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XL Group plc Announces First Quarter 2015 Results

  • Operating net income1, 2 of $194.4 million, or $0.75 per share, for the quarter on a fully diluted basis
  • P&C combined ratio of 88.9% for the quarter, compared to 89.7% in the prior year quarter
  • Natural catastrophe pre-tax losses net of reinsurance and reinstatement premiums in the quarter of $14.7 million, compared to $17.2 million in the prior year quarter
  • Operating return on average ordinary shareholders' equity3 excluding unrealized gains and losses on investments was 9.1% and including unrealized gains and losses on investments was 7.7%, annualized for the quarter
  • Net income attributable to ordinary shareholders and net income attributable to ordinary shareholders excluding the impact of the Life Retrocession Arrangements4 of $36.3 million and $164.6 million, respectively, for the quarter. Note: As a result of the Life Retrocession Arrangements4,  XL’s net income is impacted by the gains or losses on the Life Funds Withheld Assets4, with an  equal and opposite accounting adjustment in XL’s comprehensive income so that there is no effect on XL’s book value
  • Fully diluted tangible book value per ordinary share5of $37.60 at March 31, 2015, an increase of $0.81, or 2.2%, from December 31, 2014
  • There were no share buybacks during the quarter

_________________________

1Defined as net income (loss) attributable to ordinary shareholders excluding: (1) our net investment income - Life Funds Withheld Assets, net of tax, (2) our net realized (gains) losses on investments sold - excluding Life Funds Withheld Assets, net of tax, (3) our net realized (gains) losses on investments sold (including OTTI) and net unrealized (gains) losses on investments, Trading - Life Funds Withheld Assets, (4) our net realized and unrealized (gains) losses on derivatives, net of tax, (5) our net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets, (6) our share of items (2) and (4) for XL's insurance company affiliates for the periods presented, and (7) our foreign exchange (gains) losses, net of tax.  “Operating net income”, “annualized operating return on average ordinary shareholders' equity" and "annualized operating return on average ordinary shareholders' equity excluding average unrealized gains and losses on investments" are non-GAAP financial measures.  See the schedule entitled “Reconciliation” on page 9 of this press release for a reconciliation of “operating net income” to net income (loss) attributable to ordinary shareholders and the calculation of “annualized operating return on average ordinary shareholders' equity" and "annualized operating return on average ordinary shareholders' equity excluding average unrealized gains and losses on investments", both of which are based on operating net income.

2Transaction costs directly related to the acquisition of Catlin Group Limited have been excluded.

3Ordinary shareholders' equity is defined as total shareholders' equity less non-controlling interest in equity of consolidated subsidiaries.

4On May 1, 2014, our wholly-owned subsidiary, 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"), for $570 million in cash. This transaction was completed on May 30, 2014. As a result of the transaction, we have ceded the majority of our life reinsurance business to XLLR via 100% quota share reinsurance (the "Life Retrocession Arrangements"). The designated investments that support the Life Retrocession Arrangements, which are written on a funds withheld basis ("Life Funds Withheld Assets"), are included within "Total investments available for sale" and "Fixed maturities, trading at fair value" on our balance sheet.  Investment results for these assets - including interest income, unrealized gains and losses, and gains and losses from sales - are passed directly to the reinsurer pursuant to a contractual arrangement that is accounted for as a derivative. Changes in the fair value of the embedded derivative associated with these Life Retrocession Arrangements are grouped within "Contribution from Life Retrocession Arrangements" in the schedule entitled "Reconciliation" on page 9 of this press release.   Net income attributable to ordinary shareholders excluding the impact of the Life Retrocession Arrangements is a non-GAAP financial measure.

5 Book value per ordinary share, fully diluted book value per ordinary share and fully diluted tangible book value per ordinary share are non-GAAP financial measures. Fully diluted book value per ordinary share represents book value per ordinary share (total shareholders' equity less non-controlling interest in equity of consolidated subsidiaries, divided by the number of outstanding ordinary shares at any period end) combined with the dilutive impact of potential future share issuances at any period end. Fully diluted tangible book value per ordinary share is calculated in the same manner as fully diluted book value per ordinary share except that goodwill and intangible assets are excluded from ordinary shareholders' equity. XL believes that fully diluted tangible book value per ordinary share is a financial measure important to investors and other interested parties who benefit from having a consistent basis for comparison with other companies within the industry. However, this measure may not be comparable to similarly titled measures used by companies either outside or inside of the insurance industry.

 

Dublin, Ireland – April 29, 2015 – XL Group plc (“XL” or the “Company”) (NYSE: XL) today reported its first quarter results.

Commenting on the Company’s performance, Chief Executive Officer Mike McGavick said:

"In the first quarter of 2015 we kept our eye firmly on the ball and produced strong underwriting results while the ongoing integration planning for our combination with Catlin proceeds. Our property and casualty combined ratio for the first quarter was a very solid 88.9%.  Insurance results included a combined ratio of 94.1%, 1.3 points better than a year ago, and Reinsurance was 74.7%, a 1.6 point improvement from the same period a year ago. While nearing what we hope will be a successful close to the transaction, we continue to focus on delivering our 2015 plan while being incredibly excited about what XL Catlin will achieve together."

Highlights        
Three Months Ended March 31        
(U.S. dollars in thousands, except per share amounts)        
  Three Months Ended  
  March 31,  
  (Unaudited)  
  2015   2014  
Operating net income (loss) $ 194,376     $ 238,649    
Per ordinary share-fully diluted. $ 0.75     $ 0.85    
         
Net income (loss) attributable to ordinary shareholders. $ 36,281     $ 255,717    
Per ordinary share-fully diluted. $ 0.14     $ 0.91    

 

  • Operating net income of $194.4 million for the quarter decreased compared to operating net income of $238.6 million in the prior year quarter primarily due to lower levels of affiliate and life reinsurance income.  Net income (loss) attributable to ordinary shareholders of $36.3 million for the quarter decreased compared to $255.7 million in the prior year quarter.  As highlighted in the reconciliation of net income to operating income on page 9 of this press release, net income for the current quarter was negatively impacted by the life retrocession derivative, which is offset by an increase in accumulated comprehensive income and therefore does not impact overall book value.
  • The P&C combined ratio for the quarter of 88.9% was 0.8 percentage points lower than in the prior year quarter, when it was 89.7%.
  • Net investment income for the quarter was $208.5 million, compared to $233.2 million in the prior year quarter and $226.2 million in the fourth quarter of 2014.  The overall decline is primarily due to the normal turnover of the portfolio combined with foreign exchange impacts.  Included in investment income in the current quarter is $50.4 million of income related to designated investments that support the Life Retrocession Arrangements written on a funds withheld basis compared to $53.9 million in the fourth quarter of 2014.
  • Net income from investment  fund and investment manager operating affiliates was $39.1 million for the quarter, compared to net income of $60.3 million in the prior year quarter. The decrease was driven primarily by lower  earnings from our investment manager affiliates.
  • Fully diluted tangible book value per ordinary share increased by $0.81 from the prior quarter to $37.60, driven by our net income and an increase in net unrealized gain on investments net of deferred tax, reduced by the payment of dividends.
  • At March 31, 2015, $267.6 million of ordinary shares remained available for purchase under our share buyback program.

 

P&C Operations        
Three Months Ended March 31        
(U.S. dollars in thousands)        
  Three Months Ended  
  March 31,  
  (Unaudited)  
  2015   2014  
Gross premiums written $ 2,480,409     $ 2,428,639    
Net premiums written $ 1,836,743     $ 1,919,540    
Net premiums earned $ 1,319,494     $ 1,412,528    
         
Underwriting profit (loss) $ 146,836     $ 144,874    
         
Loss ratio 58.3%   58.9%  
Underwriting expense ratio 30.6%   30.8%  
Combined ratio 88.9%   89.7%  

 

  • P&C gross premiums written (“GPW”) in the first quarter increased 2.1% compared to the prior year quarter. The Insurance segment GPW increased 5.3% from the prior year quarter as a result of increased new business particularly in International Property and Casualty lines, North America Surplus Lines and Construction, International Financial Lines and Specialty Marine and a higher renewing premium base in International Middle Market, Global Risk Management and North America Construction business lines. These increases were offset in part by unfavorable foreign exchange movement of $85.0 million as compared to the prior year quarter. The Reinsurance segment GPW decreased 3.7% from the prior year quarter, primarily driven by the impact of foreign exchange on the International operations, partially offset by growth in North America Crop premiums.
  • P&C net premiums earned (“NPE”) in the first quarter of $1.3 billion were comprised of $962.3 million from the Insurance segment and $357.2 million from the Reinsurance segment. Compared to the prior year quarter, Insurance NPE decreased by 3.0%, largely attributable to utilization of proportional reinsurance in International Primary Casualty as well as an increase in cessions in several North America business lines.  Reinsurance NPE decreased by 15.0%, due to the market factors impacting GPW combined with the earn through of lower net written premiums over the past year in International Casualty Treaty and Emerging Markets and the impact of foreign exchange.
  • The P&C loss ratio in the current quarter was 0.6 percentage points lower than in the prior year quarter. Included in the P&C loss ratio was favorable development of $48.5 million compared to $38.8 million in the prior year quarter. The P&C loss ratio variance was impacted by natural catastrophe pre-tax losses of $14.7 million net of reinsurance and reinstatement premiums from the Insurance segment in the current year quarter and $17.2 million in the prior year quarter.  Excluding prior year development and natural catastrophe losses net of reinsurance and reinstatement premiums, the first quarter P&C loss ratio was in line with the prior year quarter.
  • The P&C combined ratio excluding prior year development and the impact of natural catastrophe losses for the quarter was 91.4%, compared to 91.3% for the prior year quarter.  The Insurance segment combined ratio on this basis was 93.2% for the quarter compared to 94.6% for the prior year quarter, while the Reinsurance segment combined ratio on this basis was 86.6% for the quarter compared to 83.5% for the prior year quarter.
  • Operating expenses in the quarter were 4.9% higher than in the prior year quarter primarily due to the impact of the proposed acquisition of Catlin.  Excluding the Catlin-related transaction costs of approximately $10.5 million,  operating expenses were up 1.6% compared to the prior year quarter.  Interest expense in the quarter includes approximately $15.0 million in bridge financing costs related to the Catlin transaction. Both operating and interest expenses related to the Catlin transaction, totaling $25.5 million, have been excluded from operating net income.

Further details of the results for the quarter may be found in the Company’s Financial Supplement, which is dated April 29, 2015 and is available on the Investor Relations section of XL's website.

A conference call to discuss the Company’s results will be held at  5:00 p.m. Eastern Time on Wednesday, April 29, 2015. The conference call can be accessed through a listen-only dial-in number or through a live webcast. To listen to the conference call, please dial (210) 795-0624 or (866) 617-1526: Passcode: “XL GLOBAL”. The webcast will be available at www.xlgroup.com and will be archived on XL’s website from approximately 9:00 p.m. Eastern Time on April 29, 2015, until approximately midnight Eastern Time on  May 29, 2015.   A telephone replay of the conference call will also be available beginning at approximately 9:00 p.m. Eastern Time on April 29, 2015, until approximately midnight Eastern Time on May 29, 2015, by dialing (203) 369-3064 or (888) 566-0568. The following password will be required: 84719.

In connection with XL’s acquisition of Catlin, which is expected to close on May 1, 2015, subject to customary closing conditions, XL intends to hold a conference call on Thursday, May 28, 2015, regarding this transaction.  Details regarding this call will be provided at a later date.

 

About XL Group plc

XL Group plc (NYSE: XL), through its subsidiaries, is a global insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises throughout the world. XL is the company clients look to for answers to their most complex risks and to help move their world forward. To learn more, visit www.xlgroup.com.

This press release contains forward-looking statements. Statements that are not historical facts, including statements about XL’s beliefs, plans or expectations, are forward-looking statements. These statements are based on current plans, estimates and expectations, all of which involve risk and uncertainty. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “may” , "could", or "would" and similar statements of a future or forward-looking nature identify forward-looking statements. Actual results may differ materially from those included in such forward-looking statements and therefore you should not place undue reliance on them. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes (a) changes in the size of XL’s claims relating to natural or man-made catastrophe losses due to the preliminary nature of some reports and estimates of loss and damage to date; (b) trends in rates for property and casualty insurance and reinsurance;  (c) the timely and full recoverability of reinsurance placed by XL with third parties, or other amounts due to XL; (d) changes in the projected amount of ceded reinsurance recoverables and the credit ratings and credit worthiness of reinsurers; (e) actual loss experience from insured or reinsured events and the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated; (f) increased competition on the basis of pricing, capacity, coverage terms or other factors such as the increased inflow of third party capital into reinsurance markets, which could harm XL’s ability to  maintain or increase its business volumes or profitability; (g) greater frequency or severity of claims and loss activity than XL’s underwriting, reserving or investment practices anticipate based on historical experience or industry data; (h)  the impact of changes in the global financial markets, such as the effects of inflation on XL's business, including on pricing and reserving, increased government involvement or intervention in the financial services industry  and changes in interest rates, credit spreads, foreign currency exchange rates and future volatility in the world’s credit, financial and capital markets that adversely affect the performance and valuation of XL’s investments, future financing activities and access to such markets or general financial condition; (i) XL's ability to successfully implement its business strategy, including its proposed acquisition of Catlin Group  Limited ("Catlin"); (j) XL’s ability to successfully attract and raise additional third party capital for existing or new investment vehicles; (k) the potential impact on XL of government-mandated insurance coverage for acts of terrorism; (l)changes in ratings and rating agency policies or practices; (m) the potential for changes to methodologies, estimations and assumptions that underlie the valuation of XL’s financial instruments that could result in changes to investment valuations; (n) changes to XL’s assessment as to whether it is more likely than not that it will be required to sell, or has the intent to sell, available-for-sale debt securities before their anticipated recovery;  (o) the availability of borrowings and letters of credit under credit facilities; (p) the ability of XL’s subsidiaries to pay dividends to XL Group plc and XLIT Ltd.; (q) the potential effect of legislative or regulatory developments in the jurisdictions in which XL operates, such as those that could impact the financial markets or increase XL’s business costs and required capital levels,  including but not limited to changes in regulatory capital balances that must be maintained by our operating subsidiaries and governmental actions for the purpose of stabilizing the financial markets;  (r) the effects of business disruption, economic contraction or economic sanctions due to global political and social conditions such as war, terrorism or other hostilities, or pandemics; (s) changes in regulators or laws applicable to us or our subsidiaries, brokers or customers; (t) the actual amount of new and renewal business and acceptance of XL's products and services, including new products and services and the materialization of risks related to such products and services; (u) changes in the availability, cost or quality of reinsurance; (v) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (w) the loss of key personnel and changes in accounting standards, policies or practices or the application thereof; (x) changes in applicable tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof;  (y) the effects of mergers, acquisitions and divestitures, including XL's ability to modify its internal controls over financial reporting, changes to its risk appetite and its ability realize the value or benefits expected, in each case, as a result of such transactions, including the Life Retrocession Arrangements and XL's proposed acquisition of Catlin; (z) changes in general economic conditions, including new or continued sovereign debt concerns in Euro-Zone countries or downgrades of US securities by credit rating agencies, which could affect XL’s financial condition, results of operations, liquidity or cash flows; (aa) developments related to bankruptcies or other financial concerns of companies insofar as they affect property and casualty insurance and reinsurance coverage or claims that XL may have as a counterparty; (bb) judicial decisions and rulings, new theories of liability or emerging claims coverage issues, legal tactics and settlement terms and (cc) the other factors set forth in XL’s reports on Form 10-K and Form 10-Q and other documents on file with the Securities and Exchange Commission. XL undertakes no obligation to update publicly or revise any forward looking statement, whether as a result of new information, future developments or otherwise, except as required by the federal securities laws.

XL intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. Such disclosures will be included on the website in the Investor Relations section. Accordingly, investors should monitor such portions of XL's website, in addition to following its press releases, SEC filings and public conference calls and webcasts.

 

XL Group plc
SUMMARY CONSOLIDATED FINANCIAL DATA
(U.S. dollars in thousands)
         
    Three Months Ended  
Adjusted Income statement and other data (Note 1): March 31,  
    (Unaudited)  
  2015   2014  
Adjusted Revenues (Note 1):        
Net premiums written $ 1,851,249     $ 1,995,851    
         
Net premiums earned $ 1,334,000     $ 1,488,839    
           
Net investment income - excluding Life Funds Withheld Assets (Note 1) 158,094     233,189    
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets (Note 1) 4,602     19,229    
Net realized and unrealized (losses) gains on derivative instruments 16,521     1,810    
Income (loss) from investment fund affiliates 35,329     33,303    
Fee income and other 4,728     11,454    
Total adjusted revenues $ 1,553,274     $ 1,787,824    
         
Adjusted Expenses (Note 1):        
Net losses and loss expenses incurred  - P&C operations $ 769,827     $ 831,505    
Claims and policy benefits - run-off Life operations 19,387     113,587    
Acquisition costs 153,696     199,414    
Operating expenses 324,358     310,424    
Exchange (gains) losses 31,074     10,441    
Interest expense 51,438     42,941    
Total adjusted expenses $ 1,349,780     $ 1,508,312    
         
Income (loss) before income tax,  income (loss) from operating affiliates, and Life Retrocession Arrangements (Note 1) $ 203,494     $ 279,512    
         
Net income (loss) from operating affiliates 22,668     46,285    
Provision (benefit) for income tax 24,218     34,321    
         
Net income (loss) before Life Retrocession Arrangements (Notes 1 and 2) 201,944     291,476    
         
Contribution from Life Retrocession Arrangements (Note 1) (128,273)      
         
Net income (loss) 73,671     291,476    
         
Non-controlling interests 37,390     35,759    
           
Net income (loss) attributable to ordinary shareholders 36,281     255,717    
           
Other comprehensive income - Contribution from Life Retrocession Arrangements (Note 1) 128,273        
Other comprehensive income - P&C, Corporate and Other 92,440     210,004    
           
Comprehensive Income $ 256,994     $ 465,721    
           
Note 1:  This presentation includes non-GAAP financial measures, as income and expense items related to the Life Retrocession Arrangements are excluded from revenues and expenses and shown above in "Contribution from Life Retrocession Arrangements". Investment results for the Life Funds Withheld Assets - including interest income, unrealized gains and losses, and gains and losses from sales - are passed directly to the reinsurer pursuant to a contractual arrangement which is accounted for as a derivative. Changes in the fair value of the embedded derivative associated with these Life Retrocession Arrangements are also grouped above within "Contribution from Life Retrocession Arrangements".
Note 2: "Net income (loss) before Life Retrocession Arrangements" less "Non-controlling interests" is equal to "Net income (loss) attributable to ordinary shareholders excluding Contribution from Life Retrocession Arrangements" reported on page 9.

 

XL Group plc
SUMMARY CONSOLIDATED FINANCIAL DATA
 
       
Selected balance sheet data:      
(U.S. dollars in thousands except share and per share amounts) At   At
  March 31, 2015   December 31, 2014
  (Unaudited)   (Note 1)
Total investments available for sale $ 30,062,733     $ 30,484,053  
Cash and cash equivalents 3,209,934     2,521,814  
Investments in affiliates 1,655,394     1,637,620  
Unpaid losses and loss expenses recoverable. 3,529,331     3,429,368  
Goodwill and other intangible assets. 442,431     447,952  
Total assets 46,080,556     45,046,819  
       
Unpaid losses and loss expenses 18,965,264     19,353,243  
Deposit liabilities. 1,211,203     1,245,367  
Future policy benefit reserves 4,375,863     4,707,199  
Funds withheld liability on Life Retrocession Arrangements, net of future policy benefit reserves recoverable 1,138,652     1,155,016  
Unearned premiums 4,532,022     3,973,132  
Notes payable and debt 2,643,561     1,662,580  
       
Total shareholders’ equity. 11,646,423     11,435,766  
Ordinary shareholders' equity. 10,244,057     10,033,751  
Ordinary shares outstanding (Note 2) 256,723,675     255,222,835  
       
Basic book value per ordinary share (Note 3). $ 39.90     $ 39.31  
Fully diluted book value per ordinary share (Note 3). $ 39.30     $ 38.51  
Fully diluted tangible book value per ordinary share (Note 3) $ 37.60     $ 36.79  
       
Note 1: Certain items have been reclassified to conform to the current period presentation.
Note 2: Ordinary shares outstanding include all ordinary shares legally issued and outstanding (as disclosed on the face of the balance sheet) as well as all director share units outstanding.
Note 3: Book value per ordinary  share, fully diluted book value per ordinary share and fully diluted tangible book value per ordinary share are non-GAAP financial measures. Fully diluted book value per ordinary share represents book value per ordinary share (total shareholders’ equity less non-controlling interest in equity of consolidated subsidiaries, divided by the number of outstanding ordinary shares at any period end) combined with the dilutive impact of potential future share issuances at any period end. Fully diluted tangible book value per ordinary share is calculated in the same manner as fully diluted book value per ordinary share except that goodwill and intangible assets are excluded from ordinary shareholders’ equity.

 

 

XL Group plc

RECONCILIATION

The following is a reconciliation of XL’s net income (loss) attributable to ordinary shareholders to operating net income (loss) (Note 3) and also includes the calculation of annualized return on average ordinary shareholders’ equity and annualized return on average ordinary shareholders’ equity excluding average unrealized gains and losses on investments, in each case based on operating net income (loss) for the three months ended March 31, 2015 and 2014.

(U.S. dollars in thousands except share and per share amounts) Three Months Ended  
  March 31,  
  (Unaudited)  
  2015   2014  
      (Note 1)  
Net income (loss) attributable to ordinary shareholders. $ 36,281     $ 255,717    
Net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets. 229,367        
Net realized (gains) losses on investments and net unrealized (gains) losses on investments, Trading - Life Funds Withheld Assets (48,289)      
Net investment income -  Life Funds Withheld Assets, net of tax (50,419)      
Foreign exchange revaluation (gains) losses on and other income and expense items related to Life Funds Withheld Assets. (2,386)      
Net income (loss) attributable to ordinary shareholders excluding Contribution from Life Retrocession Arrangements  (Note 2) $ 164,554     $ 255,717    
Net realized (gains) losses on investments sold - excluding Life Funds Withheld Assets, net of tax (4,518)   (18,889)  
Net realized and unrealized (gains) losses on derivatives, net of tax. (16,521)   (1,810)  
Net realized and unrealized (gains) losses on investments and derivatives related to the Company's insurance company affiliates, net of tax. 658     (3,958)  
Exchange (gains) losses, net of tax 24,739     7,589    
Expenses related to Catlin acquisition. 25,464        
Operating net income (loss) (Note 3) $ 194,376     $ 238,649    
Per ordinary share results: (Note 4)        
Net income (loss) attributable to ordinary shareholders. $ 0.14     $ 0.91    
Operating net income (loss) (Note 3) $ 0.75     $ 0.85    
Weighted average ordinary shares outstanding:        
Basic 255,723,731     276,336,989    
Diluted - Net income 260,703,815     280,458,123    
Diluted - Operating net income. 260,703,815     280,458,123    
Return on ordinary shareholders' equity:        
Closing ordinary shareholders' equity (Note 5) 10,244,057     10,244,962    
Closing unrealized (gain) loss on investments, net of tax (Note 6) $ (1,697,606)   $ (947,047)  
Average ordinary shareholders' equity excluding average unrealized gains (losses) on investments, net of tax (Note 4) $ 8,533,067     $ 9,281,153    
Average ordinary shareholders' equity (Note 5) $ 10,138,905     $ 10,121,298    
Operating net income (loss) (Note 3) $ 194,376     $ 238,649    
Annualized operating net income (loss) (Note 3) $ 777,504     $ 954,596    
Annualized operating return on average ordinary shareholders' equity (Notes 3 and 5) 7.7%   9.4%  
Annualized operating return on average ordinary shareholders' equity excluding average unrealized gains and losses on investments (Notes 3 and 5) 9.1%   10.3%  
         
Note 1: Certain amounts have been reclassified to conform to the current period presentation.  
Note 2: Investment results for the Life Funds Withheld Assets - including interest income, unrealized gains and losses, and gains and losses from sales - are passed directly to the reinsurer pursuant to a contractual arrangement which is accounted for as a derivative. Changes in the fair value of the embedded derivative associated with these Life Retrocession Arrangements are grouped within "Net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets" in the reconciliation above.
Note 3: Defined as net income (loss) attributable to ordinary shareholders excluding: (1) our net investment income - Life Funds Withheld Assets, net of tax, (2) our net realized (gains) losses on investments sold - excluding Life Funds Withheld Assets, net of tax, (3) our net realized (gains) losses on investments sold (including OTTI) and net unrealized (gains) losses on investments, Trading - Life Funds Withheld Assets, (4) our net realized and unrealized (gains) losses on derivatives, net of tax, (5) our net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets, (6) our share of items (2) and (4) for XL's insurance company affiliates for the periods presented, (7) our foreign exchange (gains) losses, net of tax, and (8) our expenses related to the Catlin acquisition, net of tax.  In addition to presenting net income (loss), we believe that showing "operating net income (loss)", "annualized operating return on average ordinary shareholders' equity" and "annualized operating return on average ordinary shareholders' equity excluding average unrealized gains and losses on investments" enables investors and other users of our financial information to analyze our performance in a manner similar to how we analyze our performance. In this regard, we believe that providing only a GAAP presentation of net income (loss) would make it more difficult for users of our financial information to evaluate our underlying business. We also believe that equity analysts and certain rating agencies that follow us (and the insurance industry as a whole) exclude these items from their analyses for the same reasons, and they request that we provide this non-GAAP financial information on a regular basis. A reconciliation of our net income (loss) attributable to ordinary shareholders to operating net income (loss) is provided above.
Note 4:  Diluted weighted average number of ordinary shares outstanding is used to calculate per share data except where it is anti-dilutive to earnings per share or where there is a net loss. When it is anti-dilutive or when a net loss occurs, basic weighted average ordinary shares outstanding is utilized in the calculation of net loss per share and net operating loss per share.
Note 5: Ordinary shareholders’ equity is defined as total shareholders’ equity less non-controlling interest in equity of consolidated subsidiaries.
Note 6: Unrealized (gain) loss on investments, net of tax is the cumulative impact of mark to market fluctuations on our investment portfolio that have not been realized through sales.

 

 

Comment on Regulation G

XL presents its operations in the way it believes will be most meaningful and useful to investors, analysts, rating agencies and others who use XL’s financial information in evaluating XL’s performance.  This press release contains the presentation of (i) operating net income (loss) (“Operating Net Income”), which is defined as net income (loss) attributable to ordinary shareholders excluding: (1) net investment income - Life Funds Withheld Assets, net of tax, (2) net realized (gains) losses on investments sold - excluding Life Funds Withheld Assets, net of tax,(3) net realized (gains) losses on investments sold (including OTTI) and net unrealized (gains) losses on investments, Trading - Life Funds Withheld Assets, (4) net realized and unrealized (gains) losses on derivatives, net of tax, (5) net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets, (6) share of items (2) and (4) for XL's insurance company affiliates for the periods presented, (7) foreign exchange (gains) losses, net of tax, and (8) expenses related to the Catlin acquisition, net of tax; (ii) annualized return on average ordinary shareholders’ equity (“ROE”) based on operating net income (loss) (“Operating ROE”); (iii) Operating ROE excluding average unrealized gains and losses on investments; (iv) annualized net income (loss) attributable to ordinary shareholders excluding the Contribution from the Life Retrocession Arrangements and (v) book value per ordinary share  (ordinary shareholders’ equity divided by the number of shares outstanding at the period end date), fully diluted book value per ordinary share (book value per share combined with the dilutive impact of potential future share issues at any period end), and fully diluted tangible book value per ordinary share (calculated in the same manner as fully diluted book value per ordinary share except that goodwill and intangible assets are excluded from ordinary shareholders’ equity). These items are "non-GAAP financial measures" as defined in Regulation G. The reconciliation of such measures to the most directly comparable GAAP financial measures in accordance with Regulation G is included in this press release on page 9.

Although the investment of premiums to generate income (or loss) and realize capital gains (or losses) is an integral part of XL’s operations, the determination to realize capital gains (or losses) is independent of the underwriting process.  In addition, under applicable GAAP accounting requirements, losses can be created as the result of other than temporary declines in value and from goodwill impairment charges without actual realization.  In this regard, certain users of XL’s financial information, including certain rating agencies, evaluate earnings before tax and capital gains to understand the profitability of the operational sources of income without the effects of these two variables. Furthermore, these users believe that, for many companies, the timing of the realization of capital gains and the recognition of goodwill impairment charges are largely a function of economic and interest rate conditions.

Net realized and unrealized (gains) losses on derivatives, net of tax, include all derivatives entered into by XL other than certain credit derivatives and the life retrocession embedded derivative. With respect to credit derivatives, because XL and its insurance company operating affiliates generally hold financial guaranty contracts written in credit default derivative form to maturity, the net effects of the changes in fair value of these credit derivatives are excluded (similar with other companies’ treatment of such contracts) as the changes in fair value each quarter are not indicative of underlying business performance.

Net investment income - Life Funds Withheld Assets, net of tax, and net realized (gains) losses on the life retrocession embedded derivative and derivative instruments - Life Funds Withheld  Assets,  have been excluded because, as a result of the Life Retrocession Arrangement, XL no longer shares in the risks and rewards of the underlying performance of the Life Funds Withheld Assets that support these retrocession arrangements.  The returns on the Life Funds Withheld Assets are passed directly to the reinsurer pursuant to a contractual arrangement that is accounted for as a derivative.  Therefore, net investment income from the Life Funds Withheld Assets and changes in the fair value of the embedded derivative associated with these life retrocession arrangements are not relevant to XL’s underlying business performance. In addition, the loss on the sale of life reinsurance subsidiary, net of tax, has been excluded due to the one-time, non-operating nature of this loss.

Foreign exchange (gains) losses in the income statement are only one element of the overall impact of foreign exchange fluctuations on XL’s financial position and are not representative of any economic gain or loss made by XL.  Accordingly, it is not a relevant indicator of financial performance and it is excluded.

In summary, XL evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income (loss), XL believes that showing operating net income (loss) enables investors and other users of XL’s financial information to analyze XL’s performance in a manner similar to how management of XL analyzes performance. In this regard, XL believes that providing only a GAAP presentation of net income (loss) would make it much more difficult for users of XL’s financial information to evaluate XL’s underlying business. Also, as stated above, XL believes that the equity analysts and certain rating agencies that follow XL (and the insurance industry as a whole) exclude these items from their analyses for the same reasons and they request that XL provide this non-GAAP financial information on a regular basis.

Operating ROE is a widely used measure of any company’s profitability that is calculated by dividing annualized operating net income for any period other than a fiscal year when actual operating income is used by the average of the opening and closing ordinary shareholders’ equity. XL establishes target Operating ROEs for its total operations, segments and lines of business. If XL’s Operating ROE targets are not met with respect to any line of business over time, XL seeks to re-evaluate these lines. Operating ROE excluding net unrealized gains and losses on investments is an additional measure of a company's profitability that eliminates the impacts of mark to market fluctuations on a company's investment portfolio that have not been realized through sales, which XL believes provides a more consistent measure of company performance.

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