10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 2015
 
 
 
 
 
OR
 
 
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to ______
Commission file number 1-10804
XL GROUP
Public Limited Company
(Exact name of registrant as specified in its charter)

Ireland
 
98-0665416
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
XL House, 8 St. Stephen's Green, Dublin 2, Ireland
(Address of principal executive offices and zip code)
+353 (1) 400-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer" "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 2, 2015, there were 297,759,367 outstanding Ordinary Shares, $0.01 par value per share, of the registrant.



XL GROUP PLC
INDEX TO FORM 10-Q
 
 
Page No.
 
 
 
 
 
 
 
Unaudited Consolidated Balance Sheets at September 30, 2015 and December 31, 2014
 
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
Unaudited Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014
 
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION

ITEM 1.
 
FINANCIAL STATEMENTS
XL GROUP PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
September 30, 2015
 
December 31, 2014
ASSETS
Investments:
 

 
 

Fixed maturities, at fair value (amortized cost: 2015, $32,207,019; 2014, $27,728,771)
$
33,276,322

 
$
29,359,034

Equity securities, at fair value (cost: 2015, $984,192; 2014, $763,833)
969,706

 
868,292

Short-term investments, at fair value (amortized cost: 2015, $545,979; 2014, $257,221)
546,020

 
256,727

Total investments available for sale
$
34,792,048

 
$
30,484,053

Fixed maturities, at fair value (amortized cost: 2015, $933,872; 2014, $1,180)
$
914,337

 
$
1,171

Short-term investments, at fair value (amortized cost: 2015, $70,883; 2014, nil)
70,886

 

Total investments trading
$
985,223

 
$
1,171

Investments in affiliates
1,592,841

 
1,637,620

Other investments
1,676,140

 
1,248,439

Total investments
$
39,046,252

 
$
33,371,283

Cash and cash equivalents
3,340,070

 
2,521,814

Restricted cash
147,810

 

Accrued investment income
311,679

 
315,964

Deferred acquisition costs and value of business acquired
1,036,260

 
354,533

Ceded unearned premiums
2,088,569

 
952,525

Premiums receivable
5,257,588

 
2,473,736

Reinsurance balances receivable
425,521

 
131,519

Unpaid losses and loss expenses recoverable
5,197,577

 
3,429,368

Receivable from investments sold
95,571

 
92,762

Goodwill and other intangible assets
2,213,688

 
447,952

Deferred tax asset
252,492

 
204,491

Other assets
1,003,446

 
750,872

Total assets
$
60,416,523

 
$
45,046,819

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
 

 
 

Unpaid losses and loss expenses
$
25,789,541

 
$
19,353,243

Deposit liabilities
1,194,815

 
1,245,367

Future policy benefit reserves
4,323,748

 
4,707,199

Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable: 2015, $3,886,297; 2014, $4,265,678)
930,834

 
1,155,016

Unearned premiums
7,840,331

 
3,973,132

Notes payable and debt
2,726,917

 
1,662,580

Reinsurance balances payable
2,295,890

 
493,230

Payable for investments purchased
154,342

 
42,291

Deferred tax liability
126,130

 
66,246

Other liabilities
1,133,467

 
912,749

Total liabilities
$
46,516,015

 
$
33,611,053

Commitments and Contingencies


 


Shareholders’ Equity:
 

 
 

Ordinary shares, 999,990,000 authorized, par value $0.01; issued and outstanding (2015, 299,317,344; 2014, 255,182,955)
$
2,993

 
$
2,552

Additional paid in capital
9,036,407

 
7,359,102

Accumulated other comprehensive income
955,082

 
1,484,458

Retained earnings
1,943,747

 
1,187,639

Shareholders’ equity attributable to XL Group plc
$
11,938,229

 
$
10,033,751

Non-controlling interest in equity of consolidated subsidiaries
1,962,279

 
1,402,015

Total shareholders’ equity
$
13,900,508

 
$
11,435,766

Total liabilities and shareholders’ equity
$
60,416,523

 
$
45,046,819

See accompanying Notes to Unaudited Consolidated Financial Statements

1




XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(U.S. dollars in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Revenues:
 

 
 

 
 

 
 

Net premiums earned
$
2,423,552

 
$
1,473,412

 
$
5,839,605

 
$
4,458,845

Net investment income:
 
 
 
 
 
 
 
Net investment income - excluding Life Funds Withheld Assets
178,560

 
169,956

 
512,994

 
616,753

Net investment income - Life Funds Withheld Assets
46,586

 
56,474

 
143,869

 
75,639

Total net investment income
$
225,146

 
$
226,430

 
$
656,863

 
$
692,392

Net realized gains (losses) on investments, and net unrealized gains (losses) on investments trading securities ("Trading") - Life Funds Withheld Assets:
 
 
 
 
 
 
 
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets
42,513

 
10,957

 
78,630

 
139,373

Other-than-temporary impairments ("OTTI") on investments - excluding Life Funds Withheld Assets
(42,013
)
 
(752
)
 
(69,048
)
 
(27,390
)
OTTI on investments transferred to (from) other comprehensive income - excluding Life Funds Withheld Assets
(701
)
 
(392
)
 
(830
)
 
(2,097
)
 Net realized gains (losses) on investments sold - Life Funds Withheld Assets
53,780

 
2,022

 
174,555

 
2,646

OTTI on investments - Life Funds Withheld Assets
(2,023
)
 
(7,494
)
 
(10,110
)
 
(16,265
)
Net unrealized gains (losses) on investments Trading - Life Funds Withheld Assets
(149
)
 

 
(18,932
)
 

Total net realized gains (losses) on investments, and net unrealized gains (losses) on investments Trading - Life Funds Withheld Assets
$
51,407

 
$
4,341

 
$
154,265

 
$
96,267

Net realized and unrealized gains (losses) on derivative instruments
(7,903
)
 
5,131

 
57,127

 
18,540

Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
(126,140
)
 
(201,264
)
 
(116,333
)
 
(218,810
)
Income (loss) from investment fund affiliates
(3,715
)
 
24,500

 
62,991

 
75,486

Fee income and other
7,355

 
10,782

 
23,095

 
31,942

Total revenues
$
2,569,702

 
$
1,543,332

 
$
6,677,613

 
$
5,154,662

Expenses:
 
 
 
 
 
 
 
Net losses and loss expenses incurred
$
1,464,285

 
$
859,588

 
$
3,385,307

 
$
2,518,973

Claims and policy benefits
22,579

 
20,101

 
64,047

 
218,987

Acquisition costs
409,173

 
182,882

 
904,486

 
566,915

Operating expenses
570,142

 
341,255

 
1,403,152

 
984,708

Foreign exchange (gains) losses
11,661

 
(23,348
)
 
49,425

 
8,234

Loss on sale of life reinsurance subsidiary

 

 

 
666,423

Interest expense
51,929

 
42,851

 
153,034

 
99,877

Total expenses
$
2,529,769

 
$
1,423,329

 
$
5,959,451

 
$
5,064,117

Income (loss) before income tax and income (loss) from operating affiliates
$
39,933

 
$
120,003

 
$
718,162

 
$
90,545

Income (loss) from operating affiliates
8,196

 
20,021

 
40,326

 
94,044

Gain on sale of operating affiliate

 

 
340,407

 

Provision (benefit) for income tax
(37,042
)
 
30,057

 
20,135

 
58,724

Net income (loss)
$
85,171

 
$
109,967

 
$
1,078,760

 
$
125,865

Non-controlling interests
57,889

 
37,583

 
100,158

 
77,024

Net income (loss) attributable to ordinary shareholders
$
27,282

 
$
72,384

 
$
978,602

 
$
48,841

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – basic
301,867

 
264,353

 
282,506

 
270,494

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – diluted
306,954

 
269,140

 
287,473

 
274,912

Earnings (loss) per ordinary share and ordinary share equivalent – basic
$
0.09

 
$
0.27

 
$
3.46

 
$
0.18

Earnings (loss) per ordinary share and ordinary share equivalent – diluted
$
0.09

 
$
0.27

 
$
3.40

 
$
0.18

See accompanying Notes to Unaudited Consolidated Financial Statements

2



XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(U.S. dollars in thousands)
2015
 
2014
 
2015
 
2014
Net income (loss) attributable to ordinary shareholders
$
27,282

 
$
72,384

 
$
978,602

 
$
48,841

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
(97,658
)
 
(130,135
)
 
(356,248
)
 
371,945

Unrealized gains on held to maturity investment portfolio at time of transfer to available for sale, net of tax

 

 

 
424,861

Change in adjustments related to future policy benefit reserves, net of tax
40,681

 
51,286

 
127,365

 
(423,179
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
(33,569
)
 
93,921

 
(317,500
)
 
106,218

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
(10,394
)
 
15,172

 
24,293

 
29,145

Change in OTTI losses recognized in other comprehensive income, net of tax
2,137

 
5,963

 
13,570

 
10,895

Change in underfunded pension liability, net of tax
93

 
418

 
(261
)
 
379

Change in value of cash flow hedge
12

 
83

 
119

 
303

Foreign currency translation adjustments, net of tax
(22,394
)
 
(11,813
)
 
(20,714
)
 
(25,295
)
Comprehensive income (loss)
$
(93,810
)
 
$
97,279

 
$
449,226

 
$
544,113

See accompanying Notes to Unaudited Consolidated Financial Statements


3



XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
Nine Months Ended
 
September 30,
(U.S. dollars in thousands)
2015
 
2014
Ordinary Shares:
 

 
 

Balance - beginning of year
$
2,552

 
$
2,783

Issuance of ordinary shares
515

 
11

Buybacks of ordinary shares
(78
)
 
(196
)
Exercise of stock options
4

 
4

Balance - end of period
$
2,993

 
$
2,602

Additional Paid in Capital:
 

 
 

Balance - beginning of year
$
7,359,102

 
$
7,994,100

Issuance of ordinary shares
1,856,253

 
20

Buybacks of ordinary shares
(228,857
)
 
(560,007
)
Exercise of stock options
7,900

 
5,408

Share-based compensation
42,009

 
51,354

Balance - end of period
$
9,036,407

 
$
7,490,875

Accumulated Other Comprehensive Income (Loss):
 

 
 

Balance - beginning of year
$
1,484,458

 
$
736,657

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
(356,248
)
 
371,945

Unrealized gains on held to maturity investment portfolio at time of transfer to available for sale, net of tax

 
424,861

Change in adjustments related to future policy benefit reserves, net of tax
127,365

 
(423,179
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
(317,500
)
 
106,218

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
24,293

 
29,145

Change in OTTI losses recognized in other comprehensive income, net of tax
13,570

 
10,895

Change in underfunded pension liability, net of tax
(261
)
 
379

Change in value of cash flow hedge
119

 
303

Foreign currency translation adjustments, net of tax
(20,714
)
 
(25,295
)
Balance - end of period
$
955,082

 
$
1,231,929

Retained Earnings (Deficit):
 

 
 

Balance - beginning of year
$
1,187,639

 
$
1,264,093

Net income (loss) attributable to ordinary shareholders
978,602

 
48,841

Dividends on ordinary shares
(151,997
)
 
(130,714
)
Buybacks of ordinary shares
(63,334
)
 
(66,572
)
Share-based compensation
(7,163
)
 

Balance - end of period
$
1,943,747

 
$
1,115,648

Non-controlling Interest in Equity of Consolidated Subsidiaries:
 

 
 

Balance - beginning of year
$
1,402,015

 
$
1,351,665

Non-controlling interests - contributions
10,292

 
24,839

Non-controlling interests - distributions
(17,519
)
 

Non-controlling interests - acquired
562,285

 

Non-controlling interests
5,206

 
3,216

Balance - end of period
$
1,962,279

 
$
1,379,720

Total Shareholders’ Equity
$
13,900,508

 
$
11,220,774

See accompanying Notes to Unaudited Consolidated Financial Statements


4



XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
(U.S. dollars in thousands)
2015
 
2014
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
1,078,760

 
$
125,865

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Total net realized (gains) losses on investments and net unrealized (gains) losses on investments, Trading - Life Funds Withheld Assets
(154,265
)
 
(96,267
)
Net realized and unrealized (gains) losses on derivative instruments
(57,127
)
 
(18,540
)
Net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
116,333

 
218,810

Amortization of premiums (discounts) on fixed maturities
143,118

 
118,021

(Income) loss from investment and operating affiliates
(72,802
)
 
(107,659
)
Loss on sale of life reinsurance subsidiary

 
666,423

Gain on sale of ARX Holding Corp.
(340,407
)
 

Share-based compensation
57,695

 
65,304

Depreciation
50,662

 
43,511

Accretion of deposit liabilities
32,098

 
3,136

Changes in:
 
 
 
Unpaid losses and loss expenses
16,169

 
(128,919
)
Future policy benefit reserves
(208,286
)
 
(172,234
)
Funds withheld on life retrocession arrangements, net
(213,749
)
 
2,968

Unearned premiums
225,785

 
524,393

Premiums receivable
(334,537
)
 
(262,435
)
Unpaid losses and loss expenses recoverable
(346,847
)
 
(230,870
)
Ceded unearned premiums
(16,172
)
 
(251,985
)
Reinsurance balances receivable
(918
)
 
(49,462
)
Deferred acquisition costs and value of business acquired
(40,087
)
 
243,391

Reinsurance balances payable
389,494

 
264,994

Deferred tax asset - net
(38,619
)
 
(42,142
)
Derivatives
163,663

 
(6,262
)
Other assets
(30,670
)
 
(44,467
)
Other liabilities
39,841

 
(154,501
)
Other
50,368

 
16,952

Total adjustments
$
(569,260
)
 
$
602,160

Net cash provided by (used in) operating activities
$
509,500

 
$
728,025

Cash flows provided by (used in) investing activities:
 
 
 
Proceeds from sale of fixed maturities and short-term investments
$
10,568,708

 
$
4,048,233

Proceeds from redemption of fixed maturities and short-term investments
2,787,870

 
2,681,001

Proceeds from sale of equity securities
443,941

 
370,189

Purchases of fixed maturities and short-term investments
(12,720,937
)
 
(5,616,992
)
Purchases of equity securities
(436,622
)
 
(326,319
)
Proceeds from sale of affiliates
163,830

 
231,902

Purchases of affiliates
(94,745
)
 
(293,974
)
Purchase of Catlin Group Limited, net of cash acquired
(1,020,015
)
 

Proceeds from sale of life reinsurance subsidiary

 
570,000

Proceeds from sale of ARX Holding Corp.
560,552

 

Change in restricted cash
(147,810
)
 

Other, net
(138,168
)
 
(158,250
)
Net cash provided by (used in) investing activities
$
(33,396
)
 
$
1,505,790

Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from issuance of ordinary shares and exercise of stock options
$
7,904

 
$
5,411

Buybacks of ordinary shares
(292,269
)
 
(626,774
)
Dividends paid on ordinary shares
(149,030
)
 
(129,490
)
Distributions to non-controlling interests
(80,641
)
 
(41,463
)
Contributions from non-controlling interests
10,292

 
24,839

Proceeds from the issuance of debt
980,600

 

Repayment of debt

 
(600,000
)
Deposit liabilities
(79,944
)
 
(266,542
)
Net cash provided by (used in) financing activities
$
396,912

 
$
(1,634,019
)
Effects of exchange rate changes on foreign currency cash
(54,760
)
 
(46,894
)
Increase (decrease) in cash and cash equivalents
$
818,256

 
$
552,902

Cash and cash equivalents - beginning of period
2,521,814

 
1,800,832

Cash and cash equivalents - end of period
$
3,340,070

 
$
2,353,734

See accompanying Notes to Unaudited Consolidated Financial Statements

5



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation and Consolidation
Unless the context otherwise indicates, references herein to the "Company" include XL Group plc, an Irish public limited company ("XL-Ireland"), and its consolidated subsidiaries. On May 1, 2015, the Company completed its acquisition of Catlin Group Limited and its consolidated subsidiaries ("Catlin"). Catlin, through its wholly-owned subsidiaries, provided property, casualty and specialty insurance and reinsurance coverage on a worldwide basis. The Company's consolidated results of operations include those of Catlin from May 1, 2015. See Note 3(c), "Acquisitions and Disposals - Catlin Acquisition," for additional information with respect to the acquisition of Catlin.
These unaudited consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but do not include all disclosures required by GAAP. In the opinion of management, these unaudited financial statements reflect all adjustments considered necessary for a fair statement of financial position and results of operations at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure about contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. For further information, see Item 8, Note 2(a), "Significant Accounting Policies - Basis of Preparation and Consolidation," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.
2. Significant Accounting Policies
(a) Restricted Cash
Restricted cash represents cash and cash equivalents that the Company is a) holding for the benefit of a third party and is legally or contractually restricted as to withdrawal or usage for general corporate purposes; and b) not replaceable by another type of asset other than cash or cash equivalents, under the terms of the Company's contractual arrangements with such third parties. Restricted cash includes cash and cash equivalents held pursuant to the terms of the Company's contractual obligations of the transaction described in Note 3(e), "Acquisitions and Disposals - Sale of Life Reinsurance Subsidiary."
(b) Reinsurance
During the three months ended September 30, 2014, the Company recorded $20.0 million, net of tax, to premiums earned and associated tax accruals related to reinstatement premiums due under assumed reinsurance contracts arising from unpaid losses and loss expenses reported in a prior period. We evaluated the quantitative and qualitative aspects of this correction and concluded that the impact of recognizing it was not material to the consolidated financial statements, nor is it material to previously issued consolidated financial statements in prior periods.
(c) Recent Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update concerning consolidation of certain legal entities. Under this new guidance, all legal entities are required to evaluate whether they should consolidate certain legal entities. The guidance: (1) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminates the presumption that a general partner should consolidate a limited partnership; (3) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provides a scope exception from consolidation guidance for certain reporting entities. Upon adoption of the new guidance, differing requirements for performing a consolidation analysis under existing GAAP will be eliminated, and all reporting entities will now fall within the scope of the Accounting Standards Codification Subtopic 810-10, Consolidation-Overall, unless a specific exception applies. Under this Subtopic, there are only two primary models for determining whether consolidation is appropriate - a voting interest entity model, and a variable interest entity model. The guidance is effective for public business entities for annual periods beginning after December 15, 2015, and interim and annual periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of this guidance.

6



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In April 2015, the FASB issued an accounting standards update concerning the presentation of deferred debt issuance costs in an entity's balance sheet. Under this new guidance, which is part of the FASB's initiative to reduce complexity in accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements, debt issuance costs related to a recognized debt liability must be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In addition, the guidance also requires that the amortization of such costs be reported as interest expense. The guidance is effective for public business entities for annual periods beginning after December 15, 2015, and interim and annual periods thereafter, with early adoption permitted for financial statements that have not been previously issued. This guidance will not have a material impact on the Company's financial condition, results of operations or cash flows.
In May 2015, the FASB issued an accounting standards update concerning investments for which management estimates fair value using net asset value per share (or its equivalent) as a practical expedient. Under the guidance, such investments will no longer be reported within the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied, will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The guidance is effective for public business entities for annual periods beginning after December 15, 2015 and interim and annual periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of this guidance, but it is not expected to have a material impact on the Company's financial condition, results of operations or cash flows.
In May 2015, the FASB issued an accounting standards update concerning the annual disclosure regarding the liability for unpaid claims and claims adjustment expenses for insurance entities. The guidance requires: (1) incurred and paid claims development information by accident year, on a net basis after reinsurance, for the number of years for which claims incurred typically remain outstanding, including the most recent reporting period, which need not exceed 10 years; (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, with separate disclosure of reinsurance recoverable on unpaid claims for each period presented in the statement of financial position; (3) for each accident year for which incurred claims development information is presented, the total of incurred but not reported ("IBNR") liabilities plus expected development on reported claims included in the liability for unpaid claims and claims adjustment expenses, accompanied by a description of reserving methodologies; (4) for each accident year for which incurred claims development information is presented, quantitative information about claim frequency (unless it is impracticable to do so) accompanied by a qualitative description of methodologies used for determining claim frequency information; and (5) for all claims, the average annual percentage payout of incurred claims by age for the same number of accident years as the disclosure for IBNR. The guidance recommends that insurance entities aggregate or disaggregate those disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claims adjustment expenses. Additional disclosures about liabilities for unpaid claims and claim adjustment expenses reported at present value include: (1) for each period presented in the statement of financial position, the aggregate amount of discount for the time value of money deducted to derive the liability for unpaid claims and claim adjustment expenses; (2) for each period presented in the statement of income, the amount of interest accretion recognized; and (3) the line items in the statement of income in which interest accretion is classified. The guidance is effective for public business entities for annual periods beginning after December 15, 2015 and interim periods within annual periods after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, but it is not expected to have a material impact on the Company's financial condition, results of operations or cash flows.
In September 2015, the FASB issued an accounting standards update concerning the accounting for measurement period adjustments following the completion of a business combination. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable; however, it shall not exceed one year from the acquisition date. Currently under GAAP, during the measurement period the acquirer shall recognize such adjustments to the provisional amounts as if the accounting for the business combination had been completed at the acquisition date, with a corresponding adjustment to goodwill, in the reporting period in which the adjustments are determined. The acquirer shall revise comparative information for prior periods presented in financial statements as needed as a result of the change to the provisional amounts calculated. Under the new guidance,

7



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

although such adjustments shall still be calculated as if the accounting had been completed at the business combination date, the acquirer should recognize in its current-period earnings the cumulative effect of changes in depreciation, amortization, or other income effects, by line item, related to the periods subsequent to the acquisition date as a result of the adjustments. In addition, entities must present separately on the face of the income statement, or alternatively in the notes to the financial statements, the portion of such current period adjustments that would have been recorded in previous reporting periods, if the adjustments had been recognized at the acquisition date. The guidance is effective for provisional adjustments made by public business entities in annual periods beginning after December 15, 2015 - irrespective of the date of the business combination to which they relate - including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not yet been made available for issuance. To the extent that the Company were to make material measurement period adjustments to provisional amounts recognized as part of the Catlin Acquisition, this could have a material impact on the Company's results of operations during the period in which such adjustments were made. The guidance is not expected to have a material impact on the Company's financial condition or cash flows.
3. Acquisitions and Disposals
(a)    Allied Acquisition
On August 11, 2015, the Company announced that X.L. America, Inc., an indirect, wholly-owned subsidiary of XL-Ireland ("XLA") had entered into a definitive agreement to acquire Allied International Holdings, Inc. and its subsidiaries ("Allied"). Allied, through its subsidiaries, provides property and casualty insurance coverage for the amusement and entertainment industry in the United States. The transaction is expected to close no later than the first quarter of 2016, and is subject to receipt of regulatory approvals and satisfaction of customary closing conditions.
(b)     New Energy Risk
On July 24, 2015, the Company purchased, at arm's length, an additional 63.63% interest in New Energy Risk Inc. ("New Energy"), a provider of insurance risk management solutions within the alternative energy sector. A substantial portion of the additional shares were purchased directly from the family trusts of a Company employee who is responsible for managing the business generated by New Energy. Prior to the additional purchase, the Company held a 31.16% ownership interest in New Energy, which was accounted for as an equity method investment. The subsequent purchase raised the Company's ownership stake to 94.79%, which is deemed a controlling financial interest, and hence, the Company now consolidates New Energy. Subsequent to the additional purchase, the family trusts of the employee contributed their remaining 5.21% ownership interest in New Energy to XL Innovate Fund, LP ("XL Innovate Fund"), the entity that holds the Company's New Energy shares, in partial satisfaction of the employee's aggregate 5.21% investment commitment to the Fund. See Note 11, "Related Party Transactions" for further details of these transactions.
The Company paid approximately $8.8 million to acquire the additional interest in New Energy, and realized a gain of approximately $2.5 million, included within income from operating affiliates, in order to the reflect the appropriate fair value adjustment to its existing investment previously accounted for under the equity method. The assets and liabilities of New Energy are now reflected in the consolidated financial statements of the Company based on their fair value as of the acquisition date, while Goodwill of approximately $13.4 million was recorded in conjunction with the transaction. See Note 8, "Goodwill and Other Intangible Assets" for a further discussion of the goodwill recorded in conjunction with the acquisition.
(c)    Catlin Acquisition
Overview
On May 1, 2015 (the "Acquisition Date"), the Company completed its acquisition (the "Catlin Acquisition") of the entire issued share capital of Catlin as contemplated by the Implementation Agreement, dated January 9, 2015 (the "Implementation Agreement"), by and among XL-Ireland, Green Holdings Limited, a wholly-owned subsidiary of the Company ("Green Holdings"), and Catlin.
Pursuant to the terms of the Implementation Agreement, the Catlin Acquisition was implemented by way of a scheme of arrangement (the "Scheme") under Section 99 of the Companies Act 1981 of Bermuda, as amended (the "Companies Act"), and sanctioned by the Supreme Court of Bermuda (the "Court"). Immediately after such Court action, Catlin was merged with and into Green Holdings under Section 104H of the Companies Act, with Green Holdings as the surviving company, pursuant to the terms of that certain Merger Agreement, dated January 9, 2015 (the "Merger Agreement"), among XL-Ireland, Green Holdings and Catlin.
Pursuant to the terms of the Implementation Agreement, XL-Ireland acquired each ordinary share of Catlin, par value $0.01 per share ("Catlin Shares"), for consideration per Catlin Share (the "Acquisition Consideration") equal to 388 pence in cash and

8



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

0.130 of an XL-Ireland ordinary share, par value $0.01 per share ("XL Shares"), subject to the mix and match facility set forth in the Implementation Agreement. The newly-issued XL Shares are listed on the New York Stock Exchange. The XL Shares issued in connection with the Catlin Acquisition were issued in reliance upon the exemption from registration under the U.S. Securities Act of 1933, as amended (the "Securities Act"), provided by Section 3(a)(10) of the Securities Act.
XL-Ireland issued approximately 49.9 million XL Shares and paid approximately £1.49 billion in cash to the holders of Catlin Shares as Acquisition Consideration pursuant to the terms of the Scheme.
The foregoing description of the Implementation Agreement and the Merger Agreement is qualified in its entirety by reference to the full text of the Implementation Agreement and Merger Agreement, copies of which were filed on Form 8-K on January 9, 2015.
In connection with the Catlin Acquisition, on January 9, 2015, the Company announced that it was relying on £1.6 billion of debt to be provided under a bridge facility entered into by XLIT Ltd., a wholly-owned subsidiary of the Company ("XL-Cayman"), and arranged by Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA (the "Bridge Facility") for the purposes of discharging the cash component of the Acquisition Consideration. The Company subsequently terminated the commitments under the Bridge Facility as of April 8, 2015, due to a sufficient amount in escrow to discharge the cash portion of the Acquisition Consideration. Costs related to maintaining the Bridge Facility are discussed in "Transaction-related Costs" below.
In addition, on January 9, 2015, the Company entered into deal contingent deliverable foreign exchange forwards ("FX Forwards") with Morgan Stanley Capital Services LLC and Goldman Sachs International. The purpose of the FX Forwards was to mitigate risk of foreign currency exposure related to the Catlin Acquisition. Following the closing of the Catlin Acquisition, the FX Forwards were settled.
Acquisition Consideration
The calculation of the consideration transferred to acquire Catlin Shares is as follows:
(In thousands, except per share data)
 
Catlin Shares outstanding as of April 30, 2015 that received share consideration (including the dilutive effect of warrants)
384,118

Exchange ratio per the Implementation Agreement
0.130
XL Share issuance to Catlin shareholders
49,935

Closing price per XL share on April 30, 2015 (1)
$
37.08

XL Share issuance consideration
$
1,851,601

Catlin Shares outstanding as of April 30, 2015 that received cash consideration (including the dilutive effect of warrants)
384,118

Cash price component, per Catlin Share in GBP
£
3.88

Cash consideration, in GBP
£
1,490,377

Foreign exchange rate: GBP/USD on April 30, 2015
$
1.5349

Cash consideration
$
2,287,579

Total acquisition consideration
$
4,139,180

____________
(1)
The closing market price of XL Shares on the Acquisition Date represents the fair value of XL shares issued as part of the Acquisition Consideration.
The Company financed the $2.29 billion cash portion of the Acquisition Consideration by issuing $1.0 billion of subordinated debt, the proceeds (net of debt issuance costs) of which were $980.6 million, and the remaining $1.31 billion by using cash and cash equivalents on hand. See Note 10, "Notes Payable and Debt and Financing Arrangements," for further information on the debt issuance.
Fair Value of Net Assets Acquired and Liabilities Assumed
The purchase price was allocated to the acquired assets and assumed liabilities of Catlin based on estimated fair values on the Acquisition Date. The Company recognized goodwill of $778.0 million which is primarily attributable to the synergies and economies of scale expected to result upon integration of Catlin into the Company's operations, including further diversification in geographic mix and product offerings and an increase in distribution strength. The Company has not completed the assignment of goodwill to reporting units for the reporting period ended September 30, 2015. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes. The Company also recognized indefinite lived intangible assets of $673.0 million and other intangible assets of $315.0 million, which will be amortized over their estimated useful lives. See Note 8, "Goodwill and Other Intangible Assets," for further information.

9



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The foregoing allocation of the purchase price is based on information that was available to management at the time the consolidated financial statements were prepared. The allocation may change as additional information becomes available within the measurement period, which cannot exceed 12 months from the Acquisition Date. The fair value recorded for these items may be subject to adjustments, which may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Acquisition Date:
(U.S. dollars in thousands)
 
ASSETS
Fixed maturities, at fair value
$
6,266,489

Short-term investments, at fair value
634,599

Equity investments, at fair value
236,230

Investment in affiliates
216,843

Other investments
386,828

Total investments
$
7,740,989

Cash and cash equivalents (1)
1,267,565

Accrued investment income
35,063

Premiums receivable
2,545,188

Unpaid losses and loss expenses recoverable
1,493,267

Reinsurance balances receivable
299,579

Ceded unearned premiums
1,143,852

Deferred acquisition costs and value of business acquired
679,259

Intangible assets
988,000

Receivable from investments sold
9,633

Other assets
314,168

Total assets
$
16,516,563

 
 
LIABILITIES
Unpaid losses and loss expenses
$
6,933,144

Unearned premiums
3,742,234

Reinsurance balances payable
1,441,749

Notes payable and debt
82,066

Payable for investments purchased
34,149

Deferred tax liability
94,071

Other liabilities
265,728

Total liabilities
$
12,593,141

Net assets acquired before non-controlling interest
$
3,923,422

Non-controlling interest in equity of consolidated subsidiaries
562,285

Net assets acquired
$
3,361,137

Acquisition Consideration
$
4,139,180

Goodwill
$
778,043

____________
(1)    Includes Restricted Cash
An explanation of the significant adjustments to the components of fair value are as follows:
Deferred acquisition costs and value of business acquired - The adjustment consists of two components. The first adjustment is the elimination of Catlin's deferred acquisition costs asset. The second adjustment is the establishment of the value of business acquired asset, which represents the present value of the expected underwriting profit within the unearned premiums liability, net of reinsurance, less costs to service the related policies and a risk premium. This adjustment will be amortized to underwriting, acquisition and insurance expenses over approximately two years, as the contracts for business in-force as of the Acquisition Date expire. The Company has included $140.4 million and $323.7 million, respectively, in acquisition expenses related to the amortization of the value of business acquired during the three and nine months ended September 30, 2015.

10



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets - Establish the estimated fair value of intangible assets related to Catlin. See Note 8, "Goodwill and Other Intangible Assets," for further information.
Other assets - Establish the estimated fair value of Catlin's internally developed software.
Unpaid losses and loss adjustment expenses - Unpaid losses and loss adjustment expenses acquired include an increase to adjust the carrying value of Catlin's historical unpaid losses and loss adjustment expenses, net of related reinsurance recoverable, to fair value as of the Acquisition Date. The estimated fair value consists of the present value of the expected net loss and loss adjustment expense payments plus a risk premium. This adjustment, plus the unamortized fair value adjustment included in Catlin's historical unpaid losses and loss adjustment expenses, will be amortized to losses and loss adjustment expenses over a weighted average period of approximately 20 years, based on the estimated payout pattern of net reserves as of the Acquisition Date.
Net deferred tax liabilities - The adjustment to deferred tax liabilities is related to the deferred tax impact of the adjustments to fair value as noted above. This net increase of deferred tax liabilities is explained further in "Income Taxes" below.
Non-controlling interest - The fair value was determined based on the last trade price of preferred shares issued by Catlin Insurance Company Limited ("Catlin-Bermuda"). See Note 9, "Share Capital," for further information.
Income Taxes
As part of the allocation of the purchase price, the Company recorded a total net deferred tax liability of $94.1 million. This is the combination of an excess of gross tax liabilities over gross tax assets by $22.1 million, and a valuation allowance of $72.0 million across several jurisdictions. The $94.1 million total net deferred tax liability is comprised of a deferred tax liability of $133.8 million related to the estimated fair value of the intangible assets recorded at the Acquisition Date, partially offset by deferred tax assets, net of associated valuation allowances, of $17.4 million related to loss carry forwards, $13.0 million related to fixed assets, and $8.8 million related to the fair value measurements of unpaid losses and loss adjustment expenses, and deferred acquisition costs and the value of business acquired. The remaining $0.5 million of deferred tax assets relates primarily to differences between financial reporting and tax bases of the other acquired assets and liabilities as of the Acquisition Date.
As a result of the Catlin Acquisition, the Company's expected full year effective tax rate has been determined using a single rate approach taking into account the full year expected results, including the post-acquisition results of the acquired businesses.
In order to align all U.S. regulated entities under XLA, XLA purchased 100% of the stock of Catlin Inc. from Catlin North America Holdings, Ltd, a U.K. holding company, on September 28, 2015. The transaction resulted in a release of the $47.5 million valuation allowance previously held against the Catlin Inc. deferred tax asset. The Company incorporated $17.8 million of the associated tax benefit in its determination of the expected full year effective tax rate, with the remaining $29.7 million tax benefit reported as a discrete item in the period.
Transaction-related Costs
The Company incurred certain acquisition and financing costs associated with the Catlin Acquisition. The Company has recorded $63.0 million of these costs for the nine months ended September 30, 2015, of which $48.5 million has been included in Operating Expense and $14.5 million has been included in Interest Expense.
Transaction costs included in Operating Expense primarily consist of due diligence, legal, advisory and investment banking costs. Transaction costs included in Interest Expense related to the maintenance of the Bridge Facility. Pursuant to the terms of the Implementation Agreement, Catlin was required to pay its own costs and expenses in relation to the negotiation, preparation, execution and implementation of the Catlin Acquisition. Costs incurred by Catlin were recorded and paid by Catlin prior to the Acquisition Date and are not included within the Company's consolidated statements of income and comprehensive income.

11



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As a part of the ongoing integration of Catlin's operations, the Company incurs costs associated with restructuring the systems, processes and workforce. These costs include such items as severance, retention, facilities and consulting and other costs. The Company separately identifies such costs and includes these expenses within Corporate and Other:
(U.S. dollars in thousands)
Severance related costs
 
Retention and other compensation costs
 
Facilities-related costs
 
Consulting and other
Costs incurred in 2015
$
27,778

 
$
16,363

 
$
6,689

 
$
32,215

2015 payments
14,078

 
7,343

 
6,689

 
23,723

Liabilities at September 30, 2015
$
13,700

 
$
9,020

 
$

 
$
8,492

Financial Results
The following table summarizes the financial results of the acquired legal entity Catlin subsidiaries since the Acquisition Date that have been included within the Company's consolidated statements of income and comprehensive income as required by ASC 805-10-50-2(h) based on legal entity reporting. These results are not used as a part of management analysis of the financial results and performance of the Company's business. These results are adjusted, where possible, for transaction and integration related costs. These results involve a significant amount of estimates and are not indicative of future results of the acquired Catlin subsidiaries, which will be further impacted by potential changes in targeted business mix, investment management strategies, and synergies recognized from changes in the combined entity's operating structure, as well as the impact of changes in other business and capital management strategies.
Since the Acquisition Date, a growing number of underlying policies have been underwritten onto different legal entities, staffing has been allocated to new divisions and activities, and reinsurance has been purchased to cover combined risks, only some of which would have been reflected in the underlying legacy Catlin infrastructure, systems and general ledgers of the acquired Catlin subsidiaries. In future quarters, the summary results of such subsidiaries will be increasingly impractical to produce and even less indicative of the results of the acquired Catlin operations given the significant estimates involved and the nature and pace of our integration activities which are intended to promote the operation of the consolidated group as a whole as quickly as possible.
(U.S. dollars in thousands)
May 1, 2015 to September 30, 2015
Total revenues - see comments above
$
1,770,886

Net income (loss) - see comments above
$
65,796

Supplemental Pro Forma Information
The results of the acquired Catlin operations have been included in the Company's unaudited consolidated financial statements from the Acquisition Date to September 30, 2015. The following table presents unaudited pro forma consolidated information for the nine months ended September 30, 2015 and 2014 and assumes the Catlin Acquisition occurred on January 1, 2014. The pro forma financial information is presented for informational purposes only and does not necessarily reflect the results that would have occurred had the acquisition taken place on January 1, 2014, nor is it necessarily indicative of future results. Significant adjustments used to determine pro forma results include amortization of intangible assets and amortization of fair value adjustments discussed above, and the corresponding income tax effects. Non-recurring transaction related costs noted above have been included in the unaudited pro forma results for the nine months ended September 30, 2014.
 
Unaudited Pro Forma
 
Nine Months Ended September 30,
(In thousands, except per share data)
2015
 
2014
Total revenues
$
7,997,602

 
$
8,391,849

Net income attributable to ordinary shareholders
986,918

 
226,983

Earnings (loss) per ordinary share and ordinary share equivalent – basic
3.24

 
0.71

Earnings (loss) per ordinary share and ordinary share equivalent – diluted
3.19

 
0.70


12



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(d)    Sale of Strategic Operating Affiliate
On April 1, 2015, XL Re Ltd ("XL Re"), an indirect wholly-owned subsidiary of the Company, completed the previously announced sale of all of its shares in ARX Holding Corp. ("ARX") to The Progressive Corporation ("Progressive") pursuant to the terms of the Stock Purchase Agreement with Progressive. XL Re's shares in ARX represented approximately 40.6% of ARX's outstanding capital stock on a fully diluted basis at the time of the announcement. The carrying value of XL Re's shares in ARX was $220.2 million at the time of the sale.
XL Re received $560.6 million in proceeds from the transaction, which was based upon the consolidated tangible net book value of ARX and its subsidiaries as of December 31, 2014, and certain other factors. Thus, the Company recorded a gain of $340.4 million as a result of this transaction that is reflected in the unaudited consolidated statement of income for the nine months ended September 30, 2015.
(e)    Sale of Life Reinsurance Subsidiary
On May 1, 2014, a wholly owned subsidiary of the Company, XL Insurance (Bermuda) Ltd ("XLIB"), entered into a sale and purchase agreement with GreyCastle Holdings Ltd. ("GreyCastle") providing for the sale of 100% of the common shares of XLIB's wholly-owned subsidiary, XL Life Reinsurance (SAC) Ltd ("XLLR"), to GreyCastle for $570 million in cash (subsequent to the transaction, XLLR changed its name to GreyCastle Life Reinsurance (SAC) Ltd ("GCLR")). This transaction closed on May 30, 2014. As a result of the transaction, the Company ceded the majority of its life reinsurance business to GCLR via 100% quota share reinsurance (the "Life Retro Arrangements"). This transaction covered a substantial portion of our life reinsurance reserves. The Company ceased writing new life reinsurance contracts in 2009 and since that time has been managing the run-off of its life reinsurance operations ("Run-Off Life Operations"). The designated investments that support the Life Retro Arrangements on a funds withheld basis ("Life Funds Withheld Assets") are managed pursuant to agreed investment guidelines that meet the contractual commitments of the Company's ceding subsidiaries and applicable laws and regulations. All of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GCLR.
Because the Company no longer shares in the risks and rewards of the underlying performance of the supporting invested assets, disclosures within the financial statement notes included herein separate the Life Funds Withheld Assets from the rest of the Company's investments.
As of May 30, 2014, gross future policy benefit reserves relating to the Life operations were approximately $5.2 billion. Subsequent to the completion of the GreyCastle transaction, the Company retained approximately $0.4 billion of these reserves, and recorded a reinsurance recoverable from GCLR of $4.8 billion. Under the terms of the transaction, the Company continues to own, on a funds withheld basis, assets supporting the Life Retro Arrangements consisting of cash, fixed maturity securities and accrued interest. Based upon the right of offset, the funds withheld liability owing to GCLR is recorded net of future policy benefit reserves recoverable, and is included within "Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable)" on the consolidated balance sheets. The transaction resulted in an overall after-tax GAAP net loss of $621.3 million that is reflected in the unaudited consolidated statements of income for the nine months ended September 30, 2014.
As of September 30, 2015, gross future policy benefit reserves relating to the Run-Off Life Operations were approximately $4.3 billion, of which the Company retained approximately $0.4 billion, after consideration of its future policy benefit reserves recoverable from GCLR of approximately $3.9 billion. The net funds withheld liability included within "Funds withheld on life retrocession arrangements, net of future policy benefit reserves recoverable," was $0.9 billion. The Company continued to own $4.8 billion of assets supporting the Life Retro Arrangements.

13



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The impact of the Life Retro Arrangements on the Company's results was as follows:
Impact of Life Retro Arrangements
Three months ended September 30,
 
Nine Months Ended September 30,
(U.S. dollars in thousands)
2015
 
2014
 
2015
 
2014
Underwriting profit (loss) (1)
$

 
$
3,711

 
$
603

 
$
3,711

Net investment income - Life Funds Withheld Assets
46,586

 
56,474

 
143,869

 
75,639

Net realized gains (losses) on investments sold - Life Funds Withheld Assets
53,780

 
2,022

 
174,555

 
2,646

Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets
(149
)
 

 
(18,932
)
 

OTTI on investments - Life Funds Withheld Assets
(2,023
)
 
(7,494
)
 
(10,110
)
 
(16,265
)
Exchange gains (losses)
8,754

 
2,062

 
(5,932
)
 
2,062

Other income and expenses
(121
)
 
124

 
2,354

 
105

Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
(126,140
)
 
(201,264
)
 
(116,333
)
 
(218,810
)
Net income (loss)
$
(19,313
)
 
$
(144,365
)
 
$
170,074

 
$
(150,912
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
(33,569
)
 
93,921

 
(317,500
)
 
106,218

Change in adjustments related to future policy benefit reserves, net of tax
40,681

 
51,286

 
127,365

 
51,286

Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax
12,201

 
2,869

 
20,664

 
(2,881
)
Total changes to other comprehensive income as a result of Life Retro Arrangements
$
19,313

 
$
148,076

 
$
(169,471
)
 
$
154,623

Comprehensive income (loss)
$

 
$
3,711

 
$
603

 
$
3,711

____________
(1)
The underwriting profit of $0.6 million relates to a premium adjustment during the nine months ended September 30, 2015 relating to the Life Retro Arrangements transaction. Excluding this transaction, the impact to comprehensive income relating to the Life Retro Arrangements was nil for the nine months ended September 30, 2015.
As shown in the table above, although the Company's net income (loss) is subject to variability related to the Life Retro Arrangements, there is minimal net impact on the Company's comprehensive income in any period. The life retrocession embedded derivative value includes the interest income, unrealized gains and losses, and realized gains and losses from sales on the Life Funds Withheld Assets subsequent to May 30, 2014.

14



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Fair Value Measurements
Fair value is defined as the amount that would be received for the sale of an asset or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The fair values for available for sale investments are generally sourced from third parties. The fair value of fixed income securities is based upon quoted market values where available, "evaluated bid" prices provided by third party pricing services ("pricing services") where quoted market values are not available, or by reference to broker quotes where pricing services do not provide coverage for a particular security. While the Company receives values for the majority of the investment securities it holds from pricing services, it is ultimately management’s responsibility to determine whether the values received and recorded in the financial statements are representative of appropriate fair value measurements.
The Company performs regular reviews of the prices received from its third party valuation sources to assess if the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for obtaining the valuations. The approaches taken by the Company include, but are not limited to, annual reviews of the controls of the external parties responsible for sourcing valuations, which are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, and monthly reconciliations between the valuations provided by our external parties and valuations provided by our third party investment managers at a portfolio level.
Where broker quotes are the primary source of the valuations, sufficient information regarding the specific inputs utilized by the brokers is generally not available to support a Level 2 classification. The Company obtains the majority of broker quoted values from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value.
As discussed in Note 3(e), "Acquisitions and Disposals - Sale of Life Reinsurance Subsidiary," under the Life Retro Arrangements, all of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GCLR. Because the Company no longer shares in the risks and rewards of the underlying performance of the Life Funds Withheld Assets, the financial statements and accompanying notes included herein separately report the Life Funds Withheld Assets from the rest of the Company's investments.
For further information about the Company's fair value measurements, see Item 8, Note 2(b), "Significant Accounting Policies - Fair Value Measurements," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
(a) Fair Value Summary
The following tables set forth the Company’s assets and liabilities that were accounted for at fair value as of September 30, 2015 and December 31, 2014 by level within the fair value hierarchy:
September 30, 2015
(U.S. dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Collateral
and
Counterparty
Netting
 
Balance at
September 30, 2015
Assets
 

 
 

 
 

 
 

 
 

Fixed maturities - Available for Sale ("AFS") - Excluding Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$

 
$
4,298,723

 
$

 
$

 
$
4,298,723

Corporate - Financials

 
3,062,530

 
10,000

 

 
3,072,530

Corporate - Non Financials (1)

 
6,850,318

 
5,272

 

 
6,855,590


15



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Residential mortgage-backed securities – Agency ("RMBS - Agency")

 
3,920,607

 
2,882

 

 
3,923,489

Residential mortgage-backed securities – Non-Agency ("RMBS - Non-Agency")

 
362,965

 

 

 
362,965

Commercial mortgage-backed securities ("CMBS")

 
850,084

 

 

 
850,084

Collateralized debt obligations ("CDOs")

 
2,500

 
407,663

 

 
410,163

Other asset-backed securities (1)

 
2,059,478

 
36,120

 

 
2,095,598

U.S. States and political subdivisions of the States

 
2,648,670

 

 

 
2,648,670

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported

 
5,120,149

 

 

 
5,120,149

Total fixed maturities - AFS - Excluding Funds Withheld Assets, at fair value
$

 
$
29,176,024

 
$
461,937

 
$

 
$
29,637,961

Equity securities, at fair value
478,815

 
490,891

 

 

 
969,706

Short-term investments, at fair value (1)(2)

 
546,020

 

 

 
546,020

Total investments AFS - Excluding Funds Withheld Assets
$
478,815

 
$
30,212,935

 
$
461,937

 
$

 
$
31,153,687

Fixed maturities - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$

 
$
13,412

 
$

 
$

 
$
13,412

Corporate - Financials

 
669,788

 

 

 
669,788

Corporate - Non Financials

 
1,480,112

 

 

 
1,480,112

RMBS – Agency

 
814

 

 

 
814

RMBS – Non-Agency

 
28,833

 

 

 
28,833

CMBS

 
141,166

 

 

 
141,166

Other asset-backed securities

 
162,871

 

 

 
162,871

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported

 
1,141,365

 

 

 
1,141,365

Total fixed maturities - AFS - Life Funds Withheld Assets, at fair value
$

 
$
3,638,361

 
$

 
$

 
$
3,638,361

Total investments - AFS, at fair value
$
478,815

 
$
33,851,296

 
$
461,937

 
$

 
$
34,792,048

Fixed maturities - trading securities ("Trading")


 


 


 


 


U.S. Government and Government-Related/Supported
$

 
$
4,610

 
$

 
$

 
$
4,610

Corporate - Financials

 
219,767

 

 

 
219,767

Corporate - Non Financials

 
393,246

 

 

 
393,246

CMBS

 
4,982

 

 

 
4,982

Other asset-backed securities

 
19,872

 

 

 
19,872

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported

 
342,746

 

 

 
342,746

Total fixed maturities - Trading, at fair value
$

 
$
985,223

 
$

 
$

 
$
985,223

Cash equivalents (3)
940,303

 
455,699

 

 

 
1,396,002

Cash equivalents - Life Funds Withheld Assets (3)
1,440

 
86,840

 

 

 
88,280

Other investments (4)

 
1,051,558

 
278,222

 

 
1,329,780

Other assets (5)

 
59,231

 
14,884

 
(3,900
)
 
70,215

Total assets accounted for at fair value
$
1,420,558

 
$
36,489,847

 
$
755,043

 
$
(3,900
)
 
$
38,661,548

Liabilities
 
 
 
 
 
 
 
 
 
Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) (6)
$

 
$
468,187

 
$

 
$

 
$
468,187

Financial instruments sold, but not yet purchased (7)
1,588

 
693

 

 

 
2,281

Other liabilities (5)

 
25,142

 
24,568

 
(3,900
)
 
45,810

Total liabilities accounted for at fair value
$
1,588

 
$
494,022

 
$
24,568

 
$
(3,900
)
 
$
516,278


16



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014
(U.S. dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Collateral
and
Counterparty
Netting
 
Balance at
December 31,
2014
Assets
 

 
 

 
 

 
 

 
 

Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$

 
$
2,171,953

 
$

 
$

 
$
2,171,953

Corporate - Financials

 
2,761,916

 

 

 
$
2,761,916

Corporate - Non Financials (1)

 
6,010,563

 
5,894

 

 
$
6,016,457

Residential mortgage-backed securities – RMBS - Agency

 
3,726,666

 
1,910

 

 
$
3,728,576

Residential mortgage-backed securities – RMBS - Non-Agency

 
427,351

 

 

 
$
427,351

CMBS

 
1,052,544

 

 

 
$
1,052,544

CDOs

 
4,076

 
687,958

 

 
$
692,034

Other asset-backed securities (1)

 
1,060,005

 
5,288

 

 
$
1,065,293

U.S. States and political subdivisions of the States

 
2,021,272

 

 

 
$
2,021,272

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported

 
4,240,073

 

 

 
$
4,240,073

Total fixed maturities - AFS - Excluding Funds Withheld Assets, at fair value
$

 
$
23,476,419

 
$
701,050

 
$

 
$
24,177,469

Equity securities, at fair value
502,284

 
366,008

 

 

 
868,292

Short-term investments, at fair value (1)(2)

 
256,727

 

 

 
256,727

Total investments AFS - Excluding Funds Withheld Assets
$
502,284

 
$
24,099,154

 
$
701,050

 
$

 
$
25,302,488

Fixed maturities - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$

 
$
18,724

 
$

 
$

 
$
18,724

Corporate - Financials

 
801,019

 

 

 
$
801,019

Corporate - Non Financials

 
2,016,961

 

 

 
$
2,016,961

RMBS – Agency

 
3,782

 

 

 
$
3,782

RMBS – Non-Agency

 
85,335

 

 

 
$
85,335

CMBS

 
193,167

 

 

 
$
193,167

Other asset-backed securities

 
273,541

 

 

 
$
273,541

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported

 
1,789,036

 

 

 
$
1,789,036

Total fixed maturities - AFS - Life Funds Withheld Assets, at fair value
$

 
$
5,181,565

 
$

 
$

 
$
5,181,565

Total investments - AFS, at fair value
$
502,284

 
$
29,280,719

 
$
701,050

 
$

 
$
30,484,053

Fixed maturities - Trading
 
 
 
 
 
 
 
 
 
Corporate - Non Financials

 
1,171

 

 

 
$
1,171

Total fixed maturities - Trading, at fair value
$

 
$
1,171

 
$

 
$

 
$
1,171

Cash equivalents (3)
1,103,877

 
397,955

 

 

 
$
1,501,832

Cash equivalents - Life Funds Withheld Assets (3)
460

 
132,738

 

 

 
$
133,198

Other investments (4)

 
708,974

 
185,083

 

 
$
894,057

Other assets (5)

 
122,996

 
13,663

 
(696
)
 
$
135,963

Total assets accounted for at fair value
$
1,606,621

 
$
30,644,553

 
$
899,796

 
$
(696
)
 
$
33,150,274

Liabilities
 
 
 
 
 
 
 
 
 
Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) (6)
$

 
$
450,831

 
$

 
$

 
$
450,831

Financial instruments sold, but not yet purchased (7)
4,737

 
25,669

 

 

 
$
30,406

Other liabilities (5)

 
7,757

 
23,427

 
(696
)
 
$
30,488

Total liabilities accounted for at fair value
$
4,737

 
$
484,257

 
$
23,427

 
$
(696
)
 
$
511,725

____________
(1)
Included are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes had a fair value of $74.3 million and $79.9 million and an amortized cost of $64.6 million and $68.4 million as of September 30, 2015 and December 31, 2014, respectively. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.
(2)
Short-term investments consist primarily of Corporate securities and U.S. and Non-U.S. Government and Government-Related/Supported securities.

17



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(3)
Cash equivalents balances subject to fair value measurement include certificates of deposit and money market funds. Operating cash balances are not subject to recurring fair value measurement guidance.
(4)
The Other investments balance excludes certain structured transactions including certain investments in project finance transactions, and a payment obligation and liquidity financing provided to a structured credit vehicle as a part of a third party medium term note facility. These investments, which totaled $346.4 million as of September 30, 2015 and $354.4 million as of December 31, 2014, are carried at amortized cost. For further information, see Item 8, Note 8, "Other Investments," to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.
(5)
Other assets and other liabilities include derivative instruments. The derivative balances included in each category are reported on a gross basis by level with a netting adjustment presented separately in the Collateral and Counterparty Netting column. The fair values of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy. For further details regarding derivative fair values and associated collateral received or paid, see Note 7, "Derivative Instruments," to the Unaudited Consolidated Financial Statements.
(6)
Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) include balances related to the life retrocession embedded derivative, under which all investment results associated with the Life Funds Withheld Assets related to the Life Retro Arrangements described in Note 3(e), "Acquisitions and Disposals - Sale of Life Reinsurance Subsidiary," accrue to the benefit of GCLR.
(7)
Financial instruments sold, but not yet purchased, represent "short sales" and are included within "Payable for investments purchased" on the balance sheets.
(b) Level 3 Assets and Liabilities
The tables below present additional information about assets and liabilities measured at fair value on a recurring basis and for which Level 3 inputs were utilized to determine fair value. The tables present a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2015 and 2014 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at September 30, 2015 and 2014, respectively. The tables do not include gains or losses that were reported in Level 3 in prior periods for assets that were transferred out of Level 3 prior to September 30, 2015 and 2014, respectively. Gains and losses for assets and liabilities classified within Level 3 in the table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, it should be noted that the following tables do not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by the Company that are either economically hedged by certain exposures to the Level 3 positions or that hedge the exposures in Level 3 positions.
In general, Level 3 assets include securities for which values were obtained from brokers where either significant inputs were utilized in determining the values that were difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not available to support a Level 2 classification. Transfers into or out of Level 3 primarily arise as a result of the valuations utilized by the Company changing between either those provided by independent pricing services that do not contain significant unobservable inputs or other valuations sourced from brokers that are considered Level 3.
There were no significant transfers between Level 1 and Level 2 during each of the three and nine months ended September 30, 2015 and 2014.

18



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities - Three Months Ended September 30, 2015
(U.S. dollars in thousands)
Corporate - Financials
 
Corporate - Non-Financials
 
RMBS - Agency
 
RMBS - Non
Agency
Balance, beginning of period
$
10,000

 
$
5,554

 
$
3,038

 
$

Realized gains (losses)

 
(45
)
 

 

Movement in unrealized gains (losses)

 
(1
)
 
(2
)
 

Purchases and issuances (1)

 

 

 

Sales

 

 

 

Settlements

 
(236
)
 
(154
)
 

Transfers into Level 3


 

 

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$
10,000

 
$
5,272

 
$
2,882

 
$

Movement in total gains (losses) above relating to instruments still held at the reporting date
$

 
$
(1
)
 
$
(2
)
 
$

 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities - Three Months Ended September 30, 2015
(U.S. dollars in thousands)
CMBS
 
CDO
 
Other asset-
backed
securities
 
Non-US Sovereign
Government,
Provincial,
Supranational and
Government
Related/Supported
Balance, beginning of period
$

 
$
484,171

 
$
42,745

 
$

Realized gains (losses)

 
(8,469
)
 
553

 

Movement in unrealized gains (losses)

 
8,994

 
(976
)
 

Purchases and issuances (1)

 
2,101

 
3,334

 

Sales

 
(56,576
)
 

 

Settlements

 
(22,558
)
 
(3,087
)
 

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 
(6,449
)
 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$
407,663

 
$
36,120

 
$

Movement in total gains (losses) above relating to instruments still held at the reporting date
$

 
$
164

 
$
(5
)
 
$

 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities - Three Months Ended September 30, 2015
(U.S. dollars in thousands)
 
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
 
 
$

 
$
255,672

 
$
(9,753
)
Realized gains (losses)
 
 

 
9,185

 

Movement in unrealized gains (losses)
 
 

 
(5,567
)
 
69

Purchases and issuances (1)
 
 

 
30,519

 

Sales
 
 

 
(1,417
)
 
 
Settlements
 
 

 
(10,170
)
 

Transfers into Level 3
 
 

 

 

Transfers out of Level 3
 
 

 

 

Fixed maturities to short-term investments classification change
 
 

 

 

Balance, end of period
 
 
$

 
$
278,222

 
$
(9,684
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
 
 
$

 
$
3,618

 
$
69

____________
(1)    Includes assets acquired as result of the transaction described in Note 3(c), "Acquisitions and Disposals - Catlin Acquisition."

19



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities - Three Months Ended September 30, 2014
(U.S. dollars in thousands)
Corporate - Financials
 
Corporate - Non-Financials
 
RMBS - Agency
 
RMBS - Non
Agency
Balance, beginning of period
$

 
$
3,933

 
$
6,896

 
$
11

Realized gains (losses)

 
3