Ed Noonan
Chairman and Chief Executive Officer

Dear Fellow Shareholders,

This year marked our eleventh consecutive year of profitability since our founding in 2005. We continue to measure success by how well we do at growing the book value of our company including the dividends that we pay to you. We have had compound annual growth in diluted book value per share plus accumulated dividends of 11.6% since  starting the company in 2005, and remain committed to responsibly building long-term shareholder value.

Despite very competitive market conditions, we have exhibited strong discipline in the pricing and selection of business, and our underwriting performance continues to stand out in our industry. While we have appropriately reduced our business in both Talbot and Validus Re, we saw good opportunities in the U.S. and consequently had strong premium growth of 16% at Western World during the year. Our balance sheet continues to be extremely strong, and despite our conservative approach to investing, we generated $150 million in net investment income for the year. All told, we had a good year, with net income available to Validus common shareholders of $359 million and return on average equity of 9.7%.

The year also saw the creation of Validus Specialty in the U.S., which provides a wide range of E&S and admitted insurance solutions. Validus Specialty operates on behalf of Western World and Talbot. With the flexibility of offering 'A+'rated Lloyd's policies and 'A' rated U.S. domestic excess and surplus lines or admitted policies through Western World, Validus Specialty provides enhanced distribution access, excellent technical underwriting, claims management and access to leading underwriting capacity.

We recently announced our agreement to acquire Archer Daniels Midland Company's (ADM) Crop Risk Services (CRS) business, which is expected to close in the first half of 2017, and will become a key part of Western World. This represents an important part of our strategy to continue to expand our presence in U.S. primary specialty lines. It also complements Validus existing agriculture book and provides a marketing services agreement with ADM, one of the largest agricultural processors in the world. CRS's business model is unique and they have been one of the onlycrop insurers able to grow market share organically over the last few years. They also have exceptional homegrown technology that makes them extremely customer-friendly and have pioneered the use of drone technology in the claims settlement process, allowing them to stand out for rapid and accurate payment of claims to farmers.

Since our founding in 2005, we have grown into a leading global insurance, reinsurance and investment management firm with informed insight guided by years of accumulated expertise in crafting industry leading solutions. Our gross premiums written are now comprised of 43% insurance and 57% reinsurance for the year ended December 31, 2016, and pro forma for the acquisition of CRS, our gross premiums written would have been 53% insurance and 47% reinsurance. Now, I'd like to share a bit more detail on each of  our main operating segments.

Today, through our global multi-line reinsurance group Validus Re, we are one of the largest and most successful reinsurers specializing in the assumption of volatility risk. Validus Re operates from six offices internationally and is able to provide a broad suite of reinsurance products and services, backed by highly-rated capital and specialized local knowledge, in virtually every corner of the world. We have the financial strength and resources to satisfy the most demanding global clients, but we are also nimble enough to provide innovative and client-focused solutions in a complex and evolving marketplace. We continue to leverage our leading analytics to identify attractively priced business, optimize our portfolio and maximize our position on the best quality opportunities. Validus Re has successfully grown in attractively priced segments in the specialty market over the last few years and continues to see opportunities in composite reinsurance, mortgage and political risk. We have no delusions about the nature of risk and cyclicality, and there are risk classes  that are attractive today that you may not see us actively underwrite at other points in time.

Talbot enjoys a strong competitive position despite challenging market conditions and rate declines in London. Gross premiums written in the segment decreased 5% in 2016, driven by a decrease in the upstream energy and cargo classes. These were partially offset by increases in the political lines, financial lines and contingency classes. Looking forward, we do not expect any material improvement in the competitive environment during 2017, and you should not be surprised to see us reduce our underwriting risk by shrinking our business further while we wait for a better pricing environment. We do, however, expect to see Talbot take on more business through Validus Specialty, which will offset some of the weakness in the Lloyd's market.

Validus' third party asset manager, AlphaCat, enables us to optimally combine ILS capital with our own balance sheet to offer customers the most efficient reinsurance solutions. Our ability to leverage our analytics and portfolio management skills with our balance  sheet strength and our capabilities as an asset manager, firmly position us as a global leader in catastrophe risk. AlphaCat had another year of growth in 2016. Total assets under management reached $2.7 billion at January 1, 2017, $2.5 billion of which is managed for third parties. Third-party AUM grew by approximately 20% during the year. In additionto significant growth in the ILS funds, AlphaCat also received its first third-party investment in the BetaCat funds at January 1, 2017, which are passively managed vehicles focused on catastrophe bonds.

Turning to Western World, our U.S. based specialty property and casualty underwriter, our two goals for this segment are to bring the businesses to scale through growth, particularly in the binding authority business, and to drive down loss ratios by increasing the property and short-tail components of the book. The binding authority business continues to show strong growth with a 25% increase for the year and our property and short-tail account grew from 18% to 28% of Western World's total portfolio. As a result, Western World's fourth quarter expense ratio has decreased by 2.4 points over the prior year. However, we experienced $6.3 million, or 8.3 points on the loss ratio, in losses from notable and U.S.-based weather loss events in the fourth quarter. This was driven by low-single-digit million losses on both Hurricane Matthew and the Tennessee Wildfires. The good news is that we continue to make strong progress on the strategic front, the bad news is that Mother Nature didn't fully cooperate. There is more work to be done at Western World, but we believe we are on the right path to achieve our goals.

We continue to roll out new products through Western World, which accounted for about half of Western World’s growth in 2016 and we remain focused on the smaller end of the E&S market as competition is more muted and we still see good opportunities for growth. We expect Western World’s expense ratio to continue to trend downward and the loss ratio should also reduce as we write more short-tail business.

From an analytics perspective, we are very fortunate to have some of the best and brightest minds in the industry representing our Validus Research division, a thought leader in catastrophe risk quantification and model development. This is an essential component of our business and supports everything we do by researching, modeling and interpreting risk. Their insight is continuously evolving as is the technology that our Research team uses. We are in an era in which significantly greater insight can be gained through the ability to use new and evolving tools to manage and assess the massive amounts of data we collect and store. Our team is at the forefront of our industry in this regard and we will continue to invest in this critical competitive advantage.

We have reached the point in the underwriting cycle at which bad decisions over the last few years are manifesting themselves as poor results and reserve deficiencies for many of our competitors. We continue to maintain a conservative approach to reserving and a disciplined approach to underwriting, which have allowed us to avoid the potholes that many of our competitors seem to be encountering.

Finally, I should say a word about consolidation, a topic that has been widely covered of late. Given the fluidity of global markets, we continue to see a great deal of consolidation across the (re)insurance industry. We have always been opportunistic in our growth and continue to consider a variety of opportunities as a buyer. Conversely, we take our responsibility to you, our owners, very seriously and if some other consolidator provides better value for our owners, we will be equally willing sellers. For now, I am confident that Validus is well positioned to weather the current soft market and we are focused on building the foundation to make the most of better market conditions down the road.

We are proud of the business we have built over the past eleven years. Our focus has been on delivering strong financial results for our shareholders, something we continued to achieve through 2016. We remain committed to building a very high quality and sustainable franchise in the global insurance and reinsurance markets.

Thank you for the privilege of overseeing your investment in Validus for another year.

Ed Noonan
Chairman and Chief Executive Officer