XNYS:XL XL Group PLC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

OR

 

 

 

o

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

(I.R.S. Employer Identification No.)

incorporation or organization)

 

No. 1 Hatch Street Upper, 4th Floor, Dublin 2, Ireland
(Address of principal executive offices and zip code)
+353 (1) 405-2033
(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 o

          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 o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

          Large accelerated filer x          Accelerated filer o           Non-accelerated filer o          Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

          As of May 7, 2012, there were 311,707,372 outstanding Ordinary Shares, $0.01 par value per share, of the registrant.


XL GROUP PLC

INDEX TO FORM 10-Q

 

 

 

 

 

 

 

 

Page No.

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements:

 

 

 

 

Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011

 

1

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

2

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

3

 

 

Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

63

 

Item 4.

Controls and Procedures

 

71

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

72

 

Item 1A.

Risk Factors

 

73

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

 

Item 6.

Exhibits

 

74

 

 

Signatures

 

75

 



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,
2012

 

December 31,
2011

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2012: $26,695,459; 2011: $25,771,715)

 

$

27,291,662

 

 

$

26,190,025

 

Equity securities, at fair value (cost: 2012: $593,168; 2011: $480,685)

 

 

631,068

 

 

468,197

 

Short-term investments, at fair value (amortized cost: 2012: $212,393; 2011: $359,378)

 

 

212,327

 

 

 

359,063

 

 

 

     

 

     

Total investments available for sale

 

$

28,135,057

 

$

27,017,285

 

Fixed maturities, held to maturity at amortized cost (fair value: 2012: $2,994,429; 2011, $2,895,688)

 

 

2,769,800

 

 

 

2,668,978

 

Investments in affiliates

 

 

1,000,989

 

 

1,052,729

 

Other investments

 

 

1,160,497

 

 

 

985,262

 

 

 

     

 

     

Total investments

 

$

33,066,343

 

$

31,724,254

 

Cash and cash equivalents

 

 

2,506,318

 

 

 

3,825,125

 

Accrued investment income

 

 

335,376

 

 

331,758

 

Deferred acquisition costs

 

 

737,706

 

 

 

647,113

 

Ceded unearned premiums

 

 

650,201

 

 

596,895

 

Premiums receivable

 

 

3,021,121

 

 

 

2,411,611

 

Reinsurance balances receivable

 

 

259,897

 

 

220,017

 

Unpaid losses and loss expenses recoverable

 

 

3,440,919

 

 

 

3,654,948

 

Receivable from investments sold

 

 

17,556

 

 

59,727

 

Goodwill and other intangible assets

 

 

408,878

 

 

 

407,321

 

Deferred tax asset

 

 

107,651

 

 

115,601

 

Other assets

 

 

547,044

 

 

 

610,803

 

 

 

     

 

     

Total assets

 

$

45,099,010

 

$

44,605,173

 

 

 

     

 

     

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Unpaid losses and loss expenses

 

$

20,340,306

 

 

$

20,613,901

 

Deposit liabilities

 

 

1,590,188

 

 

1,608,108

 

Future policy benefit reserves

 

 

4,929,063

 

 

 

4,845,394

 

Unearned premiums

 

 

4,250,821

 

 

3,555,310

 

Notes payable and debt

 

 

1,674,653

 

 

 

2,275,327

 

Reinsurance balances payable

 

 

336,605

 

 

90,552

 

Payable for investments purchased

 

 

54,155

 

 

 

58,494

 

Deferred tax liability

 

 

101,118

 

 

91,104

 

Other liabilities

 

 

767,612

 

 

 

710,853

 

 

 

     

 

     

Total liabilities

 

$

34,044,521

 

$

33,849,043

 

 

 

     

 

     

Commitments and Contingencies

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Ordinary shares, 999,990,000 authorized, par value $0.01; issued and outstanding: (2012: 311,667,649; 2011: 315,645,796)

 

 

3,117

 

 

 

3,156

 

Additional paid in capital

 

 

8,846,832

 

 

8,938,679

 

Accumulated other comprehensive income

 

 

831,516

 

 

 

583,064

 

Retained earnings (deficit)

 

 

28,557

 

 

(113,241

)

 

 

     

 

     

Shareholders’ equity attributable to XL Group plc

 

$

9,710,022

 

 

$

9,411,658

 

Non-controlling interest in equity of consolidated subsidiaries

 

 

1,344,467

 

 

1,344,472

 

 

 

     

 

     

Total shareholders’ equity

 

$

11,054,489

 

 

$

10,756,130

 

 

 

     

 

     

Total liabilities and shareholders’ equity

 

$

45,099,010

 

$

44,605,173

 

 

 

     

 

     

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)

 

2012

 

2011

 

 

 

     

 

     

Revenues:

 

 

 

 

 

 

 

 

Net premiums earned

 

$

1,436,418

 

$

1,361,383

 

Net investment income

 

 

265,242

 

 

 

280,263

 

Realized investment gains (losses):

 

 

 

 

 

 

 

Net realized gains (losses) on investments sold

 

 

41,768

 

 

 

(28,992

)

Other-than-temporary impairments on investments

 

 

(18,565

)

 

(33,720

)

Other-than-temporary impairments on investments transferred to (from) other comprehensive income

 

 

(2,400

)

 

 

(3,725

)

 

 

           

Total net realized gains (losses) on investments

 

$

20,803

 

$

(66,437

)

Net realized and unrealized gains (losses) on derivative instruments

 

 

702

 

 

 

3,567

 

Income (loss) from investment fund affiliates

 

 

19,408

 

 

27,150

 

Fee income and other

 

 

9,859

 

 

 

8,932

 

 

 

           

Total revenues

 

$

1,752,432

 

$

1,614,858

 

 

 

           

Expenses:

 

 

 

 

 

 

 

 

Net losses and loss expenses incurred

 

$

854,065

 

$

1,208,865

 

Claims and policy benefits

 

 

121,307

 

 

 

133,231

 

Acquisition costs

 

 

224,151

 

 

188,490

 

Operating expenses

 

 

282,411

 

 

 

260,992

 

Exchange (gains) losses

 

 

12,718

 

 

9,514

 

Interest expense

 

 

39,298

 

 

 

54,147

 

 

 

           

Total expenses

 

$

1,533,950

 

$

1,855,239

 

 

 

           

Income (loss) before income tax and income (loss) from operating affiliates

 

$

218,482

 

 

$

(240,381

)

Income (loss) from operating affiliates

 

 

16,253

 

 

13,636

 

Provision (benefit) for income tax

 

 

21,550

 

 

(32,797

)

 

 

           

Net income (loss)

 

$

213,185

 

$

(193,948

)

Non-controlling interests

 

 

(36,557

)

 

 

(33,336

)

 

 

           

Net income (loss) attributable to XL Group plc and ordinary shareholders

 

$

176,628

 

$

(227,284

)

 

 

           

Weighted average ordinary shares and ordinary share equivalents outstanding – basic

 

 

315,120

 

 

 

311,478

 

 

 

           

Weighted average ordinary shares and ordinary share equivalents outstanding – diluted

 

 

317,639

 

 

311,478

 

 

 

           

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

 

$

0.56

 

 

$

(0.73

)

 

 

           

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

 

$

0.56

 

$

(0.73

)

 

 

           

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)

 

2012

 

2011

 

 

 

           

Net income (loss) attributable to XL Group plc

 

$

176,628

 

 

$

(227,284

)

Change in net unrealized gains (losses) on investments, net of tax

 

 

212,324

 

 

13,379

 

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

 

 

15,050

 

 

 

24,235

 

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

 

 

12,421

 

 

25,307

 

Change in underfunded pension liability

 

 

(174

)

 

 

(344

)

Change in value of cash flow hedge

 

 

110

 

 

110

 

Foreign currency translation adjustments

 

 

8,721

 

 

 

11,616

 

 

 

           

Comprehensive income (loss)

 

$

425,080

 

$

(152,981

)

 

 

           

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)

 

2012

 

2011

 

 

 

           

Ordinary Shares:

 

 

 

 

 

 

 

 

Balance - beginning of year

 

$

3,156

 

$

3,165

 

Issuance of ordinary shares

 

 

8

 

 

 

2

 

Buybacks of ordinary shares

 

 

(48

)

 

(73

)

Exercise of stock options

 

 

1

 

 

 

-

 

 

 

           

Balance - end of period

 

$

3,117

 

$

3,094

 

 

 

           

Additional Paid in Capital:

 

 

 

 

 

 

 

 

Balance - beginning of year

 

$

8,938,679

 

$

8,993,016

 

Issuance of ordinary shares

 

 

7

 

 

 

8

 

Buybacks of ordinary shares

 

 

(100,442

)

 

(166,429

)

Exercise of stock options, net of tax

 

 

942

 

 

 

-

 

Share based compensation expense

 

 

7,646

 

 

10,169

 

 

 

           

Balance - end of period

 

$

8,846,832

 

 

$

8,836,764

 

 

 

           

Accumulated Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

Balance - beginning of year

 

$

583,064

 

 

$

100,795

 

Change in net unrealized gains (losses) on investments, net of tax

 

 

212,324

 

 

13,379

 

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

 

 

15,050

 

 

 

24,235

 

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

 

 

12,421

 

 

25,307

 

Change in underfunded pension liability

 

 

(174

)

 

 

(344

)

Change in value of cash flow hedge

 

 

110

 

 

110

 

Foreign currency translation adjustments

 

 

8,721

 

 

 

11,616

 

 

 

           

Balance - end of period

 

$

831,516

 

$

175,098

 

 

 

           

Retained Earnings (Deficit):

 

 

 

 

 

 

 

 

Balance - beginning of year

 

$

(113,241

)

$

500,497

 

Net income attributable to XL Group plc

 

 

176,628

 

 

 

(227,284

)

Dividends on ordinary shares

 

 

(34,830

)

 

(34,251

)

 

 

           

Balance - end of period

 

$

28,557

 

 

$

238,962

 

 

 

           

Non-controlling Interest in Equity of Consolidated Subsidiaries:

 

 

 

 

 

 

 

Balance - beginning of year

 

$

1,344,472

 

 

$

1,002,296

 

Non-controlling interests

 

 

-

 

 

4

 

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

 

 

(5

)

 

 

(2

)

Purchase of Series E preference ordinary shares

 

 

-

 

 

(500

)

 

 

           

Balance - end of period

 

$

1,344,467

 

 

$

1,001,798

 

 

 

           

Total Shareholders’ Equity

 

$

11,054,489

 

$

10,255,716

 

 

 

           

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)

 

2012

 

2011

 

 

 

           

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

213,185

 

$

(193,948

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net realized (gains) losses on investments

 

 

(20,803

)

 

66,437

 

Net realized and unrealized (gains) losses on derivative instruments

 

 

(702

)

 

 

(3,567

)

Amortization of premiums (discounts) on fixed maturities

 

 

36,678

 

 

19,861

 

(Income) loss from investment and operating affiliates

 

 

(35,661

)

 

 

(40,786

)

Share based compensation

 

 

11,172

 

 

12,156

 

Depreciation

 

 

13,859

 

 

 

11,969

 

Accretion of deposit liabilities

 

 

16,446

 

 

16,887

 

Unpaid losses and loss expenses

 

 

(444,959

)

 

 

29,810

 

Future policy benefit reserves

 

 

(37,565

)

 

(24,989

)

Unearned premiums

 

 

655,416

 

 

 

524,331

 

Premiums receivable

 

 

(573,122

)

 

(476,200

)

Unpaid losses and loss expenses recoverable

 

 

245,960

 

 

 

112,365

 

Ceded unearned premiums

 

 

(47,201

)

 

(84,247

)

Reinsurance balances receivable

 

 

(38,319

)

 

 

(5,617

)

Deferred acquisition costs

 

 

(81,792

)

 

(62,634

)

Reinsurance balances payable

 

 

243,696

 

 

 

220,048

 

Deferred tax asset - net

 

 

9,243

 

 

(42,956

)

Derivatives

 

 

(17,908

)

 

 

53,240

 

Other assets

 

 

42,434

 

 

(3,841

)

Other liabilities

 

 

(45,522

)

 

 

(103,843

)

Other

 

 

8,835

 

 

38,859

 

 

 

           

Total adjustments

 

$

(59,815

)

 

$

257,283

 

 

 

           

Net cash provided by (used in) operating activities

 

$

153,370

 

$

63,335

 

 

 

           

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of fixed maturities and short-term investments

 

$

1,499,832

 

$

1,122,182

 

Proceeds from redemption of fixed maturities and short-term investments

 

 

1,246,431

 

 

 

689,130

 

Proceeds from sale of equity securities

 

 

7,635

 

 

70,349

 

Purchases of fixed maturities and short-term investments

 

 

(3,385,981

)

 

 

(1,188,395

)

Purchases of equity securities

 

 

(119,052

)

 

(248,446

)

Net dispositions of investment affiliates

 

 

34,358

 

 

 

51,170

 

Other investments, net

 

 

(45,333

)

 

4,103

 

 

 

           

Net cash provided by (used in) investing activities

 

$

(762,110

)

 

$

500,093

 

 

 

           

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares and exercise of stock options

 

$

942

 

 

$

-

 

Buybacks of ordinary shares

 

 

(100,490

)

 

(166,502

)

Dividends paid on ordinary shares

 

 

(1,218

)

 

 

(34,021

)

Distributions to non-controlling interests

 

 

(3,985

)

 

(2,287

)

Repayment of debt

 

 

(600,000

)

 

 

-

 

Deposit liabilities

 

 

(30,437

)

 

(26,648

)

 

 

           

Net cash provided by (used in) financing activities

 

$

(735,188

)

 

$

(229,458

)

Effects of exchange rate changes on foreign currency cash

 

 

25,121

 

 

28,967

 

 

 

           

Increase (decrease) in cash and cash equivalents

 

$

(1,318,807

)

 

$

362,937

 

Cash and cash equivalents - beginning of period

 

 

3,825,125

 

 

3,022,868

 

 

 

           

Cash and cash equivalents - end of period

 

$

2,506,318

 

 

$

3,385,805

 

 

 

           

See accompanying Notes to Unaudited Consolidated Financial Statements

5


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation and Consolidation

          These unaudited consolidated financial statements include the accounts of the Company and all of its subsidiaries 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 were 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 (consisting of normal recurring accruals) 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 and disclosure of 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.

          To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.

          Unless the context otherwise indicates, references herein to the “Company” include XL Group plc and its consolidated subsidiaries.

2. Significant Accounting Policies

(a) Recent Accounting Pronouncements

          In October 2010, the FASB issued an accounting standards update to address disparities in practice regarding the interpretation of which costs relating to the acquisition of new and renewal insurance contracts qualify for deferral. The provisions of the guidance specify that only costs that are related directly to the successful acquisition of new and renewal insurance contracts may be capitalized. These include incremental direct costs of contract acquisition and certain other costs related directly to underwriting activities. Incremental direct costs of contract acquisition are those which result directly from and are essential to a contract transaction, and would not have been incurred by the insurance entity had the transaction not occurred. Administrative costs, rent, depreciation, occupancy, equipment and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. On January 1, 2012, the Company adopted this guidance on a retrospective basis for all fiscal years presented, and interim periods within those years. The impact of adoption was a reduction in deferred acquisition costs of approximately $21 million, a reduction in deferred tax liabilities of approximately $7 million, and a corresponding reduction in opening retained earnings of approximately $14 million within the Company’s December 31, 2011 balance sheet. The adoption of this guidance did not have an impact on the Company’s consolidated statements of income or comprehensive income.

          In May 2011, the FASB issued an accounting standards update to amend existing requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy, requiring quantitative and qualitative information to be disclosed related to: (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value, but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities, as well as instruments classified in shareholders’ equity. The Company has applied this guidance from January 1, 2012; however, it impacted disclosure only and did not have an impact on the Company’s financial condition or results of operations. See Note 3, “Fair Value Measurements,” for these updated disclosures.

          In June 2011, the FASB issued an accounting standards update concerning the presentation of comprehensive income in financial statements. This guidance allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income only as part of the statement of changes in shareholders’ equity. The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. However, a separate accounting standards update issued in December 2011deferred indefinitely a provision within the original standard requiring entities to present components of reclassifications of other comprehensive income on the face of the income statement. The Company applied the guidance from January 1, 2012; however, it did not have an impact on the Company’s disclosure, financial condition or results of operations.

          In September 2011, the FASB issued an accounting standards update to simplify how entities test goodwill for impairment, by allowing an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying amount, as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required in FASB Accounting Standards Codification Topic 350. After assessing the circumstances that should be considered in making the qualitative assessment, if an entity determines that the fair value of a reporting unit as compared to its carrying value meets the threshold, then performing the two-step impairment step is unnecessary. In other circumstances, performance of the two-step test is required. The guidance also eliminates the option for an entity to carry forward its detailed calculation of a reporting unit’s fair value in certain situations. The amendments do not change the current guidance for testing other indefinite-lived intangible assets for impairment. The Company adopted this guidance beginning on January 1, 2012. It did not have an impact on the Company’s consolidated financial condition or results of operations.

6


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements

          Fair value is defined as the exchange price that would be received for 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 or underwriter bid indications where pricing services do not provide coverage for a particular security. While the Company receives values for the majority of the investment securities it holds from pricing services, it is ultimately management’s responsibility to determine whether the values received and recorded in the financial statements are representative of appropriate fair value measurements.

          The Company performs regular reviews of the prices received from its third party valuation sources to assess if the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for obtaining the valuations. The approaches taken by the Company include, but are not limited to, annual reviews of the controls of the external parties responsible for sourcing valuations which are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, and monthly reconciliations between the valuations provided by our external parties and valuations provided by our third party investment managers at a portfolio level.

          Where broker quotes are the primary source of the valuations, sufficient information regarding the specific inputs utilized by the brokers is generally not available to support a Level 2 classification. The Company obtains the majority of broker quoted values from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value.

          For further information, see Item 8, Note 2, “Significant Accounting Policies,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

(a) Fair Value Summary

          The following tables set forth the Company’s assets and liabilities that were accounted for at fair value at March 31, 2012 and December 31, 2011 by level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012
(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,
2012

 

 

 

   

 

   

 

   

 

   

 

   

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government - Related/Supported

 

$

-

 

 

$

2,233,820

 

 

$

-

 

 

$

-

 

 

$

2,233,820

 

Corporate (1) (2)

 

 

-

 

 

 

10,186,687

 

 

 

33,305

 

 

 

-

 

 

 

10,219,992

 

Residential mortgage-backed securities – Agency (“RMBS - Agency”)

 

 

-

 

 

 

5,353,596

 

 

 

39,795

 

 

 

-

 

 

 

5,393,391

 

Residential mortgage-backed securities – Non-Agency (“RMBS - Non-Agency”)

 

 

-

 

 

 

632,054

 

 

 

-

 

 

 

-

 

 

 

632,054

 

Commercial mortgage-backed securities (“CMBS”)

 

 

-

 

 

 

944,153

 

 

 

-

 

 

 

-

 

 

 

944,153

 

Collateralized debt obligations (“CDO”)

 

 

-

 

 

 

7,868

 

 

 

638,697

 

 

 

-

 

 

 

646,565

 

Other asset-backed securities (2)

 

 

-

 

 

 

1,409,732

 

 

 

16,410

 

 

 

-

 

 

 

1,426,142

 

U.S. States and political subdivisions of the States

 

 

-

 

 

 

1,768,182

 

 

 

-

 

 

 

-

 

 

 

1,768,182

 

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

 

 

-

 

 

 

4,027,363

 

 

 

-

 

 

 

-

 

 

 

4,027,363

 

 

 

     

 

     

 

     

 

     

 

     

Total fixed maturities, at fair value

 

$

-

 

 

$

26,563,455

 

 

$

728,207

 

 

$

-

 

 

$

27,291,662

 

Equity securities, at fair value (3)

 

 

322,713

 

 

 

308,355

 

 

 

-

 

 

 

-

 

 

 

631,068

 

Short-term investments, at fair value (1)(4)

 

 

-

 

 

 

212,327

 

 

 

-

 

 

 

-

 

 

 

212,327

 

 

 

     

 

     

 

     

 

     

 

     

Total investments available for sale

 

$

322,713

 

 

$

27,084,137

 

 

$

728,207

 

 

$

-

 

 

$

28,135,057

 

Cash equivalents (5)

 

 

1,140,591

 

 

 

566,444

 

 

 

-

 

 

 

-

 

 

 

1,707,035

 

Other investments (6)

 

 

-

 

 

 

727,948

 

 

 

115,659

 

 

 

-

 

 

 

843,607

 

Other assets (7)(8)

 

 

-

 

 

 

116,301

 

 

 

-

 

 

 

(77,963

)

 

 

38,338

 

 

 

     

 

     

 

     

 

     

 

     

Total assets accounted for at fair value

 

$

1,463,304

 

 

$

28,494,830

 

 

$

843,866

 

 

$

(77,963

)

 

$

30,724,037

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments sold, but not yet purchased (9)

 

$

-

 

 

$

21,575

 

 

$

-

 

 

$

-

 

 

$

21,575

 

Other liabilities (7)(8)

 

 

-

 

 

 

26,248

 

 

 

40,630

 

 

 

(512

)

 

 

66,366

 

 

 

     

 

     

 

     

 

     

 

     

 

Total liabilities accounted for at fair value

 

$

-

 

 

$

47,823

 

 

$

40,630

 

 

$

(512

)

 

$

87,941

 

 

 

     

 

     

 

     

 

     

 

     

7


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements (Continued)

(a) Fair Value Summary (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011
(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,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government - Related/Supported

 

$

-

 

 

$

1,990,983

 

 

$

-

 

 

$

-

 

 

$

1,990,983

 

Corporate (1) (2)

 

 

-

 

 

 

10,084,804

 

 

 

23,818

 

 

 

-

 

 

 

10,108,622

 

RMBS – Agency

 

 

-

 

 

 

5,347,365

 

 

 

32,041

 

 

 

-

 

 

 

5,379,406

 

RMBS – Non-Agency

 

 

-

 

 

 

641,815

 

 

 

-

 

 

 

-

 

 

 

641,815

 

CMBS

 

 

-

 

 

 

974,835

 

 

 

-

 

 

 

-

 

 

 

974,835

 

CDO

 

 

-

 

 

 

7,751

 

 

 

650,851

 

 

 

-

 

 

 

658,602

 

Other asset-backed securities (2)

 

 

-

 

 

 

1,323,697

 

 

 

16,552

 

 

 

-

 

 

 

1,340,249

 

U.S. States and political subdivisions of the States

 

 

-

 

 

 

1,797,378

 

 

 

-

 

 

 

-

 

 

 

1,797,378

 

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

 

 

-

 

 

 

3,298,135

 

 

 

-

 

 

 

-

 

 

 

3,298,135

 

 

 

     

 

     

 

     

 

     

 

     

Total fixed maturities, at fair value (2)

 

$

-

 

 

$

25,466,763

 

 

$

723,262

 

 

$

-

 

 

$

26,190,025

 

Equity securities, at fair value (3)

 

 

239,175

 

 

 

229,022

 

 

 

-

 

 

 

-

 

 

 

468,197

 

Short-term investments, at fair value (1)(4)

 

 

-

 

 

 

359,063

 

 

 

-

 

 

 

-

 

 

 

359,063

 

 

 

     

 

     

 

     

 

     

 

     

Total investments available for sale

 

$

239,175

 

 

$

26,054,848

 

 

$

723,262

 

 

$

-

 

 

$

27,017,285

 

Cash equivalents (5)

 

 

1,686,101

 

 

 

1,068,264

 

 

 

-

 

 

 

-

 

 

 

2,754,365

 

Other investments (6)

 

 

-

 

 

 

547,598

 

 

 

113,959

 

 

 

-

 

 

 

661,557

 

Other assets (7)(8)

 

 

-

 

 

 

143,622

 

 

 

-

 

 

 

(77,888

)

 

 

65,734

 

 

 

     

 

     

 

     

 

     

 

     

Total assets accounted for at fair value

 

$

1,925,276

 

 

$

27,814,332

 

 

$

837,221

 

 

$

(77,888

)

 

$

30,498,941

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments sold, but not yet purchased (9)

 

$

-

 

 

$

20,844

 

 

$

-

 

 

$

-

 

 

$

20,844

 

Other liabilities (7)(8)

 

 

-

 

 

 

16,871

 

 

 

42,644

 

 

 

(809

)

 

 

58,706

 

 

 

     

 

     

 

     

 

     

 

     

Total liabilities accounted for at fair value

 

$

-

 

 

$

37,715

 

 

$

42,644

 

 

$

(809

)

 

$

79,550

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes, which are in a gross unrealized loss position, had a fair value of $198.7 million and $266.0 million and an amortized cost of $220.0 million and $297.7 million at March 31, 2012 and December 31, 2011, respectively. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.

(2)

The Company invests in covered bonds issued by financial institutions (“Covered Bonds”). Covered Bonds are senior secured debt instruments issued by financial institutions and backed by over-collateralized pools of public sector or mortgage loans. During the three months ended March 31, 2012, Covered Bonds within Total fixed maturities with a fair value of $415.5 million, have been included within Other asset-backed securities to align the Company’s classification to market indices. At December 31, 2011, Covered Bonds within Total fixed maturities with a fair value of $353.9 million, have been reclassified from Corporate to Other asset-backed securities to conform to current period presentation.

(3)

Included within equity securities are investments in fixed income funds of $98.0 million and $91.6 million at March 31, 2012 and December 31, 2011, respectively.

(4)

Short-term investments consist primarily of Corporate securities and U.S. Government and Government-Related/Supported securities.

(5)

Cash equivalents balances subject to fair value measurement include certificates of deposit and money market funds. Operating cash balances are not subject to fair value measurement guidance.

(6)

The Other investments balance excludes certain structured transactions including certain investments in project finance transactions, 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 are carried at amortized cost that totaled $316.9 million at March 31, 2012 and $323.7 million at December 31, 2011.

(7)

Other assets and other liabilities include derivative instruments.

(8)

The derivative balances included in each category above are reported on a gross basis by level with a netting adjustment presented separately in the “Collateral and Counterparty Netting” column. The Company often enters into different types of derivative contracts with a single counterparty and these contracts are covered under a netting agreement. In addition, the Company held net cash collateral related to derivative positions of approximately $77.5 million and $77.1 million at March 31, 2012 and December 31, 2011, respectively. This balance is included within cash and cash equivalents and the corresponding liability to return the collateral has been offset against the derivative positions within the balance sheet as appropriate under the netting agreement. The fair values of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy.

(9)

Financial instruments sold, but not yet purchased, represent “short sales” and are included within “Payable for investments purchased” on the balance sheet.

8


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements (Continued)

(b) Level 3 Gains and Losses

          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 reflect gains and losses for the three months ended March 31, 2012 and 2011 for all financial assets and liabilities categorized as Level 3 at March 31, 2012 and 2011, 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, 2012 and 2011. Gains and losses for assets and liabilities classified within Level 3 in the table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, it should be noted that the following tables do not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by the Company that are either economically hedged by certain exposures to the Level 3 positions or that hedge the exposures in Level 3 positions.

          In general, Level 3 assets include securities for which values were obtained from brokers where either significant inputs were utilized in determining the value 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 observable inputs, or other valuations sourced from brokers that are considered Level 3.

          There were no transfers between Level 1 and Level 2 during the three month periods ended March 31, 2012 and 2011.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Assets and Liabilities - Three Months Ended March 31, 2012

 

 

 

   

(U.S. dollars in thousands)

 

Corporate

 

 

RMBS - Agency

 

 

RMBS - Non
Agency

 

 

CMBS

 

 

CDO

 

 

 

   

 

   

 

   

 

   

 

   

Balance, beginning of period

 

$

23,818

 

 

$

32,041

 

 

$

-

 

 

$

-

 

 

$

650,851

 

Realized gains (losses)

 

 

(18

)

 

 

13

 

 

 

-

 

 

 

-

 

 

 

(1,649

)

Movement in unrealized gains (losses)

 

 

(315

)

 

 

(79

)

 

 

-

 

 

 

-

 

 

 

33,116

 

Purchases and issuances

 

 

9,076

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

-

 

Sales and settlements

 

 

(137

)

 

 

(2,348

)

 

 

-

 

 

 

-

 

 

 

(43,621

)

Transfers into Level 3

 

 

881

 

 

 

10,132

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfers out of Level 3

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Fixed maturities to short-term investments classification change

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

     

 

     

 

     

 

     

 

     

Balance, end of period

 

$

33,305

 

 

$

39,795

 

 

$

-

 

 

$

-

 

 

$

638,697

 

 

 

     

 

     

 

     

 

     

 

     

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

 

$

(332

)

 

$

(54

)

 

$

-

 

 

$

-

 

 

$

29,202

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Assets and Liabilities - Three Months Ended March 31, 2012

 

 

 

   

(U.S. dollars in thousands)

 

Other asset-
backed
securities

 

 

Non-US
Sovereign
Government,
Provincial,
Supranational
and Government
Related

 

 

Short-term
investments

 

 

Other
investments

 

 

Derivative
Contracts - Net

 

 

 

   

 

   

 

   

 

   

 

   

Balance, beginning of period

 

$

16,552

 

 

$

-

 

 

$

-

 

 

$

113,959

 

 

$

(42,644

)

Realized gains (losses)

 

 

21

 

 

 

-

 

 

 

-

 

 

 

1,925

 

 

 

-

 

Movement in unrealized gains (losses)

 

 

(163

)

 

 

-

 

 

 

-

 

 

 

899

 

 

 

2,014

 

Purchases and issuances

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,317

 

 

 

-

 

Sales and settlements

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,441

)

 

 

-

 

Transfers into Level 3

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfers out of Level 3

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Fixed maturities to short-term investments classification change

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

     

 

     

 

     

 

     

 

     

Balance, end of period

 

$

16,410

 

 

$

-

 

 

$

-

 

 

$

115,659

 

 

$

(40,630

)

 

 

     

 

     

 

     

 

     

 

     

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

 

$

(431

)

 

$

-

 

 

$

-

 

 

$

(313

)

 

$

2,014

 

 

 

     

 

     

 

     

 

     

 

     

9


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements (Continued)

(b) Level 3 Gains and Losses (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Assets and Liabilities - Three Months Ended March 31, 2011

 

 

 

   

(U.S. dollars in thousands)

 

Corporate

 

 

RMBS - Agency

 

 

RMBS - Non
Agency

 

 

CMBS

 

 

CDO

 

 

 

   

 

   

 

   

 

   

 

   

Balance, beginning of period

 

$

36,866

 

 

$

30,255

 

 

$

4,964

 

 

$

1,623

 

 

$

721,572

 

Realized gains (losses)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(889

)

 

 

(652

)

Movement in unrealized gains (losses)

 

 

46

 

 

 

38

 

 

 

6

 

 

 

1,040

 

 

 

26,045

 

Purchases and issuances

 

 

10,629

 

 

 

11,460

 

 

 

-

 

 

 

-

 

 

 

-

 

Sales and settlements

 

 

(1,970

)

 

 

(1,269

)

 

 

(301

)

 

 

(17

)

 

 

(4,414

)

Transfers into Level 3

 

 

4,397

 

 

 

3,944

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfers out of Level 3

 

 

(15,083

)

 

 

(11,441

)

 

 

(1,334

)

 

 

-

 

 

 

-

 

Fixed maturities to short-term investments classification change

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

     

 

     

 

     

 

     

 

     

Balance, end of period

 

$

34,885

 

 

$

32,987

 

 

$

3,335

 

 

$

1,757

 

 

$

742,551

 

 

 

     

 

     

 

     

 

     

 

     

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

 

$

51

 

 

$

38

 

 

$

6

 

 

$

151

 

 

$

25,393

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 Assets and Liabilities - Three Months Ended March 31, 2011

 

 

 

   

(U.S. dollars in thousands)

 

Other asset-
backed
securities

 

 

Non-US
Sovereign
Government,
Provincial,
Supranational
and Government
Related

 

 

Short-term
investments

 

 

Other
investments

 

 

Derivative
Contracts - Net

 

 

 

   

 

   

 

   

 

   

 

   

Balance, beginning of period

 

$

24,650

 

 

$

3,667

 

 

$

-

 

 

$

133,717

 

 

$

(39,195

)

Realized gains (losses)

 

 

(452

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Movement in unrealized gains (losses)

 

 

2,818

 

 

 

-

 

 

 

-

 

 

 

9,771

 

 

 

2,449

 

Purchases and issuances

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,864

 

 

 

-

 

Sales and settlements

 

 

(9,650

)

 

 

-

 

 

 

-

 

 

 

(518

)

 

 

(64

)

Transfers into Level 3

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Transfers out of Level 3

 

 

(4,995

)

 

 

(3,667

)

 

 

-

 

 

 

-

 

 

 

-

 

Fixed maturities to short-term investments classification change

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

     

 

     

 

     

 

     

 

     

Balance, end of period

 

$

12,371

 

 

$

-

 

 

$

-

 

 

$

144,834

 

 

$

(36,810

)

 

 

     

 

     

 

     

 

     

 

     

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

 

$

1,912

 

 

$

-

 

 

$

-

 

 

$

8,707

 

 

$

2,449

 

 

 

     

 

     

 

     

 

     

 

     

10


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements (Continued)

(c) Fixed maturities and short-term investments

          The Company’s Level 3 assets consist primarily of 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 CDOs 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 the CDO 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 to primarily to private equity investments and certain derivative positions as described below.

(d) Other investments

          Included within the Other investments component of the Company’s Level 3 valuations are private investments and alternative fund investments 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 which 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 alternative funds included in Other investments utilize strategies including arbitrage, directional, event driven and multi-style. These funds potentially have lockup and gate provisions which may limit redemption liquidity. For further details regarding the nature of Other investments and related features see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

(e) Derivative instruments

          Derivative instruments recorded within Other liabilities and classified within Level 3 include credit derivatives sold providing 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 (“GMIB”) 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.

(f) 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 at March 31, 2012 and December 31, 2011. All of these fair values estimates are considered Level 2 fair value measurements. The fair values for fixed maturities held to maturity are provided by third party pricing vendors and significant valuation inputs for all other items included are based upon market data obtained from sources independent of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

 

December 31, 2011

 

 

 

   

 

   

 

 

Carrying
Value

 

 

Fair
Value

 

 

Carrying
Value

 

 

Fair
Value

 

 

 

         

 

         

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, held to maturity

 

$

2,769,800

 

 

$

2,994,429

 

 

$

2,668,978

 

 

$

2,895,688

 

Other investments - structured transactions

 

 

316,889

 

 

 

291,151

 

 

 

323,705

 

 

 

297,124

 

 

 

     

 

     

 

     

 

     

Financial Assets

 

$

3,086,689

 

 

$

3,285,580

 

 

$

2,992,683

 

 

$

3,192,812

 

 

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit liabilities

 

$

1,590,188

 

 

$

1,817,915

 

 

$

1,608,108

 

 

$

1,809,812

 

Notes payable and debt

 

 

1,674,653

 

 

 

1,772,525

 

 

 

2,275,327

 

 

 

2,340,148

 

 

 

     

 

     

 

     

 

     

Financial Liabilities

 

$

3,264,841

 

 

$

3,590,440

 

 

$

3,883,435

 

 

$

4,149,960

 

 

 

     

 

     

 

     

 

     

11


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Fair Value Measurements (Continued)

(f) Financial Instruments Not Carried at Fair Value (Continued)

          The Company historically participated in structured transactions. Remaining structured transactions include cash loans supporting project finance transactions, providing liquidity facility financing to structured project deals and an investment in a payment obligation with an insurance company. These transactions are carried at amortized cost. The fair value of these investments held by the Company is determined through use of internal models utilizing reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

          Deposit liabilities include obligations under structured insurance and reinsurance transactions. For purposes of fair value disclosures, the Company determines the estimated fair value of the deposit liabilities by assuming a discount rate equal to the appropriate U.S. Treasury rate plus 102.5 basis points and the appropriate U.S. Treasury rate plus 161.8 basis points at March 31, 2012 and December 31, 2011, respectively. The discount rate incorporates the Company’s own credit risk into the determination of estimated fair value.

          The fair values of the Company’s notes payable and debt outstanding are determined based on quoted market prices.

          There are no significant concentrations of credit risk within the Company’s financial instruments as defined in the authoritative guidance over disclosures of fair value of financial instruments not carried at fair value, which excludes certain financial instruments, particularly insurance contracts.

4. Segment Information

          The Company is organized into three operating segments: Insurance, Reinsurance and Life operations. The Company’s general investment and financing operations are reflected in Corporate.

          The Company evaluates the performance of both the Insurance and Reinsurance segments based on underwriting profit while the Life operations segment performance is based on contribution. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, the Company does not allocate investment assets by segment for its Property and Casualty (“P&C”) operations. Investment assets related to the Company’s Life operations and certain structured products included in the Insurance and Reinsurance segments and Corporate are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from each of these segments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2012
(U.S. dollars in thousands, except ratios)

 

Insurance

 

 

Reinsurance

 

 

Total P&C

 

 

Life
Operations

 

 

Total

 

 

 

   

 

   

 

   

 

   

 

   

Gross premiums written

 

$

1,336,634

 

 

$

980,350

 

 

$

2,316,984

 

 

$

86,683

 

 

$

2,403,667

 

Net premiums written

 

 

1,036,526

 

 

 

926,702

 

 

 

1,963,228

 

 

 

78,496

 

 

 

2,041,724

 

Net premiums earned

 

 

934,056

 

 

 

423,842

 

 

 

1,357,898

 

 

 

78,520

 

 

 

1,436,418

 

Net losses and loss expenses

 

 

(631,685

)

 

 

(222,380

)

 

 

(854,065

)

 

 

(121,307

)

 

 

(975,372

)

Acquisition costs

 

 

(128,256

)

 

 

(88,244

)

 

 

(216,500

)

 

 

(7,651

)

 

 

(224,151

)

Operating expenses (1)

 

 

(185,346

)

 

 

(38,747

)

 

 

(224,093

)

 

 

(2,607

)

 

 

(226,700

)

 

 

     

 

     

 

     

 

     

 

     

Underwriting profit (loss)

 

$

(11,231

)

 

$

74,471

 

 

$

63,240

 

 

$

(53,045

)

 

$

10,195

 

Net investment income

 

 

-

 

 

 

-

 

 

 

172,968

 

 

 

75,026

 

 

 

247,994

 

Net results from structured products (2)

 

 

2,819

 

 

 

2,498

 

 

 

5,317

 

 

 

-

 

 

 

5,317

 

Net fee income and other (3)

 

 

(2,020

)

 

 

333

 

 

 

(1,687

)

 

 

48

 

 

 

(1,639

)

Net realized gains (losses) on investments

 

 

 

 

 

 

 

 

 

 

24,967

 

 

 

(4,164

)

 

 

20,803

 

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

Contribution from P&C and Life Operations

 

 

 

 

 

 

 

 

 

$

264,805

 

 

$

17,865

 

 

$

282,670

 

 

 

 

 

 

 

 

 

 

 

     

 

     

 

 

 

 

Corporate & other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized & unrealized gains (losses) on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

702

 

Net income (loss) from investment fund affiliates and operating affiliates (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,661

 

Exchange gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,718

)

Corporate operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,260

)

Interest expense (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,320

)

Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,557

)

Income tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Net income (loss) attributable to XL Group plc

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

176,628

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Ratios – P&C operations: (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss expense ratio

 

 

67.6

%

 

 

52.5

%

 

 

62.9

%

 

 

 

 

 

 

 

 

Underwriting expense ratio

 

 

33.6

%

 

 

29.9

%

 

 

32.4

%

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 

Combined ratio

 

 

101.2

%

 

 

82.4

%

 

 

95.3

%

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 


 

 

 

 

 

(1)

Operating expenses exclude Corporate operating expenses, shown separately.

(2)

The net results from P&C structured products include net investment income and interest expense of $17.2 million and $12.0 million, respectively.

(3)

Net fee income and other includes operating expenses from the Company’s loss prevention consulting services business.

(4)

The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.

(5)

Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.

(6)

Ratios are based on net premiums earned from P&C operations.

12


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Segment Information (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011
(U.S. dollars in thousands, except ratios)

 

Insurance

 

 

Reinsurance

 

 

Total P&C

 

 

Life
Operations

 

 

Total

 

 

 

   

 

   

 

   

 

   

 

   

Gross premiums written

 

$

1,222,349

 

 

$

876,771

 

 

$

2,099,120

 

 

$

97,659

 

 

$

2,196,779

 

Net premiums written

 

 

918,990

 

 

 

795,292

 

 

 

1,714,282

 

 

 

89,672

 

 

 

1,803,954

 

Net premiums earned

 

 

875,920

 

 

 

395,776

 

 

 

1,271,696

 

 

 

89,687

 

 

 

1,361,383

 

Net losses and loss expenses

 

 

(788,513

)

 

 

(420,352

)

 

 

(1,208,865

)

 

 

(133,231

)

 

 

(1,342,096

)

Acquisition costs

 

 

(107,644

)

 

 

(73,526

)

 

 

(181,170

)

 

 

(7,320

)

 

 

(188,490

)

Operating expenses (1)

 

 

(164,095

)

 

 

(45,630

)

 

 

(209,725

)

 

 

(2,166

)

 

 

(211,891

)

 

 

     

 

     

 

     

 

     

 

     

Underwriting profit (loss)

 

$

(184,332

)

 

$

(143,732

)

 

$

(328,064

)

 

$

(53,030

)

 

$

(381,094

)

Net investment income

 

 

-

 

 

 

-

 

 

 

183,565

 

 

 

76,976

 

 

 

260,541

 

Net results from structured products (2)

 

 

3,260

 

 

 

4,214

 

 

 

7,474

 

 

 

-

 

 

 

7,474

 

Net fee income and other (3)

 

 

(5,912

)

 

 

1,394

 

 

 

(4,518

)

 

 

41

 

 

 

(4,477

)

Net realized gains (losses) on investments

 

 

 

 

 

 

 

 

 

 

(26,886

)

 

 

(39,551

)

 

 

(66,437

)

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

Contribution from P&C and Life Operations

 

 

 

 

 

 

 

 

 

$

(168,429

)

 

$

(15,564

)

 

$

(183,993

)

 

 

 

 

 

 

 

 

 

 

     

 

     

 

 

 

 

Corporate & other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized & unrealized gains (losses) on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,567

 

Net income (loss) from investment fund affiliates and operating affiliates (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,786

 

Exchange gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,514

)

Corporate operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,692

)

Interest expense (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,899

)

Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,336

)

Income tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Net income (loss) attributable to XL Group plc

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(227,284

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

Ratios – P&C operations: (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss expense ratio

 

 

90.0

%

 

 

106.2

%

 

 

95.1

%

 

 

 

 

 

 

 

 

Underwriting expense ratio

 

 

31.0

%

 

 

30.1

%

 

 

30.7

%

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 

Combined ratio

 

 

121.0

%

 

 

136.3

%

 

 

125.8

%

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 


 

 

 

 

 

(1)

Operating expenses exclude Corporate operating expenses, shown separately.

(2)

The net results from P&C structured products include net investment income and interest expense of $19.7 million and $12.2 million, respectively.

(3)

Net fee income and other includes operating expenses from the Company’s loss prevention consulting services business and expenses related to the cost of an endorsement facility with National Indemnity Company.

(4)

The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.

(5)

Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.

(6)

Ratios are based on net premiums earned from P&C operations.

13


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Segment Information (Continued)

          The following tables summarize the Company’s net premiums earned by line of business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2012
(U.S. dollars in thousands)

 

Insurance

 

 

Reinsurance

 

 

Life
Operations

 

 

Total

 

 

 

   

 

   

 

   

 

   

P&C Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casualty - professional lines

 

$

323,821

 

 

$

54,908

 

 

$

-

 

 

$

378,729

 

Casualty - other lines

 

 

167,357

 

 

 

73,238

 

 

 

-

 

 

 

240,595

 

Property catastrophe

 

 

-

 

 

 

102,925

 

 

 

-

 

 

 

102,925

 

Other property

 

 

133,419

 

 

 

135,743

 

 

 

-

 

 

 

269,162

 

Marine, energy, aviation and satellite

 

 

120,100

 

 

 

35,743

 

 

 

-

 

 

 

155,843

 

Other specialty lines (1)

 

 

184,034

 

 

 

-

 

 

 

-

 

 

 

184,034

 

Other (2)

 

 

5,325

 

 

 

21,285

 

 

 

-

 

 

 

26,610

 

 

 

     

 

     

 

     

 

     

Total P&C Operations

 

$

934,056

 

 

$

423,842

 

 

$

-

 

 

$

1,357,898

 

 

 

     

 

     

 

     

 

     

Life Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Life

 

 

-

 

 

 

-

 

 

 

47,063

 

 

 

47,063

 

Annuity

 

 

-

 

 

 

-

 

 

 

31,457

 

 

 

31,457

 

 

 

     

 

     

 

     

 

     

Total P&C Operations

 

$

-

 

 

$

-

 

 

$

78,520

 

 

$

78,520

 

 

 

     

 

     

 

     

 

     

Total

 

$

934,056

 

 

$

423,842

 

 

$

78,520

 

 

$

1,436,418

 

 

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011
(U.S. dollars in thousands)

 

Insurance

 

 

Reinsurance

 

 

Life
Operations

 

 

Total

 

 

 

   

 

   

 

   

 

   

P&C Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casualty - professional lines

 

$

315,643

 

 

$

53,718

 

 

$

-

 

 

$

369,361

 

Casualty - other lines

 

 

156,704

 

 

 

51,043

 

 

 

-

 

 

 

207,747

 

Property catastrophe

 

 

-

 

 

 

94,564

 

 

 

-

 

 

 

94,564

 

Other property

 

 

106,921

 

 

 

136,243

 

 

 

-

 

 

 

243,164

 

Marine, energy, aviation and satellite

 

 

125,536

 

 

 

38,428

 

 

 

-

 

 

 

163,964

 

Other specialty lines (1)

 

 

168,666

 

 

 

-

 

 

 

-

 

 

 

168,666

 

Other (2)

 

 

2,450

 

 

 

21,780

 

 

 

-

 

 

 

24,230

 

 

 

     

 

     

 

     

 

     

Total P&C Operations

 

$

875,920

 

 

$

395,776

 

 

$

-

 

 

$

1,271,696

 

 

 

     

 

     

 

     

 

     

Life Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Life

 

 

-

 

 

 

-

 

 

 

56,764

 

 

 

56,764

 

Annuity

 

 

-

 

 

 

-

 

 

 

32,923

 

 

 

32,923

 

 

 

     

 

     

 

     

 

     

Total P&C Operations

 

$

-

 

 

$

-

 

 

$

89,687

 

 

$

89,687

 

 

 

     

 

     

 

     

 

     

Total

 

$

875,920

 

 

$

395,776

 

 

$

89,687

 

 

$

1,361,383

 

 

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Other specialty lines within the Insurance segment includes: environmental, programs, equine, warranty, specie, middle markets and excess and surplus lines.

(2)

Other includes credit and surety, whole account contracts, structured indemnity and other lines.

14


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments

(a) Fixed Maturities, Short-Term Investments and Equity Securities

          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, other-than-temporary impairments (“OTTI”) recorded in accumulated other comprehensive income (“AOCI”) of the Company’s available for sale (“AFS”) and held to maturity (“HTM”) investments at March 31, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in AOCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012
(U.S. dollars in thousands)

 

Cost or
Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Related to
Changes in
Estimated
Fair Value

 

 

Non-credit
Related
OTTI

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities - AFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government-Related/Supported (1)

 

$

2,130,093

 

 

$

110,804

 

 

$

(7,077

)

 

$

-

 

 

$

2,233,820

 

Corporate (2) (3) (4)

 

 

9,854,093

 

 

 

557,350

 

 

 

(148,569

)

 

 

(42,882

)

 

 

10,219,992

 

RMBS – Agency

 

 

5,238,075

 

 

 

163,999

 

 

 

(8,683

)

 

 

-

 

 

 

5,393,391

 

RMBS – Non-Agency

 

 

792,800

 

 

 

23,227

 

 

 

(71,292

)

 

 

(112,681

)

 

 

632,054

 

CMBS

 

 

882,762

 

 

 

66,416

 

 

 

(1,407

)

 

 

(3,618

)

 

 

944,153

 

CDO

 

 

798,313

 

 

 

8,262

 

 

 

(155,123

)

 

 

(4,887

)

 

 

646,565

 

Other asset-backed securities (2)

 

 

1,423,283

 

 

 

36,312

 

 

 

(23,474

)

 

 

(9,979

)

 

 

1,426,142

 

U.S. States and political subdivisions of the States

 

 

1,663,058

 

 

 

106,968

 

 

 

(1,844

)

 

 

-

 

 

 

1,768,182

 

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (1)

 

 

3,912,982

 

 

 

127,717

 

 

 

(13,336

)

 

 

-

 

 

 

4,027,363

 

 

 

     

 

     

 

     

 

     

 

     

Total fixed maturities - AFS

 

$

26,695,459

 

 

$

1,201,055

 

 

$

(430,805

)

 

$

(174,047

)

 

$

27,291,662

 

Total short-term investments (1)

 

$

212,393

 

 

$

263

 

 

$

(329

)

 

$

-

 

 

$

212,327

 

Total equity securities

 

$

593,168

 

 

$

44,609

 

 

$

(6,709

)

 

$

-

 

 

$

631,068

 

 

 

     

 

     

 

     

 

     

 

     

Total investments - AFS

 

$

27,501,020

 

 

$

1,245,927

 

 

$

(437,843

)

 

$

(174,047

)

 

$

28,135,057

 

 

 

     

 

     

 

     

 

     

 

     

Fixed maturities - HTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government-Related/Supported (1)

 

$

10,683

 

 

$

1,174

 

 

$

-

 

 

$

-

 

 

$

11,857

 

Corporate (2)

 

 

1,374,617

 

 

 

94,905

 

 

 

(4,164

)

 

 

-

 

 

 

1,465,358

 

RMBS – Non-Agency

 

 

83,023

 

 

 

4,259

 

 

 

(147

)

 

 

-

 

 

 

87,135

 

CMBS

 

 

12,912

 

 

 

1,211

 

 

 

-

 

 

 

-

 

 

 

14,123

 

Other asset-backed securities (2)

 

 

222,157

 

 

 

14,004

 

 

 

(573

)

 

 

-

 

 

 

235,588

 

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (1)

 

 

1,066,408

 

 

 

118,273

 

 

 

(4,313

)

 

 

-

 

 

 

1,180,368

 

 

 

     

 

     

 

     

 

     

 

     

Total investments - HTM

 

$

2,769,800

 

 

$

233,826

 

 

$

(9,197

)

 

$

-

 

 

$

2,994,429

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments includes government-related securities with an amortized cost of $2,272.1 million and fair value of $2,313.4 million and U.S. Agencies with an amortized cost of $461.2 million and fair value of $499.4 million.

(2)

During the three months ended March 31, 2012, Covered Bonds within Fixed maturities – AFS with an amortized cost of $398.6 million and a fair value of $415.5 million and Covered Bonds within Fixed maturities – HTM with an amortized cost of $8.3 million and a fair value of $7.7 million have been included within Other asset-backed securities to align the Company’s classification to market indices. Covered Bonds were previously included in Corporate.

(3)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $198.7 million and an amortized cost of $220.0 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.

(4)

Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $411.2 million and an amortized cost of $489.3 million at March 31, 2012.

15


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(a) Fixed Maturities, Short-Term Investments and Equity Securities (Continued)

          Amortized Cost and Fair Value Summary (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in AOCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011
(U.S. dollars in thousands)

 

Cost or
Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Related to
Changes in
Estimated
Fair Value

 

 

Non-credit
Related
OTTI

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities - AFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government-Related/Supported (1)

 

$

1,864,354

 

 

$

130,874

 

 

$

(4,245

)

 

$

-

 

 

$

1,990,983

 

Corporate (2) (3) (4)

 

 

9,866,677

 

 

 

527,192

 

 

 

(233,581

)

 

 

(51,666

)

 

 

10,108,622

 

RMBS – Agency

 

 

5,189,473

 

 

 

193,782

 

 

 

(3,849

)

 

 

-

 

 

 

5,379,406

 

RMBS – Non-Agency

 

 

851,557

 

 

 

19,667

 

 

 

(112,867

)

 

 

(116,542

)

 

 

641,815

 

CMBS

 

 

927,684

 

 

 

56,704

 

 

 

(2,405

)

 

 

(7,148

)

 

 

974,835

 

CDO

 

 

843,553

 

 

 

6,624

 

 

 

(186,578

)

 

 

(4,997

)

 

 

658,602

 

Other asset-backed securities (2)

 

 

1,341,309

 

 

 

30,731

 

 

 

(25,486

)

 

 

(6,305

)

 

 

1,340,249

 

U.S. States and political subdivisions of the States

 

 

1,698,573

 

 

 

101,025

 

 

 

(2,220

)

 

 

-

 

 

 

1,797,378

 

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (1)

 

 

3,188,535

 

 

 

127,439

 

 

 

(17,839

)

 

 

-

 

 

 

3,298,135

 

 

 

     

 

     

 

     

 

     

 

     

Total fixed maturities - AFS

 

$

25,771,715

 

 

$

1,194,038

 

 

$

(589,070

)

 

$

(186,658

)

 

$

26,190,025

 

Total short-term investments (1)

 

$

359,378

 

 

$

519

 

 

$

(834

)

 

$

-

 

 

$

359,063

 

Total equity securities

 

$

480,685

 

 

$

27,947

 

 

$

(40,435

)

 

$

-

 

 

$

468,197

 

 

 

     

 

     

 

     

 

     

 

     

Total investments - AFS

 

$

26,611,778

 

 

$

1,222,504

 

 

$

(630,339

)

 

$

(186,658

)

 

$

27,017,285

 

 

 

     

 

     

 

     

 

     

 

     

Fixed maturities - HTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and Government-Related/Supported (2)

 

$

10,399

 

 

$

1,510

 

 

$

-

 

 

$

-

 

 

$

11,909

 

Corporate (2)

 

 

1,290,209

 

 

 

91,313

 

 

 

(14,433

)

 

 

-

 

 

 

1,367,089

 

RMBS – Non-Agency

 

 

80,955

 

 

 

6,520

 

 

 

(32

)

 

 

-

 

 

 

87,443

 

Other asset-backed securities (2)

 

 

288,741

 

 

 

20,875

 

 

 

(320

)

 

 

-

 

 

 

309,296

 

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (1)

 

 

998,674

 

 

 

127,227

 

 

 

(5,950

)

 

 

-

 

 

 

1,119,951

 

 

 

     

 

     

 

     

 

     

 

     

Total investments - HTM

 

$

2,668,978

 

 

$

247,445

 

 

$

(20,735

)

 

$

-

 

 

$

2,895,688

 

 

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments includes government-related securities with an amortized cost of $1,878.3 million and fair value of $1,915.6 million and U.S. Agencies with an amortized cost of $494.0 million and fair value of $541.2 million.

(2)

Covered Bonds within Fixed maturities – AFS with an amortized cost of $345.4 million and a fair value of $353.9 million and Covered Bonds within Fixed maturities – HTM with an amortized cost of $8.1 million and a fair value of $7.7 million at December 31, 2011 have been reclassified from Corporate to Other asset-backed securities to align the Company’s classification to market indices and conform to current period presentation.

(3)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $266.0 million and an amortized cost of $297.7 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.

(4)

Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $386.1 million and an amortized cost of $494.9 million at December 31, 2011.

16


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(a) Fixed Maturities, Short-Term Investments and Equity Securities (Continued)

          Amortized Cost and Fair Value Summary (Continued)

          At March 31, 2012 and December 31, 2011, approximately 2.8% and 2.4%, respectively, of the Company’s fixed income investment portfolio at fair value was invested in securities that were below investment grade or not rated. Approximately 33.6% and 31.4% of the gross unrealized losses in the Company’s fixed income securities portfolio at March 31, 2012 and December 31, 2011, respectively, related to securities that were below investment grade or not rated.

          Classification of Fixed Income Securities

          During the third quarter of 2011, the Company changed the manner in which it classifies fixed income securities between Fixed maturities and Short-term investments on the balance sheet and the related note disclosure. Short-term investments under the Company’s previous classification comprised investments with a remaining maturity of less than one year from the reporting date. Under this prior presentation, longer term securities were reclassified from Fixed maturities to Short-term investments as they neared maturity. Under the Company’s new classification, Short-term investments include investments due to mature within one year from the date of purchase and are valued using the same external factors and in the same manner as Fixed maturities. No reclassifications will be made between Fixed maturities and Short-term investments subsequent to the initial date of purchase.

          This change in classification did not have an impact on the total value of investments available for sale on the balance sheet, nor did it impact the consolidated statements of income, comprehensive income, shareholders’ equity or cash flows. The only impact, other than the changes in the balance sheet line items, are changes required within the detailed tables included within this note as well as Note 3, “Fair Value Measurements,” to allocate securities previously classified as Short-term investments under the former practice into the appropriate categories of Fixed maturities within each table to conform to the new accounting presentation for current and comparative periods.

          The Company has elected to hold certain fixed income securities to maturity. Consistent with this intention, the Company reclassified these securities from AFS to HTM in the consolidated financial statements. As a result of this classification, these fixed income securities are reflected in the HTM portfolio and recorded at amortized cost in the consolidated balance sheets and not fair value. The HTM portfolio is comprised of long duration non-U.S. securities, which are Euro and U.K. sterling denominated. The Company believes this HTM strategy is achievable due to the relatively stable and predictable cash flows of the Company’s long-term liabilities within its Life operations, along with its ability to substitute other assets at a future date in the event that liquidity was required due to changes in expected cash flows or other transactions entered into related to the long-term liabilities supported by the HTM portfolio. At March 31, 2012, 97.8% of the HTM securities were rated A or higher. The unrealized appreciation at the dates of these reclassifications continues to be reported as a separate component of shareholders’ equity and is being amortized over the remaining lives of the securities as an adjustment to yield in a manner consistent with the amortization of any premium or discount. At the time of the reclassifications, the unrealized U.S. dollar equivalent appreciation related to securities reclassified was $128.9 million in total, with $110.5 million and $108.4 million unamortized at March 31, 2012 and December 31, 2011, respectively.

          Covered Bonds were previously included within Corporate securities. They are now classified as Other asset-backed securities to align the Company’s classification to market indices. At December 31, 2011, Covered Bonds with a fair value of $353.9 million have been reclassified from Corporate to Other asset-backed securities to conform to current period presentation.

          Contractual Maturities Summary

          The contractual maturities of AFS and HTM fixed income securities at March 31, 2012 and December 31, 2011 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.

17


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(a) Fixed Maturities, Short-Term Investments and Equity Securities (Continued)

          Contractual Maturities Summary (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012 (1)

 

 

December 31, 2011 (1)

 

 

 

   

 

   

(U.S. dollars in thousands)

 

Amortized
Cost

 

 

Fair
Value

 

 

Amortized
Cost

 

 

Fair
Value

 

 

 

   

 

   

 

   

 

   

Fixed maturities - AFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due less than one year

 

$

1,888,009

 

 

$

1,902,217

 

 

$

2,004,395

 

 

$

2,020,361

 

Due after 1 through 5 years

 

 

8,510,647

 

 

 

8,768,164

 

 

 

7,736,717

 

 

 

7,909,354

 

Due after 5 through 10 years

 

 

3,745,093

 

 

 

3,930,750

 

 

 

3,619,141

 

 

 

3,777,073

 

Due after 10 years

 

 

3,416,477

 

 

 

3,648,226

 

 

 

3,257,886

 

 

 

3,488,330

 

 

 

     

 

     

 

     

 

     

 

 

$

17,560,226

 

 

$

18,249,357

 

 

$

16,618,139

 

 

$

17,195,118

 

RMBS – Agency

 

 

5,238,075

 

 

 

5,393,391

 

 

 

5,189,473

 

 

 

5,379,406

 

RMBS – Non-Agency

 

 

792,800

 

 

 

632,054

 

 

 

851,557

 

 

 

641,815

 

CMBS

 

 

882,762

 

 

 

944,153

 

 

 

927,684

 

 

 

974,835

 

CDO

 

 

798,313

 

 

 

646,565

 

 

 

843,553

 

 

 

658,602

 

Other asset-backed securities

 

 

1,423,283

 

 

 

1,426,142

 

 

 

1,341,309

 

 

 

1,340,249

 

 

 

     

 

     

 

     

 

     

Total mortgage and asset-backed securities

 

$

9,135,233

 

 

$

9,042,305

 

 

$

9,153,576

 

 

$

8,994,907

 

 

 

     

 

     

 

     

 

     

Total fixed maturities - AFS

 

$

26,695,459

 

 

$

27,291,662

 

 

$

25,771,715

 

 

$

26,190,025

 

 

 

     

 

     

 

     

 

     

Fixed maturities - HTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due less than one year

 

$

35,696

 

 

$

35,831

 

 

$

11,796

 

 

$

11,768

 

Due after 1 through 5 years

 

 

134,543

 

 

 

138,274

 

 

 

122,091

 

 

 

123,871

 

Due after 5 through 10 years

 

 

398,290

 

 

 

418,132

 

 

 

393,865

 

 

 

402,424

 

Due after 10 years

 

 

1,883,179

 

 

 

2,065,346

 

 

 

1,771,530

 

 

 

1,960,886

 

 

 

     

 

     

 

     

 

     

 

 

$

2,451,708

 

 

$

2,657,583

 

 

$

2,299,282

 

 

$

2,498,949

 

RMBS – Non-Agency

 

 

83,023

 

 

 

87,135

 

 

 

80,955

 

 

 

87,443

 

CMBS

 

 

12,912

 

 

 

14,123

 

 

 

-

 

 

 

-

 

Other asset-backed securities

 

 

222,157

 

 

 

235,588

 

 

 

288,741

 

 

 

309,296

 

 

 

     

 

     

 

     

 

     

Total mortgage and asset-backed securities

 

$

318,092

 

 

$

336,846

 

 

$

369,696

 

 

$

396,739

 

 

 

     

 

     

 

     

 

     

Total fixed maturities - HTM

 

$

2,769,800

 

 

$

2,994,429

 

 

$

2,668,978

 

 

$

2,895,688

 

 

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Included in the table above are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions, at their fair value of $411.2 million and $386.1 million at March 31, 2012 and December 31, 2011, respectively. These securities are reflected in the table based on their call date and have net unrealized losses of $78.1 million and $108.8 million at March 31, 2012 and December 31, 2011, respectively.

          OTTI Considerations

          Under final authoritative accounting guidance, a debt security for which amortized cost exceeds fair value is deemed to be other-than-temporarily impaired if it meets either of the following conditions: (a) the Company intends to sell, or it is more likely than not that the Company will be required to sell, the security before a recovery in value, or (b) the Company does not expect to recover the entire amortized cost basis of the security. Other than in a situation in which the Company has the intent to sell a debt security or more likely than not will be required to sell a debt security, the amount of the OTTI related to a credit loss on the security is recognized in earnings, and the amount of the OTTI related to other factors (e.g., interest rates, market conditions, etc.) is recorded as a component of OCI. The net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (“NPV”). The remaining difference between the security’s NPV and its fair value is recognized in OCI. Subsequent changes in the fair value of these securities are included in OCI unless a further impairment is deemed to have occurred.

          In the scenario where the Company has the intent to sell a security in which its amortized cost exceeds its fair value, or it is more likely than not it will be required to sell such a security, the entire difference between the security’s amortized cost and its fair value is recognized in earnings.

          The determination of credit losses is based on detailed analyses of underlying cash flows. Such analyses require the use of certain assumptions to develop the estimated performance of underlying collateral. Key assumptions used include, but are not limited to, items such as RMBS default rates based on collateral duration in arrears, severity of losses on default by collateral class, collateral reinvestment rates and expected future general corporate default rates.

18


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(a) Fixed Maturities, Short-Term Investments and Equity Securities (Continued)

          OTTI Considerations (Continued)

          Factors considered in determining that a gross unrealized loss is not other-than-temporarily impaired include management’s consideration of current and near term liquidity needs and other available sources of funds, an evaluation of the factors and time necessary for recovery and an assessment of whether the Company has the intention to sell or considers it more likely than not that it will be forced to sell a security.

          Pledged Assets

          Certain of the Company’s invested assets are held in trust and pledged in support of insurance and reinsurance liabilities. 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, certain deposit liabilities and annuity contracts require the use of pledged assets. At March 31, 2012 and December 31, 2011, the Company had $17.6 billion and $17.2 billion in pledged assets, respectively.

(b) Gross Unrealized Losses

          The following is an analysis of how long the AFS and HTM securities at March 31, 2012 and December 31, 2011 had been in a continual unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

Equal to or greater
than 12 months

 

 

 

   

 

   

March 31, 2012
(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 and Government-Related/Supported

 

$

478,076

 

 

$

(3,042

)

 

$

31,499

 

 

$

(4,183

)

Corporate (1) (2) (3)

 

 

638,803

 

 

 

(14,193

)

 

 

1,084,471

 

 

 

(177,433

)

RMBS – Agency

 

 

1,081,932

 

 

 

(5,053

)

 

 

34,328

 

 

 

(3,630

)

RMBS – Non-Agency

 

 

36,572

 

 

 

(3,466

)

 

 

489,071

 

 

 

(180,507

)

CMBS

 

 

41,017

 

 

 

(618

)

 

 

32,415

 

 

 

(4,407

)

CDO

 

 

13,501

 

 

 

(2,643

)

 

 

622,684

 

 

 

(157,367

)

Other asset-backed securities (3)

 

 

145,767

 

 

 

(3,683

)

 

 

163,694

 

 

 

(29,770

)

U.S. States and political subdivisions of the States

 

 

8,475

 

 

 

(40

)

 

 

16,045

 

 

 

(1,804

)

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

 

 

572,425

 

 

 

(5,802

)

 

 

166,060

 

 

 

(7,540

)

 

 

     

 

     

 

     

 

     

Total fixed maturities and short-term investments - AFS

 

$

3,016,568

 

 

$

(38,540

)

 

$

2,640,267

 

 

$

(566,641

)

 

 

     

 

     

 

     

 

     

Total equity securities (4)

 

$

228,847

 

 

$

(6,709

)

 

$

-

 

 

$

-

 

 

 

     

 

     

 

     

 

     

Fixed maturities -HTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate (3)

 

$

61,497

 

 

$

(2,652

)

 

$

54,404

 

 

$

(1,512

)

RMBS – Non-Agency

 

 

9,521

 

 

 

(147

)

 

 

-

 

 

 

-

 

Other asset-backed securities (3)

 

 

7,709

 

 

 

(573

)

 

 

-

 

 

 

-

 

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

 

 

74,668

 

 

 

(655

)

 

 

20,064

 

 

 

(3,658

)

 

 

     

 

     

 

     

 

     

Total fixed maturities - HTM

 

$

153,395

 

 

$

(4,027

)

 

$

74,468

 

 

$

(5,170

)

 

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes, which are in a gross unrealized loss position, have a fair value of $198.7 million and an amortized cost of $220.0 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.

(2)

Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities, which are in a gross unrealized loss position, have a fair value of $411.2 million and an amortized cost of $489.3 million at March 31, 2012.

(3)

Covered Bonds within Fixed maturities and short-term investments – AFS with a fair value of $33.9 million and Covered Bonds within Fixed Maturities – HTM with a fair value of $7.7 million have been included within Other asset-backed securities to align the Company’s classification to market indices. Covered Bonds were previously included in Corporate.

(4)

Included within equity securities are investments in fixed income funds with a fair value of $98.0 million and an amortized cost of $100.0 million at March 31, 2012.

19


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(b) Gross Unrealized Losses (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

 

Equal to or greater
than 12 months

 

 

 

   

 

   

December 31, 2011
(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 and Government-Related/Supported

 

$

289,260

 

 

$

(332

)

 

$

43,622

 

 

$

(3,984

)

Corporate (1) (2) (3)

 

 

1,078,664

 

 

 

(42,151

)

 

 

1,185,535

 

 

 

(243,683

)

RMBS – Agency

 

 

310,318

 

 

 

(849

)

 

 

36,960

 

 

 

(3,000

)

RMBS – Non-Agency

 

 

106,294

 

 

 

(31,714

)

 

 

449,138

 

 

 

(197,695

)

CMBS

 

 

69,109

 

 

 

(2,716

)

 

 

39,444

 

 

 

(6,837

)

CDO

 

 

3,357

 

 

 

(2,261

)

 

 

636,362

 

 

 

(189,456

)

Other asset-backed securities (3)

 

 

227,098

 

 

 

(3,324

)

 

 

161,312

 

 

 

(28,467

)

U.S. States and political subdivisions of the States

 

 

25,309

 

 

 

(199

)

 

 

27,646

 

 

 

(2,021

)

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

 

 

265,766

 

 

 

(4,707

)

 

 

202,890

 

 

 

(13,166

)

 

 

     

 

     

 

     

 

     

Total fixed maturities and short-term investments - AFS

 

$

2,375,175

 

 

$

(88,253

)

 

$

2,782,909

 

 

$

(688,309

)

 

 

     

 

     

 

     

 

     

Total equity securities (4)

 

$

361,585

 

 

$

(40,435

)

 

$

-

 

 

$

-

 

 

 

     

 

     

 

     

 

     

Fixed maturities -HTM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate (3)

 

$

147,836

 

 

$

(7,770

)

 

$

62,343

 

 

$

(6,663

)

RMBS – Non-Agency

 

 

9,372

 

 

 

(32

)

 

 

-

 

 

 

-

 

Other asset-backed securities (3)

 

 

7,743

 

 

 

(314

)

 

 

1,106

 

 

 

(6

)

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

 

 

79,242

 

 

 

(1,206

)

 

 

18,330

 

 

 

(4,744

)

 

 

     

 

     

 

     

 

     

Total fixed maturities - HTM

 

$

244,193

 

 

$

(9,322

)

 

$

81,779

 

 

$

(11,413

)

 

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes, which are in a gross unrealized loss position, have a fair value of $266.0 million and an amortized cost of $297.7 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.

(2)

Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities, which are in a gross unrealized loss position, have a fair value of $386.1 million and an amortized cost of $494.9 million at December 31, 2011.

(3)

Covered Bonds within Fixed maturities and short-term investments – AFS with a fair value of $44.7 million and Covered Bonds within Fixed Maturities – HTM with a fair value of $7.7 million have been included within Other asset-backed securities to align the Company’s classification to market indices and to conform to current period presentation. Covered Bonds were previously included in Corporate.

(4)

Included within equity securities are investments in fixed income funds with a fair value of $91.6 million and an amortized cost of $100.0 million at December 31, 2011.

20


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(b) Gross Unrealized Losses (Continued)

          The Company had gross unrealized losses totaling $611.9 million on 1,543 securities out of a total of 7,349 held at March 31, 2012 on its AFS portfolio and $9.2 million on 23 securities out of a total of 210 held on its HTM portfolio, which it considers to be temporarily impaired or includes non-credit losses on OTTI. Individual security positions comprising this balance have been evaluated by management to determine the severity of these impairments and whether they should be considered other-than-temporary.

          Gross unrealized losses of $611.9 million on AFS assets and $9.2 million on HTM assets at March 31, 2012 can be attributed to the following significant drivers:

 

 

 

 

gross unrealized losses of $184.1 million related to the Non-Agency RMBS portfolio (which consists of the Company’s holdings of sub-prime Non-Agency securities, second liens, ABS CDOs with sub-prime collateral, Alt-A and Prime RMBS), which had a fair value of $535.2 million at March 31, 2012. The Company, in conjunction with its investment manager service providers, undertook a security level review of these securities and recognized charges to the extent it believed the discounted cash flow value of any security was below its amortized cost. The Company has incurred realized losses, consisting of charges for OTTI and realized losses from sales, of approximately $1.4 billion since the beginning of 2007 through March 31, 2012 on these asset classes.

 

 

 

 

gross unrealized losses of $160.7 million related to the Company’s Life operations investment portfolio, which had a fair value of $6.6 billion at March 31, 2012. Of these gross unrealized losses, $89.2 million related to $1.2 billion of exposures to corporate financial institutions, including $323.6 million Tier One and Upper Tier Two securities. At March 31, 2012, this portfolio had an average interest rate duration of 8.5 years, primarily denominated in U.K. sterling and Euros. As a result of the long duration, significant gross losses have arisen as the fair values of these securities are more sensitive to prevailing government interest rates and credit spreads. This portfolio is generally matched to corresponding long duration liabilities. A hypothetical parallel increase in interest rates and credit spreads of 50 and 25 basis points, respectively, would increase the unrealized losses related to this portfolio at March 31, 2012 by approximately $280.4 million and $108.6 million, respectively, on both the AFS and HTM portfolios. Given the long term nature of this portfolio, the level of credit spreads on financial institutions at March 31, 2012 relative to historical averages within the U.K. and Euro-zone, and the Company’s liquidity needs at March 31, 2012, the Company believes that these assets will continue to be held until such time as they mature, or credit spreads on financial institutions revert to levels more consistent with historical averages.

 

 

 

 

gross unrealized losses of $160.0 million related to the P&C portfolios of Core CDO holdings (defined by the Company as investments in non-subprime CDOs), which consisted primarily of collateral loan obligations (“CLOs”) and had a fair value of $636.2 million at March 31, 2012. The Company evaluated each of these securities in conjunction with its investment manager service providers and recognized charges to the extent it believed the discounted cash flow value of the security was below the amortized cost. The Company believes that the level of impairment is primarily a function of continuing wide spreads in the CDO market, driven by low liquidity in this market. The Company believes it is likely these securities will be held until either maturity or a recovery of value.

 

 

 

 

gross unrealized losses of $96.6 million related to the corporate holdings within the Company’s non-life fixed income portfolios, which had a fair value of $7.9 billion at March 31, 2012. During the three months ended March 31, 2012, as a result of declining credit spreads, the gross unrealized losses on these holdings has decreased. Of the gross unrealized losses noted above, $45.7 million relate to financial institutions. In addition, $22.1 million relate to medium term notes primarily supported by pools of investment grade European investment grade credit with varying degrees of leverage. These had a fair value of $198.7 million at March 31, 2012. Management believes that expected cash flows from these bonds over the expected holding period will be sufficient to support the remaining reported amortized cost.

          Management, in its assessment of whether securities in a gross unrealized loss position are temporarily impaired, considers the significance of the impairments. The Company had structured credit securities with gross unrealized losses of $65.5 million, with a fair value of $32.5 million, which at March 31, 2012 had cumulative fair value decline of greater than 50% of amortized cost. All of these are mortgage and asset-backed securities. The Company, in conjunction with its investment manager service providers, undertook a security level review of these securities and recognized charges to the extent it believed the discounted cash flow value of any security was below its amortized cost. These securities include gross unrealized losses of $183.1 million on non-Agency RMBS, $160.0 million on Core CDOs and $5.1 million of CMBS holdings.

21


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(c) Net Realized Gains (Losses)

          The following represents an analysis of net realized gains (losses) on investments:

 

 

 

 

 

 

 

 

 

Net Realized Gains (Losses) on Investments
(U.S. dollars in thousands)

 

Three Months Ended
March 31,

 

 

   

 

2012

 

 

2011

 

 

 

   

 

   

Gross realized gains

 

$

66,889

 

 

$

27,142

 

Gross realized losses on investments sold

 

 

(25,121

)

 

 

(56,134

)

OTTI on investments, net of amounts transferred to other comprehensive income

 

 

(20,965

)

 

 

(37,445

)

 

 

     

 

     

Net realized gains (losses) on investments

 

$

20,803

 

 

$

(66,437

)

 

 

     

 

     

          The significant components of the net impairment charges of $21.0 million for the three months ended March 31, 2012 were:

 

 

 

 

$17.0 million for structured securities where the Company determined that the likely recovery on these securities was below the carrying value and, accordingly, recorded an impairment of the securities to the discounted value of the cash flows expected to be received on these securities. Also included was a $3.3 million charge related to a change in intent to hold on 14 securities that the Company had decided to sell.

 

 

 

 

$3.0 million related to medium term notes backed primarily by European investment grade credit. On certain notes, management concluded that future returns on the underlying assets were not sufficient to support the previously reported amortized cost.

 

 

 

 

$1.0 million for corporate securities, excluding medium term notes, principally on hybrid securities that had not been called on the first call date during the quarter.

          The following table sets forth the amount of credit loss impairments on fixed income securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.

 

 

 

 

 

 

 

Credit Loss Impairments
(U.S. dollars in thousands)

 

Three Months Ended
March 31,

 

 

   

 

2012

 

 

2011

 

 

 

   

 

   

Balance at January 1,

 

$

333,379

 

 

$

426,372

 

Credit loss impairment recognized in the current period on securities not previously impaired

 

 

1,835

 

 

 

4,573

 

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period

 

 

(18,940

)

 

 

(125,711

)

Credit loss impairments previously recognized on securities impaired to fair value during the period

 

 

(16,384

)

 

 

-

 

Additional credit loss impairments recognized in the current period on securities previously impaired

 

 

14,930

 

 

 

25,459

 

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected

 

 

(15

)

 

 

(523

)

 

 

     

 

     

Balance at March 31,

 

$

314,805

 

 

$

330,170

 

 

 

     

 

     

          During the three months ended March 31, 2012 and 2011, the $18.9 million and $125.7 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $9.9 million and $91.7 million, respectively, of non-Agency RMBS.

22


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments (Continued)

(d) Other Investments

          Structured Transactions - Project Finance Loans

          The Company historically participated in structured transactions in project finance related areas under which the Company provided a cash loan supporting project finance transactions. These transactions are accounted for in accordance with guidance governing accounting by certain entities (including entities with trade receivables) that lend to or finance the activities of others under which the loans are considered held for investment as the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff. Accordingly, these funded loan participations are reported in the balance sheet at outstanding principal adjusted for any allowance for loan losses as considered necessary by management.

          The following table shows a summary of the structured project finance loans:

 

 

 

 

 

 

 

 

 

Project Finance Loans
(U.S. dollars in thousands)

 

March 31,
2012

 

 

December 31,
2011

 

 

 

   

 

   

Aggregate loan value

 

$

39,786

 

 

$

49,650

 

Aggregate loan net carrying value

 

$

33,886

 

 

$

40,483

 

 

 

 

 

 

 

 

 

 

Opening allowance for loan losses

 

$

(9,167

)

 

$

(9,167

)

Amounts charged off during the period

 

 

3,267

 

 

 

-

 

 

 

     

 

     

Closing allowance for loan losses

 

$

(5,900

)

 

$

(9,167

)

 

 

     

 

     

 

 

 

 

 

 

 

 

 

Number of individual loan participations

 

 

5

 

 

 

6

 

Number of individual loan participations relating to the allowance for loan losses

 

 

2

 

 

 

2

 

Weighted average contractual term to maturity

 

1.41 years

 

 

2.12 years

 

Weighted average credit rating

 

BB

 

 

BB-

 

Range of individual credit ratings

 

BB+ to B+

 

 

BB+ to CCC

 

          Surveillance procedures are conducted over each structured project finance loan on an ongoing basis with current expectations of future collections of contractual interest and principal used to determine whether any allowance for loan losses may be required at each period end. If it is determined that a future credit loss on a specific contract is reasonably possible and an amount can be estimated, an allowance is recorded. The contractual receivable is only charged off when the final outcome is known and the Company has exhausted all commercial efforts to try and collect any outstanding balances.

          During the three months ended March 31, 2012 and year ended December 31, 2011, management conducted separate reviews of each loan participation and determined loss allowance estimates, as shown in the table above, using a recovery value concept. Management considers recovery value to be the percentage of all future contractual interest and principal that the Company expects to receive from the borrower through any combination of regular debt service, other payments, salvage and recovery. The allowances for loan losses are made when it is probable that a loss will be incurred based upon current information received from the borrower.

23


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Derivative Instruments

          The Company enters into derivative instruments for both risk management and investment purposes. The Company is exposed to potential loss from various market risks, and manages its market risks based on guidelines established by management and the Risk and Finance Committee of the Board of Directors of XL Group plc. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value, with the changes in fair value of derivatives shown in the consolidated statement of income as “net realized and unrealized gains and losses on derivative instruments” unless the derivatives are designated as hedging instruments. The accounting for derivatives that are designated as hedging instruments is described in Item 8, Note 2(h), “Significant Accounting Policies – Derivative Instruments,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

          The following table summarizes information on the location and gross amounts of derivative fair values contained in the consolidated balance sheet at March 31, 2012 and December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

   

 

 

(U.S. dollars in thousands, except ratios)

 

Asset
Derivative
Notional
Amount

 

 

Asset
Derivative
Fair Value
(1)

 

 

Liability
Derivative
Notional
Amount

 

 

Liability
Derivative
Fair Value
(1)

 

 

Asset
Derivative
Notional
Amount

 

 

Asset
Derivative
Fair Value
(1)

 

 

Liability
Derivative
Notional
Amount

 

 

Liability
Derivative
Fair Value
(1)

 

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

Derivatives designed as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (2)

 

$

156,271

 

 

$

106,941

 

 

$

-

 

 

$

-

 

 

$

156,271

 

 

$

109,761

 

 

$

-

 

 

$

-

 

Foreign exchange contracts

 

 

971,816

 

 

 

5,830

 

 

 

1,798,665

 

 

 

(21,415

)

 

 

2,033,428

 

 

 

25,387

 

 

 

457,892

 

 

 

(4,518

)

 

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

     

Total derivatives designed as hedging instruments

 

$

1,128,087

 

 

$

112,771

 

 

$

1,798,665

 

 

 

(21,415

)

 

$

2,189,699

 

 

$

135,148

 

 

$

457,892

 

 

 

(4,518

)

 

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designed as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Related Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate exposure

 

$

92,377

 

 

$

2,311

 

 

$

8,886

 

 

$

(26

)

 

$

70,978

 

 

$

1,946

 

 

$

55,033

 

 

$

(43

)

Foreign exchange exposure

 

 

78,100

 

 

 

384

 

 

 

131,658

 

 

 

(2,137

)

 

 

232,422

 

 

 

3,759

 

 

 

384,592

 

 

 

(11,737

)

Credit exposure

 

 

113,750

 

 

 

1,745

 

 

 

486,513

 

 

 

(14,839

)

 

 

172,500

 

 

 

5,271

 

 

 

449,513

 

 

 

(13,986

)

Financial market exposure

 

 

49,088

 

 

 

1,392

 

 

 

13,880

 

 

 

-

 

 

 

23,874

 

 

 

615

 

 

 

14,321

 

 

 

-

 

Financial Operations Derivatives: (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit exposure (2)

 

 

-

 

 

 

-

 

 

 

82,146

 

 

 

(10,288

)

 

 

-

 

 

 

-

 

 

 

81,678

 

 

 

(10,288

)

Other Non-Investment Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed minimum income benefit contract

 

 

-

 

 

 

-

 

 

 

70,352

 

 

 

(20,475

)

 

 

-

 

 

 

-

 

 

 

78,777

 

 

 

(22,490

)

Modified coinsurance funds withheld contract

 

 

76,890

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

77,200

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

     

Total derivatives not designed as hedging instruments

 

$

410,205

 

 

$

5,832

 

 

$

793,435

 

 

$

(47,765

)

 

$

576,974

 

 

$

11,591

 

 

$

1,063,914

 

 

$

(58,544

)

 

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 

 

 

 

(1)

Derivative instruments in an asset or liability position are included within Other assets or Other liabilities, respectively, in the balance sheet.

(2)

At March 31, 2012 and December 31, 2011, the Company held net cash collateral related to these derivative positions of $77.5 million and $77.1 million, respectively. The collateral balance is included within Cash and cash equivalents and the corresponding liability to return the collateral has been offset against the derivative asset within the balance sheet as appropriate under the netting agreement.

(3)

Financial operations derivatives represent interests in variable interest entities as described in Note 10, “Variable Interest Entities.”

(a) Derivative Instruments Designated as Fair Value Hedges

          The Company designates certain of its derivative instruments as fair value hedges or cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the hedging derivative to specific assets and liabilities. The Company assesses the effectiveness of the hedge, both at inception and on an on-going basis and determines whether the hedge is highly effective in offsetting changes in fair value or cash flows of the linked hedged item.

          At March 31, 2012 and 2011, a portion of the Company’s liabilities are hedged against changes in the applicable designated benchmark interest rate. Interest rate swaps are also used to hedge the changes in fair value of certain fixed rate liabilities and fixed income securities due to changes in the designated benchmark interest rate. In addition, the Company utilizes foreign exchange contracts to hedge the fair value of certain fixed income securities as well as to hedge certain net investments in foreign operations.

24


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Derivative Instruments (Continued)

(a) Derivative Instruments Designated as Fair Value Hedges (Continued)

          The following table provides the total impact on earnings relating to derivative instruments formally designated as fair value hedges along with the impacts of the related hedged items for the three month periods ended March 31, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged Items - Amount of Gain/(Loss)
Recognized in Income Attributable to Risk

 

 

 

 

Derivatives Designated as Fair Value Hedges:
Three Months Ended March 31, 2012

(U.S. dollars in thousands)

 

Gain/(Loss)
Recognized
in Income on
Derivative

 

 

Deposit
Liabilities

 

 

Fixed Maturity
Investments

 

 

Ineffective
Portion of
Hedging
Relationship -
Gain/(Loss)

 

 

 

   

 

   

 

   

 

   

Interest rate exposure

 

$

(5,457

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange exposure

 

 

(15,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(20,557

)

 

$

3,607

 

 

$

14,511

 

 

$

(2,439

)

 

 

     

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2011
(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate exposure

 

$

(874

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange exposure

 

 

(20,425

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(21,299

)

 

$

2,381

 

 

$

20,139

 

 

$

1,221

 

 

 

     

 

     

 

     

 

     

          The gains (losses) recorded on both the derivatives instruments and specific items designated as being hedged as part of the fair value hedging relationships outlined above are recorded through Net realized and unrealized gains (losses) on derivative instruments in the income statement along with any associated ineffectiveness in the relationships. In addition, the periodic coupon settlements relating to the interest rate swaps are recorded as adjustments to net investment income for the hedges of fixed maturity investments and as adjustments to interest expense for the hedges of deposit liabilities and notes payable and debt.

          The periodic coupon settlements also resulted in decreases to Interest expense of $2.4 million and $2.5 million for the three months ended March 31, 2012 and 2011, respectively.

Settlement of Fair Value Hedges

          During the year ended December 31, 2010, the Company settled the interest rate contracts designated as fair value hedges of certain of the Company’s notes payable and debt and also settled three interest rate contracts designated as fair value hedges of certain of the Company’s deposit liability contracts. The cumulative increase recorded to the carrying value of the hedged notes payable and debt, and the deposit liability contracts, representing the effective portion of the hedging relationship, is amortized through interest expense over the remaining terms of the debt and deposit liability contracts. A summary of the fair value hedges that were settled in 2010 and their results during the three months ended March 31, 2012 and 2011, including the gains on settlements, is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement of Fair Value Hedges - Summary

 

Fair Value Hedges - Notes
Payable and Debt
Three Months Ended
March 31,

 

 

Fair Value Hedges - Deposit
Liabilities
Three Months Ended
March 31,

 

 

 

   

 

   

(U.S. dollars in thousands, except years)

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

   

 

   

 

   

 

   

Cumulative reduction to interest expense

 

$

12,019

 

 

$

5,690

 

 

$

11,070

 

 

$

3,780

 

Remaining balance

 

$

9,605

 

 

$

15,933

 

 

$

138,415

 

 

$

145,705

 

Weighted average years remaining to maturity

 

 

2.5

 

 

 

3.1

 

 

 

33.0

 

 

 

35.7

 

25


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Derivative Instruments (Continued)

(b) Derivative Instruments Designated as Hedges of the Net Investment in a Foreign Operation

          The Company utilizes foreign exchange contracts to hedge the fair value of certain net investments in foreign operations. During the three months ended March 31, 2012 and 2011, the Company entered into foreign exchange contracts that were formally designated as hedges of investments in foreign subsidiaries, the majority of which have functional currencies of either U.K. sterling or the Euro. There was no ineffectiveness in these transactions.

          The following table provides the weighted average U.S. dollar equivalent of foreign denominated net assets that were hedged and the resultant gain (loss) that was recorded in the cumulative translation adjustment account within AOCI for the three months ended March 31, 2012 and 2011.

 

 

 

 

Derivative Instruments Designated as Hedges of the Net Investment in a Foreign Operation - Summary

 

Three Months Ended
March 31,

 

 

 

 

 

(U.S. dollars in thousands)

 

2012

 

 

2011

 

 

 

   

 

   

Weighted average of U.S. dollar equivalent of foreign denominated net assets

 

$

1,893,401

 

 

$

1,429,874

 

Derivative gains (losses) (1)

 

$

(37,872

)

 

$

(41,409

)


 

 

 

 

 

(1)

Derivative gains (losses) from derivative instruments designated as hedges of the net investment in a foreign operation are recorded in the cumulative translation adjustment account within AOCI for each period.

(c) Derivative Instruments Not Formally Designated As Hedging Instruments

          The following table provides the total impact on earnings relating to derivative instruments not formally designated as hedging instruments under authoritative accounting guidance and from the ineffective portion of fair value hedges. The impacts are all recorded through Net realized and unrealized gains (losses) on derivatives in the income statement for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

 

 

 

 

Net Realized and Unrealized Gains (Losses) on Derivative Instruments

 

Three Months Ended
March 31,

 

 

 

 

 

(U.S. dollars in thousands)

 

2012

 

 

2011

 

 

 

   

 

   

Investment Related Derivatives:

 

 

 

 

 

 

 

 

Interest rate exposure

 

$

700

 

 

$

168

 

Foreign exchange exposure

 

 

(354

)

 

 

6,437

 

Credit exposure

 

 

(3,699

)

 

 

(1,253

)

Financial market exposure

 

 

3,944

 

 

 

1,156

 

Financial Operations Derivatives:

 

 

 

 

 

 

 

 

Credit exposure

 

 

143

 

 

 

182

 

Other Non-Investment Derivatives:

 

 

 

 

 

 

 

 

Contingent credit facility

 

 

-

 

 

 

(2,030

)

Guaranteed minimum income benefit contract

 

 

2,015

 

 

 

2,309

 

Modified coinsurance funds withheld contract

 

 

392

 

 

 

(4,623

)

 

 

     

 

     

Total derivatives not designated as hedging instruments

 

$

3,141

 

 

$

2,346

 

Amount of gain (loss) recognized in income from ineffective portion of fair value hedges

 

 

(2,439

)

 

 

1,221

 

 

 

     

 

     

Net realized and unrealized gains (losses) on derivative instruments

 

$

702

 

 

$

3,567

 

 

 

     

 

     

          The Company’s objectives in using these derivatives are explained below.

26


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Derivative Instruments (Continued)

(d)(i) Investment Related Derivatives

          The Company, either directly or through its investment managers, may use derivative instruments within its investment portfolio, including interest rate swaps, inflation swaps, credit derivatives (single name and index credit default swaps), options, forward contracts and financial futures (foreign exchange, bond and stock index futures), primarily as a means of economically hedging exposures to interest rate, credit spread, equity price changes and foreign currency risk or, in limited instances, for investment purposes. The Company is exposed to credit risk in the event of non-performance by the counterparties under any swap contracts, although the Company generally seeks to use credit support arrangements with counterparties to help manage this risk.

          Investment Related Derivatives – Interest Rate Exposure

          The Company utilizes risk management and overlay strategies that incorporate the use of derivative financial instruments, primarily to manage its fixed income portfolio duration and exposure to interest rate risks associated with primarily those assets and liabilities related to certain legacy other financial lines and structured indemnity transactions. The Company uses interest rate swaps to convert certain liabilities from a fixed rate to a variable rate of interest and may also use them to convert a variable rate of interest from one basis to another.

          Investment Related Derivatives – Foreign Exchange Exposure

          The Company has exposure to foreign currency exchange rate fluctuations through its operations and in its investment portfolio. The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities primarily within its Life operations portfolio. These contracts are not designated as specific hedges for financial reporting purposes and, therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of twelve months or less.

          In addition, certain of the Company’s investment managers may, subject to investment guidelines, enter into forward contracts where potential gains may exist.

          Investment Related Derivatives – Credit Exposure

          Credit derivatives are purchased within the Company’s investment portfolio in the form of single name and basket credit default swaps, which are used to mitigate credit exposure through a reduction in credit spread duration (i.e., macro credit strategies rather than single-name credit hedging) or exposure to selected issuers, including issuers that are not held in the underlying bond portfolio.

          Investment Related Derivatives – Financial Market Exposure

          Stock index futures may be purchased within the Company’s investment portfolio in order to create synthetic equity exposure and to add value to the portfolio with overlay strategies where market inefficiencies are believed to exist. From time to time, the Company may enter into other financial market exposure derivative contracts on various indices including, but not limited to, inflation and commodity contracts.

(d)(ii) Financial Operations Derivatives – Credit Exposure

          At March 31, 2012 and December 31, 2011, the Company held two credit derivative exposures which were written as part of the Company’s previous financial lines business and are outside of the Company’s investment portfolio: one that provides credit protection on the senior tranches of a structured finance transaction; the other is a European project finance loan participation. An aggregate summary of these credit derivative exposures at March 31, 2012 and December 31, 2011 is as follows:

 

 

 

 

 

 

 

 

 

Financial Operations Derivatives - Credit Exposure Summary:
(U.S. dollars in thousands, except term to maturity)

 

March 31,
2012

 

 

December 31,
2011 

 

 

 

   

 

   

Principal outstanding

 

$

78,763

 

 

$

78,425

 

Interest outstanding

 

 

3,383

 

 

 

3,253

 

 

 

     

 

     

Aggregate outstanding exposure

 

$

82,146

 

 

$

81,678

 

 

 

     

 

     

Total liability recorded

 

$

10,288

 

 

$

10,288

 

Weighted average contractual term to maturity

 

 

4.5 years

 

 

 

5.0 years

 

Underlying obligations credit rating

 

 

BB

 

 

 

BB

 

27


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Derivative Instruments (Continued)

(d)(ii) Financial Operations Derivatives – Credit Exposure (Continued)

          The credit protection related to the structured finance transaction is a credit default swap that was executed in 2000. The underlying collateral is predominantly securitized pools of leveraged loans and bonds. The transaction is in compliance with most of the coverage tests except the mezzanine overcollateralization test. As a result, both interest and principal proceeds are currently redirected to amortize the most senior notes, which reduces the Company’s exposure sooner than originally anticipated. In 2011, the Company’s exposure to this transaction was reduced by $147.8 million mainly due to principal pay downs. Management continues to monitor the underlying performance. The European project finance loan participation benefits from an 80% deficiency guarantee from the German state and federal governments.

          At March 31, 2012 and December 31, 2011, there were no reported events of default on these obligations. Credit derivatives are recorded at fair value, which is determined using models developed by the Company and is dependent upon a number of factors, including changes in interest rates, future default rates, credit spreads, changes in credit quality, future expected recovery rates and other market factors. The change resulting from movements in credit and credit quality spreads is unrealized as the credit derivatives are not traded to realize this resultant value.

(d)(iii) Other Non-Investment Derivatives

          The Company also has derivatives embedded in certain reinsurance contracts. For a particular life reinsurance contract, the Company pays the ceding company a fixed amount equal to the estimated present value of the excess of guaranteed benefit over the account balance upon the policyholder’s election to take the income benefit. The fair value of this derivative is determined based on the present value of expected cash flows. In addition, the Company has modified coinsurance and funds withheld reinsurance agreements that provide for a return based on a portfolio of fixed income securities. As such, the agreements contain embedded derivatives. The embedded derivative is bifurcated from the funds withheld balance and recorded at fair value with changes in fair value recognized in earnings through Net realized and unrealized gains and losses on derivative instruments.

(e) Contingent Credit Features

          Certain derivatives agreements entered into by the Company or its subsidiaries contain rating downgrade provisions that permit early termination of the agreement by the counterparty if collateral is not posted following failure to maintain certain credit ratings from one or more of the principal credit rating agencies. If the Company were required to early terminate such agreements due to a rating downgrade, it could potentially be in a net liability position at time of settlement. The aggregate fair value of all derivatives agreements containing such rating downgrade provisions that were in a liability position and the collateral posted under any of these agreements as of March 31, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

 

 

 

 

Contingent Credit Features - Summary:

 

March 31,
2012

 

 

December 31,
2011

 

 

 

   

 

   

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

Aggregate fair value of derivative agreements with downgrade provisions in a net liability position

 

$

15,763

 

 

$

15,763

 

Collateral posted to counterparty

 

$

512

 

 

$

809

 

7. Share Capital

(a) Authorized and Issued

          Ordinary Share Buybacks

          On February 27, 2012, the Company announced that its Board of Directors approved a share buyback program, authorizing the Company to purchase up to $750 million of its ordinary shares. This authorization replaced the approximately $190 million remaining under the share buyback program that was authorized in November 2010 as described in further detail in Item 8, Note 18, “Share Capital,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. During the three months ended March 31, 2012, the Company purchased and canceled 4.7 million ordinary shares under the new program for $100.0 million. All share buybacks were carried out by way of redemption in accordance with Irish law and the Company’s constitutional documents. All shares so redeemed were canceled upon redemption. At March 31, 2012, $650.0 million remained available for purchase under the new program.

(b) Stock Plans

          The Company’s performance incentive programs provide for grants of stock options, restricted stock, restricted stock units and performance units and stock appreciation rights. Share based compensation granted by the Company generally contains a vesting period of three or four years, and certain awards also contain performance conditions. The Company records compensation expense related to each award over its vesting period incorporating the best estimate of the expected outcome of performance conditions where applicable. Compensation expense is generally recorded on a straight line basis over the vesting period of an award. See Item 8, Note 18, “Share Capital,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for further information on the Company’s performance incentive programs and associated accounting.

28


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Share Capital (Continued)

(b) Stock Plans (Continued)

          On February 28, 2012, the Company granted approximately 1.2 million stock options with a weighted-average grant date fair value of $7.62 per option. The fair value of the options issued was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:

 

 

 

 

 

Dividend yield

 

 

1.90

%

Risk free interest rate

 

 

1.16

%

Volatility

 

 

46.0

%

Expected lives

 

 

6.0

 years

          On February 28, 2012, the Company granted approximately 0.3 million restricted stock awards to certain employees of the Company and its subsidiaries with an aggregate grant date fair value of approximately $5.3 million. The award recipients generally have the rights and privileges of a shareholder as to the restricted stock, including the right to receive dividends and the right to vote such restricted stock. The recipients are not entitled to receive delivery of a stock certificate prior to vesting nor may any restricted stock be sold, transferred, pledged, or otherwise disposed of prior to the satisfaction of all vesting requirements.

          In February 2012, the Company granted approximately 1.3 million restricted stock units to certain employees of the Company and its subsidiaries with an aggregate grant date fair value of approximately $25.9 million. Each restricted stock unit represents the Company’s obligation to deliver to the holder one ordinary share upon satisfaction of the three year vesting term. Restricted stock units are granted at the closing market price on the day of grant and entitle the holder to receive dividends declared and paid in the form of additional ordinary shares contingent upon vesting.

          On February 28, 2012, the Company granted approximately 1.5 million performance units (representing a potential maximum share payout of approximately 3.0 million ordinary shares) to certain employees with an aggregate grant date fair value of approximately $29.0 million. The performance units vest after three years, subject to the achievement of stated performance metrics, and entitle the holder to ordinary shares of the Company stock. There are no dividend rights associated with the performance units. Each grant of performance units has a target number of shares, with final payouts ranging from 0% to 200% of the grant amount depending upon a combination of corporate and business segment performance along with each employee’s continued service through the vest date. Performance targets are based on relative and absolute financial performance metrics.

8. Notes Payable and Debt and Financing Arrangements

(a) Notes Payable and Debt

          All outstanding debt of the Company at March 31, 2012 and December 31, 2011 was issued by XLIT Ltd. (“XL-Cayman”) except for the $600 million par value 6.5% Guaranteed Senior Notes (the “XLCFE Notes”), which were issued by XL Capital Finance (Europe) plc (“XLCFE”) and were repaid at maturity on January 15, 2012. Both XL-Cayman and XLCFE are wholly-owned subsidiaries of XL Group plc. The XLCFE Notes were fully and unconditionally guaranteed by XL Company Switzerland GmbH. The Company’s ability to obtain funds from its subsidiaries to satisfy any of its obligations under guarantees is subject to certain contractual restrictions, applicable laws and statutory requirements of the various countries in which the Company operates, including, among others, Bermuda, the United States, Ireland, Switzerland and the U.K. Aggregated required statutory capital and surplus for the principal operating subsidiaries of the Company was $6.7 billion at December 31, 2011.

29


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Notes Payable and Debt and Financing Arrangements (Continued)

(b) Letter of Credit Facilities and Other Sources of Collateral

          The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. These facilities are utilized primarily to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd’s. The Company’s letter of credit facilities and revolving credit facilities at March 31, 2012 and December 31, 2011 were as follows:

 

 

 

 

 

 

 

 

 

Letter of Credit Summary:

 

March 31,
2012 (1)

 

 

December 31,
2011 (1)

 

 

 

   

 

   

(U.S. dollars in thousands except percentages)

 

 

 

 

 

 

 

 

Revolving credit facility (2)

 

$

1,000,000

 

 

$

1,000,000

 

Available letter of credit facilities - commitments (3)

 

$

4,000,000

 

 

$

4,000,000

 

Available letter of credit facilities - in use

 

$

1,774,251

 

 

$

1,871,192

 

Collateralized by certain of the Company’s investment portfolio

 

 

93.4

%

 

 

93.8

%


 

 

 

 

 

(1)

At March 31, 2012 and December 31, 2011 there were five available letter of credit facilities.

(2)

At March 31, 2012 and December 31, 2011 the revolving credit facility was unutilized.

(3)

The Company has the option to increase the size of the March 2011 Credit Agreement by an additional $500 million and the size of the facilities under the December 2011 Credit Agreements by an additional $500 million across both such facilities.

9. Related Party Transactions

          At March 31, 2012, the Company owned minority stakes in three independent investment management companies (“Investment Manager Affiliates”) that are actively managing client capital and seeking growth opportunities. The Company seeks to develop relationships with specialty investment management organizations, generally acquiring an equity interest in the business. The Company also invests in certain of the funds and limited partnerships and other legal entities managed by these affiliates and through these funds and partnerships pays management and performance fees to the Company’s Investment Manager Affiliates.

          In the normal course of business, the Company enters into certain quota share reinsurance contracts with a subsidiary of one of its other strategic affiliates, ARX Holding Corporation. During the three months ended March 31, 2012 and 2011, these contracts resulted in reported net premiums written, net reported claims and reported acquisition costs as summarized below. Management believes that these transactions are conducted at market rates consistent with negotiated arms-length contracts.

 

 

 

 

 

 

 

 

 

ARX Holding Corporation:

 

March 31,
2012

 

 

March 31,
2011

 

 

 

   

 

   

(U.S. dollars in thousands)

 

 

 

 

 

 

 

 

Reported net premiums written

 

$

15,647

 

 

$

14,059

 

Net losses incurred

 

$

7,961

 

 

$

7,691

 

Reported acquisition costs

 

$

6,477

 

 

$

5,849

 

10. Variable Interest Entities

          At times, the Company has utilized variable interest entities (“VIEs”) both indirectly and directly in the ordinary course of the Company’s business.

          The Company invests in CDOs, and other investment vehicles that are issued through VIEs as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding the underlying collateral used to service investments therein. The Company’s involvement in these entities is passive in nature and we are not the arranger of these entities. In addition, the Company has not been involved in establishing these entities and is not the primary beneficiary of these VIEs as contemplated in current authoritative accounting guidance.

          The Company has a limited number of remaining outstanding credit enhancement exposures, including written financial guarantee and credit default swap contracts. The obligations related to these transactions are often securitized through VIEs. The Company is not the primary beneficiary of these VIEs as contemplated in current authoritative accounting guidance on the basis that management does not believe that the Company has the power to direct the activities, such as asset selection and collateral management, which most significantly impact each entity’s economic performance. For further details on the nature of the obligations and the size of the Company’s maximum exposure, see Note 6, “Derivative Instruments,” and Note 12 (a), “Commitments and Contingencies – Financial Guarantee Exposures.”

30


XL GROUP PLC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Computation of Earnings Per Ordinary Share and Ordinary Share Equivalents

 

 

 

 

 

 

 

 

 

Basic earnings per ordinary share & ordinary share equivalents outstanding:

 

March 31,
2012

 

 

March 31,
2011

 

 

 

   

 

   

(U.S. dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net income (loss) attributable to ordinary shareholders

 

$

176,628

 

 

$

(227,284

)

Weighted average ordinary shares outstanding

 

 

315,120

 

 

 

311,478

 

 

 

     

 

     

Basic earnings per ordinary share & ordinary share equivalents outstanding

 

$

0.56

 

 

$

(0.73

)

 

 

     

 

     

 

 

 

 

 

 

 

 

 

Diluted earnings per ordinary share & ordinary share equivalents outstanding:

 

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding - basic

 

 

315,120

 

 

 

311,478

 

Impact of share based compensation and certain conversion features

 

 

2,519

 

 

 

-

 

 

 

     

 

     

Weighted average ordinary shares outstanding - diluted

 

 

317,639

 

 

 

311,478

 

 

 

     

 

    &nb