Summary of VALIDUS HOLDINGS LTD

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's consolidated results of operations for the three and nine months ended September 30, 2009 and 2008 and the Company's consolidated financial condition and liquidity and capital resources at September 30, 2009 and December 31, 2008. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2008, the discussions of critical accounting policies and the qualitative and quantitative disclosure about market risk contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
The Company was formed on October 19, 2005 and completed the acquisitions of Talbot Holdings Ltd. ("Talbot") and IPC on July 2, 2007 and September 4, 2009, respectively. 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 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and in Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2009 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. Executive Overview
The Company underwrites from two distinct global operating subsidiaries, Validus Re and Talbot. Validus Re, the Company's principal reinsurance operating subsidiary, operates as a Bermuda-based provider of short-tail reinsurance products on a global basis and incorporates historical IPC business. Talbot, the Company's principal insurance operating subsidiary, operates through its two underwriting platforms: Talbot Underwriting Ltd, which manages Syndicate 1183 at Lloyd's of London ("Lloyd's") which writes short-tail insurance products on a worldwide basis, and Underwriting Risk Services Ltd, which is an underwriting agency writing primarily yachts and onshore energy business on behalf of the Talbot syndicate and others.
The Company's strategy is to concentrate primarily on short-tail risks, which is 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 September 4, 2009, the Company acquired all of the outstanding shares of IPC (the "IPC Acquisition"). Pursuant to an Amalgamation Agreement dated July 9, 2009 among IPC, Validus Holdings, Ltd and Validus, Ltd. (the "Amalgamation Agreement"), the Company acquired all of IPC's outstanding common shares in exchange for the Company's common shares and cash. IPC's operations focused on short-tail lines of reinsurance. The primary lines in which IPC conducted business were property catastrophe reinsurance and, to a limited extent, property-per-risk excess, aviation (including satellite) and other short-tail reinsurance on a worldwide basis. The acquisition of IPC was undertaken to increase the Company's capital base and gain a strategic advantage in the current reinsurance market, where capital and capacity has been depleted. This acquisition creates a leading Bermuda carrier in the short-tail reinsurance and insurance market that facilitates stronger relationships with major reinsurance intermediaries.
Business Outlook and Trends
The Company was formed in October 2005 in response to the supply/demand imbalance resulting from the large industry losses in 2004 and 2005. In the aggregate, the Company observed substantial increases in premium rates in 2006 compared to 2005 levels. During the years ended December 31, 2007 and 2008, the Company had experienced increased competition in most lines of business. Capital provided by new entrants or by the commitment of additional capital by existing insurers and reinsurers had increased the supply of insurance and reinsurance which

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resulted in a softening of rates in most lines. However, during 2008, the insurance and reinsurance industry incurred material losses and capital declines due to Hurricanes Ike and Gustav and the global financial crisis.
In the wake of these events, the January 2009 renewal season saw decreased competition and increased premium rates due to relatively scarce capital and increased demand. During 2009, the Company observed reinsurance demand stabilization and modest increases in credit market liquidity. The July 2009 renewal season continued to show notable rate increases as compared to the July 2008 renewal season. For the nine months ended September 30, 2009, there have been few notable large losses affecting the worldwide (re)insurance industry and no major hurricanes making landfall in the United States. Should this benign loss experience continue, it is possible that rates at the January 1, 2010 renewal period may show downward pressure; although, currently no such market pricing information is available. Validus Re gross premiums written at January 1, 2009 grew by 26.0% from the prior year period. For the nine months ended September 30, 2009, Validus Re and Talbot gross premiums written grew by 14.1% and 24.1%, respectively, from the comparable period in the prior year. These increases were largely due to rate increases coupled with modest exposure growth and the addition of new underwriting teams. 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. The Company's objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed and to grow premiums written only when returns meet or exceed internal requirements. Details of annualized return on average equity are provided below.

Three months ended Nine months ended Year ended September 30, September 30, December 31, 2009 2008 2009 2008 2008 Annualized return on average equity 65.3 % (25.4 )% 38.7 % 1.1 % 2.7 %

The increases in annualized return on average equity were driven primarily by an increase in net income for the three and nine months ended September 30, 2009. Net income for the three months ended September 30, 2009 increased by $625.5 million, or 495.2% compared to the three months ended September 30, 2008, due primarily to the gain on bargain purchase of IPC and the large event losses incurred for the three months ended September 30, 2008. Net income for the nine months ended September 30, 2009 increased by $715.6 million compared to the nine months ended September 30, 2008.
Annualized return on average equity is calculated by dividing the net income for the period by the average shareholders' equity during the period. Average shareholders' equity is the average of the beginning, ending and intervening quarter end shareholders' equity balances.
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 increased by $4.83, or 20.3%, from $23.78 at December 31, 2008 to $28.61 at September 30, 2009. The increase was substantially due to earnings generated in the nine months ended September 30, 2009, partially offset by dividend payments totaling $0.60 per share and per share equivalent in the period. 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 "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 $0.20 per common share and common share equivalent in each of the first three

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quarters of 2009. On November 4, 2009, the Company announced a quarterly cash dividend of $0.20 per each common share and $0.20 per common share equivalent for which each outstanding warrant is then exercisable, payable on December 31, 2009 to holders of record on December 15, 2009.
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) and gain on bargain purchase, net of 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 income (loss) for the three months ended September 30, 2009 and 2008 was $124.4 million and ($75.7) million, respectively. Underwriting income for the nine months ended September 30, 2009 and 2008 was $296.7 million and $65.4 million, respectively. Underwriting income is a Non-GAAP financial measure as described in detail and reconciled in the section below entitled "Underwriting Income."
Critical Accounting Policies and Estimates There are certain accounting policies that the Company considers to be critical due to the judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. The Company believes the following critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements:
• Reserve for losses and loss expenses;

• Premiums;

• Reinsurance premiums ceded and reinsurance recoverable; and

• Investment valuation.

Critical accounting policies and estimates are discussed further in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Segment Reporting
Management has determined that the Company operates in two reportable segments. The two segments are its significant operating subsidiaries, Validus Re and Talbot.
Results of Operations
Validus Re 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.

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The following table presents results of operations for the three and nine months ended September 30, 2009 and 2008:

                                                          Three months ended September 30,                  Nine months ended September 30,
(Dollars in thousands)                                     2009                   2008 (a)                   2009                   2008 (a)
Gross premiums written                                $       331,028         $         269,236        $      1,365,951         $      1,170,749
Reinsurance premiums ceded                                    (67,687 )                 (35,139 )              (202,489 )               (121,438 )

Net premiums written                                          263,341                   234,097               1,163,462                1,049,311
Change in unearned premiums                                   111,376                   105,229                (141,786 )               (108,823 )

Net premiums earned                                           374,717                   339,326               1,021,676                  940,488

Losses and loss expenses                                      134,152                   318,464                 390,736                  580,578
Policy acquisition costs                                       64,236                    60,425                 190,125                  173,545
General and administrative expenses                            46,036                    30,120                 125,315                  101,139
Share compensation expenses                                     5,862                     6,012                  18,848                   19,818

Total underwriting deductions                                 250,286                   415,021                 725,024                  875,080

Underwriting income (loss) (b)                                124,431                   (75,695 )               296,652                   65,408
Net investment income                                          29,532                    36,379                  83,267                  108,857
Other income                                                    1,101                     1,269                   2,875                    3,666
Finance expenses                                              (11,257 )                 (14,517 )               (29,732 )                (48,796 )

Operating income (loss) before taxes (b)                      143,807                   (52,564 )               353,062                  129,135
Tax benefit (expense)                                           1,799                      (487 )                 3,301                   (4,992 )

Net operating income (loss) (a) (b)                           145,606                   (53,051 )               356,363                  124,143

Gain on bargain purchase, net of expenses                     302,950                         -                 287,099                        -
Realized gain on repurchase of debentures                           -                         -                       -                    8,752
Net realized gains (losses) on investments                      5,429                   (13,667 )               (20,642 )                 (8,348 )
Net unrealized gains (losses) on investments                   50,437                   (14,649 )               109,839                  (72,608 )
Foreign exchange (losses)                                      (5,244 )                 (44,933 )                (1,012 )                (35,843 )

Net income (loss)                                     $       499,178         $        (126,300 )      $        731,647         $         16,096

Selected ratios:
Net premiums written / Gross premiums written                    79.6 %                    86.9 %                  85.2 %                   89.6 %

Losses and loss expenses                                         35.8 %                    93.9 %                  38.2 %                   61.7 %
Policy acquisition costs                                         17.1 %                    17.8 %                  18.6 %                   18.5 %
General and administrative expenses                              13.8 %                    10.6 %                  14.1 %                   12.9 %

Expense ratio                                                    30.9 %                    28.4 %                  32.7 %                   31.4 %

Combined ratio                                                   66.7 %                   122.3 %                  70.9 %                   93.1 %

a) The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently,
2008 data does
not include
IPC financial
results.

b) Non-GAAP Financial Measures. In presenting the Company's results, management has included and discussed underwriting income
(loss) 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. A
reconciliation
underwriting
income
(loss) measure to net income, the most comparable U.S. GAAP financial measure, is presented in the section below entitled "Underwriting Income."

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                                                      Three months ended September 30,                  Nine months ended September 30,
                                                        2009                   2008 (a)                  2009                   2008 (a)
Validus Re
Gross premiums written                            $        124,704         $        125,029        $         734,390         $       643,898
Reinsurance premiums ceded                                 (38,435 )                (36,286 )                (94,794 )               (61,237 )

Net premiums written                                        86,269                   88,743                  639,596                 582,661
Change in unearned premiums                                113,499                   92,653                 (101,684 )               (93,498 )

Net premiums earned                                        199,768                  181,396                  537,912                 489,163

Losses and loss expenses                                    45,987                  217,081                  142,570                 324,673
Policy acquisition costs                                    32,648                   26,520                   90,346                  72,232
General and administrative expenses                         17,987                    7,972                   45,928                  27,306
Share compensation expenses                                  1,766                    1,809                    4,986                   4,632

Total underwriting deductions                               98,388                  253,382                  283,830                 428,843


Underwriting income (loss) (b)                             101,380                  (71,986 )                254,082                  60,320


Talbot
Gross premiums written                            $        227,325         $        157,307        $         690,357         $       556,335
Reinsurance premiums ceded                                 (50,253 )                (11,953 )               (166,491 )               (89,685 )

Net premiums written                                       177,072                  145,354                  523,866                 466,650
Change in unearned premiums                                 (2,123 )                 12,576                  (40,102 )               (15,325 )

Net premiums earned                                        174,949                  157,930                  483,764                 451,325

Losses and loss expenses                                    88,165                  101,383                  248,166                 255,905
Policy acquisition costs                                    33,106                   34,026                  102,378                 101,458
General and administrative expenses                         23,424                   17,851                   65,565                  58,561
Share compensation expenses                                  1,371                    1,164                    5,804                   3,266

Total underwriting deductions                              146,066                  154,424                  421,913                 419,190


Underwriting income (loss) (b)                              28,883                    3,506                   61,851                  32,135


Corporate & Eliminations
Gross premiums written                            $        (21,001 )       $        (13,100 )      $         (58,796 )       $       (29,484 )
Reinsurance premiums ceded                                  21,001                   13,100                   58,796                  29,484

Net premiums written                                             -                        -                        -                       -
Change in unearned premiums                                      -                        -                        -                       -

Net premiums earned                                              -                        -                        -                       -

Losses and loss expenses                                         -                        -                        -                       -
Policy acquisition costs                                    (1,518 )                   (121 )                 (2,599 )                  (145 )
General and administrative expenses                          4,625                    4,297                   13,822                  15,272
Share compensation expenses                                  2,725                    3,039                    8,058                  11,920

Total underwriting deductions                                5,832                    7,215                   19,281                  27,047


Underwriting income (loss) (b)                              (5,832 )                 (7,215 )                (19,281 )               (27,047 )

Total underwriting income (b) $ 124,431 $ (75,695 ) $ 296,652 $ 65,408

a) The results of operations for IPC are consolidated only from the September 2009 date of acquisition. Consequently,
2008 data does
not include
IPC financial
results.

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."

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Three months ended September 30, 2009 compared to three months ended September 30, 2008 Net income (loss) for the three months ended September 30, 2009 was $499.2 million compared to ($126.3) million for the three months ended September 30, 2008, an increase of $625.5 million or 495.2%. The primary factors driving the increase in net income were:
• Gain on bargain purchase, net of expenses of $303.0 million on the IPC Acquisition;

• Increase in underwriting income of $200.1 million due primarily to reduced losses and loss expenses of $184.3 and increased net premiums earned of $35.4 million. For the three months ended September 30, 2008, the Company incurred $183.4 million and $22.1 million, respectively, as a result of Hurricanes Ike and Gustav;

• Increase in net realized gains on investments of $19.1 million due to the disposition of selected fixed maturities to finance the purchase of IPC;

• Increase in net unrealized gains on investments of $65.1 million, respectively, due to improved market conditions for fixed income securities; and

• Decreased foreign exchange (losses) of $39.7 million was due to the increased value of assets denominated in foreign currencies relative to the U.S. dollar reporting currency for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. Foreign exchange (losses) for the three months ended September 30, 2009 were ($5.2) million, as compared to ($44.9) million for the three months ended September 30, 2008.

The change in net income for the three months ended September 30, 2009 of $625.5 million is described in the following table:

                                                                                     Three months ended September 30, 2009
                                                                     Increase (decrease) over the three months ended September 30, 2008 (a)
                                                                                                             Corporate and
                                                                                                           other reconciling
(Dollars in thousands)                                      Validus Re                 Talbot                    items                      Total
Hurricanes Ike and Gustav - net losses and loss
expenses (b)                                             $         172,635         $        32,878         $                -         $         205,513
Hurricanes Ike and Gustav - net reinstatement
premiums (b)                                                       (19,268 )                  (392 )                        -                   (19,660 )
Other underwriting income                                           19,999                  (7,109 )                    1,383                    14,273

Underwriting income (c)                                            173,366                  25,377                      1,383                   200,126
Net investment income                                               (2,564 )                (4,108 )                     (175 )                  (6,847 )
Other income                                                         1,726                    (497 )                   (1,397 )                    (168 )
Finance expenses                                                      (180 )                 3,275                        165                     3,260

                                                                   172,348                  24,047                        (24 )                 196,371
Taxes                                                                  (10 )                 2,296                          -                     2,286

                                                                   172,338                  26,343                        (24 )                 198,657

Gain on bargain purchase, net of expenses                                -                       -                    302,950                   302,950
Net realized (losses) gains on investments                          17,925                   1,171                          -                    19,096
. . .