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EX-12 - EXHIBIT 12 - XL GROUP LTDxlgroup-03312016xex_12.htm
EX-32 - EXHIBIT 32 - XL GROUP LTDxlgroup-03312016xex_32.htm
EX-31 - EXHIBIT 31 - XL GROUP LTDxlgroup-03312016xex_31.htm
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 March 31, 2016
 
 
 
 
 
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 May 3, 2016, there were 284,669,984 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 March 31, 2016 and December 31, 2015
 
Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015
 
Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015
 
Unaudited Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2016 and 2015
 
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
 
 
 





PART I – FINANCIAL INFORMATION

ITEM 1.
 
FINANCIAL STATEMENTS
XL GROUP PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
March 31, 2016
 
December 31, 2015
ASSETS
Investments:
 

 
 

Fixed maturities, at fair value (amortized cost: 2016 - $31,444,747; 2015 - $31,517,654)
$
32,647,573

 
$
32,257,589

Equity securities, at fair value (cost: 2016 - $831,543; 2015 - $834,079)
878,407

 
878,919

Short-term investments, at fair value (amortized cost: 2016 - $317,939; 2015 - $618,851)
317,304

 
617,390

Total investments available for sale
$
33,843,284

 
$
33,753,898

Fixed maturities, at fair value (amortized cost: 2016 - $1,367,908; 2015 - $1,263,609)
$
1,409,583

 
$
1,235,699

Short-term investments, at fair value (amortized cost: 2016 - $26,949; 2015 - $60,176)
26,959

 
60,330

Total investments, trading
$
1,436,542

 
$
1,296,029

Investments in affiliates
1,953,711

 
1,708,899

Other investments
1,453,890

 
1,433,057

Total investments
$
38,687,427

 
$
38,191,883

Cash and cash equivalents
2,820,897

 
3,256,236

Restricted cash
161,019

 
154,992

Accrued investment income
291,016

 
312,667

Deferred acquisition costs and value of business acquired
1,057,941

 
890,568

Ceded unearned premiums
2,255,664

 
1,821,793

Premiums receivable
6,041,000

 
4,712,493

Reinsurance balances receivable
469,009

 
418,666

Unpaid losses and loss expenses recoverable
5,374,604

 
5,262,706

Receivable from investments sold
65,471

 
231,158

Goodwill and other intangible assets
2,233,597

 
2,210,266

Deferred tax asset
245,927

 
282,311

Other assets
942,120

 
937,199

Total assets
$
60,645,692

 
$
58,682,938

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
 

 
 

Unpaid losses and loss expenses
$
25,913,484

 
$
25,439,744

Deposit liabilities
1,170,595

 
1,168,376

Future policy benefit reserves
4,020,602

 
4,163,500

Funds withheld on GreyCastle life retrocession arrangements (net of future policy benefit reserves recoverable: 2016 - $3,574,716; 2015 - $3,719,131)
998,391

 
914,629

Unearned premiums
8,217,539

 
7,043,358

Notes payable and debt
2,653,895

 
2,644,970

Reinsurance balances payable
2,583,962

 
2,117,727

Payable for investments purchased
74,476

 
130,060

Deferred tax liability
105,589

 
120,651

Other liabilities
1,239,441

 
1,285,460

Total liabilities
$
46,977,974

 
$
45,028,475

Commitments and Contingencies


 


Shareholders’ Equity:
 

 
 

Ordinary shares, 999,990,000 authorized, par value $0.01; issued and outstanding (2016 - 286,273,358; 2015 - 294,745,045)
$
2,863

 
$
2,947

Additional paid in capital
8,608,726

 
8,910,167

Accumulated other comprehensive income
1,094,557

 
686,616

Retained earnings
1,982,598

 
2,077,349

Shareholders’ equity attributable to XL Group plc
$
11,688,744

 
$
11,677,079

Non-controlling interest in equity of consolidated subsidiaries
1,978,974

 
1,977,384

Total shareholders’ equity
$
13,667,718

 
$
13,654,463

Total liabilities and shareholders’ equity
$
60,645,692

 
$
58,682,938

See accompanying Notes to Unaudited Consolidated Financial Statements

1




XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
 
March 31,
(U.S. dollars in thousands, except per share data)
2016
 
2015
Revenues:
 

 
 

Net premiums earned
$
2,354,610

 
$
1,334,000

Net investment income:
 
 
 
Net investment income - excluding Life Funds Withheld Assets
164,326

 
158,094

Net investment income - Life Funds Withheld Assets
41,560

 
50,419

Total net investment income
$
205,886

 
$
208,513

Net realized gains (losses) on investments, and net unrealized gains (losses) on investments, trading ("Trading") - Life Funds Withheld Assets:
 
 
 
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets
11,164

 
15,178

Other-than-temporary impairments ("OTTI") on investments - excluding Life Funds Withheld Assets
(19,582
)
 
(10,515
)
OTTI on investments transferred to (from) other comprehensive income - excluding Life Funds Withheld Assets
2

 
(61
)
 Net realized gains (losses) on investments sold - Life Funds Withheld Assets
34,416

 
52,738

OTTI on investments - Life Funds Withheld Assets
(2,346
)
 
(5,209
)
Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets
69,096

 
760

Total net realized gains (losses) on investments, and net unrealized gains (losses) on investments, trading - Life Funds Withheld Assets
$
92,750

 
$
52,891

Net realized and unrealized gains (losses) on derivative instruments
(3,622
)
 
16,521

Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
(236,080
)
 
(229,367
)
Income (loss) from investment fund affiliates
(4,579
)
 
35,329

Fee income and other
8,262

 
4,728

Total revenues
$
2,417,227

 
$
1,422,615

Expenses:
 
 
 
Net losses and loss expenses incurred
$
1,382,485

 
$
769,827

Claims and policy benefits
4,937

 
19,387

Acquisition costs
403,267

 
153,696

Operating expenses
515,381

 
325,656

Foreign exchange (gains) losses
(33,819
)
 
27,390

Interest expense
52,303

 
51,438

Total expenses
$
2,324,554

 
$
1,347,394

Income (loss) before income tax and income (loss) from operating affiliates
$
92,673

 
$
75,221

Income (loss) from operating affiliates
12,650

 
22,668

Provision (benefit) for income tax
22,295

 
24,218

Net income (loss)
$
83,028

 
$
73,671

Non-controlling interests
61,143

 
37,390

Net income (loss) attributable to ordinary shareholders
$
21,885

 
$
36,281

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – basic
291,969

 
255,724

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – diluted
296,666

 
260,704

Earnings (loss) per ordinary share and ordinary share equivalent – basic
$
0.07

 
$
0.14

Earnings (loss) per ordinary share and ordinary share equivalent – diluted
$
0.07

 
$
0.14

See accompanying Notes to Unaudited Consolidated Financial Statements

2



XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2016
 
2015
Net income (loss) attributable to ordinary shareholders
$
21,885

 
$
36,281

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
363,883

 
60,345

Change in adjustments related to future policy benefit reserves, net of tax
17,035

 
60,356

Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
51,990

 
37,115

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
(9,707
)
 
15,865

Change in OTTI losses recognized in other comprehensive income, net of tax
2,267

 
9,858

Change in underfunded pension liability, net of tax
(1,049
)
 
975

Change in value of cash flow hedge
(39
)
 
95

Foreign currency translation adjustments, net of tax
(16,439
)
 
36,103

Comprehensive income (loss)
$
429,826

 
$
256,993

See accompanying Notes to Unaudited Consolidated Financial Statements


3



XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2016
 
2015
Ordinary Shares:
 

 
 

Balance - beginning of year
$
2,947

 
$
2,552

Issuance of ordinary shares
15

 
15

Buybacks of ordinary shares
(99
)
 
(1
)
Exercise of stock options

 
1

Balance - end of period
$
2,863

 
$
2,567

Additional Paid in Capital:
 

 
 

Balance - beginning of year
$
8,910,167

 
$
7,359,102

Issuance of ordinary shares
7

 
6

Buybacks of ordinary shares
(301,354
)
 
(1,573
)
Exercise of stock options
490

 
1,771

Share-based compensation
(584
)
 
1,832

Balance - end of period
$
8,608,726

 
$
7,361,138

Accumulated Other Comprehensive Income (Loss):
 

 
 

Balance - beginning of year
$
686,616

 
$
1,484,458

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
363,883

 
60,345

Change in adjustments related to future policy benefit reserves, net of tax
17,035

 
60,356

Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
51,990

 
37,115

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
(9,707
)
 
15,865

Change in OTTI losses recognized in other comprehensive income, net of tax
2,267

 
9,858

Change in underfunded pension liability, net of tax
(1,049
)
 
975

Change in value of cash flow hedge
(39
)
 
95

Foreign currency translation adjustments, net of tax
(16,439
)
 
36,103

Balance - end of period
$
1,094,557

 
$
1,705,170

Retained Earnings (Deficit):
 

 
 

Balance - beginning of year
$
2,077,349

 
$
1,187,639

Net income (loss) attributable to ordinary shareholders
21,885

 
36,281

Dividends on ordinary shares
(58,714
)
 
(41,599
)
Buybacks of ordinary shares
(54,447
)
 
(393
)
Share-based compensation
(3,475
)
 
(6,746
)
Balance - end of period
$
1,982,598

 
$
1,175,182

Non-controlling Interest in Equity of Consolidated Subsidiaries:
 

 
 

Balance - beginning of year
$
1,977,384

 
$
1,402,015

Non-controlling interests - contributions
882

 
2,569

Non-controlling interests - distributions
(3,030
)
 
(4,175
)
Non-controlling interests
3,679

 
1,957

Non-controlling interest share in change in accumulated other comprehensive income (loss)
59

 

Balance - end of period
$
1,978,974

 
$
1,402,366

Total Shareholders’ Equity
$
13,667,718

 
$
11,646,423

See accompanying Notes to Unaudited Consolidated Financial Statements


4



-XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2016
 
2015
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
83,028

 
$
73,671

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
(92,750
)
 
(52,891
)
Net realized and unrealized (gains) losses on derivative instruments
3,622

 
(16,521
)
Net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
236,080

 
229,367

Amortization of premiums (discounts) on fixed maturities
47,505

 
35,998

(Income) loss from investment and operating affiliates
19,797

 
(45,467
)
Share-based compensation
20,707

 
18,295

Depreciation and amortization
22,592

 
10,907

Accretion of deposit liabilities
12,055

 
10,044

Changes in:
 
 
 
Unpaid losses and loss expenses
330,160

 
77,832

Future policy benefit reserves
(59,858
)
 
(49,279
)
Funds withheld on GreyCastle life retrocession arrangements, net
(121,272
)
 
(169,569
)
Unearned premiums
1,148,149

 
655,733

Premiums receivable
(1,322,085
)
 
(517,881
)
Unpaid losses and loss expenses recoverable
(82,729
)
 
(148,962
)
Ceded unearned premiums
(436,332
)
 
(146,049
)
Reinsurance balances receivable
(49,781
)
 
10,057

Deferred acquisition costs and value of business acquired
(156,373
)
 
(72,340
)
Reinsurance balances payable
460,982

 
84,261

Deferred tax asset - net
(7,945
)
 
14,119

Derivatives
17,863

 
141,754

Other assets
(47,084
)
 
(31,407
)
Other liabilities
(155,826
)
 
(94,545
)
Other
(41,618
)
 
17,851

Total adjustments
$
(254,141
)
 
$
(38,693
)
Net cash provided by (used in) operating activities
$
(171,113
)
 
$
34,978

Cash flows provided by (used in) investing activities:
 
 
 
Proceeds from sale of fixed maturities and short-term investments
$
3,772,077

 
$
1,473,941

Proceeds from redemption of fixed maturities and short-term investments
949,221

 
1,053,739

Proceeds from sale of equity securities
62,895

 
189,473

Purchases of fixed maturities and short-term investments
(4,325,679
)
 
(2,835,304
)
Purchases of equity securities
(55,411
)
 
(94,141
)
Proceeds from sale of affiliates
41,538

 
77,916

Purchases of affiliates
(247,049
)
 
(29,037
)
Purchase of Allied International Holdings, Inc., net of cash acquired
(69,745
)
 

Change in restricted cash
(6,027
)
 

Other
82,141

 
(32,141
)
Net cash provided by (used in) investing activities
$
203,961

 
$
(195,554
)
Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from issuance of ordinary shares and exercise of stock options
$
491

 
$
1,772

Buybacks of ordinary shares
(355,901
)
 
(1,966
)
Dividends paid on ordinary shares
(57,861
)
 
(40,922
)
Distributions to non-controlling interests
(27,857
)
 
(7,172
)
Contributions from non-controlling interests
883

 
2,569

Proceeds from the issuance of debt

 
980,600

Deposit liabilities
(8,546
)
 
(38,788
)
Net cash provided by (used in) financing activities
$
(448,791
)
 
$
896,093

Effects of exchange rate changes on foreign currency cash
(19,396
)
 
(47,397
)
Increase (decrease) in cash and cash equivalents
$
(435,339
)
 
$
688,120

Cash and cash equivalents - beginning of period
3,256,236

 
2,521,814

Cash and cash equivalents - end of period
$
2,820,897

 
$
3,209,934

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.
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, 2015.
On February 29, 2016, the Company announced a proposal to change the parent holding company's place of incorporation to Bermuda from Ireland. To effect the redomestication, XL Group Ltd, a wholly-owned subsidiary of XL-Ireland and a Bermuda exempted company ("XL-Bermuda"), would replace XL-Ireland as the ultimate holding company of the XL group of companies, and XL-Ireland's ordinary shareholders would receive one common share of XL-Bermuda in exchange for each ordinary share of XL-Ireland held by them. The Company expects to submit the proposal for redomestication, along with related proposals, to its shareholders in the next several months and complete the transaction in the third quarter of 2016. The proposed redomestication will be subject to approval by the Company's ordinary shareholders and sanctioning by the High Court of Ireland. In addition, the proposed redomestication could be abandoned by the Company prior to its completion for any reason, including if any necessary regulatory approvals are not obtained. XL-Bermuda will continue to be registered with the U.S. Securities and Exchange Commission (the "SEC") and be subject to SEC reporting requirements applicable to domestic registrants. Further, if approved, XL-Bermuda will be subject to the applicable corporate governance rules of the New York Stock Exchange ("NYSE"), and will report its financial results in U.S. dollars and under U.S. generally accepted accounting principles, in addition to any reporting requirements under Bermuda law. XL-Bermuda's shares will continue to trade on the NYSE under the ticker symbol "XL". The Company does not expect the redomestication to have a material impact on the Company's financial condition, results of operations, including its global effective tax rate, or cash flows. If, and only if, the proposed redomestication is consummated, XL-Ireland will be liquidated and following the effectiveness of such liquidation, XL-Ireland's direct, wholly-owned subsidiary XLIT Ltd ("XL-Cayman"). will become a direct, wholly-owned subsidiary of XL-Bermuda. If the proposed redomestication is consummated the liquidation of XL-Ireland is expected to occur at the end of 2016 or beginning of 2017.
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. For further information, see Item 8, Note 3(c), "Acquisitions and Disposals - Catlin Acquisition," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
In May 2014, the Company ceded the majority of its life reinsurance business to GreyCastle Life Reinsurance ("GCLR") via 100% quota share reinsurance (the "GreyCastle Life Retro Arrangements"). Under the terms of the transaction, the Company continues to own, on a funds withheld basis, assets supporting the GreyCastle Life Retro Arrangements consisting of cash, fixed maturity securities and accrued interest (the "Life Funds Withheld Assets"). The Life Funds Withheld Assets are managed pursuant to agreed investment guidelines that meet the contractual commitments of the XL ceding companies 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. For further information, see Item 8, Note 3(e), "Acquisitions and Disposals - Sale of Life Reinsurance Subsidiary," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.

6



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. Significant Accounting Policies
(a) Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update concerning the accounting for financial instruments. The guidance retains the basic existing framework for accounting for financial instruments under GAAP, while achieving limited convergence with IFRS in this area. The guidance: (1) requires equity investments (except consolidated entities and those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income, although equity instruments without a readily determinable fair value may be measured at cost less impairment with an adjustment for observable price changes; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for non-public business entities; (4) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet; (5) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial statements; (7) requires separate presentation of financial assets and financial liabilities by measurement category and form of asset in the financial statements; and (8) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for the amendment relating to presentation of the change in the fair value of a liability resulting from a change in instrument-specific credit risk and should be applied as of the beginning of the fiscal year of adoption. All of the amendments from this update should be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except the amendments related to impairment of equity securities without readily determinable fair values. The Company is currently evaluating the impact of this guidance, but expects that it will have an effect on results of operations as mark to market movements will prospectively impact net income. The Company does not expect this new guidance to have a material impact on the Company's financial condition or cash flows.
In February 2016, the FASB issued an accounting standards update concerning the accounting for leases. The most significant change to existing GAAP created by this standard will be the lessee recognition of lease assets and lease liabilities for those leases classified as operating. The core principle of this guidance stipulates that a lessee should recognize in the statement of financial position, initially measured at the present value of the lease payments, both a liability for contractual payments due under the lease, and an asset representing its right to use the underlying leased asset for the lease term ("right-of-use asset"). For financing leases, interest on the lease liability should be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income. Additionally, as regards the presentation of financing lease activities within the statement of cash flows, repayments of the principal portion of the lease liability should be classified within financing activities, while payments of interest on the lease liability should be classified within operating activities. For operating leases, a single net lease cost should be recognized over the lease term, generally on a straight-line basis, and all cash payments related to the lease should be classified within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, and therefore recognize lease expense for such leases on a straight-line basis over the lease term. The guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will substantively continue to account for leases that commence before the effective date in accordance with existing GAAP, except that a right-of-use asset and a lease liability must be recorded for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were previously tracked and disclosed. The Company is currently evaluating the impact of this guidance, but expects that it will have an effect on the Company's financial condition as new assets and liabilities related to operating leases are likely to be recorded as a result of adoption. The Company does not expect this new guidance to have a material impact on the Company's results of operations or cash flows.
In March 2016, the FASB issued an accounting standards update concerning the accounting for equity method investments. The amendments in this update require that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of that date. Additionally, if the investment was previously accounted for as an available-for sale security, an entity also shall

7



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

immediately recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (“AOCI”) as of that date. Thus, this new treatment is eliminating existing GAAP rules requiring retroactive adjustment of an entity’s investments, results of operations and retained earnings when an existing investment qualifies for the equity method of accounting. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and should be applied prospectively upon their effective date. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, but does not expect this new guidance to have a material impact on the Company's financial condition, results of operations or cash flows.
In March 2016 as part of its simplification initiative, the FASB issued an accounting standards update concerning the accounting for several aspects of employee share-based payment awards including: income tax consequences, classification of awards as either equity or liabilities, classification of items in the statement of cash flows, and certain expedients that entities can now elect regarding estimates and assumptions in this area. Regarding the accounting for income taxes, all excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, should be recognized as income tax expense or benefit (regardless of whether the benefit reduces taxes payable in the current period) in the income statement, as opposed to additional paid-in capital as current GAAP prescribes. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Regarding the classification of awards, the update changes the threshold to qualify for equity classification from the employer's minimum statutory withholding requirements to the maximum statutory tax rates in the applicable jurisdictions. Regarding the classification of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, while cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. As regards new expedients which can be elected related to estimates and assumptions in this area of accounting, the only one allowable for public business entities is that they may now make an entity-wide accounting policy election to either estimate the number of share-based payment awards that are expected to vest (which is current GAAP) or account for forfeitures as they occur. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted so long as all the amendments in the update are adopted in the same period. The amendments within the guidance related to the recognition of excess tax benefits and tax deficiencies in the income statement as opposed to in paid-in capital should be applied prospectively. The amendments related to the statement of cash flows presentation of excess tax benefits may be adopted either prospectively or retrospectively, while the amendments related to the presentation of employee taxes paid must be applied retrospectively. The remaining amendments - relating to the timing of when excess tax benefits are recognized, the change in the threshold for equity versus liability classification of certain awards, and the allowable policy election regarding forfeitures - should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company is currently evaluating the impact of this guidance, but expects it will have an impact on the Company's financial position, results of operations and cash flows upon adoption.
3. Acquisitions and Disposals
(a)    Allied Acquisition
Overview
On February 1, 2016, the Company announced that its indirect, wholly-owned subsidiary, XL Reinsurance America Inc. ("XLRA"), completed the acquisition ("Allied Acquisition") of Allied International Holdings, Inc. ("Allied"). Allied is the holding company of Allied Specialty Insurance, Inc. and T.H.E. Insurance Company, a leading insurer of the outdoor entertainment industry in the U.S.
Acquisition Consideration
The Company made an initial payment of $75.6 million to acquire Allied. Additional contingent consideration then will be paid based on production and underwriting profitability over a three year period subsequent to the acquisition date. The target payments of contingent consideration range from $7.5 million to $30.0 million. The Company currently believes the fair market value of these payments to be $15.0 million, resulting in total consideration of $90.6 million recorded for the acquisition.
Fair Value of Net Assets Acquired and Liabilities Assumed
The purchase price was allocated to the acquired assets and assumed liabilities of Allied based on estimated fair values on the acquisition date. The fair value of the net assets acquired and liabilities assumed was $76.7 million, which includes indefinite-lived intangible assets of $8.0 million and other intangible assets of $6.0 million, which will be amortized over their estimated useful lives. Other adjustments to the historical carrying value of acquired assets and liabilities included: estimating the fair value of net loss and loss expense reserves at the present value of expected net loss and loss adjustment expense

8



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

payments plus a risk premium, estimating the value of the business acquired at the present value of expected underwriting profits with net unearned premiums plus a risk margin less policy servicing costs, and estimating the fair value of real estate assets at appraised market values. In conjunction with the transaction, the Company recognized goodwill of $13.9 million which is primarily attributable to the acquiree's underwriting expertise in a niche specialty risk business. The Company has allocated all of the $13.9 million of goodwill to its Insurance segment. See Note 8, "Goodwill and Other Intangible Assets," for further information.
The 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.
(b)     New Energy Risk
On July 24, 2015, the Company purchased 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 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 Group Limited ("Catlin") for approximately $4.1 billion. For further information, see Item 8, Note 3(c), "Acquisitions and Disposals - Catlin Acquisition," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
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 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.
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 $794.0 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 allocated $466.1 million of this goodwill to its Insurance segment and $327.9 million to its Reinsurance segment. 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 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.
As part of the purchase price allocation, the Company adjusted the historical carrying value of the acquired assets and liabilities based on estimated fair values at the Acquisition Date. An explanation of the significant adjustments for fair value that are being amortized to net income is 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 $59.6 million in acquisition expenses related to the amortization of the value of business acquired during the three months ended March 31, 2016.
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.
Transaction-related Costs
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
 
Total
Liabilities at December 31, 2015
$
16,127

 
$
16,969

 
$
818

 
$
23,375

 
$
57,289

Costs incurred in 2016
16,758

 
8,006

 
6,103

 
24,120

 
54,987

2016 payments
16,535

 
17,466

 
1,040

 
16,303

 
51,344

Liabilities at March 31, 2016
$
16,350

 
$
7,509

 
$
5,881

 
$
31,192

 
$
60,932

(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.

10



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 our third party valuation sources to assess whether 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 that are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, comparisons of executed sales prices to prior valuations, regular deep dives on a sample of securities across our major asset classes and monthly reconciliations between the valuations provided by external parties and valuations provided by third party investment managers at a portfolio level.
In addition, the Company assesses the effectiveness of valuation controls performed by external parties responsible for sourcing appropriate valuations from third parties on our behalf. The approaches taken by these external parties to gain comfort include, but are not limited to, comparing valuations between external sources, completing recurring reviews of third party pricing services' methodologies and reviewing controls of the third party service providers to support the completeness and accuracy of the prices received. 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 reasonable estimates of the fair value.
For further information about the Company's fair value measurements, see Item 8, Note 2(b), "Significant Accounting Policies - Fair Value Measurements," and Item 8, Note 4, "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, 2015.

11



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(a) Fair Value Summary
The following tables set forth the Company’s assets and liabilities that were accounted for at fair value as of March 31, 2016 and December 31, 2015 by level within the fair value hierarchy:
March 31, 2016
(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
March 31, 2016
Assets
 

 
 

 
 

 
 

 
 

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

 
$
4,532,047

 
$
44,940

 
$

 
$
4,576,987

Corporate - Financials

 
3,660,732

 
43,583

 

 
3,704,315

Corporate - Non Financials

 
7,091,329

 
181

 

 
7,091,510

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

 
4,364,154

 
2,853

 

 
4,367,007

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

 
302,843

 

 

 
302,843

Commercial mortgage-backed securities ("CMBS")

 
325,485

 

 

 
325,485

Collateralized debt obligations ("CDOs")

 

 
21,729

 

 
21,729

Other asset-backed securities (1)

 
1,158,698

 
4,200

 

 
1,162,898

U.S. States and political subdivisions of the States

 
2,584,747

 

 

 
2,584,747

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported ("Non-U.S. Governments")

 
5,546,695

 

 

 
5,546,695

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

 
$
29,566,730

 
$
117,486

 
$

 
$
29,684,216

Equity securities, at fair value
532,672

 
345,735

 


 

 
878,407

Short-term investments, at fair value (1)

 
317,304

 

 

 
317,304

Total investments AFS - Excluding Funds Withheld Assets
$
532,672

 
$
30,229,769

 
$
117,486

 
$

 
$
30,879,927

Fixed maturities - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government
$

 
$
12,692

 
$

 
$

 
$
12,692

Corporate - Financials

 
547,279

 

 

 
547,279

Corporate - Non Financials

 
1,269,262

 

 

 
1,269,262

RMBS – Agency

 
733

 

 

 
733

RMBS – Non-Agency

 
25,829

 

 

 
25,829

CMBS

 
108,914

 

 

 
108,914

Other asset-backed securities

 
121,721

 

 

 
121,721

Non-U.S. Governments

 
876,927

 

 

 
876,927

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

 
$
2,963,357

 
$

 
$

 
$
2,963,357

Total investments - AFS, at fair value
$
532,672

 
$
33,193,126

 
$
117,486

 
$

 
$
33,843,284

Fixed maturities - Trading


 


 


 


 


U.S. Government
$

 
$
15,267

 
$

 
$

 
$
15,267

Corporate - Financials

 
382,755

 

 

 
382,755

Corporate - Non Financials

 
558,284

 

 

 
558,284

RMBS – Agency

 
1,869

 

 

 
1,869

CMBS

 
4,760

 

 

 
4,760

Other asset-backed securities

 
25,615

 

 

 
25,615

Non-U.S. Governments

 
421,033

 

 

 
421,033

Total fixed maturities - Trading, at fair value
$

 
$
1,409,583

 
$

 
$

 
$
1,409,583

Short-term investments, at fair value (1)

 
26,959

 

 

 
$
26,959

Total investments, Trading
$

 
$
1,436,542

 
$

 
$

 
$
1,436,542


12



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016
(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
March 31, 2016
Cash equivalents (2)
295,962

 
881,157

 

 

 
1,177,119

Cash equivalents - Life Funds Withheld Assets (2)

 
92,444

 

 

 
92,444

Other investments (3)

 
1,011,336

 
301,095

 

 
1,312,431

Other assets (4)

 
56,118

 
20,486

 
(37,870
)
 
38,734

Total assets accounted for at fair value
$
828,634

 
$
36,670,723

 
$
439,067

 
$
(37,870
)
 
$
37,900,554

Liabilities
 
 
 
 
 
 
 
 
 
Funds withheld on GreyCastle life retrocession arrangements (net of future policy benefit reserves recoverable) (5)
$

 
$
681,811

 
$

 
$

 
$
681,811

Financial instruments sold, but not yet purchased (6)
2,180

 

 

 

 
2,180

Other liabilities (4)

 
58,350

 
30,338

 
(37,870
)
 
50,818

Total liabilities accounted for at fair value
$
2,180

 
$
740,161

 
$
30,338

 
$
(37,870
)
 
$
734,809


December 31, 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
December 31,
2015
Assets
 

 
 

 
 

 
 

 
 

Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government
$

 
$
5,020,574

 
$
45,063

 
$

 
$
5,065,637

Corporate - Financials

 
3,508,224

 
53,685

 

 
$
3,561,909

Corporate - Non Financials

 
6,900,259

 
188

 

 
$
6,900,447

RMBS - Agency

 
3,754,894

 
3,077

 

 
$
3,757,971

RMBS - Non-Agency

 
328,540

 

 

 
$
328,540

CMBS

 
405,316

 

 

 
$
405,316

CDOs

 
2

 
32,408

 

 
$
32,410

Other asset-backed securities

 
1,150,715

 
17,857

 

 
$
1,168,572

U.S. States and political subdivisions of the States

 
2,632,070

 

 

 
$
2,632,070

Non-U.S. Government

 
5,251,614

 

 

 
$
5,251,614

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

 
$
28,952,208

 
$
152,278

 
$

 
$
29,104,486

Equity securities, at fair value
528,581

 
350,338

 

 

 
878,919

Short-term investments, at fair value (1)

 
617,390

 

 

 
617,390

Total investments AFS - Excluding Funds Withheld Assets
$
528,581

 
$
29,919,936

 
$
152,278

 
$

 
$
30,600,795

Fixed maturities - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government
$

 
$
12,742

 
$

 
$

 
$
12,742

Corporate - Financials

 
598,236

 

 

 
$
598,236

Corporate - Non Financials

 
1,308,628

 

 

 
$
1,308,628

RMBS – Agency

 
752

 

 

 
$
752

RMBS – Non-Agency

 
26,953

 

 

 
$
26,953

CMBS

 
122,481

 

 

 
$
122,481

Other asset-backed securities

 
149,795

 

 

 
$
149,795

Non-U.S. Government

 
933,516

 

 

 
$
933,516

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

 
$
3,153,103

 
$

 
$

 
$
3,153,103

Total investments - AFS, at fair value
$
528,581

 
$
33,073,039

 
$
152,278

 
$

 
$
33,753,898


13



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 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
December 31,
2015
Fixed maturities - Trading
 
 
 
 
 
 
 
 
 
U.S. Government
$

 
$
4,990

 
$

 
$

 
$
4,990

Corporate - Financials

 
335,956

 

 

 
$
335,956

Corporate - Non Financials

 
493,621

 

 

 
$
493,621

RMBS – Agency

 
368

 

 

 
$
368

CMBS

 
4,803

 

 

 
$
4,803

Other asset-backed securities

 
25,700

 

 

 
$
25,700

Non-U.S. Government

 
370,261

 

 

 
$
370,261

Total fixed maturities - Trading, at fair value
$

 
$
1,235,699

 
$

 
$

 
$
1,235,699

Short-term investments, at fair value (1)

 
60,330

 

 

 
$
60,330

Total investments, Trading
$

 
$
1,296,029

 
$

 
$

 
$
1,296,029

Cash equivalents (2)
437,742

 
830,924

 

 

 
$
1,268,666

Cash equivalents - Life Funds Withheld Assets (2)
517

 
100,757

 

 

 
$
101,274

Other investments (3)

 
1,008,176

 
283,550

 

 
$
1,291,726

Other assets (4)

 
69,914

 
19,400

 
(3,087
)
 
$
86,227

Total assets accounted for at fair value
$
966,840

 
$
36,378,839

 
$
455,228

 
$
(3,087
)
 
$
37,797,820

Liabilities
 
 
 
 
 
 
 
 
 
Funds withheld on GreyCastle life retrocession arrangements (net of future policy benefit reserves recoverable) (5)
$

 
$
463,915

 
$

 
$

 
$
463,915

Financial instruments sold, but not yet purchased (6)
347

 

 

 

 
$
347

Other liabilities (4)

 
16,304

 
29,191

 
(3,087
)
 
$
42,408

Total liabilities accounted for at fair value
$
347

 
$
480,219

 
$
29,191

 
$
(3,087
)
 
$
506,670

____________
(1)
Short-term investments consist primarily of Corporate securities and U.S. and Non-U.S. Government and Government-Related/Supported securities.
(2)
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.
(3)
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 $141.5 million as of March 31, 2016 and $141.3 million as of December 31, 2015, 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, 2015.
(4)
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."
(5)
Funds withheld on GreyCastle 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 GreyCastle Life Retro Arrangements described in Note 1, "Basis of Preparation and Consolidation," accrue to the benefit of GCLR.
(6)
Financial instruments sold, but not yet purchased, represent "short sales" and are included within "Payable for investments purchased" on the balance sheets.

14



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(b) Level 2 Asset Valuations
U.S. Government, Corporate - Financials, Corporate - Non Financials and Non-U.S. Government
Transaction activity inputs utilized in the valuation of fair value hierarchy Level 2 securities within these sub-categories include actual trades, dealer posts, results of bids-wanted, institutional secondary offerings, primary market offerings and Trade Reporting and Compliance Engine ("TRACE") trade feeds. As part of the evaluation process, transaction activity is compared to prior evaluations and necessary adjustments are made accordingly. Market-color inputs include actively quoted benchmark issues, buy-side/evaluator dialogue, sell-side/evaluator dialogue and credit derivative indices.
RMBS - Agency, RMBS - Non-Agency, CMBS, CDO and Other asset-backed securities
As part of the fair valuation process, Level 2 securities in these sub-categories are analyzed by collateral type, deal structure, deal performance and vintage. Market inputs into the valuation process for each sub-category include reported or observed trades, results of bids-wanted, buy-side/sell-side evaluator dialogue, dealer offering and market research reports. Cash flow inputs into the evaluation process include conditional prepayment rates, conditional decay rates, delinquency and loss severity rates. This assumptive data is reviewed and updated using third party reported information to reflect current market convention.
U.S. States and political subdivisions of the States
Transaction activity inputs utilized in the valuation of fair value hierarchy Level 2 securities within this sub-category include client and broker trades, dealer posts, results of bids-wanted, institutional secondary offerings, primary market offerings, and Municipal Securities Rulemaking trade feeds. As part of the evaluation process, transaction activity is compared to prior evaluations and necessary adjustments are made accordingly. Market-color inputs include bids, offerings, two-sided markets, buy-side/evaluator dialogue and sell-side/evaluator dialogue. Credit information inputs include issuer financial statements, default and material event notices, developer reports and liquidation and restructuring analysis.
Equity securities and other investments
Other investment securities generally include investments in thinly traded equity funds and hedge funds. Fair value is determined based upon the most recent net asset values (“NAV’) received from the fund administrators, the nature of the underlying investments in the funds and the frequency of subscriptions or redemptions as dictated by the fund’s governing documents.
Other assets and other liabilities
Other assets and other liabilities primarily include over-the-counter (“OTC”) derivatives, which are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative independent pricing sources where an understanding of the inputs utilized in arriving at the valuations is obtained. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms and specific risks inherent in the instrument as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, interest rate swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment.
There were no significant transfers between Level 1 and Level 2 during each of the three months ended March 31, 2016 and 2015.
(c) 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 months ended March 31, 2016 and 2015 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at March 31, 2016 and 2015, 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 March 31, 2016 and 2015, 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.

15



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 and other valuations sourced from brokers that are considered Level 3.
Fixed maturities and short-term investments
The Company’s Level 3 assets consist primarily of U.S. Government and Government-Related/Supported, Corporates and CDOs, for which non-binding broker quotes are the primary source of the valuations. Sufficient information regarding the specific inputs utilized by the brokers was not available to support a Level 2 classification. The Company obtains the majority of broker quotes for these securities 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. Although the Company does not have access to the specific unobservable inputs that may have been used in the fair value measurements of these securities provided by brokers, we would expect that the significant inputs considered are prepayment rates, probability of default, loss severity in the event of default, recovery rates, liquidity premium and reinvestment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significantly different fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
The remainder of the Level 3 assets relate primarily to private investments (including funds) and certain derivative positions as described below.
Other investments
Included within the other investments component of the Company’s Level 3 valuations are private investments (including funds) and hedge funds where the Company is not deemed to have significant influence over the investee. The fair value of these investments is based upon net asset values received from the investment manager or general partner of the respective entity. The nature of the underlying investments held by the investee that form the basis of the net asset value include assets such as private business ventures and are such that significant Level 3 inputs are utilized in the determination of the individual underlying holding values and, accordingly, the fair value of the Company’s investment in each entity is classified within Level 3. The Company has not adjusted the net asset values received; however, management incorporates factors such as the most recent financial information received, annual audited financial statements and the values at which capital transactions with the investee take place when applying judgment regarding whether any adjustments should be made to the net asset value in recording the fair value of each position. Investments in hedge funds included in other investments utilize strategies including arbitrage, directional, event driven and multi-style. The funds potentially have lockup and gate provisions that may limit redemption liquidity. For further details regarding the nature of other investments and related features, see Item 8, Note 8, "Other Investments," to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Derivative instruments
Derivative instruments recorded within other liabilities and classified within Level 3 include credit derivatives sold that provide protection on senior tranches of structured finance transactions where the value is obtained directly from the investment bank counterparty and sufficient information regarding the inputs utilized in such valuation was not obtained to support a Level 2 classification and guaranteed minimum income benefits embedded within one reinsurance contract. The majority of inputs utilized in the valuations of these types of derivative contracts are considered Level 1 or Level 2; however, each valuation includes at least one Level 3 input that was significant to the valuation and, accordingly, the values are disclosed within Level 3.
The calculation of the change in fair value of the embedded derivative associated with the GreyCastle Life Retro Arrangements includes the interest income, realized and unrealized gains and losses on Life Funds Withheld Assets and certain related expenses related to the Life Funds Withheld Assets. The fair value of the embedded derivative is included in “Funds withheld on GreyCastle life retrocession arrangements, net of future policy benefit reserves recoverable” on the consolidated balance sheets. The fair value of the embedded derivative is considered a Level 2 valuation.

16



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities - Three Months Ended March 31, 2016
(U.S. dollars in thousands)
U.S. Government
 
Corporate - Financials
 
Corporate - Non-Financials
 
RMBS - Agency
Balance, beginning of period
$
45,063

 
$
53,685

 
$
188

 
$
3,077

Realized gains (losses)
(37
)
 
53

 

 
(3
)
Movement in unrealized gains (losses)
593

 
(39
)
 
(1
)
 
7

Purchases and issuances

 
169

 

 

Sales

 

 

 

Settlements
(679
)
 

 
(6
)
 
(228
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 
(10,285
)
 

 

Fixed maturities to short-term investments classification change


 

 

 

Balance, end of period
$
44,940

 
$
43,583

 
$
181

 
$
2,853

Movement in total gains (losses) above relating to instruments still held at the reporting date
$
554

 
$
15

 
$
(1
)
 
$
4

 
 
 
 
 
 
 
 
(U.S. dollars in thousands)
RMBS - Non
Agency
 
CMBS
 
CDO
 
Other asset-
backed
securities
Balance, beginning of period
$

 
$

 
$
32,408

 
$
17,857

Realized gains (losses)

 

 
41

 
1,049

Movement in unrealized gains (losses)

 

 
5,257

 
(2,758
)
Purchases and issuances

 

 

 

Sales

 

 

 

Settlements

 

 
(15,977
)
 
(11,948
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$

 
$
21,729

 
$
4,200

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

 
$

 
$
5,297

 
$
(1,708
)
 
 
 
 
 
 
 
 
(U.S. dollars in thousands)
Non-US Government
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$

 
$

 
$
283,550

 
$
(9,791
)
Realized gains (losses)

 

 
5,807

 

Movement in unrealized gains (losses)

 

 
(2,717
)
 
(61
)
Purchases and issuances

 

 
13,779

 

Sales

 

 

 

Settlements

 

 
(14,818
)
 

Transfers into Level 3

 

 
15,494

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$

 
$
301,095

 
$
(9,852
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$

 
$

 
$
3,090

 
$
(61
)



17



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities - Three Months Ended March 31, 2015
(U.S. dollars in thousands)
U.S. Government
 
Corporate - Financials
 
Corporate - Non-Financials
 
RMBS - Agency
Balance, beginning of period
$

 
$

 
$
5,894

 
$
1,910

Realized gains (losses)

 

 
(1
)
 

Movement in unrealized gains (losses)

 

 
48

 
(1
)
Purchases and issuances (1)

 

 

 

Sales

 

 

 

Settlements

 

 
(80
)
 
(89
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$

 
$
5,861

 
$
1,820

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

 
$

 
$
48

 
$
(1
)
 
 
 
 
 
 
 
 
(U.S. dollars in thousands)
RMBS - Non
Agency
 
CMBS
 
CDO
 
Other asset-
backed
securities
Balance, beginning of period
$

 
$

 
$
687,958

 
$
5,288

Realized gains (losses)

 

 
36

 
(1
)
Movement in unrealized gains (losses)

 

 
5,555

 
2

Purchases and issuances (1)

 

 

 

Sales

 

 
(155,085
)
 

Settlements

 

 
(41,541
)
 
(3,045
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$

 
$
496,923

 
$
2,244

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

 
$

 
$
2,668

 
$

 
 
 
 
 
 
 
 
(U.S. dollars in thousands)
Non-US
Government
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$

 
$

 
$
185,083

 
$
(9,764
)
Realized gains (losses)

 

 
1,302

 

Movement in unrealized gains (losses)

 

 
(1,827
)
 
158

Purchases and issuances (1)

 

 
6,793

 

Sales

 

 

 

Settlements

 

 
(1,254
)
 

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Fixed maturities to short-term investments classification change

 

 

 

Balance, end of period
$

 
$

 
$
190,097

 
$
(9,606
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$

 
$

 
$
(524
)
 
$
158




18



XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(d) Financial Instruments Not Carried at Fair Value
Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure of fair value information for financial instruments not carried at fair value in both interim and annual reporting periods. Certain financial instruments, particularly insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents, accrued investment income, net receivable from investments sold, other assets, net payable for investments purchased, other liabilities and other financial instruments not included below approximated their fair values. The following table includes financial instruments for which the carrying value differs from the estimated fair values as of March 31, 2016 and December 31, 2015. All of these fair value estimates are considered Level 2 fair value measurements.
 
March 31, 2016
 
December 31, 2015
(U.S. dollars in thousands)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Financial Assets - Other investments
$
141,459

 
$
153,844

 
$
141,329