended December 31, 2010, $19,242 was allocated to the Chilean earthquake and $16,614 was allocated to the New Zealand earthquake from the 2010 reserve for development on notable loss events.

During the year ended December 31, 2011, $14,769 was allocated to Deepwater Horizon from the 2010 reserve for development on notable loss events. During the same period $29,788 was allocated to the Tohoku earthquake and $20,212 was allocated to the Christchurch earthquake from the 2011 reserve for development on notable loss events.

During the year ended December 31, 2012, $18,617 was allocated to Deepwater Horizon from the 2010 reserve for development on notable loss events. During the same period $16,342 was allocated to the Tohoku earthquake, $20,121 was allocated to the Christchurch earthquake, $7,665 was allocated to the Danish flood and $14,262 was allocated to the Thailand floods and $5,355 was allocated to the Gryphon Alpha mooring failure.

(b) Notable losses for the year ended December 31, 2010 included Chilean earthquake, Melbourne hailstorm, Windstorm Xynthia, Deepwater Horizon, Aban Pearl, Bangkok riots, Perth hailstorm, New Zealand earthquake, Oklahoma windstorm, Political risk loss, Hurricane Karl, Queensland floods, Political violence loss, Satelite failure and Financial institution loss.

Notable losses for the year ended December 31, 2011 included Tohoku earthquake, Gryphon Alpha mooring failure, Christchurch earthquake, Brisbane floods, CNRL Horizon, Cat 46, Cat 48, Jupiter 1, Danish floods, Hurricane Irene and Thailand floods. As at September 30, 2012, the Company has concluded that CNRL Horizon and Jupiter 1 no longer remains eligible for potential allocations from the 2011 RDE.

Notable losses for the year ended December 31, 2012 included Costa Concordia, Cat 67, U.S. drought, Hurricane Isaac and Hurricane Sandy.

(c) The 2011 notable loss events, principally the Tohoku earthquake, the Christchurch earthquake and the Thailand floods continued to experience adverse development as shown in the notable loss roll forward table. Contract complexity, the nature and number of perils arising from these events, limits and sub limits exposed, the quality, flow and timing of information received by the Company, information regarding retrocessional covers, assumptions, both explicit and implicit, regarding future paid and reported loss development patterns, frequency and severity trends, claims settlement practices and potential changes in the legal environment continue to lead to complexity and volatility in the ultimate loss estimates for these events.

Given the potential that one or some of the 2011 notable loss events eligible for potential allocation from the 2011 RDE may experience adverse development, rather than all deteriorating proportionately, an addition to the 2011 RDE of $27.9 million was made.

(d) The RDE is included as part of the Company's overall reserve requirement as defined and disclosed in the Critical Accounting Policies and Estimates section above.

111-------------------------------------------------------------------------------- Table of Contents Policy Acquisition Costs Policy acquisition costs for the year ended December 31, 2012 were $334.7 million compared to $314.2 million for the year ended December 31, 2011, an increase of $20.5 million or 6.5%. Policy acquisition costs as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 17.9% and 17.4%, respectively. Details of policy acquisition costs by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Policy Policy Acquisition Policy Policy Acquisition Policy Policy Acquisition (Dollars in Acquisition Acquisition Cost Acquisition Acquisition Cost Acquisition Acquisition Cost thousands) Costs Costs (%) Ratio Costs Costs (%) Ratio Costs Costs (%) Ratio Property $ 107,062 32.0 % 12.4 % $ 112,261 35.8 % 12.6 % $ 119,894 40.9 % 13.0 % Marine 140,714 42.0 % 23.1 % 113,845 36.2 % 22.0 % 92,271 31.5 % 20.7 % Specialty 86,922 26.0 % 21.8 % 88,078 28.0 % 22.4 % 80,734 27.6 % 20.6 % Total $ 334,698 100.0 % 17.9 % $ 314,184 100.0 % 17.4 % $ 292,899 100.0 % 16.6 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Validus Re. Validus Re policy acquisition costs for the year ended December 31, 2012 were $154.4 million compared to $154.6 million for the year ended December 31, 2011, a decrease of $0.2 million or 0.1%. Details of Validus Re policy acquisition costs by line of business are provided below.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Policy Policy Acquisition Policy Policy Acquisition Policy Policy Acquisition (Dollars in Acquisition Acquisition Cost Acquisition Acquisition Cost Acquisition Acquisition Cost thousands) Costs Costs (%) Ratio Costs Costs (%) Ratio Costs Costs (%) Ratio Property $ 94,239 61.1 % 14.0 % $ 95,893 62.1 % 14.4 % $ 111,478 69.9 % 14.8 % Marine 44,343 28.7 % 17.5 % 44,431 28.7 % 21.0 % 33,691 21.1 % 19.1 % Specialty 15,780 10.2 % 16.6 % 14,258 9.2 % 15.8 % 14,358 9.0 % 13.2 % Total $ 154,362 100.0 % 15.1 % $ 154,582 100.0 % 16.0 % $ 159,527 100.0 % 15.3 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Policy acquisition costs include brokerage, commission and excise tax, are generally driven by contract terms, are normally a set percentage of premiums and are also net of ceding commission income on retrocessions. Items such as ceded premium, earned premium adjustments and reinstatement premiums that are recognized in the period have an effect on policy acquisition costs. Validus Re policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 2012 and 2011 were 15.1% and 16.0%, respectively. The policy acquisition cost ratio on the marine line has decreased by 3.5 percentage points due to an increase in reinstatement premiums that attract little or no policy acquisition costs.

AlphaCat. AlphaCat policy acquisition costs for the year ended December 31, 2012 were $1.8 million compared to $7.9 million for the year ended December 31, 2011, a decrease of $6.2 million or 77.7%.

Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 Policy Policy Acquisition Policy Policy Acquisition Policy Policy Acquisition (Dollars in Acquisition Acquisition Cost Acquisition Acquisition Cost Acquisition Acquisition Cost thousands) Costs Costs (%) Ratio Costs Costs (%) Ratio Costs Costs (%) Ratio Property $ 1,774 100.0 % 10.0 % $ 7,946 100.0 % 12.0 % $ 1,072 100.0 % 9.7 % Total $ 1,774 100.0 % 10.0 % $ 7,946 100.0 % 12.0 % $ 1,072 100.0 % 9.7 % Policy acquisition costs as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 10.0% and 12.0%, respectively Talbot. Talbot policy acquisition costs for the year ended December 31, 2012 were $183.9 million compared to $157.3 million for the year ended December 31, 2011, an increase of $26.6 million or 16.9%. Details of Talbot policy acquisition costs by line of business are provided below.

112-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Year Ended December 31, 2011 Year Ended December 31, 2010 Policy Policy Acquisition Policy Policy Acquisition Policy Policy Acquisition (Dollars in Acquisition Acquisition Cost Acquisition Acquisition Cost Acquisition Acquisition Cost thousands) Costs Costs (%) Ratio Costs Costs (%) Ratio Costs Costs (%) Ratio Property $ 16,114 8.8 % 9.2 % $ 13,814 8.7 % 8.6 % $ 18,628 12.9 % 11.8 % Marine 96,582 52.5 % 27.2 % 69,624 44.3 % 22.8 % 58,614 40.8 % 21.8 % Specialty 71,230 38.7 % 23.5 % 73,896 47.0 % 24.4 % 66,527 46.3 % 23.5 % Total $ 183,926 100.0 % 22.1 % $ 157,334 100.0 % 20.4 % $ 143,769 100.0 % 20.3 % Policy acquisition costs as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 22.1% and 20.4%, respectively. During the nine months ended September 30, 2012, Talbot reassessed commission costs on underwriting years 2007 and prior, related to business on the marine class. This resulted in a $14.8 million increase in gross premiums written and earned premium, offset by an equal increase on policy acquisition costs for the marine class, resulting in no net impact. The effect on the policy acquisition cost ratio was an increase of 9.3 percentage points for the year ended December 31, 2012. Excluding the effect of this implementation, the marine lines and total policy acquisition cost ratios would have been 23.0% and 20.3%, respectively.

General and Administrative Expenses General and administrative expenses for the year ended December 31, 2012 were $263.7 million compared to $197.5 million for the year ended December 31, 2011, an increase of $66.2 million or 33.5%. The increase was primarily due to an increase in Corporate expenses of $30.0 million, a $21.2 million increase in the Talbot segment and a $18.4 million increase in the Validus Re segment. The increase was offset by a $3.4 million decrease in the AlphaCat segment.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 General and General and General and General and General and General and (Dollars in Administrative Administrative Administrative Administrative Administrative Administrative thousands) Expenses Expenses (%) Expenses Expenses (%) Expenses Expenses (%) Validus Re $ 63,048 23.9 % $ 44,663 22.6 % $ 45,613 21.8 % AlphaCat 7,532 2.9 % 10,929 5.5 % 5,327 2.5 % Talbot 133,281 50.5 % 112,072 56.7 % 107,557 51.4 % Corporate & Eliminations (b) 59,791 22.7 % 29,833 15.2 % 50,793 24.3 % Total $ 263,652 100.0 % $ 197,497 100.0 % $ 209,290 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Corporate and Eliminations includes legal entity adjustments.

General and administrative expenses of $263.7 million in the year ended December 31, 2012 represented 14.1 percentage points of the expense ratio. General and administrative expenses of $197.5 million in the year ended December 31, 2011 represented 11.0 percentage points of the expense ratio. Share compensation expenses are discussed in the following section.

Validus Re. Validus Re general and administrative expenses for the year ended December 31, 2012 were $63.0 million compared to $44.7 million for the year ended December 31, 2011, an increase of $18.4 million or 41.2%. General and administrative expenses have increased primarily due to an increase in the performance bonus expense for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Other contributing factors of the increase in general and administrative expense include an increase in rent and office expenses due to the Bermuda office refurbishment, the departure of a senior executive and the Company consolidating the general and administrative expenses as a result of the acquisition of Flagstone. General and administrative expenses include salaries and benefits, professional fees, rent and office expenses.

Validus Re general and administrative expenses as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 6.2% and 4.6%, respectively.

AlphaCat. AlphaCat general and administrative expenses for the year ended December 31, 2012 were $7.5 million compared to $10.9 million for the year ended December 31, 2011, a decrease of $3.4 million or 31.1%. General and administrative expenses include salaries and benefits and professional fees.

General and administrative expenses have decreased primarily due to the deconsolidation of AlphaCat Re 2011 as at December 31, 2011, offset by an increase in salaries and benefits and performance bonus expense. AlphaCat's general and administrative expenses as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 42.6% and 16.5%, respectively. The AlphaCat segment general and administrative expense ratio has 113-------------------------------------------------------------------------------- Table of Contents been impacted by the reduction in net premiums earned as a greater proportion of the segment's revenues are generated in equity earnings from operating affiliates which is not included in the ratio calculation.

Talbot. Talbot general and administrative expenses for the year ended December 31, 2012 were $133.3 million compared to $112.1 million for the year ended December 31, 2011, an increase of $21.2 million or 18.9%. General and administrative expenses have increased primarily due to an increase in the performance bonus expense. This increase was partially offset by a decrease in Lloyd's syndicate costs. Talbot's general and administrative expenses as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 16.0% and 14.6%, respectively.

Corporate & Eliminations. Corporate general and administrative expenses for the year ended December 31, 2012 were $59.8 million compared to $29.8 million for the year ended December 31, 2011, an increase of $30.0 million or 100.4%.

General and administrative expenses have increased primarily due to an increase in the performance bonus expense and professional fees. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.

Share Compensation Expenses Share compensation expenses for the year ended December 31, 2012 were $26.7 million compared to $34.3 million for the year ended December 31, 2011, a decrease of $7.6 million or 22.1%. This expense is non-cash and has no net effect on total shareholders' equity, as it is balanced by an increase in additional paid-in capital.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Share Share Share Share Compensation Share Compensation Share Compensation (Dollars in Compensation Expense Compensation Expense Compensation Expense thousands) Expense Expenses (%) Expense Expenses (%) Expense Expenses (%) Validus Re $ 7,763 29.1 % $ 9,309 27.2 % $ 7,181 24.9 % AlphaCat 279 1.0 % 107 0.3 % 594 2.1 % Talbot 7,789 29.2 % 8,582 25.0 % 6,923 23.9 % Corporate & Eliminations (b) 10,878 40.7 % 16,298 47.5 % 14,213 49.1 % Total $ 26,709 100.0 % $ 34,296 100.0 % $ 28,911 100.0 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Corporate and Eliminations includes legal entity adjustments.

Share compensation expenses of $26.7 million in the year ended December 31, 2012 represented 1.4 percentage points of the general and administrative expense ratio. The decrease in share compensation expenses of $7.6 million is due to a reversal of $1.4 million of expenses related to performance shares based on a review of current and projected performance criteria and a reduced expense of $1.3 million on the non-qualified options which fully vested in May 2012. In addition, the share compensation expenses of $34.3 million for the year ended December 31, 2011 included $2.2 million of expenses on the employee seller shares and $1.1 million of Talbot restricted share awards which fully vested on July 2, 2011.

Validus Re. Validus Re share compensation expenses for the year ended December 31, 2012 were $7.8 million compared to $9.3 million for the year ended December 31, 2011, a decrease of $1.5 million or 16.6%. Share compensation expense as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 0.7% and 1.0%, respectively.

AlphaCat. AlphaCat share compensation expense as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 1.6% and 0.2%, respectively.

Talbot. Talbot share compensation expenses for the year ended December 31, 2012 were $7.8 million compared to $8.6 million for the year ended December 31, 2011, a decrease of $0.8 million or 9.2%. Share compensation expense as a percent of net premiums earned for the year ended December 31, 2012 and 2011 were 0.9% and 1.1%, respectively.

Corporate & Eliminations. Corporate share compensation expenses for the year ended December 31, 2012 were $10.9 million compared to $16.3 million for the year ended December 31, 2011, a decrease of $5.4 million or 33.3%.

Selected Ratios The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the loss ratio and the expense ratio. The loss ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing 114-------------------------------------------------------------------------------- Table of Contents acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expenses ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the years ended December 31, 2012, 2011 and 2010.

Year Ended December Year Ended Year Ended 31, 2012 December 31, December 31, (a) 2011 2010 Consolidated Losses and loss expenses ratio 53.4 % 69.1 % 56.1 % Policy acquisition costs ratio 17.9 % 17.4 % 16.6 % General and administrative expenses ratio (b) 15.5 % 12.9 % 13.5 % Expense ratio 33.4 % 30.3 % 30.1 % Combined ratio 86.8 % 99.4 % 86.2 % Validus Re Losses and loss expenses ratio 56.2 % 77.6 % 57.8 % Policy acquisition costs ratio 15.1 % 16.0 % 15.3 % General and administrative expenses ratio (b) 6.9 % 5.6 % 5.1 % Expense ratio 22.0 % 21.6 % 20.4 % Combined ratio 78.2 % 99.2 % 78.2 % AlphaCat Losses and loss expenses ratio 0.0 % 15.2 % 0.0 % Policy acquisition costs ratio 10.0 % 12.0 % 9.7 % General and administrative expenses ratio (b) 44.2 % 16.7 % 53.4 % Expense ratio 54.2 % 28.7 % 63.1 % Combined ratio 54.2 % 43.9 % 63.1 % Talbot Losses and loss expenses ratio 50.9 % 63.0 % 54.4 % Policy acquisition costs ratio 22.1 % 20.4 % 20.3 % General and administrative expenses ratio (b) 16.9 % 15.7 % 16.1 % Expense ratio 39.0 % 36.1 % 36.4 % Combined ratio 89.9 % 99.1 % 90.7 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Includes general and administrative expenses and share compensation expenses.

General and administrative expense ratios for the year ended December 31, 2012 and 2011 were 15.5% and 12.9%, respectively. General and administrative expense ratio is the sum of general and administrative expenses and share compensation expense divided by net premiums earned.

Year Ended December 31, 2012 (a) Year Ended December 31, 2011 Year Ended December 31, 2010 Expenses as Expenses as Expenses as % of Net % of Net % of Net Earned Earned Earned (Dollars in thousands) Expenses Premiums Expenses Premiums Expenses Premiums General and administrative expenses $ 263,652 14.1 % $ 197,497 11.0 % $ 209,290 11.9 % Share compensation expenses 26,709 1.4 % 34,296 1.9 % 28,911 1.6 % Total $ 290,361 15.5 % $ 231,793 12.9 % $ 238,201 13.5 % (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

115-------------------------------------------------------------------------------- Table of Contents Underwriting Income Underwriting income for the year ended December 31, 2012 was $248.7 million compared to $11.8 million for the year ended December 31, 2011, an increase of $236.9 million or 2,014.0%.

Year Ended % of Sub- Year Ended % of Sub- Year Ended % of Sub- (Dollars in thousands) December 31, 2012 total December 31, 2011 total December 31, 2010 total Validus Re (a) $ 222,682 70.9 % $ 8,066 15.5 % $ 226,187 76.4 % AlphaCat 8,081 2.6 % 36,984 70.8 % 4,089 1.4 % Talbot 83,253 26.5 % 7,168 13.7 % 65,698 22.2 % Sub total 314,016 100.0 % 52,218 100.0 % 295,974 100.0 % Corporate & Eliminations (65,305 ) (40,453 ) (53,537 ) Total $ 248,711 $ 11,765 $ 242,437 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

The underwriting results of an insurance or reinsurance company are also often measured by reference to its underwriting income, which is a non-GAAP measure as previously defined. Underwriting income, as set out in the table below, is reconciled to net income (the most directly comparable GAAP financial measure) by the addition or subtraction of net investment income, other income, finance expenses, gain on bargain purchase, realized gain on repurchase of debentures, net realized and unrealized gains (losses) on investments, foreign exchange gains (losses) and transaction expenses, as illustrated below.

Year Ended December 31, 2012 Year Ended Year Ended (Dollars in thousands) (a) December 31, 2011 December 31, 2010 Underwriting income $ 248,711 $ 11,765 $ 242,437 Net investment income 107,936 112,296 134,103 Other income 22,396 5,718 5,219 Finance expenses (53,857 ) (54,817 ) (55,870 ) Gain on bargain purchase, net of expenses 17,701 - - Net realized gains on investments 18,233 28,532 32,498 Net unrealized gains (losses) on investments 17,585 (19,991 ) 45,952 (Loss) from investment affiliate (964 ) - - Foreign exchange gains (losses) 4,798 (22,124 ) 1,351 Transaction expenses - (17,433 ) - Tax (expense) benefit (2,501 ) (824 ) (3,126 ) Income from operating affiliates 12,580 - - Net income $ 392,618 $ 43,122 $ 402,564 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Underwriting income indicates the performance of the Company's core underwriting function, excluding revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of underwriting income enhances the understanding of our results by highlighting the underlying profitability of the Company's core insurance and reinsurance business. Underwriting profitability is influenced significantly by earned premium growth, adequacy of the Company's pricing and loss frequency and severity. Underwriting profitability over time is also influenced by the Company's underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses. The Company believes that underwriting income provides investors with a valuable measure of profitability derived from underwriting activities.

The Company excludes the U.S. GAAP measures noted above, in particular net realized and unrealized gains and losses on investments, from its calculation of underwriting income because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its underwriting business and including them distorts the analysis of trends in its operations. In addition to presenting net income determined in accordance with U.S. GAAP, the Company believes that showing underwriting income 116-------------------------------------------------------------------------------- Table of Contents enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company's results of operations in a manner similar to how management analyzes the Company's underlying business performance. The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining total annual incentive compensation.

Underwriting income should not be viewed as a substitute for U.S. GAAP net income as there are inherent material limitations associated with the use of underwriting income as compared to using net income, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income with other companies, particularly as underwriting income may be defined or calculated differently by other companies. Therefore, the Company provides more prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income and reconciliation of underwriting income to net income.

Net Investment Income Net investment income for the year ended December 31, 2012 was $107.9 million compared to $112.3 million for the year ended December 31, 2011, a decrease of $4.4 million or 3.9%. Net investment income decreased due to falling yields on fixed maturity investments. Net investment income includes accretion of premium or discount on fixed maturities, interest on coupon-paying bonds, short-term investments and cash and cash equivalents, partially offset by investment management fees. The components of net investment income for the year ended December 31, 2012, 2011 and 2010 are as presented below.

Year Ended December Year Ended December Year Ended December (Dollars in thousands) 31, 2012 (a) 31, 2011 31, 2010 Fixed maturities and short-term investments $ 105,937 $ 111,983 $ 132,669 Other investments 2,790 - - Cash and cash equivalents 7,259 7,285 8,180 Securities lending income 14 58 200 Total gross investment income 116,000 119,326 141,049 Investment expenses (8,064 ) (7,030 ) (6,946 ) Net investment income $ 107,936 $ 112,296 $ 134,103 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Annualized investment yield is calculated by dividing net investment income (excluding other investments) by the average balance of the assets managed by our portfolio managers (excluding other investments). Average assets is the average of the beginning, ending and intervening quarter end asset balances. The Company's annualized effective investment yield was 1.65% and 1.87% for the years ended December 31, 2012 and 2011, respectively, and the average duration of the portfolio at December 31, 2012 was 1.34 years (December 31, 2011-1.63 years).

The annualized effective investment yield decreased for the year ended December 31, 2012 due to the consolidation of the Flagstone investment portfolio which included $1,060.4 million in cash and short term investments, or 72.4% of Flagstone's total investments and cash as at December 31, 2012. Excluding the effect of the consolidation of the Flagstone investment portfolio, the annualized effective investment yield would have been 1.72% for the year ended December 31, 2012. Overall yield has decreased due to falling yields on fixed maturity investments.

Other Income Other income for the year ended December 31, 2012 was $22.4 million compared to $5.7 million for the year ended December 31, 2011, an increase of $16.7 million or 291.7%. The primary component of other income for the year ended December 31, 2012 is $23.2 million in underwriting and performance fees the AlphaCat segment earned from business written by AlphaCat Re 2011, PaCRe and AlphaCat Re 2012.

AlphaCat Re 2011 was a consolidated subsidiary during the three months ended June 30, September 30 and December 31, 2011. The balance sheet of AlphaCat Re 2011 was deconsolidated as at December 31, 2011.

117-------------------------------------------------------------------------------- Table of Contents Finance Expenses Finance expenses for the year ended December 31, 2012 were $53.9 million compared to $54.8 million for the year ended December 31, 2011, an increase of $1.0 million or 1.8%. Finance expenses also include the amortization of debt offering costs and discounts, and fees related to our credit facilities.

Year Ended December 31, (Dollars in thousands) 2012 (a) 2011 2010 2006 Junior Subordinated Deferrable Debentures $ 6,964 $ 9,768 14,354 2007 Junior Subordinated Deferrable Debentures 8,922 12,115 12,114 2010 Senior Notes due 2040 22,388 22,388 20,770 Flagstone 2006 Junior Subordinated Deferrable Interest Notes 459 - - Flagstone 2007 Junior Subordinated Deferrable Interest Notes 327 - - Credit facilities 11,999 6,492 5,246 Bank charges 269 218 246 AlphaCat Re 2011 preferred dividend(b) - 3,609 - AlphaCat ILS Funds fees (c) 2,432 - - Talbot FAL Facility 97 227 333 Talbot third party FAL facility - - 2,807 Finance expenses $ 53,857 $ 54,817 55,870 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

(b) Includes preferred share dividends and finance expenses attributable to AlphaCat Re 2011.

(c) Includes finance expenses incurred by AlphaCat Managers, Ltd. in relation to the AlphaCat ILS funds and fund-raising for AlphaCat 2013.

The decrease in finance expenses of $1.0 million for the year ended December 31, 2012 was due primarily to a $3.2 million decrease in interest paid on the 2007 Junior Subordinated Deferrable Debentures due to the basis of repayments changing from a fixed interest rate of 8.480% per annum through June 15, 2012 to a floating rate of three month LIBOR plus 295 basis points, a $2.8 million decrease in interest paid on the 2006 Junior Subordinated Deferrable Debentures due to the basis of repayments changing from a fixed interest rate of 9.069% per annum through June 15, 2011 to a floating rate of three month LIBOR plus 355 basis points and a $3.6 million decrease in the preferred dividends and finance expenses attributable to AlphaCat Re 2011. These decreases were partially offset by placement fees incurred by AlphaCat for its investments in ILS Funds of $2.4 million and a $5.5 million increase in credit facility fees primarily due to closing fees on the renewal of the credit facilities and the acceleration of fees expensed on the credit facilities that were terminated during the year.

Tax (Expense) Tax expense for the year ended December 31, 2012 was $(2.5) million compared to $(0.8) million for the year ended December 31, 2011, an increase in expense of $1.7 million or 203.5%. The increase was primarily due to underwriting profits in the Talbot segment for the year ended December 31, 2012 compared to underwriting losses for the year ended December 31, 2011. The increase was also due to an increase in UK taxable profits arising from higher fee income, partially offset by a higher bonus deduction and a reduction in the deferred tax liability due to a reduction in the UK tax rate from 2013.

The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from those taxes until March 31, 2035.

Within the segment information contained in the Financial Statements, gross premiums written allocated to the territory of coverage exposure are presented for the periods indicated. Gross premiums written allocated to the United States are written primarily through Validus Reinsurance, Ltd., a Bermuda Registered Reinsurance Company. As noted, under current Bermuda law, the Company is not taxed on any Bermuda income and therefore the premium disclosed in the segment information does not correlate to pre-tax income generated in the United States.

118-------------------------------------------------------------------------------- Table of Contents Income From Operating Affiliates Income from operating affiliates for the year ended December 31, 2012, was $12.6 million compared to $nil for the year ended December 31, 2011, an increase of $12.6 million. For the year ended December 31, 2012 income from operating affiliates of $12.6 million relates to equity earnings relating to AlphaCat Re 2011 and AlphaCat Re 2012.

In the second quarter of 2011, AlphaCat Re 2011 was included in the consolidated results of the Company, therefore there was no comparative information for the year ended December 31, 2011. As at December 31, 2012, the Company owned 22.3% of AlphaCat Re 2011, therefore income from operating affiliates reflects the Company's share of AlphaCat Re 2011's net income for the year ended December 31, 2012.

AlphaCat Re 2012 was formed on May 29, 2012 therefore there was no comparative information for the year ended December 31, 2011. As at December 31, 2012, the Company owned 37.9% of AlphaCat Re 2012, therefore income from operating affiliates reflects the Company's share of AlphaCat Re 2012's net income for the year ended December 31, 2012.

Gain on Bargain Purchase, Net of Expenses On November 30, 2012, the Company acquired all of the outstanding shares of Flagstone. Pursuant to the Amalgamation Agreement, the Company acquired all of Flagstone's outstanding common shares in exchange for the Company's common shares and cash. The purchase price paid by the Company was $646.0 million for net assets acquired of $695.7 million. The Company expensed as incurred $5.8 million of transaction expenses, $20.2 million of termination expenses and $6.0 million for amortization of intangibles related to the acquisition for the year ended December 31, 2012, resulting in a gain on bargain purchase, net of expenses of $17.7 million. Transaction expenses are comprised of primarily legal and corporate advisory services.

Net Realized Gains on Investments Net realized gains on investments for the year ended December 31, 2012 were $18.2 million compared to $28.5 million for the year ended December 31, 2011, a decrease of $10.3 million or 36.1%.

Net Unrealized Gains (Losses) on Investments Net unrealized gains on fixed maturity and short term investments for the year ended December 31, 2012 were $17.6 million compared to losses of $(20.0) million for the year ended December 31, 2011, an increase of $37.6 million or 188.0%.

The net unrealized gains for the year ended December 31, 2012 were a result primarily of increased market appetite for corporate credit.

Net unrealized losses on other investments for the year ended December 31, 2012 were $(20.4) million compared to $(1.3) million for the year ended December 31, 2011, a decrease of $19.1 million. The net unrealized losses for the year ended December 31, 2012 were driven primarily by the $(19.2) million unrealized loss relating to the Paulson & Co. hedge fund investments held by PaCRe. The amount of net unrealized losses attributable to noncontrolling interest was $(17.3) million for the year ended December 31, 2012, leaving a net impact to the Company of $(1.9) million.

Net unrealized (losses) gains on investments are recorded as a component of net income. The Company has adopted all authoritative guidance on U.S. GAAP fair value measurements in effect as of the balance sheet date. Consistent with these standards, certain market conditions allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable.

Loss From Investment Affiliate The loss from investment affiliate for the year ended December 31, 2012 was $(1.0) million as compared to $nil for the year ended December 31, 2011, a decrease of $(1.0) million. The loss from investment affiliate relates to the loss incurred in the Company's investment in the Aquiline Financial Services Fund II L.P. for the year ended December 31, 2012. As at December 31, 2011, the investment in the Aquiline Financial Services Fund II L.P was included in other investments.

Foreign Exchange Gains (Losses) Our reporting currency is the U.S. dollar. Our subsidiaries have one of the following functional currencies: U.S. dollar, British pound sterling, Euro, Canadian dollar, Swiss franc, Indian rupee, South African rand and Singapore dollar. As a significant portion of our operations are transacted in foreign currencies, fluctuations in foreign exchange rates may affect period-to-period comparisons. To the extent that fluctuations in foreign currency exchange rates affect comparisons, their impact has been quantified, when possible, and discussed in each of the relevant sections. See Note 3 "Significant accounting policies" to the consolidated financial statements in Item 8, "Financial Statements and Supplementary Data." 119-------------------------------------------------------------------------------- Table of Contents Year Ended Year Ended Year Ended December 31, December 31, December 31, U.S. dollar (weakened) strengthened against: 2012 2011 2010 British Pound sterling (4.4 )% (0.4 )% 3.0 % Euro (1.7 )% 2.3 % 8.2 % Canadian Dollar (2.7 )% 2.1 % (4.7 )% Swiss Franc (2.4 )% (0.2 )% (9.4 )% Indian Rupee 3.6 % 16.5 % (2.6 )% South African Rand 4.7 % 21.6 % (10.4 )% Singapore Dollar (5.8 )% 0.4 % (8.1 )% Foreign exchange gains for the year ended December 31, 2012 were $4.8 million compared to losses of $(22.1) million for the year ended December 31, 2011, a favorable movement of $26.9 million or 121.7%. For the year ended December 31, 2012, Validus Re recognized foreign exchange gains of $2.7 million and Talbot recognized foreign exchange gains of $2.5 million.

For the year ended December 31, 2012, Validus Re segment foreign exchange gains were $2.7 million compared to a foreign exchange loss of $(19.5) million for the year ended December 31, 2011, a favorable movement of $22.2 million or 113.6%.

Validus Re currently hedges foreign currency exposure by balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-USD currencies. Consequently, Validus Re aims to have a limited exposure to foreign exchange fluctuations. The $2.7 million gain for the year ended December 31, 2012 primarily occurred as a result of the British pound sterling and Japanese Yen strengthening during the period. In the year ended December 31, 2011 a foreign exchange loss occurred as a result of the Company having liabilities in both New Zealand Dollars and Japanese Yen during a period when both of these currencies strengthened against the U.S. dollar.

For the year ended December 31, 2012, Talbot segment foreign exchange gains were $2.5 million compared to losses of $(2.2) million for the year ended December 31, 2011, a favorable movement of $4.7 million or 215.5%. The favorable movement in Talbot foreign exchange was due primarily to a $2.1 million translation of non U.S. dollar balances and a $3.5 million translation of non-monetary assets, partially of offset a $1.2 million losses incurred in the revaluation of assets held in Euros and other currencies. During 2012, the U.S. dollar to British pound sterling weakened by 4.4% as compared to a weakening of the U.S. dollar to British pound sterling of 0.4% for the in 2011.

At December 31, 2012, Talbot's balance sheet includes net unearned premiums and deferred acquisition costs denominated in foreign currencies of approximately $107.4 million and $21.5 million, respectively. These balances consisted of British pound sterling and Canadian dollars of $78.0 million and $7.9 million, respectively. Net unearned premiums and deferred acquisition costs are classified as non-monetary items and are translated at historic exchange rates.

All of Talbot's other balance sheet items are classified as monetary items and are translated at period end exchange rates. Additional foreign exchange gains (losses) may be incurred on the translation of net unearned premiums and deferred acquisition costs arising from insurance and reinsurance premiums written in future periods.

Net Loss (Income) Attributable to Noncontrolling Interest On April 2, 2012, the Company capitalized PaCRe, a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance. PaCRe was funded with $500.0 million of contributed capital. Validus invested $50.0 million in PaCRe's common equity and therefore owns 10.0% of PaCRe. The net loss attributable to noncontrolling interest of $15.8 million for the period from April 2, 2012 to December 31, 2012 was calculated as 90.0% of the net loss in PaCRe for the period.

On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. Validus Re has an equity interest in AlphaCat Re 2011 and Validus Re held a majority of AlphaCat Re 2011's outstanding voting rights up to December 23, 2011 when AlphaCat Re 2011 completed a secondary offering of its common shares to third party investors, along with a partial sale of Validus Re common shares to one of the third party investors. As a result of these transactions, the Company's outstanding voting rights decreased to 43.7%. As a result of the Company's voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 were derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and the remaining investment in AlphaCat Re 2011 is treated as an equity method investment as at December 31, 2012. For the year ended December 31, 2011, the Company recorded $(21.8) million in net income attributable to noncontrolling interest relating to AlphaCat Re 2011.

120-------------------------------------------------------------------------------- Table of Contents Transaction Expenses During the year ended December 31, 2012, the Company incurred $nil in transaction expenses compared to $17.4 million for the year ended December 31, 2011. The 2011 transaction expenses related to the Company's proposed acquisition of Transatlantic. The transaction expenses related to the November 30, 2012 acquisition of Flagstone were used in the calculation of the gain on bargain purchase of Flagstone and are presented on the section above entitled "Gain on Bargain Purchase of Flagstone." Transaction expenses are primarily comprised of legal, financial advisory and audit related services.

121-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2011 compared to Year Ended December 31, 2010 Net income available to Validus for the year ended December 31, 2011 was $21.3 million compared to $402.6 million for the year ended December 31, 2010, a decrease of $381.2 million or 94.7%. The primary factors driving the decrease in net income were: • Decrease in underwriting income of $230.7 million due primarily to a $256.8 million increase in loss and loss expenses from increased severity of catastrophe events. This was partially offset by a $41.0 million increase in net premiums earned; • Decrease in net investment income of $21.8 million; • Unfavorable movement in net unrealized gains on investments of $65.9 million; and • Unfavorable movement in foreign exchange of $23.5 million.

The change in net income available to Validus for the year ended December 31, 2011 of $381.2 million as compared to the year ended December 31, 2010 is described in the following table: Year Ended December 31, 2011 Decrease (increase) over the year ended December 31, 2010 Corporate and other reconciling (Dollars in thousands) Validus Re AlphaCat Talbot items Total Notable losses-(increase) decrease in net losses and loss expenses(a) $ (46,951 ) $ - $ (56,111 ) $ - $ (103,062 ) Less: Notable losses-increase (decrease) net reinstatement premiums(a) 21,989 - 1,602 - 23,591 Other underwriting (loss) income (193,159 ) 32,895 (4,021 ) 13,084 (151,201 ) Underwriting (loss) income(b) (218,121 ) 32,895 (58,530 ) 13,084 (230,672 ) Net investment income (14,922 ) (2,613 ) (3,907 ) (365 ) (21,807 ) Other income 3,452 7,617 (2,830 ) (7,740 ) 499 Finance expenses (2,306 ) (3,659 ) 2,913 4,105 1,053 Operating (loss) income before taxes and income from operating affiliates (231,897 ) 34,240 (62,354 ) 9,084 (250,927 ) Tax benefit 63 - 2,079 160 2,302 Net operating (loss) income (231,834 ) 34,240 (60,275 ) 9,244 (248,625 ) Net realized gains (losses) on investments (2,393 ) 425 (1,998 ) - (3,966 ) Net unrealized (losses) on investments (59,314 ) (2,001 ) (4,628 ) - (65,943 ) Foreign exchange (losses) gains (18,902 ) 99 (4,279 ) (393 ) (23,475 ) Transaction expenses - - - (17,433 ) (17,433 ) Net (loss) income (312,443 ) 32,763 (71,180 ) (8,582 ) (359,442 ) Net (income) attributable to noncontrolling interest - (21,793 ) - - (21,793 ) Net (loss) income available to Validus $ (312,443 ) $ 10,970 $ (71,180 ) $ (8,582 ) $ (381,235 ) (a) Notable losses for the year ended December 31, 2011 include: the Tohoku earthquake, Gryphon Alpha mooring failure, Christchurch earthquake, Brisbane floods, CNRL Horizon, Cat 46, Cat 48, Jupiter 1, Danish floods, Hurricane Irene and the Thailand floods. Excludes reserve for potential development on 2011 notable loss events. Notable losses for the year ended December 31, 2010 include: the Chilean earthquake, Melbourne hailstorm, windstorm Xynthia, Deepwater Horizon, Aban Pearl, Bangkok riots, Perth hailstorm, New Zealand earthquake, Oklahoma windstorm, two Political risk losses, Hurricane Karl, Queensland floods, a Political violence loss, a Satellite failure and a Financial institutions loss.

(b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income (loss) that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of this measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income".

122-------------------------------------------------------------------------------- Table of Contents Other Non-GAAP Financial Measures In presenting the Company's results, management has included and discussed certain schedules containing net operating income, underwriting income (loss), managed gross premiums written, annualized return on average equity and diluted book value per common share that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP.

Non-GAAP measures may be defined or calculated differently by other companies.

These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. The calculation of annualized return on average equity is discussed in the section above entitled "Financial Measures." A reconciliation of underwriting income to net income, the most comparable U.S.

GAAP financial measure, is presented above in the section entitled "Underwriting Income (Loss)." A reconciliation of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, is presented below.

Operating income is calculated based on net income (loss) excluding net realized gains (losses), net unrealized gains (losses) on investments, income (loss) from investment affiliates, gains (losses) arising from translation of non-US$ denominated balances and non-recurring items. A reconciliation of operating income to net income, the most comparable U.S. GAAP financial measure, is embedded in the table presenting results of operations for the years ended December 31, 2012 and 2011 in the section above entitled "Results of Operations." Realized gains (losses) from the sale of investments are driven by the timing of the disposition of investments, not by our operating performance.

Gains (losses) arising from translation of non-U.S. dollar denominated balances are unrelated to our underlying business.

Managed gross premiums written represents gross premiums written by the Company and its operating affiliates. Managed gross premiums written differs from total gross premiums written, which the Company believes is the most directly comparable GAAP measure, due to the inclusion of premiums written on behalf of the Company's operating affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, which are accounted for under the equity method of accounting. A reconciliation of managed gross premiums written to gross premiums written, the most comparable U.S. GAAP financial measure, is presented in the section below.

The following tables present reconciliations of diluted book value per share to book value per share, the most comparable U.S. GAAP financial measure, at December 31, 2012 and December 31, 2011.

As at December 31, 2012 Book Value Per Equity Amount Shares Exercise Price Share Book value per common share Total shareholders' equity $ 4,020,827 107,921,259 $ 37.26 Diluted book value per common share Total shareholders' equity 4,020,827 107,921,259 Assumed exercise of outstanding warrants 118,015 6,410,472 $ 18.41 Assumed exercise of outstanding stock options 37,745 1,823,947 $ 20.69 Unvested restricted shares - 2,443,631 Diluted book value per common share $ 4,176,587 118,599,309 $ 35.22 As at December 31, 2011 Book Value Per Equity Amount Shares Exercise Price Share Book value per common share Total shareholders' equity $ 3,448,425 99,471,080 $ 34.67 Diluted book value per common share Total shareholders' equity 3,448,425 99,471,080 Assumed exercise of outstanding warrants 121,445 6,916,678 $ 17.56 Assumed exercise of outstanding stock options 45,530 2,263,012 $ 20.12 Unvested restricted shares - 3,340,729 Diluted book value per common share $ 3,615,400 111,991,499 $ 32.28 123-------------------------------------------------------------------------------- Table of Contents The following tables present reconciliations of total gross premiums written to total managed gross premiums written, the most comparable U.S. GAAP financial measure, at December 31, 2012 and December 31, 2011.

Year Ended (unaudited) December 31, December 31, 2012 2011(a) Total gross premiums written $ 2,166,440 $ 2,124,691 Adjustments for: Gross premiums written on behalf of AlphaCat Re 2011 94,317 - Gross premiums written on behalf of AlphaCat Re 2012 32,171 - Total managed gross premiums written $ 2,292,928 $ 2,124,691 (a) Total gross premiums written for the year ended December 31, 2011 included $(1.4) million and $60.0 million of gross premiums written from AlphaCat Re 2011, which was a consolidated subsidiary during the three months ended June 30, September 30 and December 31, 2011. The balance sheet of AlphaCat Re 2011 was deconsolidated as at December 31, 2011.

Financial Condition and Liquidity Validus Holdings, Ltd. is a holding company and conducts no operations of its own. The Company relies primarily on cash dividends and other permitted payments from Validus Re and Talbot to pay finance expenses and other holding company expenses. There are restrictions on the payment of dividends from Validus Re and Talbot to the Company. Please refer to Part II, Item 5, "Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" for further discussion of the Company's dividend policy. We believe the dividend/distribution capacity of the Company's subsidiaries will provide the Company with sufficient liquidity for the foreseeable future. We continue to generate substantial cash from operating activities and remain in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure to meet short- and long-term objectives.

Sources and Uses of Cash Three main sources provide cash flows for the Company: operating activities, investing activities and financing activities. The movement in net cash provided by operating activities, net cash provided by (used in) investing activities, net cash (used in) provided by financing activities and the effect of foreign currency rate changes on cash and cash equivalents for the years ended December 31, 2012, 2011 and 2010 is described in the following table.

Year Ended December 31, (Dollars in thousands) 2012 (a) 2011 2010 Net cash provided by operating activities $ 562,565 $ 545,140 $ 630,001 Net cash (used in) provided by investing activities (268,915 ) (392,834 ) 378,426 Net cash provided by (used in) financing activities 75,345 68,681 (774,842 ) Effect of foreign currency rate changes on cash and cash equivalents 17,540 (8,883 ) (430 ) Net increase in cash $ 386,535 $ 212,104 $ 233,155 (a) The results of operations for Flagstone are consolidated only from the November 30, 2012 date of acquisition.

Operating Activities Cash flow from operating activities is derived primarily from the net receipt of premiums less claims and expenses related to underwriting activities.

During the year ended December 31, 2012, net cash provided by operating activities of $562.6 million was driven primarily by an increase in the reserve for losses and loss expenses of $116.9 million and a decrease of $95.0 million in loss reserves recoverable and paid losses recoverable.

During the year ended December 31, 2011, net cash provided by operating activities of $545.1 million was driven primarily by a significant portion of the 2011 incurred losses had yet to be paid as of December 31, 2011, which resulted in cash provided from operating activities for the period being higher than net income for the period.

124-------------------------------------------------------------------------------- Table of Contents During the year ended December 31, 2010, net cash provided by operating activities of $630.0 million was driven by increased levels of underwriting net premiums written arising from the impact of the IPC acquisition in late 2009. A significant portion of the 2010 incurred losses had yet to be paid as of December 31, 2010, which resulted in cash provided from operating activities for the period being higher than net income for the period.

We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under our contractual commitments as well as most loss scenarios through the foreseeable future. Refer to the "Capital Resources" section below for further information on our anticipated obligations.

Investing Activities Cash flow from investing activities is derived primarily from the receipt of net proceeds on the Company's investment portfolio. As at December 31, 2012, the Company's portfolio was composed of fixed income investments, short-term and other investments amounting to $6,764.0 million or 84.7% of total cash and investments. Please refer to Note 7 (c) to the Consolidated Financial Statements (Part II, Item 8) for further details of investments pledged as collateral.

During the year ended December 31, 2012, net cash used in investing activities of $268.9 million was driven primarily by net purchases of investments of $737.8 million and $104.3 million of purchases of investments in operating and investment affiliates, partially offset by $548.2 million in proceeds on maturities of investments.

During the year ended December 31, 2011, net cash provided by investing activities of $392.8 million was driven primarily by the net sales of short term securities of $208.3 million and a decrease in securities lending collateral of $14.6 million. The decrease in securities lending collateral was due to the winding down of the securities lending program beginning in the third quarter of 2011.

During the year ended December 31, 2010, net cash provided by investing activities of $378.4 million was driven primarily by the net sales of short term securities of $208.3 million and a decrease in securities lending collateral of $67.0 million.

Acquisitions and Investments in Affiliates Year Ended December 31, Net cash used in: 2012 2011 2010 Purchase of subsidiary, net of cash acquired $ 17,196 $ - $ - Investments in operating affiliates, net (91,500 ) (56,808 ) - Investments in investment affiliates, net (12,835 ) - - 2012 Acquisitions and Investments Purchase of Subsidiary, net of cash acquired: On November 30, 2012, pursuant to a Merger Agreement, the Company acquired all of Flagstone's outstanding common shares in exchange for 0.1935 Company common shares and $2.00 cash per Flagstone common share. The Flagstone Acquisition resulted in the payment of $147.7 million in cash to Flagstone shareholders and the net cash acquired from Flagstone was $164.9 million resulting in a net cash inflow to the Company of $17.2 million.

The Company assumed a letter of credit facility and long term debt as described in Note 18 "Debt and financing arrangements" to Consolidated Financial Statements (Part II, Item 8). On August 30, 2012, Flagstone had a $200.0 million secured committed letter of credit facility with Barclays Bank Plc (the "Barclays Facility"). The Barclays Facility was terminated prior to the acquisition date.

For additional information about our acquisitions, please refer to Note 5 "Business combination," to the Consolidated Financial Statements (Part II, Item 8) for further details.

Investments in operating affiliates, net: During the year ended December 31, 2012, the Company joined with other investors and contributed $26.5 million to AlphaCat Re 2012, $45.0 million to AlphaCat 2013 and $20.0 million to the AlphaCat ILS funds. Please refer to Note 8 "Investment in affiliates" to the Consolidated Financial Statements (Part II, Item 8) for further details.

Investments in investment affiliates, net: During the year ended December 31, 2012, the Company made $14.4 million in capital contributions to the Aquiline Financial Services Fund II L.P. and incurred $1.4 million in net unrealized losses. Please refer to Note 8 "Investment in affiliates" to the Consolidated Financial Statements (Part II, Item 8) for further details.

125-------------------------------------------------------------------------------- Table of Contents 2011 Investments Investments in operating affiliates, net: In May 2011, the Company joined with other investors contributed $50.0 million to AlphaCat Re 2011. During the fourth quarter of 2011, the Company sold a portion of its investment in AlphaCat Re 2011 for $11.0 million and redeemed $(67.8) million in cash in the deconsolidation of AlphaCat Re 2011.

Financing Activities Cash flow from financing activities is derived primarily from the issuance of common shares and debentures payable.

During the year ended December 31, 2012, net cash provided by financing activities of $75.3 million was driven primarily by the net cash received for the third party investment in PacRe of $450.1 million, partially offset by $260.0 million purchases of common shares under share repurchase program and $110.0 million of quarterly dividends.

During the year ended December 31, 2011, net cash provided by financing activities of $68.7 million was driven primarily by the net cash received for the third party investment in non-controlling interest of $192.1 million, partially offset by $107.7 million of quarterly dividends.

During the year ended December 31, 2010, net cash used in financing activities of $(774.8) million was driven primarily by the purchase of $856.9 million of common shares under the Company's share repurchase program and the payment of $105.7 million in quarterly dividends, partially offset by the issuance $246.8 million of 8.875% Senior Notes due 2040.

Year Ended December 31, Net cash used in: 2012 2011 2010 Net borrowings under long term revolving credit facilities - - 246,793 Payments on long term debt (40,303 ) (48,882 ) (51,149 ) Details of the Company's debt and financing arrangements at December 31, 2012 are provided below.

Maturity Date / In Use/ (Dollars in thousands) Term Outstanding 2006 Junior Subordinated Deferrable Debentures June 15, 2036 $ 150,000 2007 Junior Subordinated Deferrable Debentures June 15, 2037 139,800 2010 Senior Notes due 2040 January 26, 2040 250,000 $400,000 syndicated unsecured letter of credit facility March 9, 2016 - $525,000 syndicated secured letter of credit facility March 9, 2016 376,570 $500,000 secured letter of credit facility Evergreen 92,402 Talbot FAL facility December 31, 2015 25,000 PaCRe Senior secured letter of credit May 10, 2013 219 IPC Bi-Lateral Facility Evergreen 40,613 Flagstone Bi-Lateral Facility Evergreen 381,019 Flagstone 2006 Junior Subordinated Deferrable Interest Notes September 15, 2037 137,159 Flagstone 2007 Junior Subordinated Deferrable Interest Notes September 15, 2036 113,750 Total $ 1,706,532 For additional information about our debt, including the terms of our financing arrangements, basis for variable interest rates and debt covenants, Please refer to Note 18 "Debt and financing arrangements" to the Consolidated Financial Statements (Part II, Item 8) for further details.

Equity Transactions Year Ended December 31, Net cash used in: 2012 2011 2010 Share repurchases $ (259,962 ) $ (5,995 ) $ (856,926 ) Dividends paid to shareholders (110,037 ) (107,691 ) (105,662 ) 126-------------------------------------------------------------------------------- Table of Contents Under share repurchase programs authorized by our Board of Directors, we purchased 8.1 million, 0.2 million, and 31.7 million common shares on the open market during the twelve months ended December 31, 2012, 2011 and 2010, respectively, for $260.0 million, $6.0 million and $856.9 million, respectively.

At December 31, 2012, the Company had $122.3 million remaining for stock repurchases under the existing Board authorization.

During the twelve months ended December 31, 2012, 2011 and 2010, we paid cash dividends to shareholders of $110.0 million,$107.7 million and $105.7 million, respectively, at $1.00 per share for 2012, $1.00 per share for 2011 and $0.88 per share for 2010.

Capital Resources Shareholders' equity at December 31, 2012 was $4,455.1 million.

On February 6, 2013, the Company announced an increase in the quarterly cash dividend from $0.25 to $0.30 per common share and $0.30 per common share equivalent for which each outstanding warrant is exercisable, payable on March 29, 2013 to holders of record on March 15, 2013. In addition, the Company announced a special dividend in the amount of $2.00 per common share and $2.00 per common share equivalent for which each outstanding warrant is exercisable, payable on February 26, 2013 to shareholders and warrant holders of record as of February 19, 2013.

The timing and amount of any future cash dividends, however, will be at the discretion of the Board 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 the Board deems relevant.

On August 5, 2011, the Company filed a shelf registration statement on Form S-3 (No. 333-176116) with the U.S Securities Exchange Committee under which we may offer from time to time common shares, preference shares, depository shares representing common shares or preference shares, senior or subordinated debt securities, warrants to purchase common shares, preference shares and debt securities, share purchase contracts, share purchase units and units which may consist of any combination of the securities listed above. In addition, the shelf registration statement will provide for secondary sales of common shares sold by the Company's shareholders. The registration statement is intended to provide the Company with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and the Company's capital needs.

On May 25, 2011, the Company joined with other investors in capitalizing AlphaCat Re 2011, a special purpose reinsurer formed for the purpose of writing collateralized reinsurance and retrocessional reinsurance. At the time of formation, Validus Re had an equity interest in AlphaCat Re 2011 and as Validus Re held a majority of AlphaCat Re 2011's outstanding voting rights, the financial statements of AlphaCat Re 2011 were included in the consolidated financial statements of the Company.

On December 23, 2011, the Company completed a secondary offering of common shares of AlphaCat Re 2011 to third party investors, along with a partial sale of Validus Re's common shares to one of the third party investors. As a result of these transactions, Validus Re maintained an equity interest in AlphaCat Re 2011; however its share of AlphaCat Re 2011's outstanding voting rights decreased to 43.7%. As a result of the Company's voting interest falling below 50%, the individual assets and liabilities and corresponding noncontrolling interest of AlphaCat Re 2011 have been derecognized from the consolidated balance sheet of the Company as at December 31, 2011 and therefore the remaining investment in AlphaCat Re 2011 is treated as an equity method investment as at December 31, 2012 and 2011. The portion of AlphaCat Re 2011's earnings attributable to third party investors for the years ended December 31, 2012 and 2011 is recorded in the Consolidated Statements of Comprehensive Income (Loss) as net income attributable to noncontrolling interest.

On April 2, 2012, the Company capitalized PaCRe, a new Class 4 Bermuda reinsurer formed for the purpose of writing high excess property catastrophe reinsurance.

PaCRe was funded with $500.0 million of contributed capital. Validus invested $50.0 million in PaCRe's common equity. The Company will underwrite business for PaCRe, for which it will be paid a profit commission based on PaCRe's underwriting results.

On May 29, 2012, the Company announced that it has joined with other investors in capitalizing AlphaCat Re 2012. AlphaCat Re 2012 is a new special purpose reinsurer formed for the purpose of writing collateralized reinsurance with a particular focus on windstorm risks for Florida domiciled insurance companies.

AlphaCat Re 2012 was funded with $70.0 million of equity capital. The Company will underwrite business for AlphaCat Re 2012, for which it will be paid a commission for originating the business and a profit commission based on underwriting results.

On June 5, 2012, the Company announced the final results of its "modified Dutch auction" tender offer. Pursuant to this tender offer, the Company purchased 6,383,884 of its common shares at a price of $32.00 per common share for a total cost of $204.3 million, excluding fees and expenses relating to the tender offer. The Company funded the purchase of the shares in the tender offer using cash on hand.

127-------------------------------------------------------------------------------- Table of Contents The Company may from time to time repurchase its securities, including common shares, Junior Subordinated Deferrable Debentures and Senior Notes. On February 6, 2013, the Board of Directors of the Company authorized an increase in the Company's common share repurchase authorization to $500.0 million. This amount is in addition to, and in excess of, the $1,206.8 million of common shares repurchased by the Company through February 6, 2013 under its previously authorized share repurchase program.

The Company repurchased 43,688,633 shares at a cost of $1,227.1 million under the share repurchase programs for the period November 4, 2009 through February 13, 2013.

The Company expects the purchases under its share repurchase program to be made from time to time in the open market or in privately negotiated transactions.

The timing, form and amount of the share repurchases under the program will depend on a variety of factors, including market conditions, the Company's capital position relative to internal and rating agency targets, legal requirements and other factors. The repurchase program may be modified, extended or terminated by the Board of Directors at any time.

Contractual Obligations and Commitments The Company's contractual obligations and commitments as at December 31, 2012 are set out below: Payment Due by Period Less Than More Than (Dollars in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Reserve for losses and loss expenses(a) $ 3,517,573 $ 1,686,439 $ 1,290,199 $ 399,042 141,893 2010 Senior Notes due 2040-principal(b) 250,000 - - - 250,000 2010 Senior Notes due 2040-interest(b) n/a 22,188 44,375 44,375 22,188 p.a.

2006 Junior Subordinated Deferrable Debentures-principal(c) 150,000 - - - 150,000 2006 Junior Subordinated Deferrable Debentures-interest(c) n/a 8,747 17,494 17,494 8,747 p.a.

2007 Junior Subordinated Deferrable Debentures-principal(d) 200,000 - - - 200,000 2007 Junior Subordinated Deferrable Debentures-interest(d) n/a 10,360 20,720 20,720 10,360 p.a.

Flagstone 2006 Junior Subordinated Deferrable Interest Notes-principal (e) 137,159 - - - 137,159 Flagstone 2006 Junior Subordinated Deferrable Interest Notes-interest (e) n/a 5,278 20,720 7,576 5,278 p.a.

Flagstone 2007 Junior Subordinated Deferrable Interest Notes-principal (f) 113,750 - - - 113,750 Flagstone 2007 Junior Subordinated Deferrable Interest Notes-interest (f) n/a 3,788 7,576 7,576 3,788 p.a.

Operating lease obligations 70,962 11,933 20,328 16,785 21,916 Aquiline Financial Services Fund II L.P. (g) 32,382 32,382 - - - (a) The reserve for losses and loss expenses represents an estimate, including actuarial and statistical projections at a given point in time of an insurer's or reinsurer's expectations of the ultimate settlement and administration costs of claims incurred. As a result, it is likely that the ultimate liability will differ from such estimates, perhaps significantly.

Such estimates are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends in loss severity and frequency and other variable factors such as inflation, litigation and tort reform. This uncertainty is heightened by the short time in which the Company has operated, thereby providing limited claims loss emergence patterns specifically for the Company. The lack of historical information for the Company has necessitated the use of industry loss emergence patterns in deriving IBNR. 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.

During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability will exceed or be less than the revised estimates. The actual payment of the reserve for losses and loss expenses will differ from estimated payouts.

(b) The 2010 Senior Notes mature on January 26, 2040, and are redeemable at the Company's option in whole or any time or in part from time to time at a make-whole redemption price. The Company may redeem the notes in whole, but not in part, at any time upon the occurrence of certain tax events as described in the notes prospectus supplement. The 2010 Senior Notes bear interest at the rate of 8.875% per annum from January 26, 2010 to maturity or early redemption.

(c) The 2006 Junior Subordinated Deferrable Debentures (the "2006 JSDs") mature on mature on June 15, 2036, are redeemable at the Company's option at par beginning June 15, 2011, and require quarterly interest payments by the Company to the holders of the 2006 Junior Subordinated Deferrable Debentures.

Interest was payable at 9.069% per annum through June 15, 2011, and thereafter at a floating rate of three-month LIBOR plus 355 basis points, reset 128-------------------------------------------------------------------------------- Table of Contents quarterly. We have estimated the interest due in 2013 and future years using the December 31, 2012 LIBOR rate. During the third quarter of 2012, the Company entered into an interest rate swap which fixed the rate of interest on the 2006 JSDs at 5.83125%. The term of the swap is matched to the maturity date of the 2006 JSDs.

(d) The 2007 Junior Subordinated Deferrable Debentures (the "2007 JSDs") mature on mature on June 15, 2037, are redeemable at the Company's option at par beginning June 15, 2012, and require quarterly interest payments by the Company to the holders of the 2007 Junior Subordinated Deferrable Debentures.

Interest was payable at 8.480% per annum through June 15, 2012, and thereafter at a floating rate of three-month LIBOR plus 295 basis points, reset quarterly. We have estimated the interest due in 2013 and future years using the December 31, 2012 LIBOR rate. During the third quarter of 2012, the Company entered into an interest rate swap which fixed the rate of interest on the 2007 JSDs at 5.18%. The term of the swap is matched to the maturity date of the 2007 JSDs.

(e) The Flagstone 2006 Junior Subordinated Deferrable Interest Notes mature on September 15, 2036, are redeemable at the Company's option at par beginning September 15, 2011, and require quarterly interest payments by the Company to the holders of the Flagstone 2006 Junior Subordinated Deferrable Interest Notes. Interest is payable at a floating rate of three-month LIBOR plus 354 basis points, reset quarterly. We have estimated the interest due in 2013 and future years using the December 31, 2012 LIBOR rate.

(f) $88,750 of the Flagstone 2007 Junior Subordinated Deferrable Interest Notes mature on July 30, 2037, are redeemable at the Company's option at par beginning July 30, 2012, and require quarterly interest payments by the Company to the holders of the Flagstone 2007 Junior Subordinated Deferrable Interest Notes. Interest is payable at a floating rate of three-month LIBOR plus 300 basis points, reset quarterly. $25,000 of the Flagstone 2007 Junior Subordinated Deferrable Interest Notes mature on September 15, 2037, are redeemable at the Company's option at par beginning September 15, 2012, and require quarterly interest payments by the Company to the holders of the Flagstone 2007 Junior Subordinated Deferrable Interest Notes. Interest is payable at a floating rate of three-month LIBOR plus 310 basis points, reset quarterly. We have estimated the interest due in 2013 and future years using the December 31, 2012 LIBOR rate.

(g) Please refer to Note 20 (f) to the Consolidated Financial Statements (Part II, Item 8) for further details describing the Aquiline commitment.

While the commitment expires on July 2, 2015, it does not have a defined contractual commitment date and therefore it is included in the less than one year category.

The following table details the capital resources of the Company's more significant subsidiaries on an unconsolidated basis: Capital at (Dollars in thousands) December 31, 2012 Validus Reinsurance, Ltd. (consolidated), excluding Validus Re Americas, Ltd. and Validus UPS, Ltd.

$ 2,928,446 Validus Re Americas, Ltd. (formerly IPCRe, Ltd) 132,405 Validus UPS, Ltd. (formerly Flagstone) 1,028,281 Total Validus Reinsurance, Ltd. (consolidated) 4,089,132 Noncontrolling Interest in PaCRe, Ltd. 434,280 Talbot Holdings, Ltd. (consolidated) 774,184 Other subsidiaries, net 35,885 Other, net (90,575 ) Total consolidated capitalization 5,242,906 Senior notes payable (247,090 ) Debentures payable (540,709 ) Total shareholders' equity $ 4,455,107 RatingsThe following table summarizes the financial strength ratings of the Company and its principal reinsurance and insurance subsidiaries from internationally recognized rating agencies as of February 15, 2013: 129-------------------------------------------------------------------------------- Table of Contents A.M. Best(a) S&P(b) Moody's(c) Fitch(d) Validus Holdings, Ltd.

Issuer credit rating bbb BBB+ Baa2 BBB+ Senior debt bbb BBB+ Baa2 BBB Subordinated debt bbb- BBB- Baa3 BB+ Preferred stock bb+ BBB- Ba1 - Outlook on ratings Stable Stable Stable Positive Validus Reinsurance, Ltd.

Financial strength rating A A A3 A- Issuer credit rating a - - - Outlook on ratings Stable Stable Stable Positive Talbot Financial strength rating applicable to all Lloyd's syndicates A A+ - A+ Flagstone Reassurance Suisse, SA Financial strength rating A- Issuer credit rating a- Outlook on ratings Stable (a) The A.M. Best ratings were most recently affirmed on February 7, 2013 (b) The S&P ratings were most recently affirmed on August 30, 2012 (c) All Moody's ratings were most recently affirmed on August 31, 2012 (d) All Fitch ratings were most recently affirmed on May 8, 2012 Recent accounting pronouncements Please refer to Note 4 to the Consolidated Financial Statements (Part II, Item 8) for further discussion of relevant recent accounting pronouncements.

130-------------------------------------------------------------------------------- Table of Contents Debt and Financing Arrangements The following table details the Company's borrowings and credit facilities as at December 31, 2012.

(Dollars in thousands) Commitments(a) In Use/Outstanding 2006 Junior Subordinated Deferrable Debentures $ 150,000 $ 150,000 2007 Junior Subordinated Deferrable Debentures 200,000 139,800 2010 Senior Notes due 2040 250,000 250,000 $400,000 syndicated unsecured letter of credit facility 400,000 - $525,000 syndicated secured letter of credit facility 525,000 376,570 $500,000 bi-lateral secured letter of credit facility 500,000 92,402 Talbot FAL Facility(b) 25,000 25,000 PaCRe senior secured letter of credit facility 10,000 219 IPC Bi-Lateral Facility 80,000 40,613 Flagstone Bi-Lateral Facility 550,000 381,019 Flagstone 2006 Junior Subordinated Deferrable Interest Notes 137,159 137,159 Flagstone 2007 Junior Subordinated Deferrable Interest Notes 113,750 113,750 Total $ 2,940,909 $ 1,706,532 (a) Indicates utilization of commitment amount, not drawn borrowings.

(b) Talbot operates in Lloyd's through a corporate member, Talbot 2002 Underwriting Capital Ltd ("T02"), which is the sole participant in Syndicate 1183. Lloyd's sets T02's required capital annually based on syndicate 1183's business plan, rating environment, reserving environment together with input arising from Lloyd's discussions with, inter alia, regulatory and rating agencies. Such capital, called Funds at Lloyd's ("FAL"), comprises: cash, investments and undrawn letters of credit provided by various banks.

Please refer to Note 18 to the Consolidated Financial Statements (Part II, Item 8) for further discussion of the Company's debt and financing arrangements.

Regulation Validus Re, Validus Re Americas, Ltd., Flagstone Reassurance Suisse SA (Bermuda Branch), PaCRe and Talbot Insurance (Bermuda) Ltd. ("TIBL") (together, the "Bermuda registered companies") are registered under the Insurance Act 1978 of Bermuda ("the Act"). Under the Act, the Bermuda registered companies are required annually to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires the Bermuda registered companies to meet minimum solvency and liquidity requirements. For the year ended December 31, 2012, the Bermuda registered companies satisfied these requirements. Please refer to Note 24 to the Consolidated Financial Statements (Part II, Item 8) for further discussion of statutory and regulatory requirements.

Bermuda law limits the maximum amount of annual dividends or distributions payable by Bermuda registered companies to the Company and in certain cases requires the prior notification to, or the approval of, the Bermuda Monetary Authority. Subject to such laws, the directors of the Bermuda registered companies have the unilateral authority to declare or not declare dividends to the Company. There is no assurance that dividends will be declared or paid in the future.

Talbot's underwriting activities are regulated by the Financial Services Authority ("FSA"). The FSA has substantial powers of intervention in relation to the Lloyd's managing agents which it regulates including the power to remove their authorization to manage Lloyd's syndicates. In addition, Talbot's managing agent operates under the Lloyd's "franchise." Lloyd's approves annually Syndicate 1183's business plan and any subsequent material changes, and the amount of capital required to support that plan. Lloyd's may require changes to any business plan presented to it or additional capital to be provided to support the underwriting (known as Funds at Lloyd's).

The U.K. government has set out proposals to replace the current system of financial regulation, which it believes has weaknesses, with a new regulatory framework. The key weakness it identified was that no single institution has the responsibility, authority and tools to monitor the financial system as a whole, and respond accordingly. That power will be given to the Bank of England. The U.K. government intends to create a new Financial Policy Committee ("FPC") within the Bank, which will look at the wider economic and financial risks to the stability of the system.

131-------------------------------------------------------------------------------- Table of Contents In addition, the FSA will cease to exist in its current form, and the U.K.

government will create two new focused financial regulators: • A new Prudential Regulation Authority ("PRA") will be responsible for the day-to-day supervision of financial institutions that are subject to significant prudential regulation. It will adopt a more judgment-focused approach to regulation so that business models can be challenged, risks identified and action taken to preserve financial stability.

• A new Financial Conduct Authority ("FCA") will have a strong mandate for promoting confidence and transparency in financial services and to give greater protection for consumers of financial services.

The Financial Services Bill was introduced to Parliament on January 26, 2012 and received Royal Assent in December 2012. "Legal cutover," when the new system will be operational, is expected to be April 2013.

In November 2007, Talbot established Talbot Risk Services Pte Ltd in Singapore to source business in the Far East under the Lloyd's Asia Scheme. The Lloyd's Asia Scheme was established by the Monetary Authority of Singapore to encourage members of Lloyd's to expand insurance activities in Asia.

An EU directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II was adopted by the European Parliament in April 2009. A directive, known as Omnibus II, which will amend certain of the Solvency II proposals, including the implementation date, is due to be considered by the European Parliament in 2012. The proposed Solvency II insurance directive is currently expected to come into force with a soft launch on January 1, 2013 and a full implementation on January 1, 2014. Insurers and reinsurers are undertaking a significant amount of work to ensure that they meet the new requirements and this may divert resources from other operational roles.

The Company's implementation plans are well underway, although final Solvency II guidelines have not been published.

Flagstone Suisse is licensed to operate as a reinsurer in Switzerland and is also licensed in Bermuda through the Flagstone Suisse branch office and is not licensed in any other jurisdictions. Swiss law permits dividends to be declared only after profits have been allocated to the reserves required by law and to any reserves required by the articles of incorporation. The articles of incorporation of Flagstone Suisse do not require any specific reserves.

Therefore, Flagstone Suisse must allocate any profits first to the reserve required by Swiss law generally, and may pay as dividends only the balance of the profits remaining after that allocation. In the case of Flagstone Suisse, Swiss law requires that 20% of the company's profits be allocated to a "general reserve" until the reserve reaches 50% of its paid-in share capital. In addition, a Swiss reinsurance company may pay a dividend only if, after payment of the dividend, it will continue to comply with regulatory requirements regarding minimum capital, special reserves and solvency requirements.

Off-Balance Sheet Arrangements The Company is not party to any off-balance sheet transaction, agreement or other contractual arrangement as defined by Item 303(a) (4) of Regulation S-K to which an entity unconsolidated with the Company is a party that management believes is reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that the Company believes is material to investors.

Investments A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in a significant amount of losses on short notice. Accordingly, the Company's investment portfolio is structured to provide significant liquidity and preserve capital, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments, such as U.S. government securities, U.S. government-sponsored enterprises securities, corporate debt securities and mortgage-backed and asset-backed securities.

Substantially all of the fixed maturity investments held at December 31, 2012 were publicly traded. At December 31, 2012, the average duration of the Company's fixed maturity portfolio was 1.34 years (December 31, 2011: 1.63 years) and the average rating of the portfolio was AA- (December 31, 2011: AA-). At December 31, 2012, the total fixed maturity portfolio was $5,085.3 million (December 31, 2011: $4,894.1 million), of which $1,062.8 million (December 31, 2011: $882.9 million) were rated AAA.

On November 30, 2012, as part of the Flagstone Acquisition, the Company assumed Flagstone's investment portfolio containing $910.3 million of cash and short term investments, $231.4 million of asset-backed securities, $90.0 million of non-agency residential mortgage-backed securities, $19.0 million of catastrophe bonds, $59.3 million fund of hedge funds and $13.0 million of private equity funds.

132-------------------------------------------------------------------------------- Table of Contents With the exception of the Company's bank loan portfolio, the Company's investment guidelines require that investments be rated BBB- or higher at the time of purchase. The Company reports the ratings of its investment portfolio securities at the lower of Moody's or Standard & Poor's rating for each investment security and, as a result, the Company's investment portfolio now has $19.0 million of non-agency mortgage backed securities rated less than investment grade. The other components of less than investment grade securities held by the Company at December 31, 2012 were $56.9 million of catastrophe bonds, $658.9 million of bank loans and $0.9 million of corporate bonds.

Cash and cash equivalents and investments held by Talbot of $1,901.5 million at December 31, 2012 were held in trust for the benefit of cedants and policyholders and to facilitate the accreditation as an alien insurer/reinsurer by certain regulators (December 31, 2011: $1,686.6 million). Total cash and cash equivalents and investments in Talbot were $1,942.6 million at December 31, 2012 (December 31, 2011: $1,743.0 million).

Goodwill and Intangible Assets The Company has performed an impairment analysis of its carried goodwill and indefinite lived intangible assets as required by U.S. GAAP. The impairment analysis of goodwill and intangible assets was performed in line with Accounting Standards Update No. 2011-08, "Testing Goodwill for Impairment" ("ASU 2011-08") which was released in September 2011 and Accounting Standards Update No.

2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02") which was released in July 2012. The goodwill assessment included a qualitative analysis in determining whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Reporting units are consistent with the segmental basis. The indefinite lived intangible asset assessment included a qualitative analysis in determining whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. Based on this analysis, management has concluded that an impairment valuation is not required against the carried goodwill and carried indefinite lived intangible assets.

Cash Flows During the years ended December 31, 2012 and 2011, the Company generated net cash from operating activities of $562.6 million and $545.1 million, respectively. Cash flows from operations generally represent premiums collected, investment earnings realized and investment gains realized less losses and loss expenses paid and underwriting and other expenses paid. Cash flows from operations may differ substantially from net income.

On November 30, 2012, the Company completed its acquisition of Flagstone. Upon completion of the Merger each issued and outstanding share of Flagstone was converted into the right to receive 0.1935 Validus common shares, $2.00 in cash, without interest, and cash in lieu of any fractional share to which the holder was entitled. The Flagstone acquisition resulted in the issuance by the Company of 14,290,389 common shares valued at $34.87 per share and the payment of $147.7 million to Flagstone shareholders.

As of December 31, 2012 and December 31, 2011, the Company had cash and cash equivalents of $1,219.4 million and $832.8 million, respectively.

The Company has written certain (re)insurance business that has loss experience generally characterized as having low frequency and high severity. This results in volatility in both results and operational cash flows. The potential for large claims or a series of claims under one or more reinsurance contracts means that substantial and unpredictable payments may be required within relatively short periods of time. As a result, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years.

Management believes the Company's unused credit facility amounts and highly liquid investment portfolio are sufficient to support any potential operating cash flow deficiencies. Please refer to the table detailing the Company's borrowings and credit facilities as at December 31, 2012, presented above.

In addition to relying on premiums received and investment income from the investment portfolio, the Company intends to meet these cash flow demands by carrying a substantial amount of short and medium term investments that would mature, or possibly be sold, prior to the settlement of expected liabilities.

The Company cannot provide assurance, however, that it will successfully match the structure of its investments with its liabilities due to uncertainty related to the timing and severity of loss events.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. Any prospectus, prospectus supplement, the Company's Annual Report to shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance and reinsurance sectors in particular. Statements that include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", "may", and similar statements of a future or forward-looking nature identify forward-looking statements for 133-------------------------------------------------------------------------------- Table of Contents purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. 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 statement.

We believe that these factors include, but are not limited to, the following: • unpredictability and severity of catastrophic events; • our ability to obtain and maintain ratings, which may affect by our ability to raise additional equity or debt financings, as well as other factors described herein; • adequacy of the Company's risk management and loss limitation methods; • cyclicality of demand and pricing in the insurance and reinsurance markets; • the Company's ability to implement its business strategy during "soft" as well as "hard" markets; • adequacy of the Company's loss reserves; • continued availability of capital and financing; • the Company's ability to identify, hire and retain, on a timely and unimpeded basis and on anticipated economic and other terms, experienced and capable senior management, as well as underwriters, claims professionals and support staff; • acceptance of our business strategy, security and financial condition by rating agencies and regulators, as well as by brokers and (re)insureds; • competition, including increased competition, on the basis of pricing, capacity, coverage terms or other factors; • potential loss of business from one or more major insurance or reinsurance brokers; • the Company's ability to implement, successfully and on a timely basis, complex infrastructure, distribution capabilities, systems, procedures and internal controls, and to develop accurate actuarial data to support the business and regulatory and reporting requirements; • general economic and market conditions (including inflation, volatility in the credit and capital markets, interest rates and foreign currency exchange rates) and conditions specific to the insurance and reinsurance markets in which we operate; • the integration of businesses we may acquire or new business ventures, including overseas offices, we may start and the risk associated with implementing our business strategies and initiatives with respect to the new business ventures; • accuracy of those estimates and judgments used in the preparation of our financial statements, including those related to revenue recognition, insurance and other reserves, reinsurance recoverables, investment valuations, intangible assets, bad debts, taxes, contingencies, litigation and any determination to use the deposit method of accounting, which, for a relatively new insurance and reinsurance company like our company, are even more difficult to make than those made in a mature company because of limited historical information; • the effect on the Company's investment portfolio of changing financial market conditions including inflation, interest rates, liquidity and other factors; • acts of terrorism, political unrest, outbreak of war and other hostilities or other non-forecasted and unpredictable events; • availability and cost of reinsurance and retrocession coverage; • the failure of reinsurers, retrocessionaires, producers or others to meet their obligations to us; • the timing of loss payments being faster or the receipt of reinsurance recoverables being slower than anticipated by us; • changes in domestic or foreign laws or regulations, or their interpretations; • changes in accounting principles or the application of such principles by regulators; • statutory or regulatory or rating agency developments, including as to tax policy and reinsurance and other regulatory matters such as the adoption of proposed legislation that would affect Bermuda-headquartered companies and/or Bermuda-based insurers or reinsurers; and 134-------------------------------------------------------------------------------- Table of Contents • the other factors set forth herein under Part I Item 1A "Risk Factors" and under Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other sections of this Annual Report on Form 10-K for the year ended December 31, 2012, as well as the risk and other factors set forth in the Company's other filings with the SEC, as well as management's response to any of the aforementioned factors.

In addition, other general factors could affect our results, including: (a) developments in the world's financial and capital markets and our access to such markets; (b) changes in regulations or tax laws applicable to us, and (c) the effects of business disruption or economic contraction due to terrorism or other hostilities.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. Any forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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