Attached files
| file | filename |
|---|---|
| 8-K/A - 8-K/A - VALIDUS HOLDINGS LTD | a20130215proformacoverpage.htm |
| EX-23 - EXHIBIT 23 - VALIDUS HOLDINGS LTD | a20120215consent.htm |
Exhibit 99.1
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma financial information is intended to provide you with information about how the acquisition of Flagstone Reinsurance Holdings, S.A. ("Flagstone") might have affected the historical financial statements of Validus Holdings, Ltd. ("Validus") if it had been consummated at earlier times. The unaudited condensed consolidated pro forma financial information is for illustrative purposes only and has been prepared by Validus' management, after discussion with Flagstone's management, and is based on Validus' historical consolidated financial statements and Flagstone's historical consolidated financial statements. Certain amounts from Flagstone's historical consolidated financial statements have been reclassified to conform to the Validus presentation. The following unaudited condensed consolidated pro forma financial information does not necessarily reflect the financial position or results of operations that would have actually resulted had the acquisition occurred as of the dates indicated, nor should they be taken as necessarily indicative of the future financial position or results of operations of Validus or a combined company.
The unaudited condensed consolidated pro forma financial information should be read in conjunction with Validus' Form 10-Q for the quarter ended September 30, 2012 (the "Validus 10-Q"), Validus' Form 10-K for the year ended December 31, 2011 (the "Validus 10-K"), Flagstone's Form 10-Q for the quarter ended September 30, 2012, and Flagstone's 10-K for the year ended December 31, 2011, each as filed with the United States Securities and Exchange Commission. The unaudited condensed consolidated pro forma financial information gives effect to the proposed acquisition as if it had occurred at September 30, 2012 for the purposes of the unaudited consolidated pro forma balance sheet and at January 1, 2011 for the purposes of the unaudited condensed consolidated pro forma statements of operations for the year ended December 31, 2011 and the nine months ended September 30, 2012.
This pro forma information is subject to risks and uncertainties, including those discussed in the Validus 10-Q and the Validus 10-K under the caption "Risk Factors" and "Cautionary Note Regarding Forward Looking Statements."
The following table presents unaudited condensed consolidated pro forma balance sheet data at September 30, 2012 (expressed in thousands of U.S. dollars, except share and per share data) giving effect to the proposed acquisition of Flagstone as if it had occurred at September 30, 2012:
Historical Validus Holdings, Ltd. | Historical Flagstone Reinsurance Holdings, S.A. | Pro Forma Purchase adjustments | Notes | Pro Forma Consolidated | ||||||||||||||
Assets | ||||||||||||||||||
Fixed maturities, at fair value | $ | 4,887,622 | $ | 350,262 | $ | — | $ | 5,237,884 | ||||||||||
Short-term investments, at fair value | 275,324 | 719,294 | — | 994,618 | ||||||||||||||
Other investments, at fair value | 525,441 | 101,796 | — | 627,237 | ||||||||||||||
Cash and cash equivalents | 1,005,829 | 307,499 | (163,929 | ) | 3(b), 4 | 1,149,399 | ||||||||||||
Total investments and cash | 6,694,216 | 1,478,851 | (163,929 | ) | 8,009,138 | |||||||||||||
Restricted cash | — | 22,629 | — | 22,629 | ||||||||||||||
Investments in affiliates | 99,312 | — | — | 99,312 | ||||||||||||||
Premiums receivable | 781,991 | 209,344 | — | 991,335 | ||||||||||||||
Deferred acquisition costs | 155,456 | 29,372 | — | 184,828 | ||||||||||||||
Prepaid reinsurance premiums | 144,788 | 29,934 | — | 174,722 | ||||||||||||||
Securities lending collateral | 10,383 | — | — | 10,383 | ||||||||||||||
Loss reserves recoverable | 317,252 | 126,003 | — | 443,255 | ||||||||||||||
Paid losses recoverable | 36,209 | — | — | 36,209 | ||||||||||||||
Accrued investment income | 19,945 | 2,452 | — | 22,397 | ||||||||||||||
Income taxes recoverable | 5,019 | — | — | 5,019 | ||||||||||||||
Intangible assets | 111,611 | — | — | 111,611 | ||||||||||||||
Goodwill | 20,393 | — | — | 20,393 | ||||||||||||||
Other assets | 67,245 | 96,355 | (8,372 | ) | 3(f) | 155,228 | ||||||||||||
Funds withheld | — | 24,371 | — | 24,371 | ||||||||||||||
Assets held for sale including discontinued operations | — | 16,524 | (1,000 | ) | 3(f) | 15,524 | ||||||||||||
Total assets | $ | 8,463,820 | $ | 2,035,835 | $ | (173,301 | ) | $ | 10,326,354 | |||||||||
Liabilities | ||||||||||||||||||
Reserve for losses and loss expenses | $ | 2,562,604 | $ | 668,973 | $ | 76,300 | 3(e) | $ | 3,307,877 | |||||||||
Unearned premiums | 1,034,605 | 188,010 | — | 1,222,615 | ||||||||||||||
Reinsurance balances payable | 87,955 | 34,982 | — | 122,937 | ||||||||||||||
Deferred income taxes | 22,848 | — | — | 22,848 | ||||||||||||||
Securities lending payable | 10,849 | — | — | 10,849 | ||||||||||||||
Net payable for investments purchased | 26,629 | 3,248 | — | 29,877 | ||||||||||||||
Accounts payable and accrued expenses | 86,128 | 59,321 | 36,026 | 3(f) | 181,475 | |||||||||||||
Senior notes payable | 247,063 | — | — | 247,063 | ||||||||||||||
Debentures payable | 289,800 | 250,456 | — | 540,256 | ||||||||||||||
Total liabilities | 4,368,481 | 1,204,990 | 112,326 | 5,685,797 | ||||||||||||||
Shareholders' equity | ||||||||||||||||||
Ordinary shares | 23,911 | 845 | 1,656 | 3(a), 3(c) | 26,412 | |||||||||||||
Treasury shares | (7,549 | ) | (150,202 | ) | 150,202 | 3(c) | (7,549 | ) | ||||||||||
Additional paid-in capital | 1,657,767 | 855,722 | (359,887 | ) | 3(a), 3(c) | 2,153,602 | ||||||||||||
Accumulated other comprehensive (loss) | (4,565 | ) | (15,265 | ) | 15,265 | 3(c) | (4,565 | ) | ||||||||||
Retained earnings | 1,964,289 | 139,745 | (92,863 | ) | 3(b), 3(c), 3(d) 3(e), 3(f) | 2,011,171 | ||||||||||||
Total shareholders' equity available to the Company | 3,633,853 | 830,845 | (285,627 | ) | 4,179,071 | |||||||||||||
Noncontrolling interest | 461,486 | — | — | 461,486 | ||||||||||||||
Total shareholders' equity | 4,095,339 | 830,845 | (285,627 | ) | 4,640,557 | |||||||||||||
Total liabilities and shareholders' equity | $ | 8,463,820 | $ | 2,035,835 | $ | (173,301 | ) | $ | 10,326,354 | |||||||||
Common shares outstanding | 93,494,391 | 71,352,487 | 13,806,706 | 107,301,097 | ||||||||||||||
Common shares and common share equivalents outstanding | 104,438,941 | 72,554,787 | 14,291,259 | 118,730,200 | ||||||||||||||
Book value per share | $ | 38.87 | $ | 11.64 | 7 | $ | 38.95 | |||||||||||
Diluted book value per share | $ | 36.27 | $ | 11.45 | 7 | $ | 36.50 | |||||||||||
Diluted tangible book value per share | $ | 35.01 | $ | 11.45 | 7 | $ | 35.39 | |||||||||||
The following table sets forth unaudited condensed consolidated pro forma results of operations for the year ended December 31, 2011 (expressed in thousands of U.S. dollars, except share and per share data) giving effect to the proposed acquisition of Flagstone as if it had occurred at January 1, 2011:
Historical Validus Holdings, Ltd. | Historical Flagstone Reinsurance Holdings, S.A. | Pro Forma Purchase adjustments | Notes | Pro Forma Consolidated | ||||||||||||||
Revenues | ||||||||||||||||||
Gross premiums written | $ | 2,124,691 | $ | 789,697 | $ | — | $ | 2,914,388 | ||||||||||
Reinsurance premiums ceded | (289,241 | ) | (231,265 | ) | — | (520,506 | ) | |||||||||||
Net premiums written | 1,835,450 | 558,432 | — | 2,393,882 | ||||||||||||||
Change in unearned premiums | (33,307 | ) | 13,046 | — | (20,261 | ) | ||||||||||||
Net premiums earned | 1,802,143 | 571,478 | — | 2,373,621 | ||||||||||||||
Net investment income | 112,296 | 34,312 | (3,156 | ) | 3(b) | 143,452 | ||||||||||||
Net realized gains (losses) on investments | 28,532 | (20,770 | ) | — | 7,762 | |||||||||||||
Net realized and unrealized gains - other | — | 2,494 | — | 2,494 | ||||||||||||||
Net unrealized (losses) on investments | (19,991 | ) | — | — | (19,991 | ) | ||||||||||||
Other income | 5,718 | 5,434 | — | 11,152 | ||||||||||||||
Foreign exchange (losses) | (22,124 | ) | (4,481 | ) | — | (26,605 | ) | |||||||||||
Total revenues | 1,906,574 | 588,467 | (3,156 | ) | 2,491,885 | |||||||||||||
Expenses | ||||||||||||||||||
Losses and loss expenses | 1,244,401 | 676,535 | — | 1,920,936 | ||||||||||||||
Policy acquisition costs | 314,184 | 115,325 | — | 429,509 | ||||||||||||||
General and administrative expenses | 197,497 | 84,686 | — | 282,183 | ||||||||||||||
Share compensation expenses | 34,296 | 1,131 | — | 35,427 | ||||||||||||||
Transaction expenses | 17,433 | — | — | 17,433 | ||||||||||||||
Finance expenses | 54,817 | 11,668 | — | 66,485 | ||||||||||||||
Total expenses | 1,862,628 | 889,345 | — | 2,751,973 | ||||||||||||||
Income (loss) before taxes | 43,946 | (300,878 | ) | (3,156 | ) | (260,088 | ) | |||||||||||
Tax (expense) benefit | (824 | ) | 51 | — | (773 | ) | ||||||||||||
Income from operating affiliates | — | (922 | ) | — | (922 | ) | ||||||||||||
Net income (loss) from continuing operations | $ | 43,122 | $ | (301,749 | ) | $ | (3,156 | ) | $ | (261,783 | ) | |||||||
Net loss from discontinued operations, net of tax | — | (21,662 | ) | — | (21,662 | ) | ||||||||||||
Net income (loss) | $ | 43,122 | $ | (323,411 | ) | $ | (3,156 | ) | $ | (283,445 | ) | |||||||
Net income attributable to noncontrolling interest | (21,793 | ) | (2,722 | ) | — | (24,515 | ) | |||||||||||
Net income (loss) available to company | $ | 21,329 | $ | (326,133 | ) | $ | (3,156 | ) | $ | (307,960 | ) | |||||||
Dividends and distributions declared on outstanding warrants | 7,644 | — | — | 7,644 | ||||||||||||||
Net income (loss) available to common shareholders | $ | 13,685 | $ | (326,133 | ) | $ | (3,156 | ) | $ | (315,604 | ) | |||||||
Earnings per share | ||||||||||||||||||
Weighted average number of common shares and common share equivalents outstanding | ||||||||||||||||||
Basic | 98,607,439 | 70,129,756 | 13,622,565 | 112,230,004 | ||||||||||||||
Diluted | 100,928,284 | 70,129,756 | 13,622,565 | 112,230,004 | ||||||||||||||
Basic earnings (loss) per share | $ | 0.14 | $ | (4.65 | ) | 6 | $ | (2.81 | ) | |||||||||
Diluted earnings (loss) per share | $ | 0.14 | $ | (4.65 | ) | 6 | $ | (2.81 | ) | |||||||||
The following table sets forth unaudited condensed consolidated pro forma results of operations for the nine months ended September 30, 2012 (expressed in thousands of U.S. dollars, except share and per share data) giving effect to the proposed acquisition of Flagstone as if it had occurred at January 1, 2011:
Historical Validus Holdings, Ltd. | Historical Flagstone Reinsurance Holdings, S.A. | Pro Forma Purchase adjustments | Notes | Pro Forma Consolidated | ||||||||||||||
Revenues | ||||||||||||||||||
Gross premiums written | $ | 1,854,593 | $ | 345,420 | $ | — | $ | 2,200,013 | ||||||||||
Reinsurance premiums ceded | (271,847 | ) | (89,846 | ) | — | (361,693 | ) | |||||||||||
Net premiums written | 1,582,746 | 255,574 | — | 1,838,320 | ||||||||||||||
Change in unearned premiums | (208,816 | ) | 43,223 | — | (165,593 | ) | ||||||||||||
Net premiums earned | 1,373,930 | 298,797 | — | 1,672,727 | ||||||||||||||
Net investment income | 79,134 | 15,063 | (2,157 | ) | 3(b) | 92,040 | ||||||||||||
Net realized gains on investments | 22,749 | 31,319 | — | 54,068 | ||||||||||||||
Net realized and unrealized (losses) - other | — | (1,335 | ) | — | (1,335 | ) | ||||||||||||
Net unrealized gains on investments | 53,442 | 6,436 | — | 59,878 | ||||||||||||||
(Loss) from investment affiliate | (558 | ) | — | — | (558 | ) | ||||||||||||
Other income | 22,209 | 6,544 | — | 28,753 | ||||||||||||||
Foreign exchange gains (losses) | 3,617 | (6,736 | ) | — | (3,119 | ) | ||||||||||||
Total revenues | 1,554,523 | 350,088 | (2,157 | ) | 1,902,454 | |||||||||||||
Expenses | ||||||||||||||||||
Losses and loss expenses | 541,136 | 181,983 | — | 723,119 | ||||||||||||||
Policy acquisition costs | 252,884 | 65,870 | — | 318,754 | ||||||||||||||
General and administrative expenses | 198,557 | 56,730 | — | 255,287 | ||||||||||||||
Share compensation expenses | 19,583 | 3,140 | — | 22,723 | ||||||||||||||
Transaction expenses | 3,784 | — | (3,784 | ) | 3(b) | — | ||||||||||||
Finance expenses | 39,347 | 8,673 | — | 48,020 | ||||||||||||||
Total expenses | 1,055,291 | 316,396 | (3,784 | ) | 1,367,903 | |||||||||||||
Income before taxes | 499,232 | 33,692 | 1,627 | 534,551 | ||||||||||||||
Tax expense | (1,886 | ) | (882 | ) | — | (2,768 | ) | |||||||||||
Income from operating affiliates | 13,194 | 288 | — | 13,482 | ||||||||||||||
Net income from continuing operations | $ | 510,540 | $ | 33,098 | 1,627 | $ | 545,265 | |||||||||||
Net income from discontinued operations, net of tax | — | 19,366 | — | 19,366 | ||||||||||||||
Net income | $ | 510,540 | $ | 52,464 | 1,627 | $ | 564,631 | |||||||||||
Net income attributable to noncontrolling interest | (11,386 | ) | (1,135 | ) | — | (12,521 | ) | |||||||||||
Net income available to company | $ | 499,154 | $ | 51,329 | 1,627 | $ | 552,110 | |||||||||||
Dividends and distributions declared on outstanding warrants | 5,121 | — | — | 5,121 | ||||||||||||||
Net income available to common shareholders | $ | 494,033 | $ | 51,329 | $ | 1,627 | $ | 546,989 | ||||||||||
Earnings per share | ||||||||||||||||||
Weighted average number of common shares and common share equivalents outstanding | ||||||||||||||||||
Basic | 97,016,034 | 71,128,790 | 14,303,837 | 111,319,871 | ||||||||||||||
Diluted | 102,333,515 | 71,766,808 | 14,427,293 | 116,760,808 | ||||||||||||||
Basic earnings per share | $ | 5.09 | $ | 0.72 | 6 | $ | 4.91 | |||||||||||
Diluted earnings per share | $ | 4.88 | $ | 0.72 | 6 | $ | 4.73 | |||||||||||
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements
(Expressed in thousands of U.S. dollars, except share and per share data)
1. Basis of Presentation
The unaudited condensed consolidated pro forma financial information gives effect to the proposed acquisition as if it had occurred at September 30, 2012 for the purposes of the unaudited condensed consolidated pro forma balance sheet and at January 1, 2011 for the purposes of the unaudited condensed consolidated pro forma statements of operations for the year ended December 31, 2011 and nine months ended September 30, 2012. The unaudited condensed consolidated pro forma financial information is for illustrative purposes only and has been prepared by Validus' management, after discussion with Flagstone's management, and is based on Validus' historical consolidated financial statements and Flagstone's historical consolidated financial statements.
This unaudited condensed consolidated pro forma financial information is prepared in conformity with Accounting Principles generally accepted in the United States ("US GAAP"). The unaudited condensed consolidated pro forma balance sheet as of September 30, 2012 and the unaudited condensed consolidated pro forma statements of operations for the year ended December 31, 2011 and the nine month period ended September 30, 2012 have been prepared using the following information:
(a) | Audited historical consolidated financial statements of Validus as of December 31, 2011 and for the year ended December 31, 2011; |
(b) | Audited historical consolidated financial statements of Flagstone as of December 31, 2011 and for the year ended December 31, 2011; |
(c) | Unaudited historical consolidated financial statements of Validus as of September 30, 2012 and for the nine months ended September 30, 2012; |
(d) | Unaudited historical consolidated financial statements of Flagstone as of September 30, 2012 and for the nine months ended September 30, 2012; and |
(e) | Such other known supplementary information as considered necessary to reflect the acquisition in the unaudited condensed consolidated pro forma financial information. |
The pro forma adjustments reflecting the acquisition under the acquisition method of accounting are based on certain estimates and assumptions. Validus' management believes that its assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated based on information available to Validus at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited condensed consolidated pro forma financial information.
The unaudited condensed consolidated pro forma financial information does not include any financial benefits, revenue enhancements or operating expense efficiencies arising from the acquisition.
Estimated costs of the transaction as well as the benefit of the negative goodwill have been reflected in the unaudited condensed consolidated pro forma balance sheet, but have not been included on the pro forma income statement due to their non-recurring nature.
The unaudited condensed consolidated pro forma financial information is not intended to reflect the results of operations or the financial position that would have resulted had the acquisition been effected on the dates indicated and if the companies had been managed as one entity. The unaudited condensed consolidated pro forma financial information should be read in conjunction with the Validus 10-Q, the Validus 10-K, the Flagstone 10-Q and the Flagstone 10-K, as filed with the SEC.
2. Recent Accounting Pronouncements
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). The objective of ASU 2011-11 is to enhance disclosures by requiring improved information about financial instruments and derivative instruments in relation to netting arrangements. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In October 2012, the FASB issued Accounting Standards Update No. 2012-04, “Technical Corrections and Improvements” (“ASU - 2012-04”). The objective of ASU 2012-04 is to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, the amendments will make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments that will not have transition guidance will be effective upon issuance. For public entities, the
amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In January 2013, the FASB issued Accounting Standards Update No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The objective of ASU 2013-01 is to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of ASU 2011-11 applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in ASU 2011-11. ASU 2013-01 is effective for interim and annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued Accounting Standard Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The objective of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, since this update affects disclosures only, it is not expected to have a material impact on the Company's consolidated financial statements.
3. Purchase Adjustments
On November 30, 2012, Validus completed its acquisition of Flagstone, pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 30, 2012, by and among Validus, Flagstone, Flagstone Reinsurance Holdings (Bermuda) Limited (“Flagstone Bermuda”) and Validus UPS, Ltd. (“Validus UPS”). Pursuant to the terms of the Merger Agreement, the acquisition was completed by means of two mergers. First, Flagstone became a Bermuda entity through a first-step merger with and into Flagstone Bermuda, a newly-formed subsidiary of Flagstone (the “First-Step Merger”). Second, immediately following the First-Step Merger, Flagstone Bermuda merged through a second-step merger with and into Validus UPS, a newly-formed Validus subsidiary (the “Second-Step Merger,” and together with the First-Step Merger, the “Mergers”). Following the Second-Step Merger, the successor-in-interest to Flagstone became wholly owned by Validus. Upon completion of the Mergers, each share of Flagstone issued and outstanding immediately prior to the First-Step Merger 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 “Merger Consideration”).
In connection with the acquisition, transaction costs currently estimated at $20,000 will be incurred and expensed.
As discussed above, these pro forma purchase adjustments are based on certain estimates and assumptions made as of the date of the unaudited condensed consolidated pro forma financial information. The actual adjustments will depend on a number of factors, including further review of Flagstone's books and records, and changes in the estimated fair value of net balance sheet assets and operating results of Flagstone between September 30, 2012 and the date of the consummation of acquisition. Validus expects to make such adjustments at such time. These adjustments are likely to be different from the adjustments made to prepare the unaudited condensed consolidated pro forma financial information and such differences may be material.
The share prices for both Validus and Flagstone used in determining the preliminary estimated purchase price are based on the closing share prices on November 29, 2012. The preliminary total purchase price is calculated as follows:
Calculation of Total Purchase Price
Flagstone shares and share units subject to exchange ratio as of September 30, 2012 | 73,856,637 | ||
Exchange ratio | 0.1935 | ||
Total Validus shares to be issued | 14,291,259 | ||
Validus share price at acquisition | $ | 34.87 | |
Total value of Validus shares to be issued | $ | 498,336 | |
Total cash consideration paid | $ | 147,713 | |
Total purchase price | $ | 646,049 | |
The allocation of the purchase price is as follows:
Allocation of Purchase Price
Flagstone stockholders' equity | $ | 830,845 | |
Loss reserve increase | (76,300 | ) | |
Other fair value adjustments | (45,398 | ) | |
Flagstone stockholders' equity, adjusted (B) | $ | 709,147 | |
Total purchase price (A) | $ | 646,049 | |
Negative goodwill (A-B) | $ | 63,098 | |
(a) | In connection with the exchange offer, 14,291,259 Validus Shares are expected to be issued for all Flagstone Shares and Flagstone Shares issued following vesting of restricted shares, restricted share units and performance share units resulting in additional share capital of $2,501 and additional paid-in capital of $495,835. |
(b) | In addition to the cash consideration of $147,713, it is expected that total transaction costs currently estimated at $20,000 will be incurred by the consolidated entity. Based on an expected investment return of 1.87% for Validus and 2.00% for Flagstone per annum, investment income of $3,156 would have been foregone during the year ended December 31, 2011 had these payments of $167,713 been made. Approximately $3,784 of the estimated $20,000 total transaction costs have been incurred and expensed in the nine months ended September 30, 2012. The expenses have been eliminated from the unaudited condensed consolidated pro forma results of operations for the nine months ended September 30, 2012. In addition, an adjustment of $16,216 was made to retained earnings as at September 30, 2012 to reflect the remaining transaction costs. Based on an expected investment return of 1.73% for Validus and 2.00% for Flagstone per annum, pre tax investment income of $2,157 would have been foregone during the nine months ended September 30, 2012 had these remaining payments of $163,929 been made. |
(c) | Elimination of Flagstone ordinary shares of common stock of $845, treasury shares of $150,202, additional paid-in capital of $855,722, accumulated other comprehensive loss of $15,265 and retained earnings of $139,745. |
(d) | The unaudited condensed consolidated pro forma financial statements have been prepared by Validus' management, after discussion with Flagstone's management, and are based on Validus' historical consolidated financial statements and Flagstone's historical consolidated financial statements. With the exception of notes 3(e) and 3(f) below, the carrying value of assets and liabilities in Flagstone's financial statements are considered to be a proxy for fair value of those assets and liabilities, with the difference between the net assets and the total purchase price considered to be negative goodwill. Pursuant to Accounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"), a bargain purchase is defined as a business combination in which the total fair value of the identifiable net assets acquired on the date of acquisition exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. Negative goodwill of $63,098 has been recorded as a credit to retained earnings as upon completion of the acquisition of Flagstone Shares negative goodwill will be treated as a gain in the consolidated statement of operations. |
(e) | It is expected that an additional reserve of $76,300 will be required to harmonize Flagstone's reserving methodology with Validus'. This charge to the balance sheet of $76,300 has been recorded as a reduction to retained earnings. |
(f) | Following a review of Flagstone's books and records and discussion with Flagstone's management, it was determined that an additional payable of $36,026 should be recognized to reflect the costs of winding up certain parts of Flagstone's operations. In addition, a credit of $8,372 to Other Assets and $1,000 to Assets held for sale including discontinued operations was recorded to reflect the realizable value of Flagstone's tangible assets. A reduction to retained earnings in the amount of $45,398 was made to reflect these fair value adjustments. |
4. Adjustments to Cash and Cash Equivalents
The acquisition of Flagstone Shares will result in the payment of cash and cash equivalents by Flagstone of $15,000 and by Validus of $148,929, reflecting aggregate cash consideration of $147,713 and remaining transaction expenses of $16,216.
The unaudited condensed consolidated pro forma statements of operations reflect the impact of these reductions in cash and cash equivalents. Actual transaction costs may vary from such estimates which are based on the best information available at the time the unaudited condensed consolidated pro forma financial information was prepared.
For purposes of presentation in the unaudited condensed consolidated pro forma financial information, the sources and uses of funds of the acquisition are as follows:
Sources of Funds
Flagstone cash and cash equivalents | $ | 15,000 | |
Validus cash and cash equivalents | 148,929 | ||
Total | $ | 163,929 | |
Uses of Funds
Cash consideration | $ | 147,713 | |
Validus transaction costs | 1,216 | ||
Flagstone transaction costs | 15,000 | ||
Total | $ | 163,929 | |
5. Selected Ratios
Selected ratios of Validus, Flagstone and pro forma combined are as follows:
Year Ended December 31, 2011 | Nine months Ended September 30, 2012 | |||||||||||||||||
Validus Holdings, Ltd. | Flagstone Reinsurance Holdings, S.A. | Pro Forma combined | Validus Holdings, Ltd. | Flagstone Reinsurance Holdings, S.A. | Pro Forma combined | |||||||||||||
Losses and loss expense ratios | 69.1 | % | 118.4 | % | 80.9 | % | 39.4 | % | 60.9 | % | 43.2 | % | ||||||
Policy acquisition costs ratios | 17.4 | 20.2 | 18.1 | 18.4 | 22.0 | 19.1 | ||||||||||||
General and administrative cost ratios | 12.9 | 15.0 | 13.4 | 15.9 | 20.0 | 16.6 | ||||||||||||
Combined ratio | 99.4 | % | 153.6 | % | 112.4 | % | 73.7 | % | 102.9 | % | 78.9 | % | ||||||
6. Earnings per Validus Share
(a) Pro forma earnings per common share for the year ended December 31, 2011 and the nine months ended September 30, 2012 have been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described in 6(b) below. The historical weighted average number of outstanding Validus Shares was 98,607,439 and 100,928,284 basic and diluted, respectively, for the year ended December 31, 2011 and 97,016,034 and 102,333,515 basic and diluted, respectively, for the nine months ended September 30, 2012.
(b) The pro forma weighted average number of Validus Shares outstanding for the year ended December 31, 2011 and nine months ended September 30, 2012, after giving effect to the exchange of shares as if the Exchange Offer had been issued and outstanding for the whole year, is 112,230,004 and 112,230,004, basic and diluted, and 111,319,871 and 116,760,808, basic and diluted, respectively.
(c) In the basic earnings per share calculation, dividends and distributions declared on warrants are deducted from net income. In calculating diluted earnings per share, we consider the application of the treasury stock method and the two-class method and whichever is more dilutive is included in the calculation of diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per share for the nine months ended September 30, 2012:
Historical Validus Holdings, Ltd. | Pro Forma Consolidated | |||||||
Net income available to common shareholders | $ | 494,033 | $ | 546,989 | ||||
Weighted average shares-basic ordinary shares outstanding | 97,016,034 | 111,319,871 | ||||||
Share equivalents | ||||||||
Warrants | 3,116,298 | 3,116,298 | ||||||
Restricted Shares | 1,423,938 | 1,547,394 | ||||||
Options | 777,245 | 777,245 | ||||||
Weighted average shares-diluted | 102,333,515 | 116,760,808 | ||||||
Basic earnings per share | $ | 5.09 | $ | 4.91 | ||||
Diluted earnings per share | $ | 4.88 | $ | 4.73 | ||||
The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31, 2011:
Historical Validus Holdings, Ltd. | Pro Forma Consolidated | |||||||
Net income (loss) available to common shareholders | $ | 13,685 | $ | (315,604 | ) | |||
Weighted average shares-basic ordinary shares outstanding | 98,607,439 | 112,230,004 | ||||||
Share equivalents | ||||||||
Warrants | — | — | ||||||
Restricted Shares | 1,544,641 | — | ||||||
Options | 776,204 | — | ||||||
Weighted average shares-diluted | 100,928,284 | 112,230,004 | ||||||
Basic earnings (loss) per share | $ | 0.14 | $ | (2.81 | ) | |||
Diluted earnings (loss) per share | $ | 0.14 | $ | (2.81 | ) | |||
7. Book Value per Share
Validus calculates diluted book value per share using the "as-if-converted" method, where all proceeds received upon exercise of warrants and stock options would be retained by Validus and the resulting common shares from exercise remain outstanding. Flagstone's diluted book value per share has been calculated based on the "as-if-converted" method consistent with Flagstone's presentation of diluted book value per share and Validus' calculation.
The following table sets forth the computation of book value and diluted book value per share adjusted for the acquisition as of September 30, 2012:
Historical Validus Holdings, Ltd. | Pro Forma Consolidated | |||||||
Book value per common share calculation | ||||||||
Total shareholders' equity available to the Company | $ | 3,633,853 | $ | 4,179,071 | ||||
Shares | 93,494,391 | 107,301,097 | ||||||
Book value per common share | $ | 38.87 | $ | 38.95 | ||||
Diluted book value per common share calculation | ||||||||
Total shareholders' equity available to the Company | $ | 3,633,853 | $ | 4,179,071 | ||||
Proceeds of assumed exercise of outstanding warrants | $ | 116,822 | $ | 116,822 | ||||
Proceeds of assumed exercise of outstanding stock options | $ | 37,745 | $ | 37,745 | ||||
Unvested restricted shares | — | — | ||||||
$ | 3,788,420 | $ | 4,333,638 | |||||
Shares | 93,494,391 | 107,301,097 | ||||||
Warrants | 6,652,550 | 6,652,550 | ||||||
Options | 1,823,947 | 1,823,947 | ||||||
Unvested restricted shares | 2,468,053 | 2,952,606 | ||||||
104,438,941 | 118,730,200 | |||||||
Diluted book value per common share | $ | 36.27 | $ | 36.50 | ||||
8. Capitalization
The following table sets forth the computation of debt to total capitalization and debt (excluding debentures payable) to total capitalization at September 30, 2012, adjusted for the acquisition:
Historical Validus Holdings, Ltd. | Pro Forma Consolidated | ||||||
Total debt | |||||||
Senior notes payable | $ | 247,063 | $ | 247,063 | |||
Debentures payable | 289,800 | 540,256 | |||||
Total debt | $ | 536,863 | $ | 787,319 | |||
Total capitalization | |||||||
Total shareholders' equity | $ | 4,095,339 | $ | 4,640,557 | |||
Senior notes payable | 247,063 | 247,063 | |||||
Debentures payable | 289,800 | 540,256 | |||||
Total capitalization | $ | 4,632,202 | $ | 5,427,876 | |||
Total debt to total capitalization | 11.6 | % | 14.5 | % | |||
Debt (excluding debentures payable) to total capitalization | 5.3 | % | 4.6 | % | |||