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Validus Holdings, Ltd. (VR - Snapshot Report) reported second-quarter 2014 net operating income of $1.39 per share, missing the Zacks Consensus Estimate by 4.1%. However, earnings increased 35% year over year, driven by strong underwriting results, conservative reserving practices and better diversification between insurance and reinsurance.

Adjusting for non-recurring items, Validus reported net income of $153.4 million or $1.61 per share compared with $30.7 million or 28 cents in the year-ago quarter.

Behind the Headlines

Net premiums earned for the reported quarter declined 14.9% year over year.

Net investment income was $21.3 million, down 18.8% year over year.  Annualized effective yield was 1.19%, down 10 basis points due to the sale of bank loans for investing in high-grade structured products fund.

Underwriting income increased 24.2% year over year due to a decline in the loss expenses and policy acquisition costs.

Combined ratio for the second quarter improved by 990 basis points (bps) to 68.6% due to solid performance in all the segments.

General and administrative expenses increased 31.3% year over year.

Segment Details

Validus Re: Gross premiums were $310 million, down 12.2% year over year due to lower premiums at property lines and marine lines of business.

The combined ratio improved by 2370 bps year over year due to a better loss ratio, driven by favorable loss reserve development.

Talbot: Gross premiums earned inched up 0.8% year over year, led by increase in marine premiums and specialty premiums in the reported quarter.

The combined ratio deteriorated 340 bps due to deterioration in the loss ratio.

AlphaCat: Gross premiums including realized and unrealized gains on the PaCre investments were $43.8 million, down 6.4% year over year in the reported quarter.

The combined ratio improved by 1350 bps year over year in the reported quarter.

The ownership of Validus in various AlphaCat entities had a favorable impact on net operating income available, which came in at $0.9 million.

Financial Update

Validus exited the quarter with cash and cash equivalents of $1.16 billion, up 10.4% as of Dec 31, 2013.

Total assets of Validus increased 6.0% to $10.4 billion from 2013-end level.

Total shareholders’ equity came in at nearly $4.3 billion as of Jun 30, 2014, up about 2% from the 2013 year-end.

Book value per share increased 6.4% to $38.55 per share as of Jun 30, 2014.

Return on equity was 14.3%, up from 11.9% year over year.

Performance of Other Broker Insurers

While Aon plc (AON - Analyst Report) and Blue Capital Reinsurance Holdings Ltd. (BCRH - Snapshot Report) outperformed the Zacks Consensus Estimate, Brown & Brown Inc. (BRO - Snapshot Report) missed the same.

Zacks Rank

Validus Holdings, Ltd. currently has a Zacks Rank #3 (Hold).

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