Attached files

file filename
EX-32 - EXHIBIT 32 - XL GROUP LTDxlgroup-03312017xex_32.htm
EX-31 - EXHIBIT 31 - XL GROUP LTDxlgroup-03312017xex_31.htm
EX-12 - EXHIBIT 12 - XL GROUP LTDxlgroup-03312017xex_12.htm
EX-10.1 - EXHIBIT 10.1 - XL GROUP LTDexhibit101-formofletterofa.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, 2017
 
 
 
 
 
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 LTD
(Exact name of registrant as specified in its charter)

Bermuda
 
98-1304974
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
O'Hara House, One Bermudiana Road, Hamilton HM 08, Bermuda
(Address of principal executive offices and zip code)
(441) 292-8515
(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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 x
Accelerated filer
 ¨
Non-accelerated filer
 ¨
Smaller reporting company
  ¨
Emerging growth company
 ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At May 1, 2017, there were 261,441,684 outstanding Common Shares, $0.01 par value per share, of the registrant.



XL GROUP LTD
INDEX TO FORM 10-Q
 
 
Page No.
 
 
 
 
 
 
 
Unaudited Consolidated Balance Sheets at March 31, 2017 and December 31, 2016
 
Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016
 
Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016
 
Unaudited Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016
 
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
 
 
Item 5.
Other Information
 





PART I – FINANCIAL INFORMATION

ITEM 1.
 
FINANCIAL STATEMENTS
XL GROUP LTD
UNAUDITED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
March 31, 2017
 
December 31, 2016
ASSETS
Investments:
 

 
 

Fixed maturities, at fair value (amortized cost: 2017 - $29,923,912; 2016 - $29,587,656)
$
30,651,790

 
$
30,256,602

Equity securities, at fair value (cost: 2017 - $1,017,172; 2016 - $996,610)
1,094,509

 
1,037,331

Short-term investments, at fair value (amortized cost: 2017 - $260,407; 2016 - $626,142)
260,153

 
625,193

Total investments available for sale
$
32,006,452

 
$
31,919,126

Fixed maturities, at fair value (amortized cost: 2017 - $1,631,045; 2016 - $1,548,178)
1,700,108

 
1,617,014

Short-term investments, at fair value (amortized cost: 2017 - $742; 2016 - $9,536)
754

 
9,563

Total investments, trading
$
1,700,862

 
$
1,626,577

Investments in affiliates
2,172,611

 
2,177,645

Other investments
1,150,492

 
1,164,564

Total investments
$
37,030,417

 
$
36,887,912

Cash and cash equivalents
3,352,651

 
3,426,988

Restricted cash
160,523

 
153,504

Accrued investment income
262,237

 
284,366

Deferred acquisition costs and value of business acquired
1,161,159

 
946,721

Ceded unearned premiums
2,501,294

 
1,687,864

Premiums receivable
6,746,116

 
5,522,976

Reinsurance balances receivable
641,720

 
577,479

Unpaid losses and loss expenses recoverable
5,685,623

 
5,491,297

Receivable from investments sold
95,344

 
128,411

Goodwill and other intangible assets
2,208,612

 
2,203,653

Deferred tax asset
302,301

 
310,542

Other assets
876,622

 
812,389

Total assets
$
61,024,619

 
$
58,434,102

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
 

 
 

Unpaid losses and loss expenses
$
26,445,124

 
$
25,939,571

Deposit liabilities
1,121,194

 
1,116,233

Future policy benefit reserves
3,520,069

 
3,506,047

Funds withheld on GreyCastle life retrocession arrangements (net of future policy benefit reserves recoverable: 2017 - $3,098,954; 2016 - $3,072,615)
954,327

 
998,968

Unearned premiums
8,581,973

 
7,293,028

Notes payable and debt
2,648,353

 
2,647,677

Reinsurance balances payable
3,325,748

 
2,451,717

Payable for investments purchased
211,880

 
226,009

Deferred tax liability
89,862

 
77,271

Other liabilities
1,125,463

 
1,216,902

Total liabilities
$
48,023,993

 
$
45,473,423

Commitments and Contingencies


 


Shareholders’ Equity:
 

 
 

Common shares, 999,990,000 authorized, par value $0.01; issued and outstanding (2017 - 263,735,436; 2016 - 266,889,127)
$
2,637

 
$
2,669

Additional paid in capital
7,934,161

 
8,068,503

Accumulated other comprehensive income
844,974

 
715,546

Retained earnings
2,193,112

 
2,151,794

Shareholders’ equity attributable to XL Group Ltd
$
10,974,884

 
$
10,938,512

Non-controlling interest in equity of consolidated subsidiaries
2,025,742

 
2,022,167

Total shareholders’ equity
$
13,000,626

 
$
12,960,679

Total liabilities and shareholders’ equity
$
61,024,619

 
$
58,434,102

See accompanying Notes to Unaudited Consolidated Financial Statements

1


XL GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 
Three Months Ended
 
March 31,
(U.S. dollars in thousands, except per share data)
2017
 
2016
Revenues:
 

 
 

Net premiums earned
$
2,522,791

 
$
2,354,610

Net investment income:
 
 
 
Net investment income - excluding Life Funds Withheld Assets
167,168

 
164,326

Net investment income - Life Funds Withheld Assets
33,364

 
41,560

Total net investment income
$
200,532

 
$
205,886

Net realized gains (losses) on investments, and net unrealized gains (losses) on investments, trading ("Trading"):
 
 
 
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets
11,092

 
11,164

Other-than-temporary impairments ("OTTI") on investments - excluding Life Funds Withheld Assets
(6,874
)
 
(19,582
)
OTTI on investments transferred to (from) other comprehensive income - excluding Life Funds Withheld Assets

 
2

 Net realized gains (losses) on investments sold - Life Funds Withheld Assets
34,474

 
34,416

OTTI on investments - Life Funds Withheld Assets

 
(2,346
)
Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets
(1,406
)
 
69,096

Total net realized gains (losses) on investments, and net unrealized gains (losses) on investments, Trading
$
37,286


$
92,750

Net realized and unrealized gains (losses) on derivative instruments
(7,069
)
 
(3,622
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
(50,101
)
 
(236,080
)
Income (loss) from investment fund affiliates
38,261

 
(4,579
)
Fee income and other
13,661

 
8,262

Total revenues
$
2,755,361

 
$
2,417,227

Expenses:
 
 
 
Net losses and loss expenses incurred
$
1,583,456

 
$
1,382,485

Claims and policy benefits
7,291

 
4,937

Acquisition costs
435,869

 
403,267

Operating expenses
468,038

 
515,381

Foreign exchange (gains) losses
(3,336
)
 
(33,819
)
Interest expense
50,711

 
52,303

Total expenses
$
2,542,029

 
$
2,324,554

Income (loss) before income tax and income (loss) from operating affiliates
$
213,332

 
$
92,673

Income (loss) from operating affiliates
13,609

 
12,650

Provision (benefit) for income tax
13,092

 
22,295

Net income (loss)
$
213,849

 
$
83,028

Non-controlling interests
61,006

 
61,143

Net income (loss) attributable to common shareholders
$
152,843

 
$
21,885

Weighted average common shares and common share equivalents outstanding, in thousands – basic
265,690

 
291,969

Weighted average common shares and common share equivalents outstanding, in thousands – diluted
269,767

 
296,666

Earnings (loss) per common share and common share equivalent – basic
$
0.58

 
$
0.07

Earnings (loss) per common share and common share equivalent – diluted
$
0.57

 
$
0.07

See accompanying Notes to Unaudited Consolidated Financial Statements

2


XL GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2017
 
2016
Net income (loss) attributable to common shareholders
$
152,843

 
$
21,885

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
102,622

 
363,883

Change in adjustments related to future policy benefit reserves, net of tax
5,132

 
17,035

Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
(20,108
)
 
51,990

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
(1,193
)
 
(9,707
)
Change in OTTI losses recognized in other comprehensive income, net of tax
1,442

 
2,267

Change in underfunded pension liability, net of tax
(357
)
 
(1,049
)
Change in value of cash flow hedge
(48
)
 
(39
)
Foreign currency translation adjustments, net of tax
41,938

 
(16,439
)
Comprehensive income (loss)
$
282,271

 
$
429,826

See accompanying Notes to Unaudited Consolidated Financial Statements


3


XL GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2017
 
2016
Common Shares:
 

 
 

Balance - beginning of year
$
2,669

 
$
2,947

Issuance of common shares
10

 
15

Buybacks of common shares
(51
)
 
(99
)
Exercise of stock options
9

 

Balance - end of period
$
2,637

 
$
2,863

Additional Paid in Capital:
 

 
 

Balance - beginning of year
$
8,068,503

 
$
8,910,167

Issuance of common shares
8

 
7

Buybacks of common shares
(154,065
)
 
(301,354
)
Exercise of stock options
23,287

 
490

Share-based compensation
(3,572
)
 
(584
)
Balance - end of period
$
7,934,161

 
$
8,608,726

Accumulated Other Comprehensive Income (Loss):
 

 
 

Balance - beginning of year
$
715,546

 
$
686,616

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
102,622

 
363,883

Change in adjustments related to future policy benefit reserves, net of tax
5,132

 
17,035

Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
(20,108
)
 
51,990

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
(1,193
)
 
(9,707
)
Change in OTTI losses recognized in other comprehensive income, net of tax
1,442

 
2,267

Change in underfunded pension liability, net of tax
(357
)
 
(1,049
)
Change in value of cash flow hedge
(48
)
 
(39
)
Foreign currency translation adjustments, net of tax
41,938

 
(16,439
)
Balance - end of period
$
844,974

 
$
1,094,557

Retained Earnings (Deficit):
 

 
 

Balance - beginning of year
$
2,151,794

 
$
2,077,349

Net income (loss) attributable to common shareholders
152,843

 
21,885

Dividends on common shares
(59,371
)
 
(58,714
)
Buybacks of common shares
(46,372
)
 
(54,447
)
Share-based compensation
(5,782
)
 
(3,475
)
Balance - end of period
$
2,193,112

 
$
1,982,598

Non-controlling Interest in Equity of Consolidated Subsidiaries:
 

 
 

Balance - beginning of year
$
2,022,167

 
$
1,977,384

Non-controlling interests - contributions
25

 
882

Non-controlling interests - distributions

 
(3,030
)
Non-controlling interests
3,036

 
3,679

Non-controlling interest share in change in accumulated other comprehensive income (loss)
514

 
59

Balance - end of period
$
2,025,742

 
$
1,978,974

Total Shareholders’ Equity
$
13,000,626

 
$
13,667,718

See accompanying Notes to Unaudited Consolidated Financial Statements


4


XL GROUP LTD
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


 
Three Months Ended
 
March 31,
(U.S. dollars in thousands)
2017
 
2016
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
213,849

 
$
83,028

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
(37,286
)
 
(92,750
)
Net realized and unrealized (gains) losses on derivative instruments
7,069

 
3,622

Net realized and unrealized (gains) losses on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
50,101

 
236,080

Amortization of premiums (discounts) on fixed maturities
42,178

 
47,505

(Income) loss from investment and operating affiliates
(28,921
)
 
19,797

Share-based compensation
12,694

 
20,707

Depreciation and amortization
19,429

 
22,592

Accretion of deposit liabilities
11,430

 
12,055

Changes in:
 
 
 
Unpaid losses and loss expenses
290,788

 
330,160

Future policy benefit reserves
(55,634
)
 
(59,858
)
Funds withheld on GreyCastle life retrocession arrangements, net
(107,596
)
 
(121,272
)
Unearned premiums
1,222,570

 
1,148,149

Premiums receivable
(1,152,760
)
 
(1,322,085
)
Unpaid losses and loss expenses recoverable
(153,063
)
 
(82,729
)
Ceded unearned premiums
(797,191
)
 
(436,332
)
Reinsurance balances receivable
(59,052
)
 
(49,781
)
Deferred acquisition costs and value of business acquired
(205,830
)
 
(156,373
)
Reinsurance balances payable
849,492

 
460,982

Deferred tax asset - net
10,852

 
(7,945
)
Derivatives
58,104

 
17,863

Other assets
(100,791
)
 
(47,084
)
Other liabilities
(128,606
)
 
(128,752
)
Other
(9,323
)
 
(41,618
)
Total adjustments
$
(261,346
)
 
$
(227,067
)
Net cash provided by (used in) operating activities
$
(47,497
)
 
$
(144,039
)
Cash flows provided by (used in) investing activities:
 
 
 
Proceeds from sale of fixed maturities and short-term investments
$
2,492,005

 
$
3,772,077

Proceeds from redemption of fixed maturities and short-term investments
1,228,356

 
949,221

Proceeds from sale of equity securities
46,379

 
62,895

Purchases of fixed maturities and short-term investments
(3,633,007
)
 
(4,325,679
)
Purchases of equity securities
(47,967
)
 
(55,411
)
Proceeds from sale of affiliates
168,237

 
41,538

Purchases of affiliates
(35,926
)
 
(247,049
)
Purchase of subsidiaries, net of cash acquired

 
(69,745
)
Change in restricted cash
(7,019
)
 
(6,027
)
Other
23,429

 
82,141

Net cash provided by (used in) investing activities
$
234,487

 
$
203,961

Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from issuance of common shares and exercise of stock options
$
23,296

 
$
491

Buybacks of common shares
(200,488
)
 
(355,901
)
Employee withholding on share-based compensation
(22,871
)
 
(27,074
)
Dividends paid on common shares
(58,392
)
 
(57,861
)
Distributions to non-controlling interests
(25,400
)
 
(27,857
)
Contributions from non-controlling interests
26

 
883

Deposit liabilities
(7,771
)
 
(8,546
)
Net cash provided by (used in) financing activities
$
(291,600
)
 
$
(475,865
)
Effects of exchange rate changes on foreign currency cash
30,273

 
(19,396
)
Increase (decrease) in cash and cash equivalents
$
(74,337
)
 
$
(435,339
)
Cash and cash equivalents - beginning of period
3,426,988

 
3,256,236

Cash and cash equivalents - end of period
$
3,352,651

 
$
2,820,897

See accompanying Notes to Unaudited Consolidated Financial Statements

5



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies
(a) Basis of Preparation and Consolidation
On July 25, 2016, XL Group plc, an Irish public limited company ("XL-Ireland"), and XL Group Ltd, a Bermuda exempted company ("XL-Bermuda"), completed a scheme of arrangement under Irish law (the "Scheme of Arrangement") that effected a transaction (the "Redomestication") that resulted in the shareholders of XL-Ireland becoming shareholders of XL-Bermuda and XL-Ireland becoming a subsidiary of XL-Bermuda. In accordance with the terms of the Scheme of Arrangement, the following steps simultaneously occurred at the effective time of the Redomestication: (i) all of the existing XL-Ireland ordinary shares, par value $0.01 per share (the "XL-Ireland shares") (other than XL-Ireland shares held by XL-Bermuda) were canceled; (ii) the reserves created on cancellation of the XL-Ireland shares were used to issue XL-Ireland shares to XL-Bermuda; and (iii) in return for such issuance of XL-Ireland shares to XL-Bermuda, XL-Bermuda issued common shares, par value $0.01 per share (the "XL-Bermuda shares"). The XL-Bermuda shares issued in connection with the redomestication were issued in reliance upon an exemption from registration under the U.S. Securities Act of 1933, as amended (the "Securities Act"), provided under Section 3(a)(10) of the Securities Act. Upon the Redomestication, XL-Bermuda became the successor issuer to XL-Ireland and succeeded XL-Ireland’s obligation to file reports, proxy statements and other information required of domestic registrants by the Securities Exchange Act of 1934, as amended (the "Exchange Act") with the U.S. Securities and Exchange Commission.  As the successor issuer, the XL-Bermuda shares were deemed to be registered under Section 12(b) of the Exchange Act. Further, XL-Bermuda is subject to the applicable listing standards of the New York Stock Exchange ("NYSE"), and reports its financial results in U.S. dollars and under accounting principles generally accepted in the United States of America ("GAAP"), in addition to any reporting requirements under Bermuda law. XL-Bermuda's shares continue in place of the XL-Ireland shares to trade on the NYSE under the ticker symbol "XL." Additionally, upon completion of the Redomestication, XL-Bermuda fully and unconditionally guaranteed the majority of the outstanding debt issued by XLIT Ltd., an exempted company incorporated under the laws of the Cayman Islands ("XL-Cayman"). See Note 9, "Notes Payable and Debt and Financing Arrangements," for more information regarding our outstanding debt.
In connection with the Redomestication, on August 3, 2016, XL-Ireland distributed the ordinary shares of XL-Cayman, to XL-Bermuda (the “Distribution”), which was recorded on the share register of XL-Cayman on August 4, 2016. As a result of the Distribution, XL-Cayman is now a direct, wholly-owned subsidiary of XL-Bermuda. It is anticipated that XL-Ireland will be liquidated (via a solvent members voluntary liquidation that was initiated on August 2, 2016) by the end of 2018.
Prior to July 25, 2016, unless the context otherwise indicates, references herein to the "Company" are to, and these financial statements include the accounts of, XL-Ireland and its consolidated subsidiaries. On and subsequent to July 25, 2016, unless the context otherwise indicates, references herein to the "Company" are to, and these financial statements include the accounts of, XL-Bermuda and its consolidated subsidiaries.
These unaudited consolidated financial statements include the accounts of the Company and have been prepared in accordance with 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 1(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, 2016.
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 2(f), "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, 2016.
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

6



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 2(g), "Acquisitions and Disposals - Sale of Life Reinsurance Subsidiary," to the Consolidated Financial Statements included the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.
(b) Recent Accounting Pronouncements
Recently Issued Accounting Standards Adopted in 2017
ASU 2016-09 Improvements to Employee Share-Based Payment Accounting
In March 2016, as part of its simplification initiative, the Financial Accounting Standards Board ("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. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods. The Company adopted this guidance during the first quarter 2017 in accordance with the following:
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 previous GAAP prescribed. This amendment has been applied prospectively from January 1, 2017.
The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Adoption of this amendment had no impact on the Company’s financial position or results of operations.
The threshold for share-based payment awards to qualify for equity classification now permits withholding up to maximum statutory tax rates in applicable jurisdictions, as opposed to employer minimum statutory withholding requirements in those jurisdictions. Adoption of this amendment had no impact on the Company’s financial position or results of operations.
Excess tax benefits now should be classified along with other income tax cash flows as an operating activity in the statement of cash flows. This amendment has been applied prospectively from January 1, 2017.
Where an employer withholds shares for employee tax-withholding purposes, the resulting employee taxes paid should be classified as a financing activity as opposed to an operating activity in the statement of cash flows. This amendment was applied retrospectively. The withholding taxes are now included within the financing section of the statement of cash flows. The statement of cash flows for the three months ended March 31, 2016 has been re-presented by $27.1 million to conform to the current year presentation.
Companies may now make an entity-wide accounting policy election to either estimate the number of share-based payment awards expected to vest (in line with previous GAAP) or account for forfeitures as they occur. The Company elected not to change its previous accounting policy for measuring forfeitures, and continues to measure the expense for share-based compensation based on the number of awards expected to ultimately vest.
ASU 2016-17 Consolidation: Interests Held through Related Parties That Are under Common Control
In October 2016, the FASB issued an accounting standards update concerning the evaluation of indirect interests held through related parties during the assessment of variable interest entities (“VIEs”). When identifying the primary beneficiary of a VIE, this update requires a reporting entity that acts as the single decision maker of that VIE to include, on a proportionate basis, those interests held through related parties under common control when assessing whether it holds a variable interest in that VIE. This is a change from previous GAAP, which required such indirect interests to be included in their entirety during this assessment. In the event that a reporting entity is not considered to be the primary beneficiary of the VIE following this assessment, the update does not change the requirement to assess whether the entity and its related parties under common control as a group possess the characteristics of a primary beneficiary. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. When adopted, the amendments in this update must be applied retrospectively to all periods since Accounting Standards Update 2015-02 was adopted, which for the Company was the

7



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

first quarter of 2016. The Company adopted this guidance in 2017. There were no changes to the identified primary beneficiaries of any VIEs in which the Company holds an interest.
ASU 2017-04 Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued an accounting standards update concerning impairment testing of goodwill. The main provision of this guidance removes the existing “Step 2” required under previous GAAP. The previous GAAP required an entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedures that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the revised guidance, an entity‘s annual goodwill impairment review should include a “quantitative impairment test” in which it should compare the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value, then the entity should record an impairment charge for this difference, limited to the total goodwill allocated to the reporting unit (an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary). The update should be applied on a prospective basis. This guidance is effective for goodwill impairment testing performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt this guidance during the first quarter of 2017. The guidance changes the Company’s goodwill impairment procedures. There was no impact on the Company’s financial position, results of operations or cash flows on adoption of this guidance.
ASU 2017-08 Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued an accounting standards update concerning the accounting for premiums on purchased callable debt securities. The premium is the amount by which the amortized cost basis of the security exceeds the amount repayable by the issuer. For callable debt securities, this ASU requires that the premium be amortized to the earliest call date. Under previous GAAP, premiums were typically amortized to the maturity date of a security, except where an entity held a large number of similar loans and considered estimates of future principal repayments. The amendments do not require an accounting change for securities held at a discount. The update should be applied on a modified retrospective basis. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within years beginning after December 15, 2020. Early adoption is permitted. The Company elected to early adopt this guidance during the first quarter of 2017. There was no impact on the Company’s financial position, results of operations or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017 the FASB released an accounting standards update concerning the presentation of costs related to defined benefit pension plans and similar plans. The amendments in this ASU principally require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by relevant employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in the Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in the ASU relating to presentation in the income statement should be applied retrospectively. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption. The Company expects that adoption of this standard will be disclosure-related only and will not have an impact on its financial position, results of operations or cash flows.
2. Acquisitions and Disposals
(a) Partial Sale of New Ocean Capital Management Limited
On October 11, 2016, Fundamental Insurance Investment Ltd ("FII"), a wholly-owned subsidiary of the Company, completed a partial sale of its common and preference shares in New Ocean Capital Management Limited ("New Ocean"), an entity in which it holds a majority voting interest, to an unrelated investor.
FII received $3.9 million in proceeds for the sale of 7.8% of the common shares held by FII and 6.4% of preference shares held by FII. The Company recorded a pre-tax gain of $3.5 million as a result of this transaction.

8



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(b)    Sale of Life Insurance Subsidiary
On September 30, 2016, X.L. America, Inc. ("XL America") and XL Life and Annuity Holding Company ("XLLAHC"), both indirect wholly-owned subsidiaries of the Company, completed the previously announced sale of the Company's wholly-owned subsidiary XL Life Insurance and Annuity Company ("XLLIAC") to Mutual of Omaha Insurance Company.
XL America and XLLAHC received a closing date payment of $20.9 million in proceeds from the transaction, which was based upon the fair market value of XLLIAC's investment assets and insurance licenses. The Company recorded a pre-tax gain of $3.7 million as a result of this transaction.
(c)    Brooklyn Acquisition
On September 30, 2016, the Company's indirect, wholly-owned subsidiary, Catlin Holdings Limited, completed the acquisition ("Brooklyn Acquisition") of Brooklyn Underwriting Pty Limited and Brooklyn IT Pty Limited (collectively “Brooklyn”). Brooklyn is a market-leading specialty underwriting agency in Australia and Lloyd's-approved coverholder, serving brokers across Australia. The Company recorded definite-lived intangible assets of $22.9 million, which will be amortized over their estimated useful lives. See Note 7, "Goodwill and Other Intangible Assets," for further information.
(d)    Allied Acquisition
Overview
On February 1, 2016, the Company's 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 $75.7 million to acquire Allied. Additional contingent consideration was to be paid based on production and underwriting profitability over a three year period subsequent to the acquisition date. The Company originally estimated the fair market value of these payments to be $15.0 million, resulting in total consideration of $90.7 million recorded for the acquisition. At the balance sheet date, this view remained unchanged. Due to an agreement reached on April 11, 2017, the target payments of contingent consideration were modified to range from $12.5 million to $20.0 million. The Company estimates the fair value of these payments to be approximately $17.0 million, resulting in an additional $2.0 million of expense to be recorded in the income statement in "Fee income and other" in the second quarter.
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 estimated 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: the estimated fair value of net loss and loss expense reserves at the present value of expected net loss and loss adjustment expense payments plus a risk premium, the estimated 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 the estimated fair value of real estate assets at appraised market values. In conjunction with the transaction, the Company recognized goodwill of $14.1 million, which is primarily attributable to Allied's underwriting expertise in a niche specialty risk business. The Company has allocated all of the $14.1 million of goodwill to its Insurance segment. See Note 7, "Goodwill and Other Intangible Assets," for further information.
(e)    Catlin Acquisition
Overview
On May 1, 2015 (the "Acquisition Date"), XL-Ireland completed its acquisition (the "Catlin Acquisition") of the entire issued share capital of Catlin for approximately $4.1 billion. For further information, see Item 8, Note 2(f), "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, 2016.
XL-Ireland acquired each common 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, subject to the mix and match facility set forth in the implementation agreement.

9



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

XL-Ireland issued approximately 49.9 million XL-Ireland shares and paid approximately £1.49 billion in cash to the holders of Catlin Shares as Acquisition Consideration.
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 7, "Goodwill and Other Intangible Assets," for further information.
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 at the Acquisition Date expire. The Company has included $4.6 million and $59.6 million for the three months ended March 31, 2017 and 2016, respectively, in acquisition expenses related to the amortization of the value of business acquired asset.
Unpaid losses and loss adjustment expenses - Unpaid losses and loss adjustment expenses acquired includes 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 at 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 at 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" in its segment disclosure in Note 3, "Segment Information." Costs incurred and payments made for the three months ended March 31, 2017 are:
(U.S. dollars in thousands)
Severance related costs
 
Retention and other compensation costs
 
Facilities-related costs
 
Consulting and other
 
Total
Liabilities at December 31, 2016
$
25,360

 
$
4,481

 
$
18

 
$
7,107

 
$
36,966

Costs incurred in 2017
13,056

 
6,454

 
4,612

 
9,827

 
33,949

2017 payments
11,263

 
7,373

 
2,168

 
9,196

 
30,000

Liabilities at March 31, 2017
$
27,153

 
$
3,562

 
$
2,462

 
$
7,738

 
$
40,915

3. Segment Information
The Company is organized into two operating segments: Insurance and Reinsurance.
The Company’s general investment and financing operations are reflected in "Corporate and Other." Subsequent to the transaction described in Note 1, "Significant Accounting Policies," GCLR reinsures the majority of the Company's life reinsurance business through the GreyCastle Life Retro Arrangements. The results of the run-off life operations not subject to the GreyCastle Life Retro Arrangements are also reported within "Corporate and Other."
The Company evaluates the performance of both the Insurance and Reinsurance segments based on underwriting profit. Other items of revenues and expenditures of the Company are not evaluated at the segment level. In addition, the Company does not allocate investment assets used to support its Property and Casualty ("P&C") operations to the individual segments,

10



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

except as noted below. Investment assets related to the Company’s run-off life operations are held in a separately identified portfolio. Net investment income from these assets is included in the contribution from "Corporate and Other." Certain structured products included in the Insurance and Reinsurance segments are also held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from the applicable segment.
The following tables summarize the segment results for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, 2017
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
2,694,216

 
$
1,927,390

 
$
4,621,606

 
$
56,811

 
$
4,678,417

Net premiums written
1,508,591

 
1,471,169

 
2,979,760

 
3,310

 
2,983,070

Net premiums earned
1,635,315

 
884,166

 
2,519,481

 
3,310

 
2,522,791

Less: Net losses and loss expenses (2)
1,060,363

 
523,093

 
1,583,456

 
7,291

 
1,590,747

Less: Acquisition costs (2)
210,483

 
224,079

 
434,562

 
1,307

 
435,869

Less: Operating expenses (3)
285,729

 
71,757

 
357,486

 
233

 
357,719

Underwriting profit (loss)
$
78,740

 
$
65,237

 
$
143,977

 
$
(5,521
)
 
$
138,456

Net investment income - excluding Life Funds Withheld Assets (4)
 
 
 
 
146,566

 
7,227

 
153,793

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
33,364

 
33,364

Net results from structured products (5)
2,269

 
645

 
2,914

 

 
2,914

Net fee income and other (6)
1,967

 
686

 
2,653

 
(438
)
 
2,215

Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
4,831

 
(613
)
 
4,218

Net realized gains (losses) on investments and net unrealized gains (losses) on investments, Trading
 

 
 

 

 
33,068

 
33,068

Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 

 
(7,069
)
 
(7,069
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
 
 
 
 

 
(50,101
)
 
(50,101
)
Net income (loss) from investment fund affiliates and operating affiliates
 

 
 

 

 
51,870

 
51,870

Less: Exchange (gains) losses
 

 
 

 

 
(3,336
)
 
(3,336
)
Less: Corporate operating expenses
 

 
 

 

 
98,873

 
98,873

Contribution from P&C and Corporate and Other
 

 
 

 
300,941

 
(33,750
)
 
267,191

Less: Interest expense (7)
 

 
 

 
 

 
40,250

 
40,250

Less: Non-controlling interests
 

 
 

 
 

 
61,006

 
61,006

Less: Income tax expense
 

 
 

 
 

 
13,092

 
13,092

Net income (loss) attributable to common shareholders
 

 
 

 
 

 
 
 
$
152,843

Ratios – P&C operations: (8)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
64.8
%
 
59.2
%
 
62.8
%
 
 

 
 

Underwriting expense ratio
30.4
%
 
33.4
%
 
31.5
%
 
 

 
 

Combined ratio
95.2
%
 
92.6
%
 
94.3
%
 
 

 
 

____________
(1)
Corporate and Other includes other items of our revenue and expenditures that are not evaluated at the segment level for reporting purposes, as well as the Company's run-off life operations.
(2)
The Company has reflected the amortization of certain fair value adjustments recorded in conjunction with the Catlin Acquisition within the respective segments.
(3)
Operating expenses of the segments exclude Corporate operating expenses, shown separately.
(4)
Net investment income - excluding Life Funds Withheld Assets does not include net investment income related to the net results from structured products.
(5)
The net results from P&C structured products include net investment income and interest expense of $13.4 million and $10.5 million, respectively.
(6)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(7)
Interest expense excludes interest expense related to structured products recorded in the Insurance and Reinsurance segments.
(8)
Ratios are based on net premiums earned from P&C operations.

11



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2016
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
2,503,972

 
$
1,855,343

 
$
4,359,315

 
$
68,911

 
$
4,428,226

Net premiums written
1,503,934

 
1,557,661

 
3,061,595

 
3,164

 
3,064,759

Net premiums earned
1,593,874

 
757,572

 
2,351,446

 
3,164

 
2,354,610

Less: Net losses and loss expenses (2)
999,592

 
382,893

 
1,382,485

 
4,937

 
1,387,422

Less: Acquisition costs (2)
225,458

 
176,348

 
401,806

 
1,461

 
403,267

Less: Operating expenses (3)
312,432

 
79,234

 
391,666

 
218

 
391,884

Underwriting profit (loss)
$
56,392

 
$
119,097

 
$
175,489

 
$
(3,452
)
 
$
172,037

Net investment income - excluding Life Funds Withheld Assets (4)
 
 
 
 
143,131

 
8,533

 
151,664

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
41,560

 
41,560

Net results from structured products (5)
1,222

 
748

 
1,970

 

 
1,970

Net fee income and other (6)
(3,862
)
 
837

 
(3,025
)
 
302

 
(2,723
)
Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
(11,160
)
 
2,744

 
(8,416
)
Net realized gains (losses) on investments and net unrealized gains (losses) on investments, Trading
 

 
 

 

 
101,166

 
101,166

Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 

 
(3,622
)
 
(3,622
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets
 
 
 
 

 
(236,080
)
 
(236,080
)
Net income (loss) from investment fund affiliates and operating affiliates
 

 
 

 

 
8,071

 
8,071

Less: Exchange (gains) losses
 

 
 

 

 
(33,819
)
 
(33,819
)
Less: Corporate operating expenses
 

 
 

 

 
112,510

 
112,510

Contribution from P&C and Corporate and Other
 

 
 

 
306,405

 
(159,469
)
 
146,936

Less: Interest expense (7)
 

 
 

 
 

 
41,613

 
41,613

Less: Non-controlling interests
 

 
 

 
 

 
61,143

 
61,143

Less: Income tax expense
 

 
 

 
 

 
22,295

 
22,295

Net income (loss) attributable to common shareholders
 

 
 

 
 

 
 
 
$
21,885

Ratios – P&C operations: (8)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
62.7
%
 
50.5
%
 
58.8
%
 
 

 
 

Underwriting expense ratio
33.8
%
 
33.8
%
 
33.7
%
 
 

 
 

Combined ratio
96.5
%
 
84.3
%
 
92.5
%
 
 

 
 

____________
(1)
Corporate and Other includes other items of our revenue and expenditures that are not evaluated at the segment level for reporting purposes, as well as the Company's run-off life operations.
(2)
The Company has reflected the amortization of certain fair value adjustments recorded in conjunction with the Catlin Acquisition within the respective segments.
(3)
Operating expenses of the segments exclude Corporate operating expenses, shown separately.
(4)
Net investment income - excluding Life Funds Withheld Assets does not include net investment income related to the net results from structured products.
(5)
The net results from P&C structured products include net investment income and interest expense of $12.7 million and $10.7 million, respectively.
(6)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(7)
Interest expense excludes interest expense related to structured products recorded in the Insurance and Reinsurance segments.
(8)
Ratios are based on net premiums earned from P&C operations.

12



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize the Company’s net premiums earned by line of business for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, 2017
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
320,253

 
$
52,926

 
$

 
$
373,179

Casualty
482,589

 
156,634

 

 
639,223

Property catastrophe

 
148,406

 

 
148,406

Property
422,531

 
272,346

 

 
694,877

Specialty
399,793

 
36,626

 

 
436,419

Other (1)
10,149

 
217,228

 

 
227,377

Total P&C Operations
$
1,635,315

 
$
884,166

 
$

 
$
2,519,481

Corporate and Other:
 

 
 

 
 

 
 

Run-off Life operations - Other Life

 

 
3,310

 
3,310

Total Corporate and Other
$

 
$

 
$
3,310

 
$
3,310

Total
$
1,635,315

 
$
884,166

 
$
3,310

 
$
2,522,791

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
(U.S. dollars in thousands)
Insurance (2)
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
332,708

 
$
43,155

 
$

 
$
375,863

Casualty
468,602

 
154,739

 

 
623,341

Property catastrophe

 
205,301

 

 
205,301

Property
366,860

 
254,399

 

 
621,259

Specialty
424,068

 
36,193

 

 
460,261

Other (1)
1,636

 
63,785

 

 
65,421

Total P&C Operations
$
1,593,874

 
$
757,572

 
$

 
$
2,351,446

Corporate and Other:
 

 
 

 
 

 
 

Run-off Life operations - Other Life

 

 
3,164

 
3,164

Total Corporate and Other
$

 
$

 
$
3,164

 
$
3,164

Total
$
1,593,874

 
$
757,572

 
$
3,164

 
$
2,354,610

____________
(1)
Other within the Insurance segment includes: surety, structured indemnity and certain discontinued lines. Other within the Reinsurance segment includes: whole account contracts, structured indemnity and other lines.
(2)
Amounts from the prior year have been re-presented to reflect current mapping of underlying lines of business to be consistent with the manner in which they are reflected in the current period. The most significant movements include movement of certain items out of Other as follows: Programs business is now reflected in Property or Casualty, depending upon the predominant line for each program; Surplus lines is now reflected primarily in Casualty; and Accident & Health is now reflected in Specialty.

13



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. Investments
(a) Fixed Maturities, Short-Term Investments and Equity Securities
Classification of Fixed Maturity Securities
In an effort to improve operational efficiency, the Company has undergone an initiative to transform its investment operations and related reporting. As a result of this initiative, the Company has simplified the classification of its fixed maturity securities by investment type to align its internal and external reporting processes. Corporate securities previously separated into two classifications have been merged into one. Residential mortgage-backed securities have also been merged into a single classification. Collateralized debt obligations are now reported under Other asset-backed securities. Comparative period amounts have been re-presented to conform to the new classification system.
Amortized Cost and Fair Value Summary
The cost (amortized cost for fixed maturities and short-term investments), fair value, gross unrealized gains and gross unrealized (losses), including non-credit related Other-Than-Temporary Impairments ("OTTI") recorded in accumulated other comprehensive income ("AOCI"), of the Company’s Available for Sale ("AFS") investments at March 31, 2017 and December 31, 2016 were as follows:
 
 
 
Included in AOCI
 
 
 
 
March 31, 2017
(U.S. dollars in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Value
 
Non-credit Related OTTI (1)
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government Agencies ("U.S. Government")
$
4,175,513

 
$
53,626

 
$
(25,786
)
 
$
4,203,353

 
$

U.S. States, municipalities and political subdivisions
2,259,820

 
95,624

 
(4,585
)
 
2,350,859

 

Non-U.S. Governments
4,962,157

 
113,776

 
(96,025
)
 
4,979,908

 

Corporate
10,465,866

 
214,671

 
(101,171
)
 
10,579,366

 
(18
)
Residential mortgage-backed securities ("RMBS")
4,370,380

 
65,045

 
(57,990
)
 
4,377,435

 
(46,495
)
Commercial mortgage-backed securities ("CMBS")
705,158

 
5,694

 
(10,655
)
 
700,197

 
(1,172
)
Other asset-backed securities
1,244,057

 
14,126

 
(8,492
)
 
1,249,691

 
(1,995
)
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets
$
28,182,951

 
$
562,562

 
$
(304,704
)
 
$
28,440,809

 
$
(49,680
)
Total short-term investments - Excluding Life Funds Withheld Assets
260,407

 
208

 
(462
)
 
260,153

 

Total equity securities - Excluding Life Funds Withheld Assets
1,017,172

 
83,845

 
(6,508
)
 
1,094,509

 

Total investments - AFS - Excluding Life Funds Withheld Assets
$
29,460,530

 
$
646,615

 
$
(311,674
)
 
$
29,795,471

 
$
(49,680
)
Fixed maturities - AFS - Life Funds Withheld Assets
 

 
 

 
 

 
 

 
 

U.S. Government
$
8,542

 
$
2,190

 
$

 
$
10,732

 
$

Non-U.S. Governments
440,648

 
147,974

 

 
588,622

 

Corporate
1,116,300

 
279,251

 

 
1,395,551

 

RMBS
19,267

 
3,071

 

 
22,338

 

CMBS
75,554

 
18,256

 

 
93,810

 

Other asset-backed securities
80,650

 
19,278

 

 
99,928

 

Total fixed maturities - AFS - Life Funds Withheld Assets
$
1,740,961

 
$
470,020

 
$

 
$
2,210,981

 
$

Total investments - AFS
$
31,201,491

 
$
1,116,635

 
$
(311,674
)
 
$
32,006,452

 
$
(49,680
)
 
____________
(1)
Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.


14



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
Included in AOCI
 
 
 
 
December 31, 2016
(U.S. dollars in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Value
 
Non-credit Related OTTI (1)
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 

 
 

 
 

 
 

 
 

U.S. Government
$
3,874,038

 
$
53,172

 
$
(32,822
)
 
$
3,894,388

 
$

U.S. States, municipalities and political subdivisions
2,399,490

 
86,041

 
(7,419
)
 
2,478,112

 

Non-U.S. Governments
5,037,482

 
112,772

 
(120,122
)
 
5,030,132

 

Corporate
10,055,757

 
198,082

 
(119,110
)
 
10,134,729

 
(36
)
RMBS
4,479,722

 
71,045

 
(58,142
)
 
4,492,625

 
(47,879
)
CMBS
670,005

 
5,955

 
(10,774
)
 
665,186

 
(1,191
)
Other asset-backed securities
1,252,435

 
13,195

 
(12,242
)
 
1,253,388

 
(2,029
)
Total fixed maturities - AFS - Excluding Life Funds Withheld Assets
$
27,768,929

 
$
540,262

 
$
(360,631
)
 
$
27,948,560

 
$
(51,135
)
Total short-term investments - Excluding Life Funds Withheld Assets
626,142

 
227

 
(1,176
)
 
625,193

 

Total equity securities - Excluding Life Funds Withheld Assets
996,610

 
48,931

 
(8,210
)
 
1,037,331

 

Total investments - AFS - Excluding Life Funds Withheld Assets
$
29,391,681

 
$
589,420

 
$
(370,017
)
 
$
29,611,084

 
$
(51,135
)
Fixed maturities - AFS - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government
$
8,468

 
$
2,109

 
$

 
$
10,577

 
$

Non-U.S. Governments
454,695

 
169,982

 

 
624,677

 

Corporate
1,173,670

 
280,938

 

 
1,454,608

 

RMBS
19,591

 
2,789

 

 
22,380

 

CMBS
77,762

 
16,478

 

 
94,240

 

Other asset-backed securities
84,541

 
17,019

 

 
101,560

 

Total fixed maturities - AFS - Life Funds Withheld Assets
$
1,818,727

 
$
489,315

 
$

 
$
2,308,042

 
$

Total investments - AFS
$
31,210,408

 
$
1,078,735

 
$
(370,017
)
 
$
31,919,126

 
$
(51,135
)
 ____________
(1)
Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
The cost (amortized cost for fixed maturities and short-term investments) and fair value of the trading investments at March 31, 2017 and December 31, 2016 were as follows:
March 31, 2017
(U.S. dollars in thousands)
Amortized
Cost
 
Fair Value
Fixed maturities - Trading - Life Funds Withheld Assets
 

 
 

U.S. Government
$
16,179

 
$
16,340

U.S. States, municipalities and political subdivisions
127

 
126

Non-U.S. Governments
454,585

 
469,597

Corporate
1,115,185

 
1,167,081

RMBS
919

 
930

CMBS
5,194

 
5,550

Other asset-backed securities
38,856

 
40,484

Total fixed maturities - Trading - Life Funds Withheld Assets
$
1,631,045

 
$
1,700,108

Total short-term investments - Trading - Life Funds Withheld Assets
$
742

 
$
754

Total investments - Trading - Life Funds Withheld Assets
$
1,631,787

 
$
1,700,862


15



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016
(U.S. dollars in thousands)
Amortized
Cost
 
Fair Value
Fixed maturities - Trading - Life Funds Withheld Assets
 

 
 

U.S. Government
$
14,361

 
$
14,708

U.S. States, municipalities and political subdivisions
219

 
224

Non-U.S. Governments
426,225

 
444,944

Corporate
1,062,853

 
1,111,205

RMBS
936

 
961

CMBS
5,242

 
5,526

Other asset-backed securities
38,342

 
39,446

Total fixed maturities - Trading - Life Funds Withheld Assets
$
1,548,178

 
$
1,617,014

Total short-term investments - Trading - Life Funds Withheld Assets
$
9,536

 
$
9,563

Total investments - Trading - Life Funds Withheld Assets
$
1,557,714

 
$
1,626,577

At March 31, 2017 and December 31, 2016, approximately 2.7% and 2.5%, respectively, of the Company's fixed income investment portfolio at fair value, excluding cash and Life Funds Withheld Assets, was invested in securities that were below investment grade or not rated. Approximately 4.4% and 4.1% of the gross unrealized losses in the Company's fixed income investment portfolio, excluding cash and Life Funds Withheld Assets, at March 31, 2017 and December 31, 2016, respectively, related to securities that were below investment grade or not rated.
Contractual Maturities Summary
The contractual maturities of AFS fixed income securities at March 31, 2017 and December 31, 2016 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2017

December 31, 2016
(U.S. dollars in thousands)
Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 


 


 


 

Due less than one year
$
2,033,484

 
$
2,061,553

 
$
2,121,088

 
$
2,135,262

Due after 1 through 5 years
12,842,652

 
12,927,078

 
12,400,798

 
12,463,844

Due after 5 through 10 years
5,674,580

 
5,722,780

 
5,509,194

 
5,531,402

Due after 10 years
1,312,640

 
1,402,075

 
1,335,687

 
1,406,853

 
$
21,863,356

 
$
22,113,486

 
$
21,366,767

 
$
21,537,361

RMBS
4,370,380

 
4,377,435

 
4,479,722

 
4,492,625

CMBS
705,158

 
700,197

 
670,005

 
665,186

Other asset-backed securities
1,244,057

 
1,249,691

 
1,252,435

 
1,253,388

Total mortgage and asset-backed securities
$
6,319,595

 
$
6,327,323

 
$
6,402,162

 
$
6,411,199

Total fixed maturities - AFS - Excluding Life Funds Withheld Assets
$
28,182,951

 
$
28,440,809

 
$
27,768,929

 
$
27,948,560

Fixed maturities - AFS - Life Funds Withheld Assets
 

 
 

 
 

 
 

Due less than one year
$
58,836

 
$
68,442

 
$
71,207

 
$
80,749

Due after 1 through 5 years
289,495

 
318,498

 
289,710

 
318,605

Due after 5 through 10 years
251,139

 
299,963

 
274,727

 
324,759

Due after 10 years
966,020

 
1,308,002

 
1,001,189

 
1,365,749

 
$
1,565,490

 
$
1,994,905

 
$
1,636,833

 
$
2,089,862

RMBS
19,267

 
22,338

 
19,591

 
22,380

CMBS
75,554

 
93,810

 
77,762

 
94,240

Other asset-backed securities
80,650

 
99,928

 
84,541

 
101,560

Total mortgage and asset-backed securities
$
175,471

 
$
216,076

 
$
181,894

 
$
218,180

Total fixed maturities - AFS - Life Funds Withheld Assets
$
1,740,961

 
$
2,210,981

 
$
1,818,727

 
$
2,308,042

Total fixed maturities - AFS
$
29,923,912

 
$
30,651,790

 
$
29,587,656

 
$
30,256,602

 
 
 
 
 
 
 
 

16



XL GROUP LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2017

December 31, 2016
(U.S. dollars in thousands)
Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Fixed maturities - Trading - Life Funds Withheld Assets
 

 
 

 
 

 
 

Due less than one year
$
61,523

 
$
61,845

 
$
59,138

 
$
59,553

Due after 1 through 5 years
358,658

 
365,639

 
322,574

 
328,997

Due after 5 through 10 years
565,720

 
581,916

 
507,631

 
521,505

Due after 10 years
600,175

 
643,744

 
614,315

 
661,026

 
$
1,586,076

 
$
1,653,144

 
$
1,503,658

 
$
1,571,081

RMBS
919

 
930

 
936

 
961

CMBS
5,194

 
5,550

 
5,242

 
5,526

Other asset-backed securities
38,856

 
40,484

 
38,342

 
39,446

Total mortgage and asset-backed securities
$
44,969

 
$
46,964

 
$
44,520

 
$
45,933

Total fixed maturities - Trading - Life Funds Withheld Assets
$
1,631,045

 
$
1,700,108

 
$
1,548,178

 
$
1,617,014

Pledged Assets
Certain of the Company's invested assets are held in trust and pledged in support of insurance and reinsurance liabilities as well as credit facilities. Such pledges are largely required by the Company's operating subsidiaries that are "non-admitted" under U.S. state insurance regulations, in order for the U.S. cedant to receive statutory credit for reinsurance. Also included are Life Funds Withheld Assets as noted in Note 1, "Significant Accounting Policies." Additionally, certain deposit liabilities and annuity contracts require the use of pledged assets. At March 31, 2017 and December 31, 2016, the Company had $17.6 billion and $17.1 billion in pledged assets, respectively.
(b) Gross Unrealized Losses
The following is an analysis of how long the AFS securities at March 31, 2017 and December 31, 2016 had been in a continual unrealized loss position:
 
Less than 12 months
 
Equal to or greater
than 12 months
March 31, 2017
(U.S. dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fixed maturities and short-term investments - AFS
 

 
 

 
 

 
 

U.S. Government
$
2,311,525

 
$
(25,010
)
 
$
34,778

 
$
(821
)