Companys
property business, which also includes construction projects, is short-tail by
nature and written on both a primary and excess of loss basis. Property
business includes exposures to man-made and natural disasters, and generally,
loss experience is characterized as low frequency and high severity.
Environmental
liability products include pollution and remediation legal liability, general
and project-specific pollution and professional liability, and commercial
general property redevelopment and contractors pollution liability. Business
is written for both single and multiple years on a primary or excess of loss,
claims-made or, less frequently, occurrence basis. Targeted industries include
environmental service firms, contractors, healthcare facilities, manufacturing
facilities, real estate redevelopment, transportation and construction.
North
America Property and Casualty
NAPC
includes the following lines of business: property, primary and excess
casualty, environmental liability, excess and surplus lines, construction,
surety and program business.
In
addition to the property, casualty, environmental and UMM products described
under IPC, the NAPC business unit also includes 100% property products for the
large account risk engineered markets and general liability, U.S. workers
compensation and auto liability for the risk management accounts, which require
customers to take large deductibles or self-insured retentions.
Excess
and surplus lines products include general liability and property coverages
where most Insurance Services Office, Inc. (ISO) products are written.
Targets include a variety of classes with focus on one-off risks generated
from a limited number of contracted wholesale brokers.
Construction
products include property coverages (builders risk, contractors equipment,
property and inland marine), general liability, U.S. workers compensation and
commercial auto, as well as professional liability for contractors and owner,
excess umbrella, subcontractor default insurance and primary casualty wrap ups.
Surety
products include contract bonds, including bid, performance, payment, and
contractor qualification bonds, as well as commercial surety bonds, including
appeal, court and qualification bonds. Products in general provide large capacity
and are written on a sole surety, co-surety or shared surety basis.
The
Companys program business specializes in insurance coverages for distinct
market segments in North America, including program administrators and managing
general agents who operate in a specialized market niche and have unique
industry backgrounds or specialized underwriting capabilities. Products
encompass mostly property and casualty coverages.
Global
Professional Lines
Professional
includes directors and officers liability, errors and omissions liability and
employment practices liability coverages. Policies are written on both a
primary and excess of loss basis. Directors and officers coverage includes
primary and excess directors and officers liability, employment practices
liability and company securities and private company directors and officers
liability. Products are targeted at a variety of different sized companies,
with a heavy concentration on small to medium-sized firms when written on a
primary basis. Employment practices liability is written primarily for very
large corporations on an excess of loss basis and covers those firms for legal
liability in regard to the treatment of employees. Errors and omissions
coverage is written on a primary and excess basis.
Errors
and omissions insurance written on a primary basis is targeted to small and
medium-sized firms and coverage is provided for various professional exposures,
including, but not limited to, architects and engineers, insurance brokers,
consultants, lawyers, public entities and real estate agents.
Global
Specialty Lines
Specialty
includes the following lines of business: aviation and satellite, marine and
offshore energy, fine art and specie, equine, product recall, political risk
and North America inland marine.
Aviation
and satellite products include comprehensive airline hull and liability,
airport liability, aviation manufacturers product liability, aviation ground
handler liability, large aircraft hull and liability, corporate non-owned
aircraft liability, space third party liability and satellite risk including
damage or malfunction during ascent to orbit and continual operation, and
aviation war. Aviation liability and physical damage coverage is offered for
large aviation risks on a proportional basis, while smaller general aviation
risks are offered on a primary basis. Satellite risks are generally written on
a proportional basis. The target markets for aviation and satellite products
include airlines, aviation product manufacturers, aircraft service firms,
general aviation operators and telecommunications firms.
Marine
and offshore energy coverage includes marine hull and machinery, marine war,
marine excess liability, cargo and offshore energy insurance. Fine art and
specie coverages include fine art and other collections, jewelers block, cash
in transit and related coverages for financial institutions. Equine products
specialize in providing bloodstock and livestock insurance. Product recall
3
coverages
include product contamination for the food and beverage sector and end-product
consumer goods and product guarantee aimed at component part manufacturers.
In
2011, the Company launched underwriting capabilities for political risk and
North America inland marine business.
Also
included as part of the Insurance segment is XL Global Asset Protection
Services (XL GAPS), a fee for service loss prevention consulting service that
offers individually tailored risk management solutions to risk managers,
insurance brokers and insurance company clients operating on a global basis.
Services are offered on an unbundled (services not tied to an insurance
contract) and bundled basis.
Underwriting
The
Company underwrites and prices most risks individually following a review of
the exposure and in accordance with the Companys underwriting guidelines. Most
of the Companys insurance operations have underwriting guidelines that are
industry-specific. The Company seeks to serve its clients while controlling its
exposure on individual insurance contracts through terms and conditions, policy
limits and sublimits, attachment points, and facultative and treaty reinsurance
arrangements on certain types of risks.
The
Companys underwriters generally evaluate each industry category and subgroups
within each category. Premiums are set and adjusted for an insured based, in
large part, on the industry group in which the insured is placed and the
insureds perceived risk relative to the other risks in that group. Rates may
vary significantly according to the industry group of the insured as well as
the insureds risk relative to the group. The Companys rating methodology for
individual insureds seeks to set premiums in accordance with claims potential
as measured by past experience and future expectations, the attachment point
and amount of underlying insurance, the nature and scope of the insureds
operations, exposures to loss, including natural hazard exposures, risk
management quality and other specific risk factors relevant in the judgment of
the Companys underwriters to the type of business being written.
Underwriting
and loss experience is reviewed regularly for, among other things, loss trends,
emerging exposures, changes in the regulatory or legal environment as well as
the efficacy of policy terms and conditions.
As
the Companys insurance products are primarily specialized coverages,
underwriting guidelines and policy forms differ by product offering as well as
by legal jurisdiction. Liability insurance is written on both a primary and
excess of loss basis, on occurrence, occurrence reported and claims-made policy
forms. Occurrence reported policies typically cover occurrences causing
unexpected and unintended personal injury or property damage to third parties
arising from events or conditions that commence at or subsequent to an
inception date, or retroactive date, if applicable, and prior to the expiration
of the policy provided that proper notice is given during the term of the
policy or the discovery period. Claims-made policies typically cover only
claims made during the policy period or extended reporting period and are
generally associated with professional liability and environmental coverages.
Traditional occurrence coverage is also available for restricted classes of
risk and is generally written on a follow-form basis for excess of loss
coverage, where the policy adopts the terms, conditions and exclusions of the
underlying policy. Property insurance risks are written on a lead or
follow-form basis that usually provides coverage for all risks of physical
damage and business interruption. Maximum limits are generally subject to
sublimits for coverage in critical earthquake and flood zones, where the
Company seeks to limit its liability in these areas.
Engineering
Property
engineering for the insurance operations includes conducting on-site
inspections and consulting services related to loss prevention, reviews of
building plans for fire protection design, Computer Assisted Drawings
(diagrams) of facilities, recommendations on how to improve site protection,
reviews of existing loss prevention reports/information for underwriters,
summarizing multiple sources of information into an account summary, and
providing underwriters an opinion on the risk to assist with risk selection,
pricing and other underwriting decisions. The property engineering team
consists of staff located in 22 countries.
Other
engineering resources support casualty, environmental, specialty and
construction lines and serve as internal consultants to their respective
underwriting teams, assisting them with making underwriting decisions, as well
as helping their customers improve their local site or account protection.
4
Reinsurance Ceded
In
certain cases, the risks assumed by the Company in the Insurance segment are
partially reinsured by third party reinsurers. Reinsurance ceded varies by
location and line of business based on a number of factors, including market
conditions. The benefits of ceding risks to third party reinsurers include
reducing exposure on individual risks, protecting against catastrophic risks,
maintaining acceptable capital ratios and enabling the writing of additional
business. Reinsurance ceded does not legally discharge the Company from its
liabilities to the original policyholder in respect of the risk being
reinsured.
The
Company uses reinsurance to support the underwriting and retention guidelines
of each of its subsidiaries as well as to control the aggregate exposure of the
Company to a particular risk or class of risks. Reinsurance is purchased at
several levels ranging from reinsurance of risks assumed on individual contracts
to reinsurance covering the aggregate exposure on a portfolio of policies
issued by groups of companies. See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, for further
information.
Premiums
Premium
rates and underwriting terms and conditions for all lines of business written
vary by jurisdiction principally due to local market conditions, competitor
product offerings and legal requirements.
The
following table provides an analysis of gross premiums written, net premiums
written and net premiums earned for the Insurance segment for the three years
ended December 31:
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2011
|
|
2010
|
|
2009 (1)
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(U.S. dollars in thousands)
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines
|
|
$
|
1,377,560
|
|
$
|
1,278,723
|
|
$
|
1,287,230
|
|
$
|
1,412,131
|
|
$
|
1,306,441
|
|
$
|
1,316,173
|
|
$
|
1,423,756
|
|
$
|
1,336,541
|
|
$
|
1,276,005
|
|
Casualty other lines
|
|
|
1,158,493
|
|
|
714,184
|
|
|
695,094
|
|
|
1,030,877
|
|
|
650,717
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|
|
632,737
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|
|
947,121
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|
|
570,887
|
|
|
655,126
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|
Other property
|
|
|
896,794
|
|
|
534,799
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|
|
481,148
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|
|
699,442
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|
|
414,251
|
|
|
416,917
|
|
|
649,592
|
|
|
361,841
|
|
|
426,441
|
|
Marine, energy, aviation, and satellite
|
|
|
657,898
|
|
|
544,499
|
|
|
528,454
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|
|
668,878
|
|
|
570,957
|
|
|
540,319
|
|
|
644,898
|
|
|
516,408
|
|
|
546,806
|
|
Other specialty lines (2)
|
|
|
734,194
|
|
|
636,047
|
|
|
665,727
|
|
|
602,787
|
|
|
519,557
|
|
|
606,682
|
|
|
577,804
|
|
|
483,166
|
|
|
634,436
|
|
Other (3)
|
|
|
(404
|
)
|
|
(718
|
)
|
|
3,552
|
|
|
(2,545
|
)
|
|
(7,582
|
)
|
|
1,554
|
|
|
5,257
|
|
|
1,077
|
|
|
12,217
|
|
Structured indemnity
|
|
|
130
|
|
|
130
|
|
|
2,522
|
|
|
6,810
|
|
|
6,809
|
|
|
14,756
|
|
|
3,460
|
|
|
3,460
|
|
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,824,665
|
|
$
|
3,707,664
|
|
$
|
3,663,727
|
|
$
|
4,418,380
|
|
$
|
3,461,150
|
|
$
|
3,529,138
|
|
$
|
4,251,888
|
|
$
|
3,273,380
|
|
$
|
3,559,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
|
Certain reclassifications
have been made to conform to current year presentation.
|
(2)
|
Other specialty lines
within the Insurance segment includes: environmental, programs, equine,
warranty, specie, middle markets and excess and surplus lines.
|
(3)
|
Other includes credit and
surety and other lines.
|
Competition
The
Company competes globally in the property and casualty insurance markets. Its
competitors include the following companies and their affiliates: The ACE Group
of Companies (ACE); Allianz Aktiengesellschaft (Allianz); American
International Group, Inc., primarily their Chartis subsidiary (AIG); Factory
Mutual Global (FMG) for property only; Hartford Financial Services
(Hartford); Lloyds of London Syndicates (Lloyds); The Chubb Corporation
(Chubb); The Travelers Companies (Travelers); and Zurich Financial Services
Group (Zurich).
The
Companys major geographical markets for its property and casualty insurance
operations are North America, Europe and Bermuda. The Companys main
competitors in each of these markets include the following:
North
America AIG, ACE, Chubb, FMG, Zurich, Travelers, CNA Financial Corporation,
Hartford, Liberty Mutual Group, Arch Capital Group Ltd (Arch) and Lloyds.
Europe
Allianz, AIG, FMG, Zurich, AXA Insurance Ltd. (AXA), ACE, Lloyds,
Assicurazioni Generali (Generali) and HDI-Gerling Industrie Versicherung AG
(HDI-Gerling).
Bermuda
ACE, Allied World Assurance Company (AWAC), Axis Capital Group (Axis), Alterra
Capital (Alterra), Endurance Specialty Insurance Ltd (Endurance) and Arch.
Marketing
and Distribution
The
majority of Insurance segment business originates via a large number of
international, national and regional producers, acting as the brokers and
representatives of current and prospective policyholders. This channel is
supported by the Companys Global Distribution and Network Unit, which consists
of sales and marketing representatives in key markets throughout the world,
representing all of the Companys products in collaboration with the four
business units. A portion of Insurance segment business is
5
also marketed
and underwritten by general agents and a portion by independent agents acting
on behalf of the Company. Typically, all such producers, general agents and
independent agents receive commission payments from the Company for their
services, which payments are calculated as a percentage of the gross premium
paid by the policyholder on an account-by-account basis. A certain portion of
business originating from producers is submitted on a fee basis under which the
producer is compensated by a fee paid to it by its policyholder client. From
time to time, the Company also considers requests for commissions from a
producer, with disclosure by the producer to the policyholder-client, where the
producer receives a fee from the policyholder-client. The Company evaluates
such requests on a case-by-case basis.
The
Company considers requests for contingent commission arrangements where such
additional commissions are based upon the volume of bound business originated
from a specific producer during a prior calendar year where legal and
appropriate. Such arrangements are distinct from program business where
additional commissions are generally based on profitability of business
submitted to and bound by the Company.
With
regard to excess and surplus lines business, the Company receives submissions
from licensed wholesale surplus lines brokers.
The
Company has no implied or explicit commitments to accept business from any
particular broker, and neither producers nor any other third party have the
authority to bind the Company, except in the case where underwriting authority
may be delegated contractually to selected general agents. Such general agents
are subject to a financial and operational due diligence review prior to any
such delegation of authority and ongoing reviews and audits are carried out as
deemed necessary by the Company with the goal of assuring the continuing
integrity of underwriting and related business operations. See Item 8, Note
17(a) to the Consolidated Financial Statements for information on the Companys
major producers, Commitments and Contingencies Concentrations of Credit
Risk.
Apart
from compensation arrangements established with producers in connection with
insurance transactions, the Company also has engaged, and may in the future
engage, certain producers or their affiliates in consulting roles pursuant to
which such producers provide access to certain systems and information that may
assist the Company with its marketing and distribution strategy. In instances
where the Company engages producers in such consulting roles, the Company may
compensate the relevant producers on a fixed fee basis, a variable fee basis
based upon Company usage of the systems and information proffered, or through a
combination of fixed and variable fees.
Claims Administration
Claims
management for the insurance operations includes the review of initial loss
reports, administration of claims databases, generation of appropriate
responses to claims reports, identification and handling of coverage issues,
determination of whether further investigation is required and, where
appropriate, retention of claims counsel, establishment of case reserves,
payment of claims and notification to reinsurers. With respect to the
establishment of case reserves, when the Company is notified of insured losses,
claims personnel record a case reserve as appropriate for the estimated amount
of the exposure at that time. The estimate reflects the judgment of claims
personnel based on general reserving practices, the experience and knowledge of
such personnel regarding the nature of the specific claim and, where
appropriate, advice of counsel. Reserves are also established to provide for
the estimated expense of settling claims, including legal and other fees and
the general expenses of administering the claims adjustment process.
Claims
in respect of business written by the Companys Lloyds syndicates are
primarily notified by various central market bureaus. Where a syndicate is a
leading syndicate on a Lloyds policy, its underwriters and claims adjusters
will work directly with the broker or insured on behalf of itself and the
following market for any particular claim. This may involve appointing
attorneys or loss adjusters. The claims bureaus and the leading syndicate
advise movement in loss reserves to all syndicates participating on the risk.
The Companys claims department may adjust the case reserves it records from
those advised by the bureaus as deemed necessary.
Certain
of the Companys product lines have arrangements with third party
administrators to provide claims handling services to the Company in respect of
such product lines. These agreements set forth the duties of the third party
administrators, limits of authority, protective indemnification language and
various procedures that are required to meet statutory compliance. These
arrangements are also subject to audit review by the Companys relevant claim
department.
In
February 2010, the insurance operations started deploying a new claims IT
platform called XL GlobalClaim (GCS). The system was successfully deployed
throughout the Company in 2011. GCS converts the claim operation to a paperless
environment and connects the legacy systems to allow for consistent data
aggregation for all global claims operations.
6
Reinsurance Segment
General
The
Companys Reinsurance segment is structured geographically into Bermuda
operations, North American operations, European/Asia Pacific operations and
Latin American operations.
The
segment provides casualty, property risk, property catastrophe, marine,
aviation, treaty and other specialty reinsurance on a global basis with
business being written on both a proportional and non-proportional basis and
also on a facultative basis. Given challenging market conditions and the
changing economic environment that was experienced since 2008, the Companys
lines of business within its reinsurance operations continued to focus on those
that provide the best return on capital. For the Companys Reinsurance segment,
this resulted, in certain instances, in a greater emphasis being placed on
short-tail lines of business.
Business
written on a non-proportional basis generally provides for an indemnification
by the Company to the ceding company for a portion of losses, both individually
and in the aggregate, on policies with limits in excess of a specified
individual or aggregate loss deductible. For business written on a proportional
basis, including quota share or surplus basis, the Company receives an
agreed percentage of the premium and is liable for the same percentage of each
and all incurred loss. For proportional business, the ceding company normally
receives a ceding commission for the premiums ceded and may also, under certain
circumstances, receive a profit commission based on performance of the
contract. Occasionally this commission could be on a sliding scale depending on
the loss ratio performance of the contract. The Companys casualty reinsurance
includes general liability, professional liability, automobile and workers
compensation. Professional liability includes directors and officers,
employment practices, medical malpractice and environmental liability. Casualty
lines are written as treaties or programs and on both a proportional and a
non-proportional basis. The treaty business includes clash programs, which
cover a number of underlying policies involved in one occurrence or a judgment
above an underlying policys limit, before suffering a loss.
The
Companys property business, primarily short-tail in nature, is written on both
a portfolio/treaty and individual/facultative basis and includes property
catastrophe, property risk excess of loss and property proportional. A
significant portion of the property business underwritten consists of large
aggregate exposures to man-made and natural disasters and, generally, loss
experience is characterized as low frequency and high severity. This may result
in volatility in the Companys results of operations, financial condition and
liquidity. See Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The
Company seeks to manage its reinsurance exposures to catastrophic events by
limiting the amount of exposure written in each geographic or peril zone
worldwide, underwriting in excess of varying attachment points and requiring
that contracts exposed to catastrophe loss include aggregate limits. The Company
also seeks to protect its total aggregate exposures by peril and zone through
the purchase of reinsurance programs.
The
Companys property catastrophe reinsurance account is generally all risk in
nature. As a result, the Company is exposed to losses from sources as diverse
as hurricanes and other windstorms, earthquakes, freezing, riots, floods,
industrial explosions, fires, and many other potential natural or man-made
disasters. In accordance with market practice, the Companys policies generally
exclude certain risks such as war, nuclear contamination or radiation.
Following the terrorist attacks at the World Trade Center in New York City,
Washington, D.C. and Pennsylvania on September 11, 2001 (collectively, the
September 11 event), terrorism cover, including, nuclear, biological,
radiological and chemical, or NBRC, has been restricted or excluded in many
territories and classes. Some U.S. states require some cover for Fire
Following terrorism and some countries make terrorism coverage mandatory. The
Companys predominant exposure under such coverage is to property damage.
Property
catastrophe reinsurance provides coverage on an excess of loss basis when
aggregate losses and loss adjustment expenses from a single occurrence of a
covered event exceed the attachment point specified in the policy. Some of the
Companys property catastrophe contracts limit coverage to one occurrence in
any single policy year, but most contracts generally enable at least one
reinstatement to be purchased by the reinsured.
The
Company also writes property risk excess of loss reinsurance. Property risk
excess of loss reinsurance covers a loss to the reinsured on a single risk of
the type reinsured rather than to aggregate losses for all covered risks on a
specific peril, as is the case with catastrophe reinsurance. The Companys
property proportional account includes reinsurance of direct property
insurance. The Company seeks to limit the catastrophe exposure from its
proportional and per risk excess business through extensive use of occurrence
and cession limits.
Other
specialty reinsurance products include energy, marine, aviation, space,
engineering, fidelity, trade credit and political risk. The Company underwrites
a small portfolio of contracts covering political risk and trade credit.
Exposure is assumed from a limited number of trade credit contracts.
The
segments most significant operating legal entities in 2011 based on revenues
were as follows: XL Reinsurance America Inc., XL Re Europe Limited, XL Re Ltd
and XL Re Latin America Ltd.
7
Underwriting
Underwriting
risks for the reinsurance property and casualty business are evaluated using a
number of factors including, but not limited to, the type and layer of risk to
be assumed, the actuarial evaluation of premium adequacy, the cedants
underwriting and claims experience, the cedants financial condition and claims
paying rating, the exposure and/or experience with the cedant, and the line of
business to be reinsured.
Other
factors assessed by the Company include the reputation of the proposed cedant,
the geographic area in which the cedant does business and its market share, a
detailed evaluation of catastrophe and risk exposures, and historical loss data
for the cedant where available and for the industry as a whole in the relevant
regions in order to compare the cedants historical loss experience to industry
averages. On-site underwriting and claim reviews are performed where it is deemed
necessary to determine the quality of a current or prospective cedants
underwriting operations, with particular emphasis on casualty proportional and
working excess of loss placements.
For
property catastrophe reinsurance business, the Companys underwriting
guidelines generally limit the amount of exposure it will directly underwrite
for any one reinsured and the amount of the aggregate exposure to catastrophic
losses in any one geographic zone. The Company believes that it has defined geographic
and peril zones such that a single occurrence, for example, an earthquake or
hurricane, should not affect more than one peril zone. While the exposure to
multiple zones is considered remote for events such as a hurricane, the Company
does manage its aggregate exposures for such a scenario where the Company
considers it appropriate to do so. The definition of the Companys peril zones
is subject to periodic review. The Company also generally seeks an attachment
point for its property catastrophe reinsurance at a level that is high enough
to produce a low frequency of loss. The Company seeks to limit its aggregate
exposure in the proportional business through extensive use of occurrence and
cession limits.
Reinsurance Retroceded
The
Company uses third party reinsurance to support the underwriting and retention
guidelines of each reinsurance subsidiary as well as to seek to limit the
aggregate exposure of the Company to a particular risk or class of risks.
Reinsurance is purchased at several levels ranging from reinsurance of risks
assumed on individual contracts to reinsurance covering aggregate exposures.
The benefits of ceding risks to other reinsurers include reducing exposure on
individual risks, protecting against catastrophic risks, maintaining acceptable
capital ratios and enabling the writing of additional business. Reinsurance
ceded does not legally discharge the Company from its liabilities in respect of
the risk being reinsured. Reinsurance ceded varies by location and line of
business based on factors including, among others, market conditions and the
credit worthiness of the counterparty.
The
Companys traditional catastrophe retrocession program was renewed in June 2011
to cover certain of the Companys exposures. These protections, in various
layers and in excess of varying attachment points according to the territory
exposed, assist in managing the Companys net retention to an acceptable level.
The Company has co-reinsurance retentions within this program. The Company
renewed additional structures with a restricted territorial scope for 12 months
in July 2011. The Company continues to buy additional protection for the
Companys marine and offshore energy exposures. These covers provide protection
in various layers and excess of varying attachment points according to the
scope of cover provided. The Company has co-reinsurance participations within
this program.
The
Company continues to buy specific reinsurance on its property and aviation
portfolios to manage its net exposures in these classes. The motor third party
liability specific reinsurance was not renewed on April 1, 2011.
See
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and Item 8, Note 9 to the Consolidated Financial
Statements, Reinsurance, for further information.
8
Premiums
The
following table provides an analysis of gross premiums written, net premiums
written and net premiums earned for the Reinsurance segment for the last three
years ended December 31:
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|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009 (2)
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
professional lines
|
|
$
|
217,389
|
|
$
|
217,389
|
|
$
|
213,949
|
|
$
|
218,301
|
|
$
|
222,133
|
|
$
|
222,720
|
|
$
|
170,928
|
|
$
|
166,903
|
|
$
|
196,624
|
|
Casualty other
lines
|
|
|
292,508
|
|
|
290,963
|
|
|
256,853
|
|
|
229,535
|
|
|
222,351
|
|
|
219,154
|
|
|
218,778
|
|
|
217,889
|
|
|
257,610
|
|
Property
catastrophe
|
|
|
461,742
|
|
|
404,447
|
|
|
387,523
|
|
|
370,266
|
|
|
326,758
|
|
|
323,588
|
|
|
357,267
|
|
|
312,321
|
|
|
312,780
|
|
Other property
|
|
|
847,816
|
|
|
583,100
|
|
|
587,611
|
|
|
802,494
|
|
|
562,416
|
|
|
534,422
|
|
|
862,310
|
|
|
553,556
|
|
|
560,379
|
|
Marine, energy,
aviation, and satellite
|
|
|
156,161
|
|
|
141,924
|
|
|
130,855
|
|
|
117,438
|
|
|
103,926
|
|
|
88,855
|
|
|
89,100
|
|
|
82,393
|
|
|
83,532
|
|
Other (1)
|
|
|
102,185
|
|
|
92,083
|
|
|
90,776
|
|
|
103,959
|
|
|
99,897
|
|
|
112,305
|
|
|
156,092
|
|
|
132,322
|
|
|
172,588
|
|
Structured
indemnity
|
|
|
(4,182
|
)
|
|
(4,182
|
)
|
|
(4,182
|
)
|
|
958
|
|
|
957
|
|
|
955
|
|
|
4,948
|
|
|
4,948
|
|
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,073,619
|
|
$
|
1,725,724
|
|
$
|
1,663,385
|
|
$
|
1,842,951
|
|
$
|
1,538,438
|
|
$
|
1,501,999
|
|
$
|
1,859,423
|
|
$
|
1,470,332
|
|
$
|
1,591,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other includes credit and surety, whole account
contracts and other lines.
|
(2)
|
Certain reclassifications have been made to conform
to current year presentation.
|
Additional
discussion and financial information about the Reinsurance segment are set
forth in Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 8, Note 4 to the Consolidated Financial
Statements, Segment Information.
Competition
The
Company competes globally in the property and casualty markets.
The
Companys major geographical markets for its property and casualty reinsurance
operations are North America, Europe, Bermuda and Emerging Markets (covering
Asia/Pacific and Latin America). The main competitors in each of these markets
include the following:
North
America Berkshire Hathaway, Munich Re Corporation, Swiss Re America Corporation,
Transatlantic Re, Everest Re Group Ltd, Hannover Re and PartnerRe Ltd.
Bermuda
ACE Tempest Reinsurance Ltd, AXIS Specialty Limited, Arch Reinsurance
Limited, Renaissance Reinsurance Limited, Montpelier Reinsurance Ltd, Platinum
Underwriters Bermuda Ltd and PartnerRe Ltd.
Latin
America Munich Re, Swiss Re, Mapfre Re and IRB
Europe
and the rest of world Munich Re, Swiss Re, Lloyds, SCOR Reinsurance Company,
Hannover Re and PartnerRe Ltd.
Marketing and Distribution
See
Insurance Segment Marketing and Distribution and Item 8, Note 17(a) to the
Consolidated Financial Statements, Commitments and Contingencies
Concentrations of Credit Risk, for information in the Companys marketing and distribution
procedures and information on the Companys major brokers.
Claims Administration
Claims
management for the reinsurance operations includes the receipt of loss
notifications, review and approval of claims through a claims approval process,
establishment of loss reserves and approval of loss payments. Case reserves for
reported claims are generally established based on reports received from ceding
companies with additional case reserves being established when deemed appropriate.
Additionally, claims audits are conducted for specific claims and claims
procedures at the offices of selected ceding companies, particularly in the
United States and the U.K.
Life Operations Segment
During
2009, the Company completed a strategic review of its life reinsurance
business. In relation to this initiative, during 2009 the Company sold the
renewal rights to certain of its businesses, sold its U.S. life reinsurance
business and announced that it would run-off its existing book of U.K. and
Irish traditional life and annuity business, and not accept new business. In
addition, in 2010, the Company consummated various transactions to novate and
recapture U.K. and Irish term assurance and critical illness treaties and U.S.
mortality retrocession pools.
9
The
Life operations segment provided life reinsurance on business written by life
insurance companies, principally to help them manage mortality, morbidity,
survivorship, investment and lapse risks.
Prior
to the decision to run-off the U.K. and Irish business, products offered
included a broad range of underlying lines of life insurance business,
including term assurances, group life, critical illness cover, immediate
annuities and disability income. In addition, prior to selling the renewal
rights, the products offered included short-term life, accident and health
business. Notwithstanding these sales, the segment still covers a range of
geographic markets, with an emphasis on the U.K., U.S., Ireland and Continental
Europe.
The
portfolio has three particularly significant components:
(1)
The portfolio includes a small number of large contracts relating to closed
blocks of U.K. and Irish fixed annuities in payment. In relation to certain of
these contracts, the Company received cash and investment assets at the
inception of the reinsurance contract, relating to the future policy benefit
reserves assumed. These contracts are long-term in nature, and the expected
claims payout period can span up to 30 or 40 years with average duration of
around 10 years. The Company is exposed to investment and survivorship risk
over the life of these arrangements.
(2)
The second component of the portfolio relates to life risks (in the U.S., the
U.K. and Ireland) and critical illness risks (in the U.K. and Ireland) where
the Company is exposed to the mortality, morbidity and lapse experience from
the underlying business, over the medium to long-term.
(3)
The third component relates to the annually renewable business covering life,
accident and health risks written in Continental Europe. These contracts are
short-term in nature and include both proportional and non-proportional
reinsurance structures. While the renewal rights for this business have been
sold, the existing business remains with the Company.
Underwriting & Claims
Administration
While
the Life operations segment was closed to new business in March 2009, the
pricing information below reflects how new business was acquired prior to that
date and hence is relevant to the in-force portfolio of business.
Life
reinsurance transactions fall into two distinct forms. The first relates to the
reinsurance of an existing and closed block of risks (in-force deal), where
the nature of the underlying exposure is known at the date of execution. The
second relates to the reinsurance of liabilities that are yet to be written by
the ceding company (new business treaty) where, provided the subsequent risks
are within the agreed treaty parameters, these risks may be added to the
portfolio.
The
underwriting of an in-force deal is highly actuarial in nature, requiring
detailed analytical appraisal of the key parameters which drive the ultimate
profitability of the deal. This includes analysis of historic experience
(claims, lapses, etc.) as well as the projection of these assumptions into the
future.
When
new business was written, in addition to the actuarial analysis required to set
the terms, there was also a requirement to establish medical underwriting
criteria that will apply to the new risks that may be added to the treaty. Once
a treaty is accepted, there is then an ongoing need to monitor the risk
selection by the medical underwriters at the ceding company and to ensure that
the criteria are being met.
The
team includes many members with specialized actuarial knowledge. Claims
administration also relies on experienced team members and specific medical
expertise, supported where required by third party medical underwriters and
claims managers.
The
Company maintained comprehensive terms of trade guidelines for all core
product lines. These guidelines describe the approach to be taken in assessing
and underwriting opportunities, including the approach to be taken to the
setting of core parameters and to the determination of appropriate pricing
levels. The terms of trade were overseen by a separate team from the new
business underwriters.
In
addition, the Company maintained a medical underwriting manual that set out the
approach to be taken to underwriting specific medical impairments when setting
terms for a new business treaty.
Reinsurance Retroceded
The
Company purchases limited retrocession capacity on a per-life basis in the
United States in order to cap the maximum claim arising from the death of a
single individual. Cover is purchased from professional retrocessionaires that
meet the Companys criteria for counterparty exposures. Limited retrocession of
fixed annuity business has been arranged to manage aggregate longevity capacity
on specific deals. Limited retrocession of life, accident and health business
on specific treaties written in Continental Europe has also been arranged to
manage mortality and morbidity risks.
10
Premiums
The
following table is an analysis of the Life operations gross premiums written,
net premiums written and net premiums earned for the year ended December 31,
2011:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
|
|
|
|
|
|
|
|
Other Life
|
|
$
|
232,754
|
|
$
|
230,130
|
|
$
|
230,786
|
|
Annuity
|
|
|
161,801
|
|
|
132,232
|
|
|
132,232
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
394,555
|
|
$
|
362,362
|
|
$
|
363,018
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
discussion and financial information about the Life operations is set forth in
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and Item 8, Note 4 to the Consolidated Financial
Statements, Segment Information.
Competition
In
regards to the Life operations segment, the core activity is in the U.S., the
U.K., Ireland and Continental Europe. While the Company no longer competes for
new business, it retains an in-force portfolio and hence views companies with
similar portfolios as competitors.
For
the fixed annuity business, competition has historically come from less
traditional reinsurance entities, such as Canada Life and Prudential (U.K.)
together with Swiss Re, Partner Re, Scor Global Life and Pacific Life Re, among
others, who have entered or re-entered this market.
Marketing and Distribution
The
Company no longer markets or distributes new products in this segment.
Other Financial Lines Business
Following
the streamlining of the Companys operating segments in the first quarter of
2009, the Other Financial Lines business was included in Corporate. This
business previously included contracts associated with the funding agreement
(FA) business and the guaranteed investment contract (GIC) business. GICs
and FAs provide users guaranteed rates of interest on amounts previously
invested with the Company. FAs were very similar to GICs in that they have
known cash flows. FAs were sold to institutional investors, typically through
medium term note programs. During August 2010, the remaining balance of FAs of
$450 million was settled and as a result, the Other Financial Lines entities
and business are no longer active.
U
NPAID
L
OSSES AND
L
OSS
E
XPENSES
Loss
reserves are established due to the significant periods of time that may lapse
between the occurrence, reporting and payment of a loss. To recognize
liabilities for unpaid losses and loss expenses, the Company estimates future
amounts needed to pay claims and related expenses with respect to insured
events. The Companys reserving practices and the establishment of any
particular reserve reflect managements judgment concerning sound financial
practice and do not represent any admission of liability with respect to any
claim. Unpaid losses and loss expense reserves are established for reported
claims (case reserves) and incurred but not reported (IBNR) claims.
The
nature of the Companys high excess of loss liability and catastrophe business
can result in loss payments that are both irregular and significant. Similarly,
adjustments to reserves for individual years can be irregular and significant.
Such adjustments are part of the normal course of business for the Company.
Certain aspects of the Companys business have loss experience characterized as
low frequency and high severity. This may result in volatility in the Companys
results of operations, financial condition and liquidity.
The
tables below present the development of the Companys unpaid losses and loss
expense reserves on both a net and gross basis. The cumulative redundancy
(deficiency) calculated on a net basis differs from that calculated on a gross
basis. As different reinsurance programs cover different underwriting years,
net and gross loss experience will not develop proportionately. The top lines
of the tables show the estimated liability, net of reinsurance recoveries, as
at the year end balance sheet date for each of the indicated years. This
represents the estimated amounts of losses and loss expenses, including IBNR,
arising in the current and all prior years that are unpaid at the year end
balance sheet date of the indicated year. The tables show the re-estimated
amount of the previously recorded reserve liability based on experience as of
the year end balance sheet date of each succeeding year. The estimate changes
as more information becomes known about the frequency and severity of claims
for individual years. The cumulative redundancy (deficiency) represents the
aggregate change with respect to that liability originally estimated. The lower
portion of the first table also reflects the cumulative paid losses relating to
these reserves. Conditions and trends that have affected development of
liabilities in the past may
11
not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate redundancies or deficiencies into the future, based on the tables
below. See Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations Cautionary Note Regarding Forward-Looking
Statements.
Analysis of P&C Losses and Loss Expense
Reserve Development
Net of Reinsurance Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESTIMATED LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES, NET OF
REINSURANCE RECOVERABLES
|
|
$
|
7,004
|
|
$
|
8,313
|
|
$
|
10,532
|
|
$
|
12,671
|
|
$
|
17,200
|
|
$
|
17,900
|
|
$
|
18,191
|
|
$
|
17,686
|
|
$
|
17,266
|
|
$
|
16,882
|
|
$
|
16,984
|
|
LIABILITY RE-ESTIMATED AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
$
|
7,404
|
|
$
|
9,250
|
|
$
|
10,800
|
|
$
|
13,785
|
|
$
|
17,090
|
|
$
|
17,475
|
|
$
|
17,580
|
|
$
|
17,401
|
|
$
|
16,893
|
|
$
|
16,597
|
|
|
|
|
Two years later
|
|
|
8,423
|
|
|
9,717
|
|
|
11,842
|
|
|
13,675
|
|
|
16,828
|
|
|
16,631
|
|
|
17,286
|
|
|
17,027
|
|
|
16,503
|
|
|
|
|
|
|
|
Three years later
|
|
|
8,653
|
|
|
10,723
|
|
|
11,849
|
|
|
13,607
|
|
|
16,155
|
|
|
16,441
|
|
|
16,956
|
|
|
16,639
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
9,727
|
|
|
10,738
|
|
|
11,860
|
|
|
13,258
|
|
|
16,067
|
|
|
16,064
|
|
|
16,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
9,674
|
|
|
10,710
|
|
|
11,680
|
|
|
13,236
|
|
|
15,796
|
|
|
15,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
9,718
|
|
|
10,642
|
|
|
11,794
|
|
|
13,068
|
|
|
15,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
9,680
|
|
|
10,824
|
|
|
11,669
|
|
|
12,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
9,921
|
|
|
10,775
|
|
|
11,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
9,863
|
|
|
10,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
9,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE REDUNDANCY (DEFICIENCY)
|
|
|
(2,772
|
)
|
|
(2,304
|
)
|
|
(932
|
)
|
|
(148
|
)
|
|
1,752
|
|
|
2,233
|
|
|
1,641
|
|
|
1,047
|
|
|
763
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE PAID LOSSES, NET OF REINSURANCE RECOVERIES, AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
$
|
2,011
|
|
$
|
2,521
|
|
$
|
1,985
|
|
$
|
2,008
|
|
$
|
3,437
|
|
$
|
3,188
|
|
$
|
3,207
|
|
$
|
3,436
|
|
|
3,028
|
|
$
|
3,256
|
|
|
|
|
Two years later
|
|
|
3,984
|
|
|
3,800
|
|
|
2,867
|
|
|
3,884
|
|
|
5,759
|
|
|
5,620
|
|
|
5,673
|
|
|
5,848
|
|
|
5,530
|
|
|
|
|
|
|
|
Three years later
|
|
|
4,703
|
|
|
4,163
|
|
|
4,380
|
|
|
5,181
|
|
|
7,590
|
|
|
7,528
|
|
|
7,471
|
|
|
7,860
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
4,641
|
|
|
5,365
|
|
|
5,286
|
|
|
6,392
|
|
|
8,936
|
|
|
8,787
|
|
|
8,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
5,526
|
|
|
6,018
|
|
|
6,225
|
|
|
7,386
|
|
|
9,882
|
|
|
9,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
5,969
|
|
|
6,764
|
|
|
7,002
|
|
|
8,098
|
|
|
10,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
6,514
|
|
|
7,381
|
|
|
7,591
|
|
|
8,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
6,965
|
|
|
7,797
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
7,291
|
|
|
8,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
7,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Analysis of P&C Losses and
Loss Expense Reserve Development
Gross of Reinsurance Recoverables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESTIMATED GROSS LIABILITY FOR UNPAID LOSSES AND LOSS EXPENSES
|
|
$
|
11,807
|
|
$
|
13,333
|
|
$
|
16,553
|
|
$
|
19,616
|
|
$
|
23,598
|
|
$
|
22,895
|
|
$
|
22,857
|
|
$
|
21,650
|
|
$
|
20,824
|
|
$
|
20,532
|
|
$
|
20,614
|
|
LIABILITY RE-ESTIMATED AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
$
|
12,352
|
|
$
|
15,204
|
|
$
|
18,189
|
|
$
|
19,987
|
|
$
|
23,209
|
|
$
|
22,458
|
|
$
|
21,803
|
|
$
|
21,348
|
|
$
|
20,509
|
|
$
|
20,258
|
|
|
|
|
Two years later
|
|
|
14,003
|
|
|
16,994
|
|
|
18,520
|
|
|
19,533
|
|
|
22,937
|
|
|
21,337
|
|
|
21,445
|
|
|
21,094
|
|
|
19,982
|
|
|
|
|
|
|
|
Three years later
|
|
|
15,377
|
|
|
17,210
|
|
|
18,324
|
|
|
19,525
|
|
|
22,139
|
|
|
21,057
|
|
|
21,305
|
|
|
20,605
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
15,441
|
|
|
17,048
|
|
|
18,362
|
|
|
19,153
|
|
|
21,992
|
|
|
20,787
|
|
|
20,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
15,267
|
|
|
17,106
|
|
|
18,236
|
|
|
19,099
|
|
|
21,835
|
|
|
20,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
15,401
|
|
|
17,051
|
|
|
18,328
|
|
|
19,050
|
|
|
21,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
15,381
|
|
|
17,189
|
|
|
18,321
|
|
|
18,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
15,602
|
|
|
17,253
|
|
|
18,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
15,639
|
|
|
17,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
15,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE REDUNDANCY (DEFICIENCY)
|
|
|
(3,701
|
)
|
|
(3,739
|
)
|
|
(1,530
|
)
|
|
850
|
|
|
2,172
|
|
|
2,545
|
|
|
2,004
|
|
|
1,045
|
|
|
842
|
|
|
274
|
|
|
|
|
The
following table presents an analysis of the Companys paid, unpaid and incurred
losses and loss expenses and a reconciliation of beginning and ending unpaid
losses and loss expenses for the years indicated:
Reconciliation of Unpaid Losses and Loss
Expenses
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses at
beginning of year
|
|
$
|
20,531,607
|
|
$
|
20,823,524
|
|
$
|
21,650,315
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,649,290
|
|
|
3,557,391
|
|
|
3,964,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss expenses at beginning
of year
|
|
|
16,882,317
|
|
|
17,266,133
|
|
|
17,685,479
|
|
Increase (decrease) in net losses and loss
expenses incurred in respect of losses occurring in:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
4,363,258
|
|
|
3,584,662
|
|
|
3,453,577
|
|
Prior years
|
|
|
(284,867
|
)
|
|
(372,862
|
)
|
|
(284,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred losses and loss expenses
|
|
|
4,078,391
|
|
|
3,211,800
|
|
|
3,168,837
|
|
Exchange rate effects
|
|
|
(130,533
|
)
|
|
(125,107
|
)
|
|
287,752
|
|
Less net losses and loss expenses paid in
respect of losses occurring in:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
589,870
|
|
|
442,262
|
|
|
439,638
|
|
Prior years
|
|
|
3,256,332
|
|
|
3,028,247
|
|
|
3,436,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net paid losses
|
|
|
3,846,202
|
|
|
3,470,509
|
|
|
3,875,935
|
|
Net unpaid losses and loss expenses at end
of year
|
|
|
16,983,973
|
|
|
16,882,317
|
|
|
17,266,133
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,629,928
|
|
|
3,649,290
|
|
|
3,557,391
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses at end of
year
|
|
$
|
20,613,901
|
|
$
|
20,531,607
|
|
$
|
20,823,524
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Companys net unpaid losses and loss expenses relating to the Companys
operating segments at December 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
11,374
|
|
$
|
11,240
|
|
Reinsurance
|
|
|
5,610
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
Net unpaid loss and loss expense reserves
|
|
$
|
16,984
|
|
$
|
16,882
|
|
|
|
|
|
|
|
|
|
13
Current year net losses incurred
Current
year net losses incurred increased by $778.6 million in 2011 as
compared to 2010. This was mainly as a result of the current year loss ratio
increasing by 10.7 loss percentage points due to higher losses from natural
catastrophes as compared to 2010, but also from the following: (i) the
Insurance segment in 2011 experienced higher large loss activity in the energy,
property and marine businesses, as compared to 2010; and (ii) the Reinsurance
segment in 2011 experienced higher
levels of large loss events in U.S.
property including a deterioration in the performance of a large U.S.
agricultural program, higher attritional losses as well as business mix
changes, as compared to 2010.
Current
year net losses incurred increased by $131.1 million in 2010 as compared to
2009. This was mainly as a result of the current year loss ratio increasing by
4.2 loss percentage points due to higher losses from natural catastrophes as
compared to 2009, but also from the following: (i) the Insurance segment - in
2010, there were higher large loss events in property and excess casualty,
adverse experience in exited lines of business and the impact of flat to
slightly negative rate changes partially offset by changes in business mix and
improved loss experience in aerospace, as compared to 2009; and (ii) the
Reinsurance segment in 2010, there were large loss events in the marine lines
which were offset by changes in business mix, improved loss experience in
property, discontinued financial lines and the professional and trade credit
business related to the credit crisis, as compared to 2009.
See
the Income Statement Analysis at Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations, for further information
regarding the current year loss ratios for each of the years indicated within
each of the Companys operating segments.
Prior year net losses incurred
The
following tables present the development of the Companys gross and net losses
and loss expense reserves. The tables also show the estimated reserves at the
beginning of each fiscal year and the favorable or adverse development (prior
year development) of those reserves during such fiscal year.
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves at January 1
|
|
$
|
20,532
|
|
$
|
20,824
|
|
$
|
21,650
|
|
Gross (favorable) adverse
development of those reserves during the year
|
|
|
(274
|
)
|
|
(315
|
)
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves re-estimated at December 31
|
|
$
|
20,258
|
|
$
|
20,509
|
|
$
|
21,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves at January 1
|
|
$
|
16,882
|
|
$
|
17,266
|
|
$
|
17,686
|
|
Net (favorable) adverse
development of those reserves during the year
|
|
|
(285
|
)
|
|
(373
|
)
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves re-estimated at December 31
|
|
$
|
16,597
|
|
$
|
16,893
|
|
$
|
17,401
|
|
|
|
|
|
|
|
|
|
|
|
|
As
different reinsurance programs cover different underwriting years, contracts
and lines of business, net and gross loss experience do not develop
proportionately. In 2011 and 2009, gross prior year favorable development was
in line with net prior year favorable development in total. However, during
2011, the Insurance segment experienced favorable net prior year development of
$76.5 million compared to adverse gross prior year development of $23.1
million. The difference between net and gross development was driven primarily
by adverse development related to large excess casualty claims associated with
the Deepwater Horizon event in the 2010 accident year totaling $135.6 million
on a gross basis while the net impact was $33.4 million due to the impact of
outwards reinsurance protections. In addition, $150.0 million gross and $65.0 million net
excess casualty IBNR reserves
were reallocated to the 2010
accident year in respect of Deepwater Horizon exposures. These IBNR movements
were entirely offset by reserve reductions in older accident years. This
activity largely explains the difference between the gross and net prior year
development for the Insurance segment in 2011 as well as the overall
strengthening of the 2010 accident year reflected in the loss reserve
development tables shown on the previous pages. During 2010, net prior year favorable development exceeded gross prior
year favorable development due primarily to the Insurance segment from a single
large claim in excess casualty that was heavily ceded.
The
following table presents the net (favorable) adverse prior year loss
development of the Companys loss and loss expense reserves by operating
segment for each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Insurance segment
|
|
$
|
(76.5
|
)
|
$
|
(127.4
|
)
|
$
|
(62.9
|
)
|
Reinsurance segment
|
|
|
(208.4
|
)
|
|
(245.5
|
)
|
|
(221.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284.9
|
)
|
$
|
(372.9
|
)
|
$
|
(284.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had net favorable prior year reserve development in property and
casualty operations of $284.9 million, $372.9 million and $284.7 million for
the years ended December 31, 2011, 2010 and 2009, respectively. See the Income
Statement Analysis
14
at Item 7, Managements
Discussion and Analysis of Financial
Condition and Results of Operations and Item 8, Note 10 to the Consolidated
Financial Statements, Losses and Loss Expenses, for further information
regarding the developments in prior year loss reserve estimates for each of the
years indicated within each of the Companys operating segments.
Net loss reserves (disposed) acquired
The
Company did not dispose of or acquire net loss reserves in 2011, 2010 or 2009.
Exchange rate effects
Exchange
rate effects on net loss reserves in each of the three years ended December 31,
2011, 2010 and 2009 related to the global operations of the Company primarily
where reporting units have a functional currency that is not the U.S. dollar.
In 2011, the U.S. dollar was stronger against U.K. sterling, the Euro,
the Brazilian real and the Swiss franc, which more than offset losses that were
driven by a stronger Australian dollar In 2010, the U.S. dollar was stronger against the Euro, while weaker
against the Swiss franc, Canadian dollar and Brazilian real. In 2009, the U.S.
dollar weakened against all of the Companys major currency exposures,
particularly the Canadian dollar and U.K. sterling. These movements in the U.S.
dollar gave rise to translation and revaluation exchange movements related to
carried loss reserve balances of $(130.5) million, $(125.1) million and $287.8
million in the years ended December 31, 2011, 2010 and 2009, respectively.
Net paid losses
Total
net paid losses were $3.8 billion, $3.5 billion and $3.9 billion in 2011, 2010
and 2009, respectively. See Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, for further information.
Other loss related information
The
Companys net incurred losses and loss expenses include actual and estimates of
potential non-recoveries from reinsurers. As at December 31, 2011 and 2010, the
reserve for potential non-recoveries from reinsurers was $99.2 million and
$121.9 million, respectively. For further information, see Item 8, Note 9 to the
Consolidated Financial Statements, Reinsurance.
Except
for certain workers compensation (including long term disability) liabilities
and certain U.K. motor liability claims, the Company does not discount its unpaid
losses and loss expenses.
The
Company utilizes tabular reserving for workers compensation (including
long-term disability) unpaid losses that are considered fixed and determinable,
and discounts such losses using an interest rate of 5% in 2011 and 2010. The
interest rate approximates the average yield to maturity on specific fixed
income investments that support these liabilities. The tabular reserving
methodology results in applying uniform and consistent criteria for
establishing expected future indemnity and medical payments (including an
explicit factor for inflation) and the use of mortality tables to determine
expected payment periods. Tabular unpaid losses and loss expenses, net of
reinsurance, at December 31, 2011 and 2010 on an undiscounted basis were $612.9
million and $660.3 million, respectively. The related discounted unpaid losses
and loss expenses were $290.3 million and $311.9 million at December 31, 2011
and 2010, respectively.
15
I
NVESTMENTS
Investment structure and strategy
The
Companys investment operations are managed centrally by the Companys
Investment Group. The Risk and Finance Committee (the RFC) of the Board of
Directors of XL-Ireland approves overall investment policy and guidelines, and
reviews the implementation of the investment strategies on a regular basis.
Strategic Asset Allocation
The
investment strategy for the investment portfolio is based on the strategic
asset allocation (SAA) process, which establishes a benchmark (SAA
Benchmark)
for each of the P&C and Life portfolios that is constructed to maximize
company value subject to risk tolerance of management and various constraints,
e.g., liability profile, local regulatory requirements, business needs,
collateral management, risk tolerance and insurance regulation. This process
involves an integrated and stochastic model of the Company that includes
financial conditions, reserve volatility and loss payout patterns, premium
expense and loss ratio projections and correlations among asset, liabilities
and economic variables.
As
part of the implementation of its SAA targets, the Company employs a
comprehensive framework of investment decision authorities (Authorities
Framework). The objective of the Authorities Framework is to ensure that the
risk profile of the Companys investment portfolio is consistent with
managements risk tolerance as reflected in the SAA Benchmarks. The Authorities
Framework controls active or tactical deviations from the SAA Benchmarks. As
the magnitude of these deviations increases or the resulting impact on the risk
profile of the investment portfolio reaches certain predetermined thresholds,
then additional levels of authority and approval are required, up to and
including the RFC.
The
RFC reviews and approves the SAA Benchmarks for P&C and Life operations and
the Authorities Framework as part of the investment policy. Management approves
further detailed Investment Authorities which integrate the Authorities
Framework into the Companys risk governance processes. The Company has an
ongoing process that focuses on optimizing the composition of the P&C and
Life portfolios relative to the SAA Benchmarks. See Investment Portfolio
Structure for more details.
Investment Portfolio Structure
The
Companys investment portfolio consists of fixed income securities, equities,
alternative investments, private investments, derivatives and other investments
and cash. These securities and investments are denominated in U.S. dollar, U.K.
sterling, Euro, Swiss franc, Canadian dollar and other foreign currencies.
The
Companys direct use of investment derivatives includes futures, forwards,
swaps and option contracts that derive their value from underlying assets,
indices, reference rates or a combination of these factors. The Companys
investment policy allows derivatives to be used in the investment portfolio to
reduce risk and enhance portfolio efficiency. Derivatives may not be used to
materially increase investment risk.
At
December 31, 2011 and 2010, total investments, cash and cash equivalents,
accrued investment income, and net receivable (payable) for investments sold
(purchased), were $35.9 billion and $35.8 billion, respectively.
Functionally,
the Companys investment portfolio is divided into two principal components:
1) P&C investment portfolio
The
largest component is the P&C investment portfolio and its principal
objective is to support the Companys insurance and reinsurance operations, the
liabilities of which have some uncertainty as to the timing and/or amount. In
addition, a smaller portion of the P&C investment portfolio supports
corporate operations as well as run-off financial lines business, in which the
liabilities have a greater level of certainty and much longer durations than
typical P&C business.
The
investment strategy for the P&C investment portfolio is based on the SAA
process. The primary performance objective is for the total return of the
P&C portfolio to meet or exceed the return of the benchmark. The second
performance objective is capital preservation through managing the risk profile
of the investment portfolio within managements risk tolerance. The third
performance objective is achieving the budget for Net Investment Income.
2) Life investment portfolio
The
second component of the investment portfolio is the Life investment portfolio,
which was approximately $6.5 billion and $6.4 billion at December 31, 2011 and
2010, respectively. At December 31, 2011 and 2010, the securities in the Life
investment portfolio represented approximately 18% of the total investment
portfolio (including cash and cash equivalents, accrued investment income and
net receivable (payable) for investments sold (purchased)).
16
The
principal objective of the Life investment portfolio is to support the
Companys Life operations, which are now in run-off. The largest portion of the
Life investment portfolio supports the policy benefit reserves associated with
asset annuity transactions, with limited uncertainty as to the timing or amount
of the liability cash flows. A smaller portion of the Life investment portfolio
supports life annuity liabilities that were assumed without portfolio asset
transfer.
As
discussed above, the investment strategy for the Life investment portfolio is
based on the SAA process. The Life SAA process incorporates an additional
overlay of the regulatory capital model and a more extensive focus on
Asset-Liability Management (ALM), which is possible owing to the
lower volatility of life liabilities relative to P&C liabilities.
The
primary performance objective for the asset annuity transactions is to achieve
a steady credit-adjusted book yield of the Life investment portfolio in order
to maximize Life embedded value and minimize statutory capital needs (owing to
unique technical requirements of the statutory capital model). For the
investments supporting the other portions of the Life investment portfolio,
which do not have this unique capital model, the performance objective is for
the constrained total return to at least match the total return of the
benchmark.
Implementation of investment strategy
Although
the Companys management within the Investment Group is responsible for
implementation of the investment strategy, the day-to-day management of the
Companys investment portfolio is outsourced to investment management service
providers in accordance with detailed investment guidelines provided and
monitored by the Company. This approach gives the Company access to top
investment talent with specialized skills across a broad range of investment
products and provides flexibility to actively manage the structure of the
portfolio as dictated by the business needs of the Company. Investment
management service providers are selected directly by the Company on the basis
of various criteria including investment style, track record, performance, risk
management capabilities, internal controls, operational risk and diversification
implications. The vast majority of the Companys investment portfolio is
managed by large, well-established asset management institutions, while a small
portion of the portfolio is managed by asset management specialist firms or
boutiques. Each investment management service provider may manage one or more
portfolios, each of which is generally governed by a detailed set of investment
guidelines, including overall objectives, risk limits (where appropriate) and
diversification requirements that fall within the Companys overall investment
policies and guidelines, including but not limited to exposures to eligible
securities, prohibited investments/transactions, credit quality and general
concentration limits.
Investment performance
See
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations Investment Performance, for discussion of the
Companys investment performance.
Investment portfolio credit ratings, duration
and maturity profile
It
is the Companys policy to operate the combined P&C and Life (aggregate)
fixed income portfolio with a minimum weighted average credit rating of
Aa3/AA. The aggregate credit rating is determined based on the weighted
average rating of securities, where the average credit rating, where available,
from Standard & Poors (S&P), Moodys Investors Service (Moodys)
and Fitch Ratings (Fitch) is allocated to each security. The weighted average
credit rating of the aggregate fixed income portfolio was Aa2/AA at December
31, 2011 and 2010. U.S. agencies paper, whether with implicit or explicit
government support, reflect the credit quality rating of the U.S. government
for the purpose of these calculations.
The
Company did not have an aggregate direct investment in a single corporate
issuer in excess of 5% of shareholders equity at December 31, 2011 or 2010.
Corporate issuers represent only direct exposure to fixed maturities and
short-term investments of the parent issuer and its subsidiaries. These
exposures exclude asset and mortgage back securities that were issued,
sponsored or serviced by the parent and government-guaranteed issues, but does
include covered bonds.
The
overall duration and currency denomination of the aggregate fixed income
portfolio is managed relative to the respective SAA Benchmarks for P&C and
Life operations, both of which incorporate matching currency and duration
within a range relative to liabilities. Duration measures bond price volatility
and is an indicator of the sensitivity of the price of a bond (or a portfolio
of bonds) to changes in interest rates, assuming a parallel change in all
global yield curves reflecting the percentage change in price for a 100 basis
point change in yield. Management believes that the duration of the aggregate
fixed income portfolio is the best single measure of interest rate risk for the
aggregate fixed income portfolio.
The
maturity profile of the aggregate fixed income portfolio is a function of the
maturity profile of estimated loss payments from the Companys liabilities, the
expected operating cash flows of the Company and, to a lesser extent, the
maturity profile of common fixed income benchmarks. For further information on
the maturity profile of the fixed income portfolio see Item 8, Note 5 to the
Consolidated Financial Statements, Investments.
17
E
NTERPRISE
R
ISK
M
ANAGEMENT
Risk Management Framework
The
Company faces strategic and operational risks related to, among others:
underwriting activities, financial reporting, changing macroeconomic
conditions, investment risks, reserving estimates, changes in laws or
regulations, information systems, business interruption and fraud. The
Companys global P&C business, its Life operations (which is in run-off)
and its investment portfolios each have their own set of risks (see Item 1A,
Risk Factors, for a discussion of such risks). From time to time, these risks
may exhibit greater levels of correlation than might be expected over the
longer term due to the presence of, to a greater or lesser degree, some common
risk drivers (internal or external to the Company) embedded in the Companys
businesses that may manifest themselves simultaneously. An enterprise view of
risk is required to identify and manage the consequences of these common risks
and risk drivers on the Companys profitability, capital strength and
liquidity.
The
Companys enterprise risk management (ERM) initiatives are led by the Chief
Enterprise Risk Officer (CERO), who is a member of the Companys senior
management team, and who reports to the Companys Chief Executive Officer. The
CERO also acts as a liaison between the Companys Enterprise Risk Committee
(see below) and the Board (or other of its committees) with respect to risk matters.
All of the Companys employees are expected to assist in the appropriate and
timely identification and management of risks and to enhance the quality and
effectiveness of ERM.
The
Companys ERM framework is designed to allow management to identify and
understand material risk concentrations, including concentrations that have
unattractive risk/reward dynamics so that prompt, appropriate, corrective or
mitigating actions can be taken. To do this, the Company has risk management
committees and processes to serve as points of managerial dialogue and
convergence across its businesses and functional areas, creates risk
aggregation methodologies and develops specific risk appetites to coordinate
the identification, vetting and discussion of risk topics and metrics. As part
of its ERM activities, the Company applies a suite of stress tests, tools, risk
indicators, metrics and reporting processes that examine the consequences of
low probability/high severity events (including those related to emerging
risks) in order to drive mitigating actions where required.
Risk Governance
Risk
Governance relates to the processes by which oversight and decision-making
authorities with respect to risks are granted to individuals within the
enterprise. The Companys governance framework establishes accountabilities for
tasks and outcomes as well as escalation criteria. Governance processes are
designed to ensure that transactions and activities, individually and in the
aggregate, are carried out in accordance with the Companys risk policies,
philosophies, appetites, limits and risk concentrations, and in a manner
consistent with expectations of excellence of integrity, accountability and
client service.
In
July 2010, after completing a comprehensive review of the Companys ERM
processes and controls, the Board determined that there was no longer a need
for a special committee focused on ERM. As a result, the RFC now oversees ERM
matters. With respect to the responsibilities relating to ERM, the RFC:
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Oversees ERM activities,
including the risk management framework employed by management. In light of
the overall risk management framework, the RFC (i) reviews the methodology
for establishing the Companys overall risk capacity; (ii) reviews the policies
for the establishment of risk limit frameworks, and adherence to such limits;
and (iii) reviews and approves enterprise risk limits.
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Oversees the Companys
compliance with any significant enterprise risk limits, authorities and
policies. The RFC evaluates what actions to take with respect to such
enterprise limits, authorities and policies, and approves any exceptions
thereto from time to time as necessary.
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Reviews the Companys
overall risk profile and monitor key risks across the Companys organization
as a whole, which may involve coordination with other committees of the Board
from time to time as appropriate.
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Reviews the Companys
process controls over model use and development with respect to model
effectiveness, accuracy, propriety and model risk.
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Monitors the Companys
risk management performance and obtains reasonable assurance from management
that the Companys risk management policies are effective and are being
adhered to.
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The
review of the Companys overall risk appetites and the evaluation of the risk
impact of any material strategic decision being contemplated, including
consideration of whether such strategic decision is within the risk profile
established by the Company, is conducted by the full Board. Risk appetites,
as referred to above, are broad statements used to guide the Companys risk and
reward preferences over time, all consistent with, among other factors,
business prudence, market opportunities, the underwriting pricing cycle and
investment climate. Risk appetites are regularly monitored and can change over
time in light of the above. See Risk Appetite Management below.
18
Management
oversight of ERM is performed, in part, via a centralized management Enterprise
Risk Committee (ERC), which is chaired by the CERO. The ERC is comprised of
the Companys most senior management from its businesses and functions and is
charged with developing and monitoring enterprise risk policies, risk
appetites, risk limits and compliance with such limits, and risk aggregations,
and identifying key emerging risks and ways to mitigate such risks.
In
addition to the ERC, the Company has established a framework of separate yet
complementary ERM subcommittees, each focusing on particular aspects of ERM.
These subcommittees include:
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Economic Capital Model
Subcommittee: This subcommittee oversees the development of economic capital
models that support ERM activities, and helps set priorities and manage
resources related to such models. It reviews assumptions and related
methodologies used within the Companys economic capital model, including
assessments of model validation, model control and model risk.
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Liability Subcommittee:
This subcommittee supports and assists the ERCs identification, measurement,
management, monitoring and reporting of key underwriting liability and
emerging risks.
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Asset Subcommittee: This
subcommittee assists the ERC in its responsibilities in relation to
governance and oversight of asset-related risks across the Company, including
its Investment Portfolio. Among its activities are (a) involvement in policy
decisions on modeling and quantification of risk measurements; and (b)
providing an interpretation and assessment of asset-related risks, with a
particular focus on market-related risks. Further, the subcommittee is
responsible for coordinating on a regular basis with the Credit Subcommittee
of the ERC on asset-related credit risks.
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Credit Subcommittee: This
subcommittee develops and implements the metrics and supporting framework for
allocation of credit risk capacity across major business units, including the
amount and types of credit exposure.
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Operational Risk
Subcommittee: This subcommittee supports the ERCs identification,
measurement, management and oversight of key operational risks through its
oversight over key operational risk management processes and through its
review of related operational risk indicators, trends and metrics.
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In
addition to the above, risk management subcommittees within each of the
Companys businesses function to ensure that risk is managed in accordance with
the risk limits, guidelines and tolerances that have been allocated to them by
the Company.
Risk Appetite Management
The
Companys risk appetite framework guides its strategies relating to, among
other things, capital preservation, earnings volatility, net worth at risk,
operational loss, liquidity standards, capital rating and capital structure,
with the objective of preserving the Companys capital base. This framework
also addresses the Companys tolerance to risks from material individual events
(e.g., natural or man-made catastrophes such as terrorism), the Companys
investment portfolio and realistic disaster scenarios that cross multiple lines
of business and risks related to some or all of the above that may occur
concurrently.
In
relation to event risk management, the Company establishes net underwriting
limits for individual large events as follows:
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1.
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The Company
imposes limits for each peril region/event type at a 1% exceedance
probability. If the Company was to deploy the full limit, for any given peril
region/event type, there would be a 1% probability that an event would occur
during the next year that would result in a net underwriting loss in excess
of the limit.
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2.
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The Company
also imposes limits for each natural catastrophe peril region at a 1% tail
value at risk (TVaR) probability. This statistic indicates the average
amount of net loss expected to be incurred given that a loss above the 1%
exceedance probability level has occurred.
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3.
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The Company
also imposes limits for certain other event types at a 0.4% exceedance
probability as described in further detail below. If the Company were to
deploy the full limit, for any such given event type, there would be a 0.4%
probability that an event would occur during the next year that would result
in a net underwriting loss in excess of the limit.
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For
planning purposes and to calibrate risk tolerances for business to be written
from September 30, 2011 through September 30, 2012, the Company set its
underwriting limits as a percent of September 30, 2011 Tangible Shareholders
Equity (hereafter, Tangible Shareholders Equity). Tangible Shareholders
Equity is defined as Total Shareholders Equity less Goodwill and Other
Intangible Assets and gives effect for
the exercise of the Companys contingent put option which resulted in the
issuance of $350.0 million of preference ordinary shares in October 2011. For
further information see Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Contingent Capital.
These limits may be recalibrated, from time to time, to reflect material changes
in Total Shareholders Equity that may occur after September 30, 2011, at the
discretion of management and as overseen by the Board.
19
Tier
I event types (Tier 1 Events), which include natural catastrophes, terrorism
and other realistic disaster scenarios, and Tier 2 event types (Tier 2
Events), which include country risk, longevity risk and pandemic risk, are
internal risk classifications for the purposes of defining the Companys risk
tolerances. In determining Tier 1 and Tier 2 Events the Company considers such
factors as:
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Anticipated
risk adjusted returns;
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Strategic
risk preferences;
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Relativity
to peers;
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Shareholder
expectations;
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Robustness
of exposure assessment methodology; and
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Projected
enterprise loss potential.
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Per
event 1% exceedance probability underwriting limits for Tier 1 Events are set
at a level not to exceed approximately 15% of Tangible Shareholders Equity.
Per
event 1% TVaR underwriting limits for certain peak natural catastrophe peril
regions approximate 20% of Tangible Shareholders Equity. 1% TVaR underwriting
limits for non-peak natural catastrophe peril regions are set below the per
event 1% TVaR limits described above.
The
Company sets separate limits for North Atlantic Windstorm as events within the
Atlantic Basin have the potential to cross multiple countries for which
separate underwriting limits are established. In particular, per event 1%
exceedance probability and per event 1% TVaR underwriting limits for North
Atlantic Windstorm are set at a level not to exceed approximately 16.5% and
22.5 % of Tangible Shareholders Equity, respectively, of which no more
than 15% and 20% of such exposures, respectively, can arise from U.S. Windstorm,
the latter being deemed a Tier 1 Event.
Per
event 1% exceedance probability underwriting limits for Tier 2 Events are set
at a level not to exceed 7.5% of Tangible Shareholders Equity.
Per
event 0.4% exceedance probability underwriting limits for Tier 2 Events are set
at a level not to exceed 15% of Tangible Shareholders Equity. The 0.4%
exceedance probability limit is used for Tier 2 Events rather than a TVaR
measure due to the difficulty in estimating the full distribution of outcomes
in the extreme tail of the distribution for these risk types as required for
the TVaR measure.
In
all instances, the above referenced underwriting limits reflect pre-tax losses
net of reinsurance and include inwards and outwards reinstatement premiums
related to the specific events being measured. The limits are not net of
underwriting profits expected to be generated in the absence of catastrophic
loss activity.
In
setting underwriting limits, the Company also considers such factors as:
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Correlation
of underwriting risk with other risks (e.g., asset/investment risk,
operational risk, etc.);
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Model risk
and robustness of data;
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Geographical
concentrations;
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Exposures at
lower return periods;
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Expected
payback period associated with losses;
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Projected
share of industry loss; and
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Annual
aggregate losses at a 1% exceedance probability and at a 1% TVaR level on
both a peril region/risk type basis as well as at the portfolio level.
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Loss
exposure estimates for all event risks are derived from a combination of
commercially available and internally developed models together with the
judgment of management, as overseen by the Board. Actual incurred losses may
vary materially from the Companys estimates. Factors that can cause a
deviation between estimated and actualized loss potential include:
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Inaccurate
assumption of event frequency and severity;
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Inaccurate
or incomplete data;
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Changing
climate conditions that may add to the unpredictability of frequency and
severity of natural catastrophes in certain parts of the world and create
additional uncertainty as to future trends and exposures;
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Future
possible increases in property values and the effects of inflation that may
increase the severity of catastrophic events to levels above the modeled
levels;
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Natural
catastrophe models that incorporate and are critically dependent on
meteorological, seismological and other earth science assumptions and related
statistical relationships that may not be representative of prevailing
conditions and risks, and may therefore misstate how particular events
actually materialize, causing a material deviation between forecasted and
actual damages associated with such events; and
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A change in
the judicial climate.
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For
the above and other reasons, the incidence, timing and severity of catastrophes
and other event types are inherently unpredictable and it is difficult to
estimate the amount of loss any given occurrence will generate. As a
consequence, there is material uncertainty around the Companys ability to
measure exposures associated with individual events and combinations of events.
This uncertainty could cause actual exposures and losses to deviate from those
amounts estimated, which in turn can create a material adverse effect on the
Companys financial condition and results of operations and may result in
substantial liquidation of investments, possibly at a loss, and outflows of cash
as losses are paid.
For
a further discussion on risk appetite management see Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations
Other Key Focuses of Management.
Impact of ERM Processes
The
Company believes that its ERM processes improve the quality and timeliness of
strategic decisions, enhance the integration of strategic initiatives with the
risks related to such initiatives and act as catalysts to improve risk
awareness and informed action by and across the Company. The Company believes
that the integration of ERM with existing business processes and controls
improves the quality of strategic decisions, optimizes the risk/reward
characteristics of business strategies, and enhances the Companys overall risk
management culture.
In
addition, the Companys ERM processes complement the Companys overall internal
control framework by helping to manage the complexity that is inherent within
an organization of the Companys size, the variety of its businesses and
investment activities and geographical reach. However, internal controls and
ERM can provide only reasonable, not absolute, assurance that control
objectives will be met. As a result, the possibility of material financial loss
remains in spite of the Companys ERM activities. An investor should carefully
consider the risks and all information set forth in this report including the
discussion included in Item 1A Risk Factors, Item 7A, Quantitative and
Qualitative Disclosure About Market Risk, and Item 8, Financial Statements
and Supplementary Data.
21
R
EGULATION
The
Companys operating subsidiaries are subject to regulation and supervision in
each of the jurisdictions where they are domiciled and licensed to conduct
business. Generally, regulatory authorities can have broad supervisory and
administrative powers over such matters as licenses, fitness of management,
standards of solvency, material transactions between affiliates, premium rates,
policy forms, investments, security deposits, methods of accounting, form and
content of financial statements, reserves for unpaid losses and loss adjustment
expenses, reinsurance, minimum capital and surplus requirements and/or risk
based capital standards, dividends and other distributions to shareholders,
periodic examinations and annual and other report filings. In general, such
regulation is for the protection of policyholders rather than shareholders.
Bermuda Operations
The
Insurance Act 1978 of Bermuda and related regulations, as amended (the Act),
regulates the Companys (re)insurance operating subsidiaries in Bermuda, and it
provides that no person may carry on any insurance business in or from within
Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the
BMA) under the Act. The Act does not distinguish between insurers and
reinsurers and the defined term Insurance business in the Act includes
reinsurance business.
The
Act imposes on Bermuda (re)insurance companies, solvency and liquidity
standards, certain restrictions on the declaration and payment of dividends and
distributions, certain restrictions on the reduction of statutory capital,
auditing and reporting requirements, and grants the BMA powers to supervise,
investigate and intervene in the affairs of insurance companies. Significant
requirements include the appointment of an independent auditor, the appointment
of a principal representative and a loss reserve specialist for general
business and an actuary for long-term business. Class 4 (re)insurers are
required to prepare and file with the BMA audited annual financial statements
prepared in accordance with U.S. generally accepted accounting principles
(GAAP) or International Financial Reporting Standards (IFRS). The BMA
publishes on its website each such Class 4 (re)insurers GAAP or IFRS audited
financial statements. In addition to the audited GAAP or IFRS financial
statements, Class 4 (re)insurers are required to prepare and file with the BMA
statutory financial statements which are not prepared in accordance with GAAP.
The statutory financial statements and statutory financial return do not form
part of the public records maintained by the BMA and the filing of the Annual
Statutory Financial Return with the BMA. The Supervisor of Insurance is the
chief administrative officer under the Act.
A
(re)insurer engaged in general business is required to maintain the value of
its relevant assets at not less than 75% of the amount of its relevant
liabilities.
Currently, all
Class 4 general business (re)insurers are required to maintain available statutory capital and
surplus at a level equal to or in excess of their enhanced capital requirement
(ECR). The applicable ECR is established by reference to either The Bermuda
Solvency Capital Requirement (BSCR), which employs a standard mathematical
model that can relate more accurately the risks taken on by (re)insurers to the
capital that is dedicated to their business or a BMA-approved internal capital
model. Beginning with the 2011 financial year end statutory filings, Class E long-term
insurers will be required to maintain available statutory capital and surplus
at a level equal to or in excess of an ECR which is established by reference
to either the BSCR for long-term insurers model or a BMA-approved internal
capital model.
Under
the Bermuda Companies Act 1981, as amended, a Bermuda company may not declare
or pay a dividend or make a distribution out of contributed surplus if there
are reasonable grounds for believing that: (a) the company is, or would after
the payment be, unable to pay its liabilities as they become due; or (b) the
realizable value of the companys assets would thereby be less than its liabilities.
For further information see Item 8, Note 23 to the Consolidated Financial
Statements, Statutory Financial Data.
All
Bermuda (re)insurers must comply with the BMAs Insurance Code of Conduct
(ICIC), which came into force on July 1, 2011. The ICIC establishes duties,
requirements and standards to be complied with under the Act. Failure to comply
with the requirements of the ICIC will be a factor taken into account by the
BMA in determining whether a (re)insurer is conducting its business in a sound
and prudent manner under the Act. Under the provisions of the Act, the BMA may,
from time to time, conduct on site visits at the offices of the (re)insurers
it regulates.
The
Insurance Amendment (No. 3) Act 2010 came into force on December 31, 2010 and
created five new classes of long-term insurance licenses: Class A Class E.
Prior to the enactment of this amendment, a (re)insurer carrying on long-term
insurance was registered simply as a long-term (re)insurer. Existing
long-term insurers were required to re-register under the appropriate new
classification system. Effective December 31, 2011, further amendments were
made to the Act to extend enhanced solvency reporting
22
requirements to Class E
(re)insurers. Class E insurers are now required to prepare and file with the
BMA, in addition to statutory financial statements, financial statements
prepared in accordance with GAAP or IFRS.
Amendments
made in 2010 to the Act provide for written notification to be made to the BMA
with respect to a person who becomes a holder of at least 10%, 20%, 33% or 50%
of the voting shares of an insurer whose shares or the shares of its parent
company are traded on any stock exchange which is recognized by the BMA for
this purpose within 45 days of becoming such a shareholder controller. Where it
appears to the BMA that a person who is a controller of any description is not
or is no longer a fit and proper person to be such a controller, it may serve
him with a written notice of objection to his continuing as a controller of the
(re)insurer. Also, a (re)insurer must provide written notice to the BMA that a
person has become, or ceased to be, a controller or officer of a (re)insurer
within 45 days of becoming aware of such fact. An officer in relation to a
(re)insurer includes a director, chief executive or senior executive performing
duties of underwriting, actuarial, risk management, compliance, internal audit,
finance or investment matters.
All
registered (re)insurers are required to give notice to the BMA of certain
measures that are likely to be of material significance to the BMA in the
discharge of its functions under the Act. A material change includes (i) the
transfer or acquisition of insurance business being part of a scheme falling
under section 25 of the Act or section 99 of the Bermuda Companies Act 1981;
(ii) the amalgamation with or acquisition of another firm; (iii) engaging in
non-insurance business and activities related thereto where such business is
not ancillary to its (re)insurance business; and (iv) engaging in unrelated
business that is retail business.
In
March 2011, the Exempted Undertaking Tax Protection Act 1966 was amended to
extend the period from March 28, 2016 to March 31, 2035 for which the Minister
of Finance may grant an assurance to an exempted undertaking, (which includes
Bermuda exempted companies, permit companies, partnerships and unit trusts)
that it will not be liable to pay certain taxes. These include any taxes
computed on profits or income or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax.
United States
Within
the United States, the Companys insurance and reinsurance subsidiaries are
subject to regulation and supervision by their respective states of
incorporation and by other jurisdictions in which they do business. The methods
of regulation vary, but in general have their source in statutes that delegate
regulatory and supervisory powers to an insurance official. The regulation and
supervision relate primarily to approval of policy forms and rates, the
standards of solvency that must be met and maintained including risk-based
capital standards, material transactions between an insurer and its affiliates,
the licensing of insurers, agents and brokers, restrictions on insurance policy
terminations, the nature of and limitations on the amount of certain investments,
restrictions and limitations on dividends paid to shareholders, limitations on
the net amount of insurance of a single risk compared to the insurers surplus,
deposits of securities for the benefit of policyholders, methods of accounting,
collateral requirements to obtain surplus credit for ceded reinsurance assets,
periodic examinations of the financial condition and market conduct of
insurance companies, the form and content of reports of financial condition
required to be filed, and reserves for unearned premiums, losses, expenses and
other obligations. All transactions between or among the insurance and
reinsurance company subsidiaries must be fair and equitable. In general, such
regulation is for the protection of policyholders rather than shareholders.
Regulations
generally require insurance and reinsurance companies to furnish information to
their domestic state insurance department concerning activities that may
materially affect the operations, management or financial condition and solvency
of the company. Regulations vary from state to state but generally require that
each primary insurance company obtain a license or certificate of authority
from the department of insurance of a state to conduct business in that state.
An insurer may also earn accreditation as an approved surplus lines insurer in
order to conduct business on an excess & surplus insurance basis within a
particular state. A reinsurance company is not generally required to have an
insurance license to reinsure a U.S. ceding company from outside the United
States. However, for a U.S. ceding company to obtain financial statement credit
for reinsurance ceded, the reinsurer must obtain an insurance license or
achieve accredited status from the cedants state of domicile or another U.S.
state with equivalent insurance regulation, or must post collateral to support
the liabilities ceded. In addition, regulations for reinsurers vary somewhat
from primary insurers in that the form and rate of reinsurance contracts and
the market conduct of reinsurers are not subject to regulator approval.
The
Companys U.S. insurance and reinsurance subsidiaries are required to file
detailed annual and, in most states, quarterly reports with state insurance
regulators in each of the states in which they are licensed or accredited. Such
annual and quarterly reports are required to be prepared on a calendar year
basis. In addition, the U.S. insurance subsidiaries operations and accounts
are subject to financial condition and market conduct examination at regular
intervals by state regulators. Effective January 1, 2010, the Companys U.S.
insurance subsidiaries were required to comply with expanded state model audit
laws which require the filing of a Managements Report of Internal Control Over
Financial Reporting. The report provides managements assertion that it has
responsibility for establishing and maintaining a system of adequate internal
controls over statutory financial reporting, and provides managements
assessment that the system is effective. In addition, these laws also expanded
the governance requirements of the insurance subsidiaries.
Statutory
surplus is an important measure utilized by the regulators and rating agencies
to assess the Companys U.S. insurance subsidiaries ability to support
business operations and provide dividend capacity. The Companys U.S. insurance
23
subsidiaries are subject to
various state statutory and regulatory restrictions that limit the amount of
dividends that may be paid, within any twelve-month period, from earned surplus
without prior approval from regulatory authorities. These restrictions differ
by state, but are generally based on a calculation of the lesser of 10% of
statutory surplus or 100% of adjusted net investment income to the extent
that it has not previously been distributed.
The
National Association of Insurance Commissioners (the NAIC) promulgated, and
all states have adopted, Risk-Based Capital (RBC) standards for property and
casualty companies and life insurance companies as a means of monitoring
certain aspects affecting the overall financial condition of insurance
companies. RBC is designed to measure the adequacy of an insurers statutory
surplus in relation to the risks inherent in its business. The NAICs RBC Model
Law provides for four incremental levels of regulatory attention for insurers
whose surplus is below the calculated RBC target. These levels of attention
range in severity from requiring the insurer to submit a plan for corrective
action to actually placing the insurer under regulatory control. The Companys
current RBC ratios for its U.S. subsidiaries are satisfactory and such ratios
are not expected to result in any adverse regulatory action. The Company is not
aware of any such actions relative to it.
While
the federal government currently does not directly regulate the insurance
business in the U.S. (other than for flood, nuclear and reinsurance of losses
from terrorism), federal legislation and administrative policies can affect the
insurance industry.
In
July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank) was passed into law. Dodd-Frank requires the creation of a
Federal Insurance Office within the Treasury Department that will be focused on
national coordination of the insurance sector, systemic risk mitigation and
international regulatory cooperation. Although the Federal Insurance Office
currently does not directly regulate the insurance industry, under Dodd-Frank
it has the power to preempt state insurance regulations that are inconsistent
with international agreements regarding insurance regulation, subject to
certain exceptions. In addition, Dodd-Frank provides that the Federal Insurance
Office must submit a report to Congress on improving U.S. insurance regulation,
which must cover the feasibility of future federal regulation of the U.S.
insurance industry.
The
federal government has also undertaken initiatives in several areas that may
impact the insurance industry including tort reform, corporate governance and
the taxation of insurance companies. In addition, legislation has been
introduced from time to time in recent years that, if enacted, could result in
the federal government assuming a more direct role in the regulation of the
insurance industry, primarily as respects federal licensing in lieu of state
licensing.
Other International Operations
A
substantial portion of the Companys property and casualty insurance business
and a majority of its life reinsurance business are carried on in countries
other than Bermuda and the United States. The degree of regulation in foreign
jurisdictions can vary. Generally, the Companys subsidiaries must satisfy
local regulatory requirements. Licenses issued by foreign authorities to
subsidiaries of the Company are subject to modification or revocation for cause
by such authorities. The Companys subsidiaries could be prevented, for cause,
from conducting business in certain of the jurisdictions where they currently operate.
While each country imposes licensing, solvency, auditing and financial
reporting requirements, the type and extent of the requirements differ
substantially. Key areas where country regulations may differ include: (i) the
type of financial reports to be filed; (ii) a requirement to use local
intermediaries; (iii) the amount of reinsurance permissible; (iv) the scope of
any regulation of policy forms and rates; and (v) the type and frequency of
regulatory examinations.
In
addition to these requirements, the Companys foreign operations are also
regulated in various jurisdictions with respect to currency, amount and type of
security deposits, amount and type of reserves, amount and type of local
investment and limitations on the share of profits to be returned to
policyholders on participating policies. For further information see Item 8,
Note 23 to the Consolidated Financial Statements, Statutory Financial Data.
European Union
Financial
services including insurance, reinsurance and trading in the U.K. are regulated
by the Financial Services Authority (FSA). The FSAs Handbook of Rules and
Guidance (the FSA Rules) covers all aspects of regulation including capital
adequacy, financial and non-financial reporting and certain activities of
U.K.-regulated firms. The Companys subsidiaries carrying out regulated
activities in the U.K. comply with the FSA Rules. The Companys Lloyds
managing agency, its managed syndicates and its associated corporate capital
vehicles are subject to additional Lloyds requirements.
FSA
regulations also impact the Company as controller (an FSA defined term) of
its U.K. regulated subsidiaries. Through the FSAs Approved Persons regime,
certain employees and directors are subject to regulation by the FSA of their
fitness and certain employees are individually registered at Lloyds.
The
Companys network of offices in the European Union consists mainly of branches
of U.K. as well as Irish (regulated by the Central Bank of Ireland) companies
that are principally regulated under European Directives from their home
states, the U.K. and Ireland, rather than by each individual jurisdiction.
Company law in the U.K. and Ireland prohibits the Companys U.K. and Irish
entities from declaring a dividend to their respective shareholders unless the
applicable entity has profits available for distribution.
24
The determination of whether
a company has profits available for distribution is based on its accumulated
realized profits less its accumulated realized losses. While the U.K. and Irish
insurance regulatory laws impose no statutory restrictions on a general
insurers ability to declare a dividend, the regulatory rules require
maintenance of each insurance companys solvency margin within its jurisdiction
and, in addition, regulatory approval must be sought in advance of paying a
distribution by an Irish or U.K. regulated company. In addition, as an Irish
public limited company, XL-Ireland is also subject to additional reporting
requirements under Irish company law.
An
E.U. directive covering the capital adequacy and risk management of, and
regulatory reporting for, insurers, known as Solvency II, was adopted by the
European Parliament in April 2009. Insurers and reinsurers within the European
Economic Area (EEA) will need to be compliant with Solvency II by January 1,
2014, although they may need to demonstrate to their regulators certain
elements of the requirements are in place in advance, particularly when
selecting internal model approval at the outset. Solvency II presents a number
of risks to XLs European operations. Insurers across Europe are liaising
closely with the regulators and undertaking a significant amount of work to
develop their internal capital models and to ensure that they will meet the new
requirements. This may divert resources from other business-related tasks.
Final Solvency II guidance has yet to be published; consequently the Companys
implementation plans are based on its current understanding of the Solvency II
requirements which may change. Increases in capital requirements as a result of
Solvency II may be required and may impact the Companys results of operations.
Swiss Operations
In
Switzerland, the Companys operations are regulated under the Insurance
Supervision Act of December 17, 2004. Both Insurance and Reinsurance operations
are supervised under this Act. Reinsurance branches of foreign legal entities
are not regulated. Insurance branches of foreign entities are subject to
limited regulations. Supervision in Switzerland is exercised by the Federal
Financial Market Supervisory Authority (FINMA). The supervisory regime
currently comprises both Solvency I requirements and Solvency II type
requirements (Swiss Solvency Test), the latter of which impose higher capital
requirements, with which the entities operating in Switzerland comply.
Furthermore, direct insurers and insurance branches operating in Switzerland
have to comply with tied assets requirements.
FINMA
may call for supervision of an Insurance group, based on certain qualitative
and quantitative standards. XLs operations in Switzerland are currently not
subject to this Group supervision. XL Company Switzerland GmbH, an
intermediary holding company, is consequently not subject to FINMA regulations.
In
its opinion dated July 2010, the European Insurance and Occupational Pensions
Authority (EIOPA) made a proposal to the European Commission that the Swiss
supervisory regime (together with the regime in Bermuda) should be considered
in the first wave of the third country equivalence assessment with regard to
all three articles on equivalence (Art. 172 Equivalence for reinsurance
supervision, Art. 227 Calculating group solvability, Art. 260 Equivalence for third
country group supervision).
25
E
MPLOYEES
At
December 31, 2011, the Company had 3,818 employees. At that date, 233 of the
Companys employees were represented by workers councils and 402 of the
Companys employees were subject to industry-wide collective bargaining
agreements in several countries outside the United States.
A
VAILABLE
I
NFORMATION
The
public can read and copy any materials the Company files with the U.S.
Securities and Exchange Commission (SEC) at the SECs Public Reference Room
at 100 F Street, NE, Washington, DC 20549. The public can obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers, including
the Company, that file electronically with the SEC. The address of the SECs
website is
http://www.sec.gov
.
The
Companys website address is
http://www.xlgroup.com
.
The information contained on the Companys website is not incorporated by
reference into this Annual Report on Form 10-K or any other of the Companys
documents filed with or furnished to the SEC.
The
Company makes available free of charge, including through the Companys
website, the Companys Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the SEC.
The
Company adopted Corporate Governance Guidelines, as well as written charters
for each of the Audit Committee, the Management Development and Compensation
Committee, the Nominating, Governance and External Affairs Committee and the
Risk and Finance Committee, as well as a Code of Conduct and a related
Compliance Program. Each of these documents is posted on the Companys website
at
http://www.xlgroup.com
, and
each is available in print to any shareholder who requests it by writing to the
Company at Investor Relations Department, XL Group plc, Seaview House, 70 Seaview Avenue, Stamford, CT 06902-6040 United States of America.
The
Company intends to post on its website any amendment to, or waiver of, a
provision of its Code of Conduct that applies to its Chief Executive Officer,
Chief Financial Officer and Corporate Controller or persons performing similar
functions and that relates to any element of the code of ethics definition set
forth in Item 406 of Regulation S-K under the Securities Act of 1933, as
amended.
The
Company intends to use its website as a means of disclosing material non-public
information and for complying with its disclosure obligations under Regulation
FD. Such disclosures will be included on the website in the Investor
Relations section. Accordingly, investors should monitor such portions of the
Companys website, in addition to following its press releases, SEC filings and
public conference calls and webcasts.
26
Any
of the following risk factors could have a significant or material adverse
effect on our business, financial condition, results of operations and/or liquidity,
in addition to the other information contained in this report. Additional risks
not presently known to us or that we currently deem immaterial may also impair
our business, financial condition and results of operations.
The occurrence of
disasters could adversely affect our financial condition, results of
operations, cashflows and prospects.
We
have substantial exposure to losses resulting from natural and man-made
disasters and other catastrophic events. Catastrophes can be caused by various
events, including hurricanes, earthquakes, floods, hailstorms, explosions,
severe weather, fires, war and acts of terrorism. Changing climate conditions
may add to the unpredictability and frequency of natural disasters in certain
parts of the world and create additional uncertainty as to future trends and
exposures. The incidence and severity of catastrophes are inherently
unpredictable, and it is difficult to predict the timing of such events with
statistical certainty or estimate the amount of loss any given occurrence will
generate.
The
occurrence of claims from catastrophic events is likely to result in
substantial volatility in our financial condition, results of operations and
cash flows for the fiscal quarter or year in which a catastrophic event occurs,
as well as subsequent fiscal periods, and could have a material adverse effect
on our financial condition and results of operations and our ability to write
new business. This risk is exacerbated due to accounting principles and rules that
do not permit (re)insurers to reserve for such catastrophic events until they
occur. We expect that future possible increases in the values and
concentrations of insured property, the effects of inflation and changes in
cyclical weather patterns may increase the severity of catastrophic events in
the future. Although we attempt to manage our exposure to catastrophic events,
a single catastrophic event could affect multiple geographic zones and lines of
business and the frequency or severity of catastrophic events could exceed our
estimates, in each case potentially having a material adverse effect on our
financial condition, results of operations and cash flows. In addition, while
we may, depending on market conditions, purchase catastrophe reinsurance and
retrocessional protection, the occurrence of one or more major catastrophes in
any given period could result in losses that exceed such reinsurance and
retrocessional protection. This could have a material adverse effect on our
financial condition and results of operations and may result in substantial
liquidation of investments, possibly at a loss, and outflows of cash as losses
are paid.
The failure of any
of the underwriting risk management strategies that we employ could have a
material adverse effect on our financial condition, results of operations
and/or liquidity.
We
seek to limit our loss exposure by, among other things, writing a number of our
reinsurance or retrocession contracts on an excess of loss basis, adhering to
maximum limitations on reinsurance written in defined geographical zones,
limiting program size for each client and prudently underwriting each program
written. In addition, in the case of proportional treaties, we generally seek
to use per occurrence limitations or loss ratio caps to limit the impact of
losses from any one event. We cannot be sure that all of these loss limitation
methods will have the precise risk management impact intended. For instance,
although we also seek to limit our loss exposure by geographic diversification,
geographic zone limitations involve significant underwriting judgments,
including the determination of the area of the zones and the inclusion of a
particular policy within a particular zones limits. Underwriting involves the
exercise of considerable judgment and the making of important assumptions about
matters that are inherently unpredictable and beyond our control, and for which
historical experience and probability analysis may not provide sufficient
guidance. The failure of any of the underwriting risk management strategies
that we employ could have a material adverse effect on our financial condition,
results of operations and cash flows. Also, we cannot provide assurance that
various provisions of our policies, such as limitations or exclusions from
coverage or choice of forum, will be enforceable in the manner that we intend
and disputes relating to coverage and choice of legal forum may arise, which
could materially adversely affect our financial condition and results of
operations.
The insurance and
reinsurance industries are historically cyclical and we may experience periods
with excess underwriting capacity and unfavorable premium rates.
The
insurance and reinsurance industries have historically been cyclical,
characterized by periods of intense price competition due to excess
underwriting capacity as well as periods when shortages of capacity permitted
favorable premium levels. An increase in premium levels is often followed by an
increasing supply of insurance and reinsurance capacity, either by capital
provided by new entrants or by the commitment of additional capital by existing
insurers or reinsurers, which may cause prices to decrease. Either of these
factors could lead to a significant reduction in premium rates, less favorable
policy terms and conditions and fewer submissions for our underwriting
services. In addition to these considerations, changes in the frequency and
severity of losses suffered by insureds and insurers may affect the cycles of
the insurance and reinsurance industries significantly.
A downgrade or
potential downgrade in our financial strength and credit ratings by one or more
rating agencies could materially and negatively impact our business, financial
condition, results of operations and/or cash flows.
As
our ability to underwrite business is dependent upon the quality of our claims
paying and financial strength ratings as evaluated by independent rating
agencies, a downgrade by any of these institutions could cause our competitive
position in the insurance and reinsurance industry to suffer and make it more
difficult for us to market our products.
27
A
downgrade below A of our principal insurance and reinsurance
subsidiaries by either Standard & Poors (S&P) or A.M.
Best Company (A.M. Best),
which is two notches below the current S&P and A.M. Best financial strength
ratings of A (Stable) for our principal insurance and reinsurance
subsidiaries, may trigger termination provisions in a significant amount of our
assumed reinsurance agreements and may potentially require us to return
unearned premium to cedants. Whether a client would exercise its termination
rights after such a downgrade would likely depend on, among other things, the
reasons for the downgrade, the extent of the downgrade, prevailing market
conditions, the degree of unexpired coverage, and the pricing and availability
of replacement reinsurance coverage. Based on premium value, approximately 70%
of our in force reinsurance contracts at January 1, 2012 contained
provisions allowing clients to terminate those contracts upon a decline in our
ratings to below A. In the event of such a downgrade, we cannot
predict whether or how many of our clients would actually exercise such termination
rights or the extent to which any such terminations would have a material
adverse effect on our financial condition, results of operations, cash flows
or future prospects or the market price for our securities. A downgrade could
also result in a substantial loss of business for us as ceding companies and
brokers that place such business may move to other insurers and reinsurers with
higher ratings and the loss of key employees. In addition, due to collateral
posting requirements under our letter of credit and revolving credit facility
agreements, such a downgrade may require the posting of cash collateral in
support of certain in use portions of these facilities (see Managements
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources under Part II, Item 7 of this report).
Specifically, a downgrade below A by A.M. Best would constitute
an event of default under the Companys three largest credit facilities
and may trigger such collateral requirements. In certain limited instances, such
downgrades may require us to return cash or assets to counterparties or to settle
derivative and/or other transactions with the respective counterparties.
In
addition to the financial strength ratings of our principal insurance and
reinsurance subsidiaries, various rating agencies also publish credit ratings
for XL-Cayman. Credit ratings are indicators of a debt issuers ability to meet
the terms of debt obligations in a timely manner are part of our overall
funding profile and affect our ability to access certain types of liquidity.
Downgrades in our credit ratings could have a material adverse effect on our
financial condition and results of operations and cash flows in a number of
ways, including adversely limiting our access to capital markets, potentially
increasing the cost of debt or requiring us to post collateral.
The recent
downgrade, or any future downgrading, of the United States credit rating could
have a material adverse effect on our business, financial condition and results
of operations.
Standard &
Poors Ratings Services lowered its long-term sovereign credit rating on the
United States from AAA to AA+ in August 2011. In addition, Moodys
Investor Services lowered its outlook on U.S. debt to negative upon affirming
its AAA rating following passage of legislation that raised the debt ceiling.
Because of the unprecedented nature of negative credit rating actions with
respect to U.S. government obligations, the impact of these actions or any
further downgrades to the U.S. governments sovereign credit rating by any
rating agency is inherently unpredictable. Such actions could have material
adverse impacts on financial markets and economic conditions on the United
States and throughout the world. In turn, this could have a material adverse
effect on our business, financial condition and results of operations,
including with respect to assets in our investment portfolio, as well as assets
in trusts or other collateral arrangements posted by or to us. In addition,
further downgrades of the United States credit rating could create broader
financial turmoil and uncertainty, and could negatively impact the average
credit rating quality of our investment portfolio.
The sovereign debt
crisis in Europe and concerns regarding the instability of Euro-zone countries
could have a material adverse effect on our business, financial condition and
results of operations.
Global markets and economic conditions
have been negatively impacted by the uncertainty relating to the level of sovereign debt of numerous E.U. member states and the
ability of those countries to service their sovereign debt obligations. This uncertainty has and could in the future result in
volatile bond yields on the sovereign debt of E.U. member states and on other European-related corporate debt held within our investment
portfolio and could have material adverse impacts on financial markets and economic conditions in the E.U. and throughout the world.
In addition, continuing downgrades of sovereign debt could bring down the average credit rating quality of our investment portfolio.
The interdependencies among European
economies and financial institutions and between such European economies and financial institutions and those of the rest of the
world have also exacerbated concern regarding the stability of European financial markets generally and certain institutions in
particular. One or more Euro-zone countries could come under increasing pressure to leave the European Monetary Union, or
the Euro as the single currency of the Euro-zone could cease to exist if the European Monetary Union were dissolved. Any of these
developments, or the perception that any of these developments are likely to occur, could lead to severe economic recession or
depression. If one or more countries abandon the Euro or the European Monetary Union dissolves, it may result in uncertainty with
respect to the terms, value or enforceability of these bonds, instruments or contracts, which could result in a material loss to
us. Similarly, if a country leaving the Euro-zone imposes currency controls, such controls may have a material adverse impact on
the value of and our ability to withdraw capital from a company domiciled in that country.
28
Given the extent of our European operations,
including that XL-Ireland is domiciled in Ireland, investment holdings and clients and counterparties, persistent volatility in
the European financial markets, or the failure of any significant European financial institution arising from the wider implications
of the crisis, even if not an immediate counterparty to us, could have a material adverse impact on our business, investment portfolio,
liquidity or financial performance. If the current Euro-zone sovereign debt crisis persists or worsens, it could lead to further
political uncertainty, material changes to tax policies of Euro-zone countries, financial turmoil and social unrest, affecting
the successful implementation of stability measures. Sovereigns, financial institutions and companies may become subject to liquidity
shortages and be unable to obtain refinancing or new funding, leading to an increased risk of a default on their existing debt,
and measures to reduce debt levels and fiscal deficits could result in a further slowdown of or negative economic growth.
For a discussion of the risks to our
business during or following a financial market disruption and risks to our investment portfolio, see the risk factor entitled
“We are exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and
foreign exchange rates as well as other investment risks, which may adversely affect our results of operations, financial condition
or cash flows.” For a discussion of risks associated with the United States’ credit rating, see the risk factor entitled
“The recent downgrade, or any future downgrading, of the United States’ credit rating could have a material adverse
effect on our business, financial condition and results of operations.”
Our efforts to
develop new products or expand in targeted markets may not be successful and
may create enhanced risks.
A
number of our recent and planned business initiatives involve developing new
products or expanding existing products in targeted markets. This includes the
following efforts, from time to time, to protect or profitably grow market
share:
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We may develop products
that insure risks we have not previously insured or contain new coverage or
coverage terms.
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We may refine our
underwriting processes.
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We may seek to expand
distribution channels.
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We may focus on geographic
markets within or outside of the United States where we have had relatively
little or no market share.
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We
may not be successful in introducing new products or expanding in targeted
markets and, even if we are successful, these efforts may create enhanced
risks. Among other risks:
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Demand for new products or
in new markets may not meet our expectations.
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To the extent we are able
to market new products or expand in new markets, our risk exposures may
change, and the data and models we use to manage such exposures may not be as
sophisticated as those we use in existing markets or with existing products.
This, in turn, could lead to losses in excess of our expectations.
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Efforts to develop new
products or markets have the potential to create or increase distribution
channel conflict.
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In connection with the
conversion of existing policyholders to a new product, some policyholders
pricing may increase, while the pricing for other policyholders may decrease,
the net impact of which could negatively impact retention and margins.
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To develop new products or
markets, we may need to make substantial capital and operating expenditures,
which may also negatively impact results in the near term.
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29
If
our efforts to develop new products or expand in targeted markets are not
successful, our results could be materially and adversely affected.
We are exposed to
significant capital markets risk related to changes in interest rates, credit
spreads, equity prices and foreign exchange rates as well as other investment
risks, which may adversely affect our results of operations, financial
condition or cash flows.
Our
operating results are affected by the performance of our investment portfolio.
Our assets are invested by a number of investment management service providers
under the direction of the Companys management within the Investment Group in
accordance, in general, with detailed investment guidelines set by us under the
oversight of the RFC, and established in accordance with our SAA framework for
our P&C operations and Life operations. Although our investment policies
stress diversification of risks and conservation of principal and liquidity,
our investments are subject to market-wide risks, as noted below, and
fluctuations, as well as to risks inherent in particular securities. We are
exposed to significant capital markets risks related to changes in interest
rates, credit spreads and defaults, market liquidity, equity prices and foreign
currency exchange rates. If significant continued market volatility, changes in
interest rates, changes in credit spreads and defaults, a lack of pricing
transparency, a reduction in market liquidity, declines in equity prices, and
the strengthening or weakening of foreign currencies against the U.S. dollar
occur, individually or in tandem, this could have a material adverse effect on
our consolidated results of operations, financial condition or cash flows
through realized losses, impairments, and changes in unrealized positions.
Levels of write-down or impairment are impacted by our assessment of the intent
to sell securities that have declined in value as well as actual losses as a
result of defaults or deterioration in estimates of cash flows. We periodically
review our investment portfolio structure and strategy. If, as a result of such
review, we determine to reposition or realign portions of the investment
portfolio and sell securities in an unrealized loss position, we will incur an
other than temporary impairment charge. Any such charge may have a material
adverse effect on our results of operations and business.
For
the year ended December 31, 2011, as a result of the prolonged and continued
volatility and disruptions in the public debt and equity markets, we incurred
realized and unrealized investment losses, as described in Managements
Discussion and Analysis of Financial Condition and Results of Operations under
Part II, Item 7 of this report. We continue to closely monitor current market
conditions and evaluate the long term impact of this market volatility on all
of our investment holdings. Depending on market conditions, we could incur
additional realized and unrealized losses in future periods, which could have a
material adverse effect on the Companys results of operations, financial
condition and business.
Our
exposure to interest rate risk relates primarily to the market price and cash
flow variability of fixed income instruments that are associated with changes
in interest rates. Our investment portfolio contains interest rate sensitive
instruments, such as fixed income securities, which have been and may continue
to be adversely affected by changes in interest rates from central bank
monetary policies, domestic and international economic and political conditions
and other factors beyond our control. A rise in interest rates would increase
the net unrealized loss position of our investment portfolio, offset by our
ability to earn higher rates of return on funds reinvested. Conversely, a
decline in interest rates would decrease the net unrealized loss position of
our investment portfolio, offset by lower rates of return on funds reinvested.
We maintain a P&C investment portfolio with diversified maturities that has
a weighted average duration that is determined in accordance with its SAA
Benchmark based on a dynamic financial analysis of investment assets and
liabilities, and that is intended to maximize the Companys enterprise value
subject to accounting, regulatory, capital and risk tolerances. The SAA
Benchmarks and portfolios supporting our Life operations are rebalanced
regularly to reflect an explicit asset-liability management process. However,
for both the P&C and Life investment portfolios our estimates of the time
and size of estimated loss payment profile may be inaccurate and we may be
forced to liquidate investments prior to maturity at a loss in order to cover
liabilities. We are exposed to interest rate risk relative to our liabilities.
Our
exposure to credit spread risk relates primarily to the market price associated
with changes in prevailing market credit spreads and the impact on our holdings
of spread products such as corporate and structured credit and credit-sensitive
government-related securities. Approximately 2.3% of our aggregate fixed income
portfolio consists of below investment-grade high yield fixed income
securities. These securities have a higher degree of credit or default risk and
a greater exposure to credit spread risk. Certain sectors within the investment
and below investment grade fixed income market, such as structured and
corporate credit, may be less liquid in times of economic weakness or market
disruptions. While we have put in place procedures to monitor the credit risk
and liquidity of our invested assets in general and those impacted by recent
credit market issues specifically, it is possible that, in periods of economic
weakness or periods of turmoil in capital markets, we may experience default
losses in both our investment grade and below investment grade corporate and structured
credit holdings. This may result in a material reduction of net income, capital
and cash flows.
We
invest a portion of our investment portfolio in common stock or equity-related
securities, including alternative funds and private equity funds. The value of
these assets fluctuates, due to changes in the equity and credit markets along
with other factors. In times of economic weakness, the market value and
liquidity of these assets may decline, and may impact net income, capital and
cash flows. In addition, certain of the products offered by our Life operations
offer fixed guaranteed returns while debt and equity yields may continue to
decline. In addition, the amount of earnings from alternative funds and private
investment funds are not earned evenly across the year, or even from year to
year. As a result, the amount of earnings that we record from these investments
may vary
30
substantially from quarter
to quarter. The timing of distributions from such private investment funds
depends on particular events relating to the underlying investments. The
ability of an alternative fund to satisfy any redemption request from its
investors depends on the underlying liquidity of the alternative funds
investments. As a result, earnings, distributions and redemptions from these
two asset classes may be more difficult to predict.
The
functional currencies of our principal insurance and reinsurance subsidiaries
include the U.S. dollar, U.K. sterling, the Euro, the Swiss franc and the Canadian
dollar. Exchange rate fluctuations relative to the functional currencies may
materially impact our financial position, results of operations and cash flows.
Many of our non-U.S. subsidiaries maintain both assets and liabilities in
currencies different than their functional currency, which exposes us to
changes in currency exchange rates.
In
addition, locally-required capital levels are invested in local currencies in
order to satisfy regulatory requirements and to support local insurance operations
regardless of currency fluctuations. Foreign exchange rate risk is reviewed as
part of our risk management process. While we utilize derivative instruments
such as futures, options and foreign currency forward contracts to, among other
things, manage our foreign currency exposure, it is possible that these
instruments will not effectively mitigate all or a substantial portion of our
foreign exchange rate risk, which could adversely impact the Companys results
of operations.
Certain of our
investments may be illiquid or are in asset classes that have been experiencing
significant market valuation fluctuations.
We
hold certain investments that may lack liquidity or for which the observability
of prices or inputs may be reduced in periods of market dislocation, such as
non-agency residential mortgage-backed and collateralized debt obligations
securities. Even some of our high quality assets have been more illiquid during
periods of challenging market conditions. Generally, securities classified as
Level 3 pursuant to the fair value hierarchy set forth in authoritative
accounting guidance over fair value measurements may be less liquid, may be
more difficult to value, requiring significant judgment, and may be more likely
to result in sales at materially different amounts than the fair values
determined by management.
If
we require significant amounts of cash on short notice in excess of normal cash
requirements or are required to post or return collateral in connection with
certain of our reinsurance contracts, credit agreements, derivative
transactions or our invested portfolio, we may have difficulty selling these
investments in a timely manner, be forced to sell them for less than we
otherwise would have been able to realize, or both.
The
reported value of our relatively illiquid types of investments and, in certain
circumstances, our high quality, generally liquid asset classes, does not
necessarily reflect the lowest current market bid price for the asset. If we
were forced to sell certain of our assets in the current market, there can be
no assurance that we will be able to sell them for the prices at which we have
recorded them and we may be forced to sell them at significantly lower prices,
particularly at times of extreme market illiquidity. Any such sales could
adversely impact the Companys financial position.
If actual claims
exceed our loss reserves, or if changes in the estimated levels of loss
reserves are necessary, our financial results and cash flows could be adversely
affected.
Our
results of operations and financial condition depend upon our ability to assess
accurately the potential losses associated with the risks that we insure and
reinsure. We establish reserves for unpaid losses and loss adjustment expense
(LAE) liabilities, which are estimates of future payments of reported and
unreported claims for losses and related expenses with respect to insured
events that have occurred. The process of establishing reserves for property
and casualty claims can be complex and is subject to considerable variability
as it requires the use of informed estimates and judgments. Actuarial estimates
of unpaid loss and LAE liabilities are subject to potential errors of
estimation, which could be significant, due to the fact that the ultimate
disposition of claims incurred prior to the date of such estimation, whether
reported or not, is subject to the outcome of events that have not yet
occurred. Examples of these events include the accuracy of the factual
information on which the estimates were based, especially as this develops,
jury decisions, court interpretations, legislative changes, changes in the
medical condition of claimants, public attitudes, and economic conditions such
as inflation.
Recent
deficit spending by governments in the Companys major markets exposes the
Company to heightened risk of inflation. Inflation in relation to medical
costs, construction costs and tort issues in particular impact the property and
casualty industry; however, broader market inflation also poses a risk of
increasing overall loss costs. The impact of inflation on loss costs could be
more pronounced for those lines of business that are considered long tail
such as general liability, as they require a relatively long period of time to
finalize and settle claims for a given accident year. Changes in the level of
inflation also result in an increased level of uncertainty in our estimation of
loss reserves, particularly for long tail lines of business. The estimation of
loss reserves may also be more difficult during times of adverse economic
conditions due to unexpected changes in behavior of claimants and
policyholders, including an increase in fraudulent reporting of exposures
and/or losses, reduced maintenance of insured properties or increased frequency
of small claims.
Similarly,
the actual emergence of claims for life business may vary from the assumptions
underlying the policy benefit reserves, in particular, the future assumed
mortality improvements on the blocks of in-payment annuities.
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In
relation to previously written financial guarantee business and related
exposures, we establish reserves for losses and LAE on such business based on
managements best estimate of the ultimate expected incurred losses.
Establishment of such reserves requires the use and exercise of significant
judgment by management, including with respect to estimates regarding the
occurrence and amount of a loss on an insured or reinsured obligation.
Estimates of losses may differ from actual results and such difference may be
material, due to the fact that the ultimate dispositions of claims are subject
to the outcome of events that have not yet occurred. Examples of these events
include changes in the level of interest rates, credit deterioration of insured
and reinsured obligations, and changes in the value of specific assets
supporting insured and reinsured obligations. In general, guarantees on
previously written credit default swaps are exposed to the same risks as noted
above, except in events of default by the guarantor. Credit default swaps,
however, do not qualify for the financial guarantee scope exception under
authoritative accounting guidance over derivative instruments and hedging
activities, and, therefore are reported at fair value with changes in the fair
value included in earnings. Fair values for such swaps are determined based on
methodologies further described in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting
Policies and Estimates. Any estimate of future costs is subject to the
inherent limitation on our ability to predict the aggregate course of future
events. It should therefore be expected that the actual emergence of losses and
LAE will vary, perhaps materially, from any estimate.
We
have an actuarial staff in each of our operating segments and a Chief Actuary
who regularly evaluates the levels of loss reserves, taking into consideration
factors that may impact the ultimate losses incurred. Any such evaluation could
result in future changes in estimates of losses or reinsurance recoverable and
would be reflected in our results of operations in the period in which the
estimates are changed. Losses and LAE, to the extent that they exceed the
applicable reserves, are charged to income as incurred. The reserve for unpaid
losses and LAE represents the estimated ultimate losses and LAE less paid
losses and LAE, and comprises case reserves and IBNR. During the loss
settlement period, which can span many years in duration for casualty business,
additional facts regarding individual claims and trends often will become known
and case reserves may be adjusted by allocation from IBNR without any change in
the overall reserve. In addition, application of statistical and actuarial
methods may require the adjustment of the overall reserves upward or downward
from time to time. Accordingly, the ultimate settlement of losses may be
significantly greater than or less than reported loss and loss expense
reserves.
The effects of
emerging claim and coverage issues on our business are uncertain.
As
industry practices and legal, judicial, social and other environmental
conditions change, unexpected issues related to claims and coverage may emerge.
These issues may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or size of claims,
such as the effects that recent disruptions in the credit markets could have on
the number and size of reported claims under directors and officers liability
insurance (D&O) and professional liability insurance lines of business.
In some instances, these changes may not become apparent until some time after
we have issued the insurance or reinsurance contracts that are affected by the
changes. Historically such claims and coverage issues have occurred at
heightened levels during periods of very soft market conditions which often
reflect an inflection point in the typical cycle of insurance industry market
conditions. In addition, our actual losses may vary materially from our current
estimate of the loss based on a number of factors, including receipt of
additional information from insureds or brokers, the attribution of losses to
coverages that had not previously been considered as exposed and inflation in
repair costs due to additional demand for labor and materials. As a result, the
full extent of liability under an insurance or reinsurance contract may not be
known for many years after such contract is issued and a loss occurs.
There can be no
assurance as to the effect that governmental and regulatory actions will have
on financial markets generally or on us in particular.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to financial institutions, there have been
numerous regulatory and governmental actions in the United States, the U.K. and
the Euro-zone among other countries. The purpose of these legislative and
regulatory actions is to stabilize the U.S. and international banking systems,
improve the flow of credit and foster an economic recovery. However, there
can be no assurance as to the success of such actions or the effect that
any such governmental actions or future regulatory initiatives may have on
certain investment instruments in our investment portfolio, or on our competitive
position, business and financial position. If global economic and market
conditions remain uncertain, persist, or deteriorate further, we may experience
material adverse impacts on our business operations results and financial
condition.
For
example, we own a number of Tier 1 and Upper Tier 2 hybrid securities issued by
financial institutions including those based in the U.S., Europe and the U.K.
There is a risk that if the capital positions of financial institutions
deteriorate further government intervention, particularly nationalization of
such institutions, could occur. There is also a risk of regulatory imposed deferral
of coupons or decisions by bank management not to call the capital or defer the
coupon payments. This may result in losses on the hybrid securities we hold.
There is also the risk of further downgrades of these securities as rating
agencies re-evaluate their rating methodologies, which would negatively impact
the regulatory capital of the Life operations.
In
particular, the current sovereign debt crisis concerning European countries,
including Greece, Italy, Ireland, Portugal and Spain, or GIIPS, and related
European financial restructuring efforts, may cause the value of the European
currencies, including the
32
Euro, to further
deteriorate, which in turn could adversely impact Euro-denominated assets held
in our investment portfolio or our European book of business. In addition, the
European crisis is contributing to instability in global credit markets, as
well as the widening of bond yield spreads. Rating agency downgrades on
European sovereign debt and growing concern of the potential default of
government issuers or of a possible break-up of the European Union has further
contributed to this uncertainty. Should governments default on their
obligations, there will be a negative impact on both our direct holdings, as
well as on non-government issues and financials held within the country of
default. See Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Balance Sheet Analysis European
Sovereign Debt Crisis for an analysis of our fixed maturity portfolios
exposure to GIIPS.
We may be unable to
purchase reinsurance and, even if we are able to successfully purchase
reinsurance, we are subject to the possibility of uncollectability. The
impairment of other financial institutions also could adversely affect us.
We
purchase reinsurance for our own account in order to mitigate the volatility
that losses impose on our financial condition. Our clients purchase reinsurance
from us to cover part of the risk originally written by them. Retrocessional
reinsurance involves a reinsurer ceding to another reinsurer, the
retrocessionaire, all or part of the reinsurance that the first reinsurer has
assumed. Reinsurance, including retrocessional reinsurance, does not legally
discharge the ceding company from its liability with respect to its obligations
to its insureds or reinsureds. A reinsurers or retrocessionaires insolvency,
inability or refusal to make timely payments under the terms of its agreements
with us, therefore, could have a material adverse effect on us because we
remain liable to our insureds and reinsureds. At December 31, 2011, we had
approximately $3.9 billion of reinsurance recoverables and reinsurance balances
receivable, net of reserves for uncollectible recoverables. For further information
regarding our reinsurance exposure, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
From
time to time, market conditions may limit or prevent us from obtaining the
types and amounts of reinsurance that we consider adequate for our business
needs such that we may not be able to obtain reinsurance or retrocessional
reinsurance from entities with satisfactory creditworthiness in amounts that we
deem desirable or on terms that we deem appropriate or acceptable.
We
also have exposure to counterparties in various industries, including banks,
hedge funds and other investment vehicles, and in transactions in addition to
reinsurance agreements, including derivative transactions. Many of these
transactions expose us to credit risk in the event our counterparty fails to
perform its obligations. Even if we are entitled to collateral when a
counterparty defaults, such collateral may be illiquid or proceeds from such
collateral when liquidated may not be sufficient to recover the full amount of
the obligation. We also have exposure to financial institutions in the form of
secured and unsecured debt instruments and equity securities.
Since we depend on a
few brokers for a large portion of our revenues, loss of business provided by
any one of them could adversely affect us.
We
market our insurance and reinsurance products worldwide primarily through
insurance and reinsurance brokers. Marsh & McLennan Companies, AON
Corporation and the Willis Group and their respective subsidiaries each
provided approximately 20%, 20% and 12% respectively, of our gross written
premiums for property and casualty operations for the year ended December 31,
2011. Loss of all or a substantial portion of the business provided by one or
more of these brokers could have a material adverse effect on our business.
Our reliance on
brokers subjects us to credit risk.
In
certain jurisdictions, when an insured or ceding insurer pays premiums for
policies of insurance or contracts of reinsurance to brokers for further
payment to us, such premiums might be considered to have been paid and the
insured or ceding insurer will no longer be liable to us for such amounts,
whether or not we have actually received the premiums from the broker. In
addition, in accordance with industry practice, we generally pay amounts owed
on claims under our reinsurance contracts to brokers, and these brokers, in
turn, pay these amounts over to the clients that have purchased reinsurance
from us. Although the law is unsettled and depends upon the facts and
circumstances of the particular case, in some jurisdictions, if a broker fails
to make such a claims payment to the insured or ceding insurer, we might remain
liable to the insured or ceding insurer for that non-payment. Consequently, we
assume a degree of credit risk associated with the brokers with whom we
transact business. Due to the unsettled and fact-specific nature of the law
governing these types of scenarios and our lack of historical experience with
such risks, we are unable to quantify our exposure to this risk.
We are subject to a
number of risks associated with our business in emerging markets.
Our
insurance and reinsurance subsidiaries conduct business outside the United
States primarily in the U.K., Bermuda, and Europe. We have also continued to
pursue opportunities in other countries, including in emerging markets such as
Asia, Africa and Latin America. In conducting such business we are subject to a
number of significant risks. These risks include restrictions such as price
controls, capital controls, exchange controls, ownership limits and other
restrictive governmental actions, which could have an adverse effect on our
business and our reputation. In addition, some countries, particularly emerging
economies, have laws and regulations that lack clarity and, even with local
expertise and effective controls, it can be difficult to determine the exact
requirements
33
of the local laws. Failure
to comply with local laws in a particular market could have a significant and
negative effect not only on our business in that market but also on our
reputation generally.
Additional
discussion of the risks associated with our operations in Europe as a result of
the sovereign debt crisis is included in the risk factor entitled The
sovereign debt crisis in Europe and concerns regarding the instability of
Euro-zone countries could have a material adverse effect on our business,
financial condition and results of operations.
Our holding company
structure and certain regulatory and other constraints affect our ability to
pay dividends, make payments on our debt securities and make other payments.
As
a holding company with no direct operations or significant assets other than
the capital stock of our subsidiaries, we rely on investment income, cash
dividends, loans and other permitted payments from our subsidiaries to make
principal and interest payments on our debt, to pay operating expenses and
ordinary and preferred shareholder dividends, to make capital investments in
our subsidiaries and to pay certain of our other obligations that may arise
from time to time. We expect future investment income, dividends and other
permitted payments from these subsidiaries to be our principal source of funds
to pay such expenses, preferred and ordinary share dividends and obligations.
The payment of dividends to us by our insurance and reinsurance subsidiaries
is regulated under the laws of various jurisdictions including Bermuda, the
U.K., Ireland and Switzerland and certain insurance statutes of various states
in the United States in which our insurance and reinsurance subsidiaries
are licensed to transact business and the other jurisdictions where we have
regulated subsidiaries. For further information regarding regulatory restrictions
governing the payment of dividends by the Companys significant property
and casualty subsidiaries in Ireland, Bermuda and the U.S., see Item 8, Note
23 to the Consolidated Financial Statements, Statutory Financial Data, and
Item 1, Business Regulation.
XL-Ireland
is subject to certain legal constraints that affect its ability to pay
dividends on or redeem or buyback our ordinary shares. While XL-Irelands
articles of association authorize its board of directors to declare and pay
dividends as justified from the profits, under Irish law, XL-Ireland may only
pay dividends or buyback or redeem shares using distributable reserves. As of
December 31, 2011, XL-Ireland had $4.1 billion in distributable reserves. In
addition, no dividend or distribution may be made unless the net assets of
XL-Ireland are not less than the aggregate of its share capital plus
undistributable reserves and the distribution does not reduce XL-Irelands
net assets below such aggregate.
In
addition, XL-Cayman is subject to certain constraints that affect its ability
to pay dividends on its preferred shares. Under Cayman Islands law, XL-Cayman
may not declare or pay a dividend if there are reasonable grounds for believing
that XL-Cayman is, or would after the payment be, unable to pay its liabilities
as they become due in the ordinary course of business. Also, the terms of
XL-Caymans preferred shares prohibit declaring or paying dividends on the
ordinary shares unless full dividends have been declared and paid on the
outstanding preferred shares. In addition, the ability to declare and pay
dividends may be restricted by covenants in our letters of credit and revolving
credit facilities.
We may require additional
capital in the future, which may not be available to us on satisfactory terms,
on a timely basis or at all.
Our
future capital requirements depend on many factors, including our ability to
write new business successfully and to establish premium rates and reserves at
levels sufficient to cover our losses. To the extent that the funds generated
by our ongoing operations are insufficient to fund future operating
requirements and cover claim payments, or that our capital position is adversely
impacted by mark-to-market changes on the investment portfolio, catastrophe
events or otherwise, we may need to raise additional funds through financings
or curtail our growth and reduce our assets. As a result of the current severe
economic conditions that persist in the capital markets, any future financing
may not be available on terms that are favorable to us, if at all. Our letter
of credit facilities are needed to a significant extent for U.S. cedants, and
are effective for such cedants only if the banks issuing letters of credit are
on the list of NAIC approved banks. If some or all of the issuing banks under
our credit facilities cease to be NAIC approved, whether arising from
macroeconomic or bank specific events, and we are unable to replace non-approved
banks with NAIC approved banks, our letter of credit facility capacity could be
significantly diminished. In addition, in the case of a macroeconomic event,
such as dissolution of the European Monetary Union, the availability of
alternative lending sources may be significantly reduced or non-existent, and
the cost of replacement facilities may be significantly increased or
prohibitive. Any future equity financings could be dilutive to our existing
shareholders or could result in the issuance of securities that have rights,
preferences and privileges that are senior to those of our other securities.
Our inability to obtain adequate capital could have a material adverse effect
on our business, financial condition and results of operations.
Competition in the
insurance and reinsurance industries could reduce our operating margins.
The
insurance and reinsurance industries are highly competitive. We compete on an
international and regional basis with major U.S., Bermudian, European and other
international insurers and reinsurers and with underwriting syndicates, some of
which have greater financial and management resources and higher ratings than
we have. We also compete with new companies that continue to be formed to enter
the insurance and reinsurance markets. In addition, capital market participants
have created alternative products that are intended to compete with reinsurance
products. Increased competition could result in fewer submissions, lower
premium rates and less favorable policy terms and conditions, which could
reduce our margins.
34
Operational risks,
including human or systems failures, are inherent in our business.
Operational
risk and losses can result from, among other things, fraud, errors, failure to
document transactions properly or to obtain proper internal authorization,
failure to comply with regulatory requirements, information technology failures, failure
to appropriately transition new hires or external events. Areas of operational risk can be heightened in discontinued
or exited business as a result of reduced overall resource allocation and the
loss of relevant knowledge and expertise by departing management. The Company
has exited a number of businesses in recent years, potentially increasing
operational risk in such businesses.
We
believe that our modeling, underwriting and information technology and
application systems are critical to our business. Moreover, our information
technology and application systems have been an important part of our
underwriting process and our ability to compete successfully. We have also
licensed certain systems and data from third parties. We cannot be certain that
we will have access to these, or comparable, service providers, or that our
information technology or application systems will continue to operate as intended.
An external cyber attack, or any ineffectiveness in or cyber attack on our
internal controls or information technology and application systems could have
a material adverse effect on our business or reputation.
In
particular, we operate globally, and have two office locations in India that
currently provide large portions of our back office support. Our global
operations present significant operational risk due to the possibility of
disruptions in communication or information processes, whether due to technical
difficulties, power failures or destruction or damage to our offices for any
reason. If any disruption occurs, our business continuity and disaster recovery
plans may not be effective, particularly if natural or man-made catastrophic events
occur, and such disruption could harm our results of operations or our
reputation in the marketplace.
In
addition, we have outsourced the day-to-day management, custody and
record-keeping of our investment portfolio to third-party managers and
custodians that we believe to be reputable. A major defect in those investment
managers investment management strategy, or decision-making could result in
management distraction and/or significant financial loss. We also rely on a few
brokers for a large portion of our revenues. A major defect in our brokers,
investment managers or custodians internal controls or information and
technology systems could result in management distraction or significant
financial loss.
Any
ineffectiveness in our internal controls, information technology, application
systems, investment management or custody and record keeping could have a
material adverse effect on our business.
Unanticipated losses
from terrorism and uncertainty surrounding the future of the TRIPRA could have
a material adverse effect on our financial condition, results of operations and
cash flows.
The
U.S. Terrorism Risk Insurance Act of 2002 (TRIA), as amended, established the
Terrorism Risk Insurance Program (TRIP), which became effective on November
26, 2002 and was a three-year federal program effective through 2005. On
December 22, 2005, President George W. Bush signed a bill extending TRIA
(TRIAE) for two more years, continuing TRIP through 2007. On December 26,
2007, President George W. Bush signed the Terrorism Risk Insurance Program
Reauthorization Act of 2007 (TRIPRA) which further extended TRIP for seven
years until December 31, 2014 and also eliminated the distinction between
foreign and domestic acts of terrorism.
In
response to the tightening of supply in certain insurance and reinsurance
markets resulting from, among other things, the September 11 event, the TRIP
was created upon the enactment of the TRIA of 2002 to ensure the availability
of commercial insurance coverage for certain terrorist acts in the U.S. This
law established a federal assistance program through the end of 2005 to help
the commercial property and casualty insurance industry cover claims related to
future terrorism-related losses and required that coverage for terrorist acts
be offered by insurers.
TRIA
voided in force terrorism exclusions as of November 26, 2002 for certified
terrorism on all TRIA specified property and casualty business. TRIA required
covered insurers to make coverage available for certified acts of terrorism on
all new and renewal policies issued after TRIA was enacted. TRIA along with
further extensions to TRIP, as noted above, allows us to assess a premium
charge for terrorism coverage and, if the policyholder declines the coverage or
fails to pay the buy-back premium, certified acts of terrorism may then be
excluded from the policy, subject, however, to state specific requirements.
Terrorism coverage cannot be excluded from workers compensation policies.
Subject to a premium-based deductible and provided that we have otherwise
complied with all the requirements as specified under TRIPRA, we are eligible
for reimbursement by the Federal Government for up to 85% of our covered
terrorism-related losses arising from a certified terrorist attack. Such
payment by the government will, in effect, provide reinsurance protection on a
quota share basis. The maximum liability during a program year, including both
the Federal Governments and insurers shares, is capped on an aggregated basis
at $100 billion. While regulations have been promulgated by the Department of
the Treasury (Treasury) requiring that Treasury advise participating
insurers, such as the Company, in advance of reaching the $100 billion aggregate
limit that such aggregate limit could be reached during the program year, there
is a risk that the Company will not be given adequate notice of the potential
exhaustion of that aggregate limit. Accordingly, the Company could overpay with
regard to such losses, and it is unlikely Treasury would reimburse the Company
for such losses; moreover, it is unclear whether the Company, in the event of
an overpayment, would be able to recover the amount of any such overpayment.
35
We
believe that TRIP and the related legislation have been an effective mechanism
to assist policyholders and industry participants with the extreme contingent
losses that might be caused by acts of terrorism. Nevertheless, we cannot
assure you that TRIPRA will be extended beyond 2014, and its expiration or a
significant change in terms could have an adverse effect on us, our clients or
the insurance industry.
The regulatory
regimes under which we operate, and potential changes thereto, could have a
material adverse effect on our business.
Our
insurance and reinsurance subsidiaries operate in 24 countries around the world
as well as in all 50 U.S. states. Our operations in each of these jurisdictions
are subject to varying degrees of regulation and supervision. The laws and
regulations of the jurisdictions in which our insurance and reinsurance
subsidiaries are domiciled require, among other things, that these subsidiaries
maintain minimum levels of statutory capital, surplus and liquidity, meet
solvency standards, submit to periodic examinations of their financial
condition and restrict payments of dividends, distributions and reductions of
capital in certain circumstances. Statutes, regulations and policies that our
insurance and reinsurance subsidiaries are subject to may also restrict the
ability of these subsidiaries to write insurance and reinsurance policies, make
certain investments and distribute funds.
In
recent years, the U.S. insurance regulatory framework has come under increased
federal scrutiny. In July 2010, the Dodd-Frank Act was signed into law. The
Dodd-Frank Act requires many federal agencies to adopt new rules and
regulations that will apply to the financial services industry and also calls
for many studies regarding various industry practices. In particular, the
Dodd-Frank Act created a Federal Insurance Office within the Treasury that is focused on national coordination of
the insurance sector, systemic risk mitigation and international regulatory
cooperation. Although the Federal Insurance Office currently does not directly
regulate the insurance industry, under the Dodd-Frank Act it has the power to
preempt state insurance regulations that are inconsistent with international
agreements regarding insurance regulation, subject to certain exceptions. In
addition, the Dodd-Frank Act provides that the Federal Insurance Office must
submit a report to Congress on improving U.S. insurance regulation, which must
cover the feasibility of future federal regulation of the U.S. insurance
industry. This study or another among the various studies required by the
legislation could result in additional rulemaking or legislative action, which
could negatively impact our business and financial results. While we have not
yet been required to make material changes to our business or operations as a
result of the Dodd-Frank Act, due to the complexity and broad scope of the
Dodd-Frank Act and the time required for regulatory implementation, it is not
certain what the scope of future rulemaking or interpretive guidance from the
SEC, CFTC or other regulatory agencies may be, and what impact this will have
on our compliance costs, business, operations and profitability.
In
addition, some state legislatures have considered or enacted laws that may
alter or increase state regulation of insurance and reinsurance companies and
holding companies. Moreover, the NAIC, which is the organization of insurance
regulators from the 50 U.S. states, the District of Columbia and the four U.S.
territories, as well as state insurance regulators regularly reexamine existing
laws and regulations.
In
addition to these proposals and initiatives in the United States, new capital
adequacy and risk management regulations called Solvency II are in the process
of being implemented throughout the EU, introducing changes to the prudential
regulation of European insurers, with a timeline to achieve full compliance by
January 1, 2014. Similar legislation is also in the process of being developed
or implemented in other jurisdictions, including Canada and Switzerland. In
addition, regulations in countries in which we have operations are working with
the International Association of Insurance Supervisors (and in the U.S., with
the NAIC) to consider changes to insurance company supervision, including
solvency requirements and group supervision. There remains significant
uncertainty as to the impact of these efforts, however, such impacts could
constrain our ability to move capital between subsidiaries or require that
additional capital or security be provided in certain jurisdictions, which may
impact profitability.
Our
Bermuda-based operating subsidiaries are subject to the BMAs risk-based
capital standards for (re)insurance companies, which impose required levels of
statutory capital and surplus on our Bermuda-based operating standards. While
our Bermuda-based operating subsidiaries currently have excess capital and
surplus under these requirements, there can be no assurance that such
requirements or similar regulations, in their current form or as may be amended
in the future, will not have a material adverse effect on our business,
financial condition or results of operations.
We
may not be able to comply fully with, or obtain desired exemptions from,
revised statutes, regulations and policies that govern the conduct of our
business. Failure to comply with, or to obtain desired authorizations and/or
exemptions under, any applicable laws could result in restrictions on our
ability to do business or undertake activities that are regulated in one or
more of the jurisdictions in which we operate and could subject us to fines and
other sanctions. In addition, changes in the laws or regulations to which we
are, or may become subject, or in the interpretations thereof by enforcement or
regulatory agencies, could have a material adverse effect on our business,
financial condition and results of operations.
Potential government
intervention in our industry as a result of recent events and instability in
the marketplace for insurance products could hinder our flexibility and
negatively affect the business opportunities that may be available to us in the
market.
Government
intervention and the possibility of future government intervention have created
uncertainty in the insurance and reinsurance markets. Government regulators are
generally concerned with the protection of policyholders to the exclusion of
other
36
constituencies, including
shareholders of insurers and reinsurers. While we cannot predict the exact
nature, timing or scope of possible governmental initiatives, such proposals
could adversely affect our business by, among other things:
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providing insurance and
reinsurance capacity in markets and to consumers that we target, e.g., the
creation or expansion of a state or federal catastrophe funds such as those
in Florida;
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requiring our
participation in industry pools and guarantee associations
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expanding the scope of
coverage under existing policies;
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regulating the terms of
insurance and reinsurance policies; or
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disproportionately
benefiting the companies of one country over those of another.
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Government
intervention has in the recent past taken the form of financial support of
certain companies in our industry. Governmental support of individual
competitors can lead to increased pricing pressure, a distortion of market
dynamics, and ultimately the prolonging of the current period of soft market
conditions. The insurance industry is also affected by political, judicial and
legal developments that may create new and expanded theories of liability,
which may result in unexpected claims frequency and severity and delays or
cancelations of products and services by insureds, insurers and reinsurers
which could adversely affect our business.
For
further information regarding government regulation and/or intervention in
response to the financial and credit crises, see risk factor entitled There
can be no assurance as to the effect that governmental actions will have on
such markets generally or on us in particular above.
Consolidation in the
insurance industry could adversely impact us.
Insurance
industry participants may seek to consolidate through mergers and acquisitions.
Continued consolidation within the insurance industry will further enhance the
already competitive underwriting environment as we would likely experience more
robust competition from larger, better capitalized competitors. These
consolidated entities may use their enhanced market power and broader capital
base to negotiate price reductions for our products and services, and reduce
their use of reinsurance, and as such, we may experience rate declines and
possibly write less business.
The loss of one or
more key executives or the inability to attract, motivate and retain qualified
personnel could adversely affect our ability to conduct business.
Our
success depends on our ability to attract new, highly skilled individuals and
to motivate and retain our existing key executives and qualified personnel. The
loss of the services of any of our key executives or the inability to attract,
motivate and retain other highly skilled individuals in the future could
adversely affect our ability to conduct our business. In addition, we do not
maintain key man life insurance policies with respect to our employees.
In
addition, certain of our executives who work in our Bermuda operations are not
Bermudian and our success in such operations may depend in part on the
continued services of key employees working in Bermuda. The recently enacted
Incentives for Job Makers Act 2011 (IJMA) permits employers to apply to the
Bermuda Government for a designation to allow up to five senior executives at
any one time to make a further application to be exempt from the provisions of
current Bermuda work permit requirements. After ten years, eligible exempted
senior executives may apply for a permanent residents certificate. Currently,
non-Bermudians (other than spouses of Bermudians and holders of permanent
resident certificates) who are not able to avail themselves of the provisions
of the IJMA may not engage in any gainful occupation in Bermuda without an
appropriate governmental work permit. A work permit may be granted or renewed
by the Bermuda government for a specific period of time, upon showing that,
after proper public advertisement, no Bermudian (or spouse of a Bermudian or
holder of a permanent resident certificate) is available who meets the minimum
standards reasonably required by an employer with respect to a certain
position. The government of Bermuda places term limits on individuals with work
permits, subject to certain exemptions for key employees. No assurances can be
given that any work permit will be issued or, if issued, renewed upon the
expiration of the relevant term or that key employee status will be granted or
revoked.
A decrease in the
fair values of our reporting units may result in future goodwill impairments.
When
we acquire an entity, the excess of the purchase price over the net
identifiable assets acquired is allocated to goodwill. We conduct impairment
tests on our reported goodwill at least annually or more frequently if
impairment indicators exist. In performing a goodwill impairment test, we use
various methods and make various assumptions to determine the fair value of our
reporting units, including the determination of expected future cash flows
and/or profitability of such reporting units, and we take into account market
value multiples and/or cash flows of entities that we deem to be comparable in
nature, scope or size to our reporting units. However, expected future cash
flows and/or profitability may be materially and negatively impacted as a
result of, among other things, a decrease in renewal activity and new business
opportunities, a decrease in retention or our underwriting teams, lower-than-
37
expected
yields and/or cash flows from our investment portfolio, higher-than-expected
claims activity and magnitude of incurred losses and general economic factors
that impact the reporting unit. In addition, previously determined market value
multiples and/or cash flows may no longer be relevant as a result of these
potential factors. As a result of these potential changes, the estimated fair
value of one or more of our reporting units may decrease, causing the carrying
value of the net assets assigned to the reporting unit to exceed the fair value
of such net assets. If we determine an impairment exists, we adjust the
carrying value of goodwill to its implied fair value. The impairment charge is
recorded in our income statement in the period in which the impairment is
determined. If we are required in the future to write down additional goodwill,
our financial condition and results of operations would be negatively affected.
In connection with fair value measurements and the accounting for goodwill, the
use of generally accepted accounting principles requires management to make
certain estimates and assumptions. Significant judgment is required in making these
estimates and assumptions, and actual results may ultimately be materially
different from such estimates and assumptions. The Company completed an interim
impairment test during the fourth quarter of 2011 which resulted in a non-cash
goodwill impairment charge of $429.0 million. The charge related to the
Insurance segment. The remaining goodwill balance carried in our consolidated
financial statements at December 31, 2011 is $391.5 million.
Provisions in our
Articles of Association may reduce the voting rights of our ordinary shares.
Our
Articles of Association generally provide that shareholders have one vote for
each ordinary share held by them and are entitled to vote, on a non-cumulative
basis, at all meetings of shareholders. However, the voting power that may be
exercised by certain persons or groups may not equal or exceed 10% or more of
the voting power conferred by our shares.
In
particular, our Articles of Association provide that if, and for so long as,
the votes conferred by the Controlled Shares (as defined below) of any person
constitute 10% or more of the votes conferred by all our issued shares, the
voting rights with respect to the Controlled Shares of such person shall be
limited, in the aggregate, to a voting power equal to approximately (but
slightly less than) 10%, pursuant to a formula set forth in the our Articles of
Association. Controlled Shares of a person (as defined in our Articles of
Association) include (1) all of our shares owned directly, indirectly or constructively
by that person (within the meaning of Section 958 of the Internal Revenue Code
of 1986, as amended (the IRS Code), and (2) all of our shares owned directly,
indirectly or constructively by that person or any group of which that person
is a part, within the meaning of Section 13(d)(3) of the Exchange Act.
Provisions in our
Articles of Association may restrict the ownership and transfer of our ordinary
shares.
Our
Articles of Association provide that our Board of Directors shall decline to
register a transfer of shares if it appears to our Board of Directors, whether
before or after such transfer, that the effect of such transfer would be to
increase the number of Controlled Shares of any person to 10% or more of any
class of our voting shares, of our total issued shares, or of the total voting
power of our total issued shares.
Certain provisions
in our charter documents could, among other things, impede an attempt to
replace our directors or imposes restrictions with respect to a change of
control, which could diminish the value of our ordinary shares.
Our
Articles of Association contain provisions that may make it more difficult for
shareholders to replace directors and could delay or prevent a change of
control that a shareholder may consider favorable. These provisions include a
staggered board of directors, limitations on the ability of shareholders to
remove directors, limitations on voting rights and certain transfer
restrictions on our ordinary shares.
As
an Irish company, we are subject to the Irish Takeover Rules, under which our
Board of Directors is not permitted to take any action that might frustrate
an offer for our shares once the Board of Directors has received an offer or
has reason to believe an offer is or may be imminent without the approval of
more than 50% of shareholders entitled to vote at a general meeting of
shareholders and/or the consent of the Irish Takeover Panel. This could limit
the ability of the Board of Directors to take defensive actions even if the
Board of Directors believes that such defensive actions would be in the best
interests of the Company and its shareholders.
The
Irish Takeover Rules also could discourage an investor from acquiring 30% or
more of our outstanding ordinary shares unless such investor was prepared to
make a bid to acquire all outstanding ordinary shares. Further, it could be
more difficult for us to obtain shareholder approval for a merger or negotiated
transaction because of heightened shareholder approval requirements for certain
types of transactions under Irish law.
In
addition, insurance regulations in certain jurisdictions may also delay or
prevent a change of control or limit the ability of a shareholder to acquire in
excess of specified amounts of our ordinary shares.
Irish shareholder
voting requirements may limit flexibility with respect to certain aspects of
capital management.
Irish
law allows shareholders to authorize a board of directors to issue shares
subsequent to receipt of authorization without further shareholder approval,
but this authorization must be renewed after five years. Additionally, subject
to specified exceptions, Irish law grants statutory pre-emption rights to
existing ordinary shareholders to subscribe for new issuances of shares for
cash, but
38
allows such
shareholders to authorize the waiver of such statutory pre-emption rights for
five years. Our Articles of Association currently provide authority to the
Board of Directors to issue shares without further shareholder approval and to
waive ordinary shareholders statutory pre-emption rights. However, these
authorizations expire in 2015, unless renewed by XL-Irelands shareholders, and
we can provide no assurance that these authorizations and waivers will always
be renewed, which could limit our ability to issue equity in the future.
It may be difficult
to enforce judgments against XL-Ireland, XL-Cayman or their directors and
executive officers.
XL-Ireland
is incorporated pursuant to the laws of Ireland. In addition, certain of our
directors and officers reside outside the United States and a substantial
portion of our assets and the assets of such directors and officers are located
outside the United States. As such, it may be difficult or impossible to effect
service of process within the United States upon those persons or to recover on
judgments of U.S. courts against us or our directors and officers, including
judgments predicated upon civil liability provisions of U.S. federal securities
laws. We have been advised that there is no treaty between Ireland and the
United States providing for the reciprocal enforcement of foreign judgments.
The following requirements must be met before the foreign judgment will be
deemed to be enforceable in Ireland:
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the judgment
must be for a definite sum;
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the judgment
must be final and conclusive; and
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the judgment
must be provided by a court of competent jurisdiction.
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An
Irish court will also exercise its right to refuse judgment if the foreign
judgment was obtained by fraud, if the judgment violated Irish public policy,
if the judgment is in breach of natural justice or if it is irreconcilable with
an earlier foreign judgment.
In
addition, XL-Cayman is incorporated pursuant to the laws of the Cayman Islands
and is an Irish tax resident. Requirements for enforceability of foreign
judgments in Ireland are summarized above. We have been advised that there is
doubt as to whether the courts of the Cayman Islands would enforce:
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judgments of
U.S. courts based upon the civil liability provisions of U.S. federal
securities laws obtained in actions against XL-Cayman or its directors and
officers who reside outside the United States; or
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original
actions brought in the Cayman Islands against these persons or XL-Cayman
predicated solely upon U.S. federal securities laws.
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We
have also been advised that there is no treaty in effect between the United
States and the Cayman Islands providing for such enforcement and there are
grounds upon which Cayman Islands courts may not enforce judgments of U.S.
courts. Some remedies available under the laws of U.S. jurisdictions, including
some remedies available under U.S. federal securities laws, may not be allowed
in Cayman Islands courts as contrary to public policy.
The ultimate outcome
of lawsuits, including putative class action lawsuits, that have been filed
against us by policyholders and security holders could have a material adverse
effect on our consolidated financial condition, future operating results and/or
liquidity.
We
are subject to lawsuits and arbitrations in the regular course of our business.
See Item 3, Legal Proceedings. In addition, lawsuits have been filed against
us as discussed in Item 8, Note 17(g) to the Consolidated Financial Statements,
Commitments and Contingencies Claims and Other Litigation. An adverse
resolution of one or more of these items could have a material adverse effect
on our results of operations in a particular fiscal quarter or year.
Changes in current
accounting practices and future pronouncements may materially impact our
reported financial results.
Unanticipated
developments in accounting practices may require us to incur considerable
additional expenses to comply with such developments, particularly if we are
required to prepare information relating to prior periods for comparative
purposes or to apply the new requirements retroactively. The impact of changes
in current accounting practices and future pronouncements cannot be predicted
but may affect the calculation of net income, net equity and other relevant
financial statement line items and the timing of when impairments and other
charges are tested or taken. In particular, recent guidance and ongoing
projects put in place by standard setters globally have indicated a possible
move away from the current insurance accounting models toward more fair value
based models which could introduce significant volatility in the earnings of
insurance industry participants.
There is a
possibility that the Master Agreement entered into at the time of the sale of
Syncora and the related commutations and releases could be challenged or that
we could be subject to litigation as a result of the Master Agreement. Any such
challenge could have a material adverse effect on our financial condition,
results of operations, liquidity or the market price of our securities.
We
provided certain reinsurance protections (the Reinsurance Agreements) with
respect to adverse development on certain transactions as well as
indemnification under specific facultative and excess of loss coverages for
subsidiaries of Syncora: Syncora
39
Guarantee Re
and Syncora Guarantee. At June 30, 2008, our total net exposure under
facultative agreements with Syncora subsidiaries was approximately $6.4 billion
of net par value outstanding. Pursuant to the closing of the Master Agreement,
all of these Reinsurance Agreements were commuted.
In
addition, through one or more of our subsidiaries, we entered into certain
agreements with subsidiaries of Syncora pursuant to which we guaranteed certain
obligations of Syncora Guarantee Re and Syncora Guarantee under specific
agreements (the Guarantee Agreements). At June 30, 2008, the total net par
value outstanding of business written by subsidiaries of Syncora which fell
under the Guarantee Agreements was approximately $60 billion. Pursuant to the
terms of, and required conditions under, the Master Agreement, Syncora
Guarantee Res facultative quota share reinsurance agreement with Syncora
Guarantee, and all individual risk cessions thereunder, and the Financial
Security Master Facultative Agreement, and all individual risk cessions
thereunder, were commuted, thereby rendering the Syncora Guarantee Re guarantee
and Financial Security guarantee of no further force and effect.
Following
the closing of the Master Agreement, Syncora and its applicable subsidiaries
were required to use commercially reasonable efforts to commute the underlying
financial guarantees that are the subject of the EIB Guarantees, which was
completed in June 2010.
While
the New York Department of Financial Services (NYDFS) and the BMA approved
the Master Agreement and related agreements and transactions, including the
commutation of the agreements described above, and the Delaware Insurance
Department (DID) approved the Master Agreement and the commutation of the
Syncora Guarantee Re/Syncora Guarantee Quota Share, and although we believe the
effect of the Master Agreement and subsequent commutation of the EIB Guarantee
relieved us of all of our obligations under the Reinsurance Agreements and the
Guarantee Agreements no assurance can be given that the enforceability of the
Master Agreement, the agreements relating thereto and the transactions
contemplated thereunder will not be challenged, including under applicable
fraudulent transfer laws (described in the following paragraph) and/or by
asserting any number of other theories for recovery, including third-party
beneficiary rights, or that other litigation will not be commenced against us
as a result of the Master Agreement and such related agreements and
transactions. We believe that we would have significant defenses to any such
challenges and would vigorously defend against any such claims. However, we
cannot assure you that any such claims would not be made or, that any such
claims would not ultimately be successful.
Under
federal bankruptcy law and comparable provisions of state fraudulent transfer
laws (including those applicable in any state insurance insolvency proceeding)
Syncoras commutation and release of our obligations pursuant to the Master
Agreement and related agreements would constitute a voidable fraudulent transfer
if it was determined that Syncora or any applicable subsidiary thereto, at the
time it entered into the Master Agreement or such related agreement:
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intended to
hinder, delay or defraud its creditors; or
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received
less than reasonably equivalent value or fair value consideration for
such release; and either:
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was
insolvent or rendered insolvent by reason of such occurrence; or
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was engaged
in a business or transaction for which its remaining assets constituted
unreasonably small capital; or
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intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they mature.
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Among
other regulatory approvals obtained in connection with the Master Agreement,
the NYDFS issued an approval letter to Syncora Guarantee under Section 1505 of
the New York Insurance Law and the DID issued an approval letter to Syncora
Guarantee Re under Section 5005(a) of the Delaware Insurance Code (effective
upon Syncora Guarantee Res redomestication to Delaware) (both of which require
that the terms of a transaction between an issuer and one or more of its
affiliates be fair and equitable) stating, in the case of NYDFS, that the terms
of the Master Agreement and each of the commutations are fair and equitable to
Syncora Guarantee and do not adversely affect policyholders of Syncora
Guarantee and, in the case of the DID, stating that the terms of the Master
Agreement and the commutation of the Syncora Guarantee Re/Syncora Guarantee
Quota Share were fair and equitable to Syncora Guarantee. The BMA (the
domiciliary regulator of Syncora Guarantee Re) also issued an approval letter
approving the Master Agreement and each commutation to which Syncora Guarantee
Re is a party, including the Syncora Guarantee Re/Syncora Guarantee Quota
Share. There can be no assurance that a court would agree with our, the
NYDFSs, the DIDs, the BMAs or Syncoras conclusions, or as to what law or
standard a court would ultimately apply in making any such determination or as
to how such court would ultimately rule. Additionally, in the event of any
liquidation or rehabilitation or similar proceeding of any insurance subsidiary
of Syncora, there can be no assurance that any insurance regulator or
regulators responsible for such proceedings, in their capacity as liquidator or
rehabilitator, would respect the insurance regulatory approvals obtained in
connection with the Master Agreement.
We and our non-U.S.
insurance subsidiaries may become subject to U.S. tax, which may have a material
adverse effect on our results of operations and your investment.
We
take the position that neither we nor any of our non-U.S. insurance
subsidiaries are engaged in a U.S. trade or business through a U.S. permanent
establishment. Accordingly, we take the position that none of our non-U.S.
insurance subsidiaries should be
40
subject to
U.S. tax (other than U.S. excise tax on insurance and reinsurance premium
income attributable to insuring or reinsuring U.S. risks and U.S. withholding
tax on some types of U.S. source investment income). However, because there is
considerable uncertainty as to the activities that constitute being engaged in
a trade or business within the United States, we cannot be certain that the
U.S. Internal Revenue Service (the IRS) will not contend successfully that we
or any of our non-U.S. insurance subsidiaries are engaged in a trade or
business in the United States. If we or any of our non-U.S. insurance
subsidiaries were considered to be engaged in a trade or business in the United
States, any such entity could be subject to U.S. corporate income and
additional branch profits taxes on the portion of its earnings effectively
connected to such U.S. business, in which case our financial condition and
results of operations could be materially adversely affected.
Changes in U.S. tax
law might adversely affect an investment in our shares.
The
tax treatment of non-U.S. companies and their U.S. and non-U.S. insurance
subsidiaries has been the subject of Congressional discussion and legislative
proposals. For example, one legislative proposal would impose additional limits
on the deductibility of interest by foreign-owned U.S. corporations. Another
legislative proposal would modify the standards that indicate when a non-U.S.
corporation might be treated as a U.S. corporation for U.S. federal income tax
purposes if it were considered to be primarily managed and controlled in the
U.S. In addition, legislation has been proposed in the U.S. that would severely
restrict the ability of a company to utilize affiliate reinsurance to manage
its U.S. risks and its capital position. Various proposals have been made that
would effectively disallow (in some cases permanently and in others
temporarily) part or all of the deduction for premiums ceded to affiliates If
any of these proposals, or a similar proposal using the same underlying
principles, is enacted, the resulting impact to the Company could have an
adverse impact on us or our shareholders. It is possible that other legislative
proposals could emerge in the future that could also have an adverse impact on
us or our shareholders.
Additionally,
the U.S. federal income tax laws and interpretations, including those regarding
whether a company is engaged in a trade or business (or has a permanent
establishment) within the United States or is a Passive Foreign Investment
Company (PFIC), or whether U.S. holders would be required to include in their
gross income subpart F income or the related person insurance income, which
we refer to as RPII of a Controlled Foreign Corporation (CFC), are subject
to change, possibly on a retroactive basis. There are currently no regulations
regarding the application of the PFIC rules to insurance companies and the
regulations regarding RPII are still in proposed form. New regulations or
pronouncements interpreting or clarifying such rules may be forthcoming. We
cannot be certain if, when or in what form such regulations or pronouncements
may be provided and whether such guidance will have a retroactive effect.
We
cannot assure you that future legislative action will not increase the amount
of U.S. tax payable by us. If an increase occurs, our financial condition and
results of operations could be materially adversely affected.
There is U.S. income
tax risk associated with reinsurance between U.S. insurance companies and their
Bermuda affiliates.
As
discussed above, Congress has periodically considered legislation intended to
eliminate certain perceived tax advantages of non-U.S. insurance companies and
U.S. insurance companies with non-U.S. affiliates, including perceived tax
benefits resulting principally from reinsurance between or among U.S. insurance
companies and their non-U.S. affiliates. In this regard, section 845 of the IRS
Code was amended in 2004 to permit the IRS to reallocate, recharacterize or
adjust items of income, deduction or certain other items related to a
reinsurance agreement between related parties to reflect the proper amount,
source or character for each item (in contrast to prior law, which only
covered source and character). If the IRS were to successfully challenge our
reinsurance arrangements under section 845, our financial condition and results
of operations could be materially adversely affected and the price of our
ordinary shares could be adversely affected.
The Organisation for
Economic Co-operation and Development has implemented measures (on Attribution
of profits to Permanent Establishments) that might change the manner in which
we are taxed.
On
July 17, 2008, the Organisation for Economic Co-operation and Development (the
OECD) issued the final version of its Report on the Attribution of Profits
to Permanent Establishments (the Report). The Report is the final report on
the OECDs project to establish a broad consensus regarding the interpretation
and practical application of Article 7 of the OECD Model Tax Convention on
Income and on Capital (Article 7). Article 7 sets forth international tax
principles for attributing profits to a permanent establishment and forms the
basis of an extensive network of bilateral income tax treaties between OECD
member countries and between many OECD member and non-member countries. Part IV
of the Report addresses the attribution of profits to a permanent establishment
of an enterprise that conducts insurance activities.
The
OECD implemented the conclusions of the Report in two phases. First, to provide
improved certainty for the interpretation of existing treaties based on the
current text of Article 7, the OECD revised the commentary to the current
version of Article 7 to take into account the conclusions of the Report that
did not conflict with the existing interpretation of Article 7 reflected in the
previous commentary. Second, to reflect the full conclusions of the Report, the
OECD issued, on July 22, 2010, a new version of Article 7 and related
commentary to be used in the negotiation of new treaties and amendments to
existing treaties. The provisions of the final version of new Article 7 and
related commentary are not expected to change materially the manner in which we
are taxed.
41
If an investor
acquires 10% or more of our ordinary shares, it may be subject to taxation
under the controlled foreign corporation rules.
Under
certain circumstances, a U.S. person who owns 10% or more of the voting power
of a foreign corporation that is a CFC (a foreign corporation in which 10% U.S.
shareholders own more than 50% of the voting power of the foreign corporation
or more than 25% of a foreign insurance company) for an uninterrupted period of
30 days or more during a taxable year must include in gross income for U.S.
federal income tax purposes such 10% U.S. Shareholders pro rata share of the
CFCs subpart F income, even if the subpart F income is not distributed to
such 10% U.S. Shareholder, if such 10% U.S. Shareholder owns (directly or
indirectly through foreign entities) any shares of the foreign corporation on
the last day of the corporations taxable year. Subpart F income of a foreign
insurance corporation typically includes foreign personal holding company
income (such as interest, dividends and other types of passive income), as well
as insurance and reinsurance income (including underwriting and investment
income) attributable to the insurance of risks situated outside the CFCs
country of incorporation.
While
provisions in our organizational documents limit voting power on our ordinary
shares, it is possible, that the IRS could challenge the effectiveness of these
provisions and that a court could sustain such a challenge, in which case an
investors investment could be materially adversely affected, if the investor
is considered to own 10% or more of our shares.
U.S. Persons who
hold shares will be subject to adverse tax consequences if we are considered to
be a PFIC for U.S. federal income tax purposes.
If
we are considered a PFIC for U.S. federal income tax purposes, a U.S. person
who owns any of our shares will be subject to adverse tax consequences,
including a greater tax liability than might otherwise apply and tax on amounts
in advance of when tax would otherwise be imposed, in which case an investors
investment could be materially adversely affected. In addition, if we were
considered a PFIC, upon the death of any U.S. individual owning shares, such
individuals heirs or estate would not be entitled to a step-up in the basis
of the shares that might otherwise be available under U.S. federal income tax
laws. We believe that we are not, have not been, and currently do not expect to
become, a PFIC for U.S. federal income tax purposes. We cannot provide
assurance, however, that we will not be deemed a PFIC by the IRS in the future.
If we were considered a PFIC, it could have material adverse tax consequences
for an investor that is subject to U.S. federal income taxation. There are
currently no regulations regarding the application of the PFIC provisions to an
insurance company. New regulations or pronouncements interpreting or clarifying
these rules may be forthcoming. We cannot predict what impact, if any, such
guidance would have on an investor that is subject to U.S. federal income
taxation.
There are U.S.
income tax risks associated with the related person insurance income of our
non-U.S. insurance subsidiaries.
If
(i) the related person insurance income, which we refer to as RPII, of any
one of our non-U.S. insurance subsidiaries were to equal or exceed 20% of that
subsidiarys gross insurance income in any taxable year and (ii) U.S. persons
were treated as owning 25% or more of the subsidiarys stock (by vote or
value), a U.S. person who owns any ordinary shares, directly or indirectly, on
the last day of such taxable year on which the 25% threshold is met would be
required to include in its income for U.S. federal income tax purposes that
persons ratable share of that subsidiarys RPII for the taxable year,
determined as if that RPII were distributed proportionately only to U.S.
holders at that date, regardless of whether that income is distributed. The
amount of RPII earned by a subsidiary (generally premium and related investment
income from the direct or indirect insurance or reinsurance of any direct or
indirect U.S. holder of shares of that subsidiary or any person related to that
holder) would depend on a number of factors, including the identity of persons
directly or indirectly insured or reinsured by that subsidiary. Although we do
not believe that the 20% threshold will be met in respect of any of our
non-U.S. insurance subsidiaries, some of the factors that may affect the result
in any period may be beyond our control. Consequently, we cannot provide
absolute assurance that we will not exceed the RPII threshold in any taxable
year.
The
RPII rules provide that if a holder who is a U.S. person disposes of shares in
a non-U.S. insurance corporation that had RPII (even if the 20% gross income
threshold was not met) and met the 25% ownership threshold at any time during
the five-year period ending on the date of disposition, and the holder owned
any stock at such time, any gain from the disposition will generally be treated
as a dividend to the extent of the holders share (taking into account certain
rules for determining a U.S. holders share of RPII) of the corporations
undistributed earnings and profits that were accumulated during the period that
the holder owned the shares (possibly whether or not those earnings and profits
are attributable to RPII). In addition, such a shareholder will be required to
comply with specified reporting requirements, regardless of the amount of
shares owned. We believe that these rules should not apply to dispositions of
our ordinary shares because XL-Ireland is not itself directly engaged in the
insurance business. We cannot provide absolute assurance, however, that the IRS
will not successfully assert that these rules apply to dispositions of our
ordinary shares.
We and our Bermuda
insurance subsidiaries may become subject to taxes in Bermuda in the future, which
may have a material adverse effect on our financial condition, results of
operations and your investment.
Our
Bermuda insurance subsidiaries have received from the Ministry of Finance in
Bermuda exemptions from any Bermuda taxes that might be imposed on profits,
income or any capital asset, gain or appreciation until March 31, 2035.
42
The
exemptions are subject to the proviso that they are not construed so as to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda (the Company and our Bermuda insurance subsidiaries are not
so currently designated) and to prevent the application of any tax payable in
accordance with the provisions of The Land Tax Act 1967 or otherwise payable in
relation to the land leased to us and our Bermuda insurance subsidiaries.
XL-Ireland and other Bermuda-based subsidiaries not incorporated in Bermuda, as
permit companies under The Companies Act 1981 of Bermuda, have also received
similar exemptions, which are also expected to be extended to 2035. Our Bermuda
insurance subsidiaries are required to pay certain annual Bermuda government
fees and certain business fees as an insurer under The Insurance Act 1978 of
Bermuda. Currently there is no Bermuda withholding tax on dividends paid by our
Bermuda insurance subsidiaries to us.
XL-Cayman may become
subject to taxes in the Cayman Islands after June 2, 2018, which may have a
material adverse effect on our results of operations and your investment.
For
tax purposes, XL-Cayman is resident in Ireland by virtue of central management
and control. In the event Cayman introduces a corporate income tax based on
place of incorporation, XL-Cayman would be a dual resident company and
potentially subject to tax in both Ireland and Cayman. As there is no double
tax treaty between the Cayman Islands and Ireland, XL-Cayman could become
subject to taxation in both Ireland and Cayman. Under current Cayman Islands
law, we are not obligated to pay any taxes in the Cayman Islands on our income
or gains. We have received an undertaking from the Governor-in-Council of the
Cayman Islands pursuant to the provisions of the Tax Concessions Law, as
amended, that until June 2, 2018, (i) no subsequently enacted law imposing any
tax on profits, income, gains or appreciation shall apply to us and (ii) no
such tax and no tax in the nature of an estate duty or an inheritance tax shall
be payable on any of our ordinary shares, debentures or other obligations.
Given the limited duration of the undertaking from the Governor-in-Council of
the Cayman Islands, we cannot be certain that we will not be subject to any
Cayman Islands tax after June 2, 2018. Such taxation could have a material
adverse effect on our financial condition, results of operations and your
investment.
Our tax position
could be adversely impacted by changes in tax laws, tax treaties or tax
regulations or the interpretation or enforcement thereof.
Our
tax position could be adversely impacted by changes in tax laws, tax treaties
or tax regulations or the interpretation or enforcement thereof by the tax
authorities in Ireland, the United States and other jurisdictions, and such
changes may be more likely or become more likely in view of recent economic
trends in such jurisdictions, particularly if such trends continue. For
example, Ireland has suffered from the consequences of worldwide adverse
economic conditions and the credit ratings on its debt have been downgraded.
Such tax law changes could cause a material and adverse change in our worldwide
effective tax rate and we may have to take further action, at potentially
significant expense, to seek to mitigate the effect of such changes. Any future
amendments to the current income tax treaties between Ireland and other
jurisdictions, including the United States, could subject us to increased
taxation and/or potentially significant expense.
Dividends you
receive may be subject to Irish dividend withholding tax and Irish income tax.
Dividend
withholding tax (currently at a rate of 20%) may arise in respect of dividends
paid on the Companys ordinary shares. However, a number of exemptions from
dividend withholding tax exist such that ordinary shareholders resident in the
United States and ordinary shareholders resident in other specified countries
(listed in Annex F attached to the Redomestication Proxy Statement filed with
the SEC on March 10, 2010) may be entitled to exemptions from dividend
withholding tax if they complete and file certain dividend withholding tax
forms. Ordinary shareholders resident in the U.S. that hold their ordinary
shares through DTC will not be subject to dividend withholding tax provided the
addresses of the beneficial owners of such ordinary shares in the records of
the brokers holding such ordinary shares are in the United States (so that such
brokers can further transmit the relevant information to a qualifying
intermediary appointed by the Company). Similarly, ordinary shareholders
resident in the U.S. that hold their ordinary shares outside of DTC are not
subject to dividend withholding tax if such ordinary shareholders held ordinary
shares in the Company on January 12, 2010 and they provided a valid Form W-9
showing a U.S. address to the Companys transfer agent. However, other ordinary
shareholders may be subject to dividend withholding tax, which could adversely
affect the price of our ordinary shares.
In
addition, ordinary shareholders entitled to an exemption from Irish dividend
withholding tax on dividends received from the Company should not be subject to
Irish income tax in respect of those dividends, unless they have some
connection with Ireland other than their ordinary shareholdings in the Company.
Ordinary shareholders who receive dividends subject to Irish dividend withholding
tax will generally have no further liability to Irish income tax on those
dividends unless they have some connection with Ireland other than their
ordinary shareholding in the Company.
A future transfer of
your ordinary shares, other than one effected by means of the transfer of book
entry interests in DTC, may be subject to Irish stamp duty.
Transfers
of our ordinary shares effected by means of the transfer of book entry
interests in DTC will not be subject to Irish stamp duty. The majority of our
ordinary shares will be traded through DTC, either directly or through brokers
who hold such ordinary shares on behalf of customers through DTC. However, if
you hold your ordinary shares directly rather than beneficially through DTC (or
through a broker that holds your ordinary shares through DTC), any transfer of
your ordinary shares could be subject
43
to Irish stamp
duty (currently at the rate of 1% of the higher of the price paid or the market
value of the ordinary shares acquired). Payment of Irish stamp duty is
generally a legal obligation of the transferee. The potential for stamp duty
could adversely affect the price of our ordinary shares.
|
|
|
|
I
TEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
|
|
|
|
None.
|
|
|
|
|
I
TEM 2.
|
PROPERTIES
|
|
|
The
Company operates in Bermuda, the United States, Europe and various other
locations around the world. In 1997, the Company acquired commercial real
estate in Hamilton, Bermuda for the purpose of securing long-term office space
for its worldwide headquarters. The development was completed in April 2001.
The total cost of this development, including land, was approximately $126.6
million. The Company has subsequently sub-leased portions of this property as a
part of its broader expense reduction initiatives.
In
July 2003, the Company acquired new offices at 70 Gracechurch Street, London,
which have become the Companys London headquarters. The acquisition was made
through a purchase, sale and leaseback transaction. The move to the new offices
was completed in 2004 and consolidated the Companys London businesses in one
location. The capital lease asset and liability associated with this
transaction totaled $100.7 million at December 31, 2011.
The
majority of all other office facilities throughout the world that are occupied
by the Company and its subsidiaries are leased.
Total
rent expense for the years ended December 31, 2011, 2010 and 2009 was $32.9
million, $31.8 million and $34.4 million, respectively. See Item 8, Note 17(d)
to the Consolidated Financial Statements, Commitments and Contingencies
Properties, for discussion of the Companys lease commitments for real
property.
|
|
|
|
I
TEM 3.
|
LEGAL
PROCEEDINGS
|
|
|
In
November 2006, a subsidiary of the Company received a grand jury subpoena from
the Antitrust Division of the U.S. Department of Justice (DOJ) and a subpoena
from the SEC, both of which sought documents in connection with an
investigation into the municipal GICs market and related products. In June
2008, subsidiaries of the Company also received a subpoena from the Connecticut
Attorney General and an Antitrust Civil Investigative Demand from the Office of
the Florida Attorney General in connection with a coordinated multi-state
Attorneys General investigation into the matters referenced in the DOJ and SEC
subpoenas. The Company is fully cooperating with these investigations.
In
August 2005, plaintiffs in a proposed class action (the Class Action) that
was consolidated into a multidistrict litigation in the United States District
Court for the District of New Jersey, captioned In re Brokerage Antitrust
Litigation, MDL No. 1663, Civil Action No. 04-5184 (the MDL), filed a
consolidated amended complaint (the Amended Complaint), which named as new
defendants approximately 30 entities, including Greenwich Insurance Company,
Indian Harbor Insurance Company and XL-Cayman (the XL Defendants). In the
MDL, the Class Action plaintiffs asserted various claims purportedly on behalf
of a class of commercial insureds against approximately 113 insurance companies
and insurance brokers through which the named plaintiffs allegedly purchased
insurance. The Amended Complaint alleged that the defendant insurance companies
and insurance brokers conspired to manipulate bidding practices for insurance
policies in certain insurance lines and failed to disclose certain commission
arrangements and asserted statutory claims under the Sherman Act, various state
antitrust laws and the Racketeer Influenced and Corrupt Organizations Act
(RICO), as well as common law claims alleging breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty and unjust enrichment. By
Opinion and Order dated August 31, 2007, the District Court dismissed the
Sherman Act claims with prejudice and, by Opinion and Order dated September 28,
2007, the District Court dismissed the RICO claims with prejudice. The
plaintiffs then appealed both Orders to the U.S. Court of Appeals for the Third
Circuit. On August 16, 2010, the Third Circuit affirmed in large part the
District Courts dismissal. The Third Circuit reversed the dismissal of certain
Sherman Act and RICO claims alleged against several defendants including the XL
Defendants but remanded those claims to the District Court for further
consideration of their adequacy. In light of its reversal and remand of certain
of the federal claims, the Third Circuit also reversed the District Courts
dismissal (based on the District Courts declining to exercise supplemental
jurisdiction) of the state-law claims against all defendants. On October 1,
2010, the remaining defendants, including the XL Defendants, filed motions to
dismiss the remanded federal claims and the state-law claims. The motions were
fully briefed in November 2010. In May 2011, a majority of the remaining
defendants, including the XL Defendants, executed a formal Settlement Agreement
with the Class Action plaintiffs to settle the Class Action and dismiss all
claims with prejudice. The settlement was preliminarily approved by the
District Court in June 2011 and a final fairness hearing was held on September
14, 2011; the District Court has not yet decided the Class Action plaintiffs
motion for approval of the settlement. The XL Defendants portion of the
defendants aggregate settlement payment is $6.75 million.
44
Various
XL entities have been named as defendants in three of the many tag-along
actions that have been consolidated into the MDL for pretrial purposes. The
complaints in these tag-along actions make allegations similar to those made in
the Amended Complaint but do not purport to be class actions. On April 4, 2006,
a tag-along complaint was filed in the U.S. District Court for the Northern
District of Georgia on behalf of New Cingular Wireless Headquarters LLC and
several other corporations and remains pending against approximately 100
defendants, including Greenwich Insurance Company, XL Specialty Insurance
Company, XL Insurance America, Inc., XL Insurance Company Limited and
XL-Cayman. On or about May 21, 2007, a tag-along complaint was filed in the
U.S. District Court for the District of New Jersey on behalf of Henley
Management Company, Big Bear Properties, Inc., Northbrook Properties, Inc., RCK
Properties, Inc., Kitchens, Inc., Aberfeldy LP and Payroll and Insurance Group,
Inc. against multiple defendants, including XL Winterthur International. On
October 12, 2007, a complaint in a third tag-along action was filed in the U.S.
District Court for the Northern District of Georgia by Sears, Roebuck & Co.,
Sears Holdings Corporation, Kmart Corporation and Lands End Inc. against many
named defendants including X.L. America, Inc., XL Insurance America, Inc., XL
Specialty Insurance Company and XL Insurance (Bermuda) Ltd. At a teleconference
hearing on October 17, 2011, the District Court lifted the stay of the
tag-along actions, including the three in which the XL entities are named
defendants, and directed the parties to submit a proposed Scheduling Order that
will include, among other things, deadlines for amending the Complaints in the
tag-along actions and filing motions to dismiss the existing or amended
Complaints.
XL-Cayman
and one of its subsidiaries, Syncora, four Syncora officers, and various
underwriters of Syncora securities were named in a Consolidated Amended
Complaint filed in August 2008 in the Southern District of New York purportedly
on behalf of a class of shareholders of Syncora. On September 27, 2011, the
court entered a judgment dismissing the action with prejudice in its entirety,
and the time for seeking rehearing or for filing a notice of appeal has now run
without plaintiffs taking any action.
The
Company and its subsidiaries are subject to litigation and arbitration in the
normal course of its business. These lawsuits and arbitrations principally
involve claims on policies of insurance and contracts of reinsurance and are
typical for the Company and for the property and casualty insurance and
reinsurance industry in general. Such legal proceedings are considered in
connection with the Companys loss and loss expense reserves. Reserves in
varying amounts may or may not be established in respect of particular claims
proceedings based on many factors, including the legal merits thereof. In
addition to litigation relating to insurance and reinsurance claims, the
Company and its subsidiaries are subject to lawsuits and regulatory actions in
the normal course of business that do not arise from or directly relate to
claims on insurance or reinsurance policies. This category of business
litigation typically involves, among other things, allegations of underwriting
errors or misconduct, employment claims, regulatory activity, shareholder
disputes or disputes arising from business ventures. The status of these legal
actions is actively monitored by management.
Legal
actions are subject to inherent uncertainties, and future events could change
managements assessment of the probability or estimated amount of potential
losses from pending or threatened legal actions. Based on available
information, it is the opinion of management that the ultimate resolution of
pending or threatened legal actions, both individually and in the aggregate,
will not result in losses in amounts exceeding recognized reserves having a
material adverse effect on the Companys position or liquidity at December 31,
2011. For further information in relation to legal proceedings, see Item
8, Note 17(g) to the Consolidated Financial Statements, Commitments and
Contingencies Claims and Other Litigation.
|
|
|
|
I
TEM
4.
|
MINE
SAFETY DISCLOSURES
|
|
|
Not
applicable.
45
Executive Officers of the Registrant
The
table below sets forth the names, ages and titles of the persons who were the
executive officers of the Company at February 27, 2012:
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Michael S. McGavick
|
|
54
|
|
Chief Executive Officer
and Director
|
Susan L. Cross
|
|
51
|
|
Executive Vice President
and Global Chief Actuary
|
Kirstin Gould
|
|
45
|
|
Executive Vice President,
General Counsel and Secretary
|
Gregory S. Hendrick
|
|
46
|
|
Executive Vice President
and Chief Executive of Insurance Operations
|
W. Myron Hendry
|
|
63
|
|
Executive Vice President
and Chief Platform Officer
|
Peter R. Porrino
|
|
55
|
|
Executive Vice President
and Chief Financial Officer
|
Elizabeth L. Reeves
|
|
58
|
|
Executive Vice President,
Chief Human Resources Officer
|
Jacob D. Rosengarten
|
|
56
|
|
Executive Vice President
and Chief Enterprise Risk Officer
|
Sarah E. Street
|
|
50
|
|
Executive Vice President
and Chief Investment Officer
|
James H. Veghte
|
|
55
|
|
Executive Vice President
and Chief Executive of Reinsurance Operations
|
Michael
S. McGavick, was appointed as Director of the Company in April 2008 and shortly
prior to his commencement as the Companys Chief Executive Officer on May 1,
2008. Previously, Mr. McGavick was President & CEO of the Seattle-based
Safeco Corporation from January 2001 to December 2005. Prior to joining Safeco,
Mr. McGavick spent six years with the Chicago-based CNA Financial Corporation,
where he held various senior executive positions before becoming President and
Chief Operating Officer of the companys largest commercial insurance operating
unit. Mr. McGavicks insurance industry experience also includes two years as
Director of the American Insurance Associations Superfund Improvement Project
in Washington D.C. where he became the Associations lead strategist in working
to transform U.S. Superfund environmental laws.
Susan
L. Cross was appointed to the Companys senior leadership team in August 2008,
serving as Executive Vice President and Global Chief Actuary. Ms. Cross has
served as Global Chief Actuary since 2006 and previously was Chief Actuary of
the Companys reinsurance operations from 2004 to 2006 and Chief Actuary of XL
Re Bermuda from 2002 to 2004. She also held various actuarial positions in the
insurance and reinsurance operations of the Company from 1999 to 2002. Prior to
joining the Company, Ms. Cross was Principal and Consulting Actuary at
Tillinghast Towers Perrin.
Peter
R. Porrino was appointed Executive Vice President, Chief Financial Officer in
August 2011. Previously, Mr. Porrino served as Ernst & Youngs Global
Director of Insurance Industry Services from 1999 to August 2011. Mr. Porrino
first joined Ernst & Young in 1978 and served in the firms New York and
National insurance practices for 15 years before leaving to serve in senior
management positions with several insurance companies. This experience includes
Zurich Financial Services, where Mr. Porrino served as CFO of Zurichs NYSE
listed subsidiary, Zurich Reinsurance Centre, Inc. He rejoined Ernst &
Young in 1999.
Kirstin
Gould was appointed to the position of Executive Vice President, General
Counsel in September 2007, which position includes her prior responsibilities
as General Counsel, Corporate Affairs and Corporate Secretary. In 2008, Ms.
Gould also assumed leadership of the Communications, Marketing and Public
Affairs department. Ms. Gould was previously Executive Vice President, General
Counsel, Corporate Affairs from July 2006 to September 2007 and also served as
Chief Corporate Legal Officer from November 2004 to July 2006, and Associate
General Counsel from July 2001 to November 2004. Prior to joining the Company
in 2000, Ms. Gould was associated with the law firms of Clifford Chance and
Dewey Ballantine in New York and London.
Gregory
S. Hendrick was appointed Executive Vice President and Chief Executive of
Insurance Operations in January 2012. From October 2010 to January 2012 Mr.
Hendrick served as Executive Vice President, Strategic Growth. From 2004 to
October 2010, Mr. Hendrick served as President and Chief Underwriting Officer
of XL Re Ltd. Previously, he served as Lead for U.S. Property Treaty
underwriting at XL Re Ltd and Vice President responsible for U.S. Property
Underwriting for XL Mid Ocean Reinsurance Ltd. Prior to joining XL, Mr.
Hendrick was Assistant Vice President of Treaty Underwriting for the Winterthur
Reinsurance Corporation of America.
W.
Myron Hendry joined the Companys senior leadership team upon his appointment
as Executive Vice President, Chief Platform Officer in December 2009. Prior to
joining the Company, from 2006 to December 2009 Mr. Hendry served as Business
Operations Executive of Bank of Americas Insurance Group, joining there from a
merger with Countrywide Insurance Services Group. Prior to the merger, Mr.
Hendry served as Managing Director and Chief Operating Officer for Countrywide
and prior to this, from 2004 to 2006, Mr. Hendry served as Senior Vice
President, Property and Casualty Services at Safeco. From 1971 to 2004, Mr.
Hendry held various leadership roles with CNA Insurance, with his last
assignment being the Senior Vice President of Worldwide Operations.
Elizabeth
L. Reeves was appointed to the Companys senior leadership team in June 2009,
serving as Executive Vice President, Chief Human Resources Officer, where she
is responsible for global compensation, employee benefits, employee relations,
recruiting, learning, organizational development, performance management,
talent development, succession planning, HR information
46
systems and Payroll. Prior
to joining the Company, from August 2008 to May 2009, Ms. Reeves served as
Senior Vice President and Chief Human Resources Officer at Liz Claiborne,
Incorporated. Prior to that, from January 2005 to May 2008, Ms. Reeves served
as Senior Vice President of Human Resources at Lincoln Financial Group.
Jacob
D. Rosengarten joined the Companys senior leadership team and was appointed
Executive Vice President, Chief Enterprise Risk Officer in September 2008.
Prior to joining the Company, Mr. Rosengarten served as Managing Director of
Risk Management and Analytics for Goldman Sachs Asset Management from 1998 to
2008. From 1993 to 1997, Mr. Rosengarten served as Director of Risk and
Quantitative Analysis at Commodities Corporation and prior to this, from 1983
to 1992 held progressively senior finance positions at Commodities Corporation.
Sarah
E. Street was appointed to the position of Executive Vice President and Chief
Investment Officer in October 2006. Ms. Street has also served as the Chief
Executive Officer of XL Capital Investment Partners Inc. since April 2001.
Prior to joining XL in 2001, Ms. Street held numerous leadership positions at
JPMorganChase and its predecessor organizations, working in a number of
corporate finance units as well as in the capital markets business of the bank.
James
H. Veghte was appointed Executive Vice President, Chief Executive of Reinsurance
Operations in January 2006. Mr. Veghte had served as the Chief Executive
Officer of XL Reinsurance America Inc. (XLRA) since 2004, having previously
served as Chief Operating Officer of the Companys reinsurance operations and
President, Chief Operating Officer & Chief Underwriting Officer of XL Re
Ltd. Additional previously held roles with the Company include President of XL
Re Latin America Ltd., Chief Operating Officer of Le Mans Re (now the French
branch of XL Re Europe Ltd.), General Manager of XL Re Ltds London branch and
Executive Vice President and Underwriter of XL Mid Ocean Reinsurance Ltd in
Bermuda. Prior to joining XL, Mr. Veghte was Senior Vice President and Chief
Underwriting Officer of Winterthur Reinsurance Corporation of America.
47
P
ART
II
|
|
|
|
I
TEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
The
Companys ordinary shares, $0.01 par value per share, are listed on the NYSE
under the symbol XL.
The
following table sets forth the high, low and closing sales prices per share of
the Companys ordinary shares per fiscal quarter, as reported on the New York
Stock Exchange Composite Tape:
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Close
|
|
|
|
|
|
|
|
|
|
2011:
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
24.82
|
|
|
21.17
|
|
|
24.60
|
|
2nd Quarter
|
|
|
25.43
|
|
|
20.53
|
|
|
21.98
|
|
3rd Quarter
|
|
|
22.65
|
|
|
17.94
|
|
|
18.80
|
|
4th Quarter
|
|
|
23.00
|
|
|
17.69
|
|
|
19.77
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
19.54
|
|
|
15.91
|
|
|
18.90
|
|
2nd Quarter
|
|
|
20.39
|
|
|
15.63
|
|
|
16.01
|
|
3rd Quarter
|
|
|
22.14
|
|
|
15.59
|
|
|
21.66
|
|
4th Quarter
|
|
|
22.52
|
|
|
19.36
|
|
|
21.82
|
|
The
number of record holders of ordinary shares as of February 24, 2011 was 175.
This figure does not represent the actual number of beneficial owners of the
Companys ordinary shares because such shares are frequently held in street
name by securities dealers and others for the benefit of individual owners who
may vote the shares.
In
2011, four quarterly dividends of $0.11 per share were paid to all ordinary
shareholders of record as of March 15, June 15, September 15 and December 15.
In 2010, four quarterly dividends were paid at $0.10 per share to all ordinary
shareholders of record as of March 15, June 15, September 15 and December 15.
The
declaration and payment of future dividends by the Company will be at the
discretion of the Board of Directors and will depend upon many factors,
including the Companys earnings, financial condition, business needs, capital
and surplus requirements of the Companys operating subsidiaries and regulatory
and contractual restrictions.
As
a holding company, the Companys principal source of income is dividends or
other statutorily permissible payments from its subsidiaries. The ability to
pay such dividends is limited by the applicable laws and regulations of the
various countries in which the Companys subsidiaries operate, including
Bermuda, the U.S. and the U.K., applicable requirements of the Society of
Lloyds, and certain contractual provisions. See Item 1, Business
Regulation, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8, Note 23 to the Consolidated
Financial Statements, Statutory Financial Data, for further discussion.
Information
concerning securities authorized for issuance under equity compensation plans
is incorporated by reference to Part III, Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.
48
Purchases of Equity
Securities by the Issuer and Affiliate Purchases
The
following table provides information about purchases by the Company during the
quarter ended December 31, 2011 of equity securities that are registered by the
Company pursuant to Section 12 of the Exchange Act:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Total Number
of Shares
Purchased
|
|
Average Price
Paid
per share
|
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced Plans
or Programs
|
|
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans
or Programs (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
|
|
|
$
|
|
|
|
|
|
$
|
290.4
million
|
|
November
|
|
|
1,867,423
|
|
$
|
19.29
|
|
|
1,865,000
|
|
$
|
254.4
million
|
|
December
|
|
|
3,080,820
|
|
$
|
20.76
|
|
|
3,080,820
|
|
$
|
190.5
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,948,243
|
|
$
|
20.21
|
|
|
4,945,820
|
|
$
|
190.5
million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Shares purchased in
connection with the vesting of restricted shares granted under the Companys
restricted stock plan do not represent shares purchased as part of publicly
announced plans or programs. All such purchases were made in connection with
satisfying tax withholding obligations of those employees. These shares were
not purchased as part of the Companys share buyback program noted below.
|
(2)
|
On November 2, 2010, the
Company announced that its Board of Directors approved a share buyback
program, authorizing the Company to purchase up to $1.0 billion of its
ordinary shares. During 2010, the Company purchased and canceled 6.9 million
ordinary shares under this program for $144.0 million. During 2011, the
Company purchased and canceled 31.7 million ordinary shares under this
program for $665.5 million. All share buybacks were carried out by way of
redemption in accordance with Irish law and the Companys constitutional
documents. All shares so redeemed were canceled upon redemption. At both
December 31, 2011 and February 24, 2012, $190.5 million remained available to
be used for purchases under this program.
|
Ordinary Share
Performance Graph
Set
forth below is a line graph comparing the yearly dollar change in the
cumulative total shareholder return over a five-year period on the Companys
ordinary shares from December 31, 2006 through December 31, 2011 as compared
to the cumulative total return of the Standard & Poors 500 Stock Index
and the cumulative total return of the Standard & Poors Property &
Casualty Insurance Index. The companies included in these indices or noted as
competitors under Item 1,
Business, may not be included in the Companys compensation
peer group.
The
graph shows the value on December 31, 2007, 2008, 2009, 2010 and 2011, of a
$100 investment made on December 31, 2006, with all dividends reinvested.
49
|
|
|
|
I
TEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
The
selected consolidated financial data below is based upon the Companys fiscal
year end of December 31. The selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto presented under Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except per share amounts)
|
|
Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
5,690,130
|
|
$
|
5,414,061
|
|
$
|
5,706,840
|
|
$
|
6,640,102
|
|
$
|
7,205,356
|
|
Net investment income
|
|
|
1,137,769
|
|
|
1,198,038
|
|
|
1,319,823
|
|
|
1,768,977
|
|
|
2,248,807
|
|
Net realized (losses) gains on investments
|
|
|
(188,359
|
)
|
|
(270,803
|
)
|
|
(921,437
|
)
|
|
(962,054
|
)
|
|
(603,268
|
)
|
Net realized and unrealized gains (losses) on derivative instruments
|
|
|
(10,738
|
)
|
|
(33,843
|
)
|
|
(33,647
|
)
|
|
(73,368
|
)
|
|
(55,451
|
)
|
Net income (loss) from investment fund affiliates (1)
|
|
|
26,253
|
|
|
51,102
|
|
|
78,867
|
|
|
(277,696
|
)
|
|
326,007
|
|
Fee income and other
|
|
|
41,748
|
|
|
40,027
|
|
|
43,201
|
|
|
52,158
|
|
|
14,271
|
|
Net losses and loss expenses incurred (2)
|
|
|
4,078,391
|
|
|
3,211,800
|
|
|
3,168,837
|
|
|
3,962,898
|
|
|
3,841,003
|
|
Claims and policy benefits life operations
|
|
|
535,074
|
|
|
513,833
|
|
|
677,562
|
|
|
769,004
|
|
|
888,658
|
|
Acquisition costs, operating expenses and foreign exchange gains and
losses
|
|
|
1,868,250
|
|
|
1,749,202
|
|
|
1,994,194
|
|
|
1,921,940
|
|
|
2,188,889
|
|
Interest expense
|
|
|
205,592
|
|
|
213,643
|
|
|
216,504
|
|
|
351,800
|
|
|
621,905
|
|
Loss on settlement of guarantee
|
|
|
|
|
|
23,500
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
22,527
|
|
|
|
|
Impairment of goodwill
|
|
|
429,020
|
|
|
|
|
|
|
|
|
989,971
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,438
|
|
|
1,858
|
|
|
1,836
|
|
|
2,968
|
|
|
1,680
|
|
Income (loss) before non-controlling interests, net income from
operating affiliates and income tax expense
|
|
|
(420,962
|
)
|
|
684,746
|
|
|
134,714
|
|
|
(872,989
|
)
|
|
1,593,587
|
|
Income (loss) from operating affiliates (1)(2)
|
|
|
76,786
|
|
|
121,372
|
|
|
60,480
|
|
|
(1,458,246
|
)
|
|
(1,059,848
|
)
|
Preference share dividends (3)
|
|
|
72,278
|
|
|
74,521
|
|
|
80,200
|
|
|
78,645
|
|
|
69,514
|
|
Net income (loss) attributable to ordinary shareholders
|
|
|
(474,760
|
)
|
|
585,472
|
|
|
206,607
|
|
|
(2,632,458
|
)
|
|
206,375
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except per
share amounts)
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share basic (4)(8)
|
|
$
|
(1.52
|
)
|
$
|
1.74
|
|
$
|
0.61
|
|
$
|
(10.94
|
)
|
$
|
1.14
|
|
Net income (loss) per ordinary share diluted (4)(8)
|
|
$
|
(1.52
|
)
|
$
|
1.73
|
|
$
|
0.61
|
|
$
|
(10.94
|
)
|
$
|
1.14
|
|
Weighted average ordinary shares outstanding diluted (4)
|
|
|
312,896
|
|
|
337,709
|
|
|
340,966
|
|
|
240,657
|
|
|
181,209
|
|
Cash dividends per ordinary share
|
|
$
|
0.44
|
|
$
|
0.40
|
|
$
|
0.40
|
|
$
|
1.14
|
|
$
|
1.52
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale
|
|
$
|
27,017,285
|
|
$
|
27,677,553
|
|
$
|
29,307,171
|
|
$
|
27,464,510
|
|
$
|
36,265,803
|
|
Total investments held to maturity
|
|
|
2,688,978
|
|
|
2,728,335
|
|
|
546,067
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,825,125
|
|
|
3,022,868
|
|
|
3,643,697
|
|
|
4,353,826
|
|
|
3,880,030
|
|
Investments in affiliates
|
|
|
1,052,729
|
|
|
1,127,181
|
|
|
1,242,810
|
|
|
1,552,789
|
|
|
2,611,149
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,654,948
|
|
|
3,671,887
|
|
|
3,584,028
|
|
|
3,997,722
|
|
|
4,697,471
|
|
Premiums receivable
|
|
|
2,411,611
|
|
|
2,414,912
|
|
|
2,597,602
|
|
|
3,135,985
|
|
|
3,637,452
|
|
Total assets
|
|
|
44,626,077
|
|
|
45,015,944
|
|
|
45,655,391
|
|
|
45,693,015
|
|
|
57,785,867
|
|
Unpaid losses and loss expenses
|
|
|
20,613,901
|
|
|
20,531,607
|
|
|
20,823,524
|
|
|
21,650,315
|
|
|
23,207,694
|
|
Future policy benefit reserves
|
|
|
4,845,394
|
|
|
5,075,127
|
|
|
5,490,119
|
|
|
5,452,865
|
|
|
6,772,042
|
|
Unearned premiums
|
|
|
3,555,310
|
|
|
3,484,830
|
|
|
3,651,310
|
|
|
4,217,931
|
|
|
4,681,989
|
|
Notes payable and debt
|
|
|
2,275,327
|
|
|
2,457,003
|
|
|
2,442,914
|
|
|
3,179,963
|
|
|
2,860,598
|
|
Shareholders equity
|
|
|
10,769,410
|
|
|
10,613,049
|
|
|
9,432,417
|
|
|
6,116,831
|
|
|
9,950,561
|
|
Fully diluted book value per ordinary share
|
|
$
|
29.64
|
|
$
|
29.78
|
|
$
|
24.60
|
|
$
|
15.46
|
|
$
|
50.29
|
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio (5)
|
|
|
76.6
|
%
|
|
63.8
|
%
|
|
61.5
|
%
|
|
66.2
|
%
|
|
59.8
|
%
|
Underwriting expense ratio (6)
|
|
|
30.9
|
%
|
|
31.0
|
%
|
|
32.1
|
%
|
|
28.7
|
%
|
|
29.0
|
%
|
Combined ratio (7)
|
|
|
107.5
|
%
|
|
94.8
|
%
|
|
93.6
|
%
|
|
94.9
|
%
|
|
88.8
|
%
|
|
|
|
|
|
(1)
|
The Company generally
records the income related to alternative fund affiliates on a one month lag
and the private investment fund affiliates on a three month lag in order for
the Company to meet the filing deadlines for its periodic reports. The
Company generally records the income related to operating affiliates on a
three month lag.
|
(2)
|
In 2008, net loss from
operating affiliates includes losses totaling approximately $1.4 billion
related to the closing of the Master Agreement as well as losses recorded
throughout 2008 and up until the closing of the Master Agreement that were
associated with previous reinsurance and guarantee agreements with Syncora.
In 2007, $351.0 million of financial guarantee reserves related to
reinsurance agreements with Syncora were recorded within net loss from
operating affiliates. In 2010, net income from operating affiliates included
$50.2 million relating to sale of a majority of the Companys shareholding in
Primus Guaranty Ltd.
|
(3)
|
Preference dividends
represent dividends on the Redeemable Series C preference ordinary shares and
the Series D and E preference ordinary shares. Following the Companys
redomestication, subsequent to July 1, 2010, the Redeemable Series C
preference ordinary shares and the Series E preference ordinary shares
represent non-controlling interests in the consolidated financial statements
of the Company. For additional information see Item 8, Note 1 to the
Consolidated Financial Statements, General.
|
(4)
|
Effective for the fiscal
year beginning January 1, 2009 and for all interim periods within 2009, the
Company adopted final authoritative guidance that addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the
earnings allocation in computing basic earnings per share (EPS) pursuant to
the two-class method described in EPS guidance. A share-based payment award
that contains a non-forfeitable right to receive cash when dividends are paid
to ordinary shareholders irrespective of whether that award ultimately vests
is considered a participating security as these rights to dividends provide a
non-contingent transfer of value to the holder of the share-based payment
award. Accordingly, these awards are included in the computation of basic EPS
pursuant to the two-class method. Under the terms of the Companys restricted
stock awards, grantees are entitled to receive dividends on the unvested portions
of their awards. There is no requirement to return these dividends in the
event the unvested awards are forfeited in the future. Accordingly, this
guidance had an impact on the Companys EPS calculations. All prior period
EPS data presented has been adjusted retrospectively to conform to the
provisions of this guidance. The adoption of this guidance reduced basic loss
per ordinary share for fiscal 2008 by $0.08, and reduced basic earnings per
ordinary share by $0.02, for fiscal 2007, and reduced diluted loss per
ordinary share for fiscal 2008 by $0.08 and reduced diluted earnings per
ordinary share by $0.01 for fiscal 2007.
|
(5)
|
The loss and loss expense
ratio related to the property and casualty operations is calculated by
dividing the losses and loss expenses incurred by the net premiums earned for
the Insurance and Reinsurance segments.
|
(6)
|
The underwriting expense
ratio related to the property and casualty operations is the sum of
acquisition expenses and operating expenses for the Insurance and Reinsurance
segments divided by net premiums earned for the Insurance and Reinsurance
segments. See Item 8, Note 4 to the Consolidated Financial Statements,
Segment Information, for further information.
|
(7)
|
The combined ratio related
to the property and casualty operations is the sum of the loss and loss
expense ratio and the underwriting expense ratio. A combined ratio under 100%
represents an underwriting profit and over 100% represents an underwriting
loss.
|
(8)
|
Effective April 1, 2009,
the Company adopted final authoritative guidance that addressed the treatment
of credit losses on investments. This guidance was not applied retroactively.
For additional information see Item 8, Note 2(r) to the Consolidated
Financial Statements, Recent Accounting Pronouncements.
|
51
|
|
|
|
I
TEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
This
Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve inherent risks
and uncertainties. Statements that are not historical facts, including
statements about the Companys beliefs and expectations, are forward-looking
statements. These statements are based upon current plans, estimates and expectations.
Actual results may differ materially from those projected in such
forward-looking statements, and therefore undue reliance should not be placed
on them. See Cautionary Note Regarding Forward-Looking Statements, for a list
of additional factors that could cause actual results to differ materially from
those contained in any forward-looking statement.
This
discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto presented under Item 8.
Certain
aspects of the Companys business have loss experience characterized as low
frequency and high severity. This may result in volatility in both the
Companys results of operations and financial condition.
52
E
XECUTIVE
O
VERVIEW
Background
The
Company, through its subsidiaries, is a global insurance and reinsurance
company providing property, casualty and specialty products to industrial,
commercial and professional firms, insurance companies and other enterprises on
a worldwide basis. The Company operates in markets where it believes its
underwriting expertise and financial strength represent a relative advantage.
The
Company has grown through acquisitions and development of new business opportunities.
Acquisitions included Global Capital Re in 1997, Mid Ocean Limited in 1998,
ECS, Inc. and NAC Re Corp. in 1999, Winterthur International in 2001 and Le
Mans Re in 2002. All acquisitions were entered into in order to further support
the Companys strategic plan to develop a global platform in insurance and
reinsurance. The Company competes as an integrated global business and at
December 31, 2011 employed 3,818 employees in 24 countries. For further
information in relation to the Companys Operations, see Item 1, Business.
Impact of Recent Natural Catastrophes
In
2011, the global insurance and reinsurance markets experienced significant
losses from natural catastrophes, including the 2011 flooding events in
Australia (the Australia floods), the earthquake that struck Christchurch,
New Zealand on February 22, 2011 (the New Zealand earthquake), the March 11,
2011 earthquake and tsunami in Japan (the Japan earthquake and tsunami), the
severe weather occurrences, including tornado activity, in the United States
over the periods April 22-28 and May 20-23, 2011 (the U.S. Storms), third
quarter Atlantic storm activity, particularly Hurricane Irene and Tropical
Storm Lee (the Atlantic Hurricanes) and the widespread flooding in Thailand
that reached its highest point during the fourth quarter (the Thailand
floods). See Significant Items Affecting Results of Operations 1) The
impact of significant large natural catastrophe activity below for a
discussion of the Companys loss estimates for the three months and year ended
December 31, 2011 from natural catastrophes.
Underwriting Environment
The
Company earns its revenue primarily from net premiums written and earned. The
property and casualty insurance and reinsurance markets have historically been
cyclical, meaning that based on market conditions, there have been periods
where premium rates are high and policy terms and conditions are more favorable
to the Company (a hard market) and there have been periods where premium
rates decline and policy terms and conditions are less favorable to the Company
(a soft market). Market conditions are driven primarily by competition in the
marketplace, the supply of capital in the industry, investment yields and the
frequency and severity of loss events. Managements goal is to build long-term
shareholder value by capitalizing on current opportunities and managing through
any cyclical downturns by reducing its property and casualty book of business
and exposures if and when rates deteriorate during soft market periods.
Insurance
- Underwriting Environment
The
trading environment for the core lines of insurance business written by the
Company remains difficult as competitive pressures continue, although there have
been signs of improvement during the second half of 2011. The Company continues
its disciplined underwriting approach to grow on a very selective basis and
exit lines where margins are unacceptable. Overall, retention ratios have
continued to improve while premium rates were broadly flat for the year. The
Insurance segment experienced rate increases in the North America P&C and
Specialty lines which were offset by declines in the highly competitive U.S.
professional lines while the International P&C line was effectively flat
for the year.
The
Company continues to develop new business opportunities in several areas,
including its North American construction and surety businesses, which were
announced in 2010 and its political risk and North America inland marine
businesses, which were announced during the fourth quarter of 2011. Geographic
expansion also continues with the opening of an office in China in April 2011
and the recent approval from the Brazilian regulators to expand the Companys presence
there complementing the Reinsurance operation with an Insurance segment
branch offering Casualty, Property, Professional and Specialty products.
Reinsurance
- Underwriting Environment
The
January 1 renewals for the Reinsurance segment saw positive pricing across the
catastrophe books of business and certain Specialty lines, while Casualty rates
overall were broadly flat. U.S. D&O continued to show rate deterioration in
this very competitive line of business.
Given
the level of global catastrophe losses this year, both loss impacted and
non-loss impacted programs in the U.S. and International books of business
experienced significant rate increases, particularly in International, while
the increases on European catastrophe books were more modest, in the single
digit percentages.
The
following sets forth potential trends relevant to the Companys property and
casualty operations:
53
2012 Underwriting Outlook
Throughout
2009 and 2010, the Company was focused on selective growth initiatives,
emphasizing short-tail lines, where applicable, in the Companys reinsurance
operations, exiting other businesses, such as Casualty facultative business and
non-renewing certain insurance programs, as well as continuing to reduce
long-term agreements within the insurance operations in order to take advantage
of improvements in market conditions when and where they occur.
In
2011, while several of these initiatives continued, the Company also shifted its
focus to concentrate on strategic growth and investment in areas where the
Company believes it can achieve appropriate future returns. Recent strategic
growth initiatives included the continued expansion of the U.S. construction
and surety lines, the addition of political risks and North America inland
marine businesses, new innovative products, including further build-out of a
product recall policy for the food and beverage industry, the establishment of
a Middle East team in the U.K. and an Accident and Health team in the U.S., and
the continued move into emerging markets, including China and Brazil. The
Company also made significant investment in 2011 to improve systems to both
achieve greater efficiency and to create a platform from which the Company can
grow as markets allow. In 2012 and beyond, this focus on strategic growth and
investment will continue.
The
following is a summary of the January 2012 rate indications and recent renewal
activity for each of the Insurance and Reinsurance segments of the Company:
Insurance
- 2012 Underwriting Outlook
With
regard to market conditions, within the Insurance segments core lines of
business, fourth quarter and full year 2011 renewals reflected broadly flat
premium rates in aggregate, however, there were several favorable signs of
improvement. For the third consecutive quarter, the segment experienced
positive pricing in its North America P&C business unit at an increase of
2%. Specialty pricing was also positive for the year at 2% and there was
material improvement in the U.S. D&O book during the fourth quarter as rate
decreases slowed and certain 2012 renewals are yielding rate increases. For the
year the segment experienced percentage rate decline in the low single digits.
The
Company continues to focus on those lines of business that it believes provide
the best return on capital, including the writing of selective new business and
remaining committed to the underwriting actions initially taken in 2009. For
2012, initial indications are consistent with current market conditions
described above. In the International P&C business unit, where nearly 40%
of the book renews on January 1, the Companys initial pricing indications are
broadly stable. Casualty rates were flat to slightly down and property rates
were showing increases in the low to mid single digits.
Reinsurance
- 2012 Underwriting Outlook
As
noted above, the pricing environment on the primary side is showing rate growth
with the exception of Professional lines. This generally positive pricing
momentum should benefit the U.S. and International casualty books where a
significant amount of proportional reinsurance is written. In addition, the
Reinsurance segment continues to develop new business opportunities in several
areas, including in an improving U.K. motor market pricing environment, and in
marine and energy following Deepwater Horizon and other recent industry loss
events in these lines. For 2012, the Reinsurance segment expects to continue to
build upon the strategic growth achieved in 2011 and will utilize the Companys
broad market relationships and experience to seek opportunities to achieve
this.
There
can be no assurance, however, that such (re)insurance rate conditions or growth
opportunities will be sustained or further materialize, or lead to improvements
in our books of business. See Cautionary Note Regarding Forward-Looking
Statements.
Investment Environment
The
Company seeks to generate income and book value growth from investment
activities through returns on its investment portfolio. The Companys current
investment strategy seeks to support the liabilities arising from the
operations of the Company, generate investment income and build book value over
the longer term. During the year ended December 31, 2011, interest rates
declined in the Companys major markets and credit spreads widened,
particularly in the Euro-zone. The Companys results of operations and
investment portfolio during the year ended December 31, 2011 were impacted by
these trends. Net investment income yields were negatively impacted by lower
interest rates which in turn reduced prevailing yields on reinvestment income.
Net realized losses resulted from sales transactions primarily on European
financials including hybrid securities and non-Agency RMBS offset partially by
gains on Agency MBS and Government and Government Related and Supported
securities. The impact of decreasing government rates offset by widening credit
spreads during the year ended December 31, 2011 was the primary reason for the
improvement in the net unrealized position on fixed maturities and short-term
investments over the course of the year. For further information, see
Investment Activities below.
54
R
ESULTS OF
O
PERATIONS AND
K
EY
F
INANCIAL
M
EASURES
Results of Operations
The
following table presents an analysis of the Companys net income (loss)
attributable to ordinary shareholders and other financial measures (described
below) for the years ended December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except share and per share amounts)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shareholders
|
|
$
|
(474,760
|
)
|
$
|
585,472
|
|
$
|
206,607
|
|
Earnings (loss) per ordinary share basic
|
|
$
|
(1.52
|
)
|
$
|
1.74
|
|
$
|
0.61
|
|
Earnings (loss) per ordinary share diluted
|
|
$
|
(1.52
|
)
|
$
|
1.73
|
|
$
|
0.61
|
|
Weighted average number of ordinary shares and ordinary share
equivalents basic
|
|
|
312,896
|
|
|
336,283
|
|
|
340,612
|
|
Weighted average number of ordinary shares and ordinary share
equivalents diluted
|
|
|
312,896
|
|
|
337,709
|
|
|
340,966
|
|
Key Financial Measures
The
following are some of the financial measures management considers important in
evaluating the Companys operating performance in the Companys P&C
operations:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except ratios and per share amounts)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Underwriting profit P&C operations
|
|
$
|
(397,353
|
)
|
$
|
262,494
|
|
$
|
327,306
|
|
Combined ratio P&C operations
|
|
|
107.5
|
%
|
|
94.8
|
%
|
|
93.6
|
%
|
Net investment income P&C operations (1)
|
|
$
|
819,708
|
|
$
|
884,866
|
|
$
|
987,398
|
|
Book value per ordinary share (2)
|
|
$
|
29.85
|
|
$
|
30.37
|
|
$
|
24.64
|
|
Fully diluted book value per ordinary share (3)
|
|
$
|
29.64
|
|
$
|
29.78
|
|
$
|
24.60
|
|
Return on average ordinary shareholders equity (4)
|
|
|
(5.0
|
)%
|
|
6.5
|
%
|
|
3.1
|
%
|
|
|
|
|
|
(1)
|
Net
investment income relating to P&C operations includes the net investment
income related to the net results from structured products.
|
(2)
|
Book value
per ordinary share, a non-GAAP financial measure, is calculated by dividing
ordinary shareholders equity (total shareholders equity less preference
shareholders equity and non-controlling interest in equity of consolidated
subsidiaries) by the number of outstanding ordinary shares at any period end.
Book value per ordinary share is affected primarily by the Companys net
income (loss), by any changes in the net unrealized gains and losses on its
investment portfolio, currency translation adjustments and also the impact of
any share buyback or issuance activity. Ordinary shareholders equity was
$9.43 billion, $9.61 billion and $8.43 billion and the number of ordinary
shares outstanding was 315.7 million, 316.5 million and 342.1 million at
December 2011, 2010 and 2009, respectively. Ordinary shares outstanding
include all ordinary shares legally issued and outstanding (as disclosed on
the face of the balance sheet) as well as all director share units
outstanding.
|
(3)
|
Fully
diluted book value per ordinary share, a non-GAAP financial measure,
represents book value per ordinary share combined with the dilutive impact of
potential future share issuances at period end. The Company believes that
fully diluted book value per ordinary share is a financial measure important
to investors and other interested parties. However, this measure may not be
comparable to similarly titled measures used by companies either outside or
inside of the insurance industry.
|
(4)
|
Return on
average ordinary shareholders equity (ROE) is a non-GAAP financial
measure and is calculated by dividing the net income (loss) for the year by
the average of the opening and closing ordinary shareholders equity. See Return
on Ordinary Shareholders Equity Calculation herein for a reconciliation
of ROE to average ordinary shareholders equity.
|
Underwriting
profit property and casualty operations
One
way that the Company evaluates the performance of its insurance and reinsurance
operations is by underwriting profit or loss. The Company does not measure
performance based on the amount of gross premiums written. Underwriting profit
or loss is calculated from premiums earned less net losses incurred and
expenses related to underwriting activities. The Companys underwriting profit
(loss) in the year ended December 31, 2011 was consistent with the combined
ratio discussed below.
Combined
ratio property and casualty operations
The
combined ratio for P&C operations is used by the Company and many other
insurance and reinsurance companies as another measure of underwriting
profitability. The combined ratio is calculated from the net losses incurred
and underwriting expenses as a ratio of the net premiums earned for the
Companys insurance and reinsurance operations. A combined ratio of less than
100% indicates an underwriting profit and greater than 100% reflects an
underwriting loss. The Companys combined ratio for the year ended December 31,
2011 reflects an underwriting loss and is higher than the same period in the
previous year, primarily as a result of an increase in the loss and loss
expense ratio, partially offset by a marginal decrease in the underwriting
expense ratio. The loss and loss expense ratio has increased as a result of
higher levels of catastrophe losses, higher large loss activity in the energy,
property and marine businesses of the Insurance segment and other large loss
events in U.S. property including a deterioration in the performance of a large
U.S. agricultural program in the Reinsurance segment.
The
Companys combined ratio for the year ended December 31, 2010 is higher than
for the same period in the previous year, primarily as a result of an increase
in the loss and loss expense ratio, partially offset by a marginal decrease in
the underwriting
55
expense ratio. The loss and
loss expense ratio has increased as a result of higher levels of catastrophe
losses and other large loss events in both the insurance and reinsurance
segments. For further information on the combined ratio, see Income Statement
Analysis below.
Net
investment income property and casualty (P&C) operations
Net
investment income related to P&C operations is an important measure that
affects the Companys overall profitability. The largest liability of the
Company relates to its unpaid loss reserves, and the Companys investment
portfolio provides liquidity for claims settlements of these reserves as they
become due. As a result, a significant part of the investment portfolio is
invested in fixed income securities. Net investment income is influenced by a
number of factors, including the amounts and timing of inward and outward cash
flows, the level of interest rates and credit spreads and changes in overall
asset allocation. See the segment results at Investment Activities below for
a discussion of the Companys net investment income for the year ended December
31, 2011.
Book value per ordinary share
Management
also views the change in the Companys book value per ordinary share as an
additional measure of the Companys performance. Book value per ordinary share
is a non-GAAP financial measure and is calculated by dividing ordinary
shareholders equity (total shareholders equity less preference shareholders
equity and non-controlling interest in equity of consolidated subsidiaries) by
the number of outstanding ordinary shares at any period end. Ordinary shares
outstanding include all ordinary shares legally issued and outstanding (as
disclosed on the face of the balance sheet) as well as all director share units
outstanding. Book value per ordinary share is affected by the Companys net
income (loss), any changes in the net unrealized gains and losses on its
investment portfolio and currency translation adjustments and also the positive
impact of any share buyback or issuance activity.
Book
value per ordinary share decreased by $0.52 in the year ended December 31, 2011
as compared to an increase of $5.73 during 2010. The decrease in 2011 was primarily
due to the net loss attributable to ordinary shareholders of $474.8 million and
the impact of settlement of the forward purchase contracts associated with the
10.75% equity security units (the 10.75% Units), which resulted in the
issuance of an aggregate of 30,456,600 ordinary shares, partially offset by an
increase in net unrealized gains on available for sale investments and the
benefit of share buyback activity.
The
increase in 2010 was a result of improved investment portfolio fair values,
higher net income and the impact of share buyback activity. During 2010, there
was a decrease in net unrealized losses on available for sale investments of
$1.1 billion, net of tax, as compared to December 31, 2009. The improved
investment portfolio fair values were due in large part to declining interest
rates during 2010 but also tightening spreads.
Fully
diluted book value per ordinary share is a non-GAAP financial measure and
represents book value per ordinary share combined with the impact from dilution
of share based compensation and certain conversion features where dilutive.
Fully diluted book value per ordinary share decreased by $0.14 and increased by
$5.18 during the years ended December 31, 2011 and 2010, respectively, as a
result of the factors noted above.
Return
on average ordinary shareholders equity
ROE is another non-GAAP financial
measure that management considers important in evaluating the Companys
operating performance. ROE is calculated by dividing the net income
attributable to ordinary shareholders for any period by the average of the
opening and closing ordinary shareholders equity. The Company establishes
minimum target ROEs for its total operations, segments and lines of business.
If the Companys minimum ROE targets over the longer term are not met with
respect to any line of business, the Company seeks to modify and/or exit this
line. In addition, among other factors, the Companys compensation of its
senior officers is dependent on the achievement of the Companys performance
goals to enhance ordinary shareholder value as measured by ROE (adjusted for
certain items considered to be non-operating in nature).
In
2011, ROE was negative due to the net loss from the significant catastrophe
losses and the impairment of goodwill, both discussed under Significant Items
Affecting the Results of Operations. and other large loss events. See Return
on Ordinary Shareholders Equity Calculation herein for a reconciliation of
ROE to average ordinary shareholders equity.
In
2010, ROE was 6.5%, 3.4 percentage points higher than for the same period in
the prior year when it was 3.1%. This was the result of increased net income
which was largely offset by significantly higher equity levels during 2010
following the increase in the fair value of the Companys investment portfolio.
56
S
IGNIFICANT
I
TEMS
A
FFECTING THE
R
ESULTS OF
O
PERATIONS
The
Companys net income and other financial measures as shown above for the year
ended December 31, 2011 have been affected by, among other things, the
following significant items:
|
|
|
|
1)
|
The impact of significant
large natural catastrophe activity;
|
|
|
|
|
2)
|
Continuing competitive factors
impacting the underwriting environment;
|
|
|
|
|
3)
|
Net favorable prior year
loss development;
|
|
|
|
|
4)
|
Market movement impacts on
the Companys investment portfolio; and
|
|
|
|
|
5)
|
Goodwill impairment charge
recorded in the fourth quarter of 2011.
|
1. The impact of significant large natural catastrophe
activity
The
following table outlines the underwriting losses and loss ratio impact for the
Insurance and Reinsurance segments from natural catastrophes for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Catastrophe Underwriting Losses
|
|
Natural Catastrophe Loss Ratio Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except ratios)
|
|
2011
|
|
2010
|
|
2009
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
355,256
|
|
$
|
135,771
|
|
$
|
10,744
|
|
|
9.6
|
%
|
|
3.8
|
%
|
|
0.3
|
%
|
Reinsurance
|
|
|
405,870
|
|
|
158,574
|
|
|
41,604
|
|
|
25.2
|
%
|
|
10.6
|
%
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total P&C
|
|
$
|
761,126
|
|
$
|
294,345
|
|
$
|
52,348
|
|
|
14.4
|
%
|
|
5.8
|
%
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notable
natural catastrophes during the year ended December 31, 2011 included the
Australia floods, the New Zealand earthquake, the Japan earthquake and tsunami,
the U.S. Storms, the Atlantic Hurricanes and the Thailand floods.
Notable
natural catastrophes during 2010 included the Chilean Earthquake, European
Windstorm Xynthia, U.S. tornadoes and hailstorm activity, the New Zealand
Earthquake and floods in Central Europe, China, Poland and Queensland,
Australia.
In
2009, natural catastrophes included Hailstorm Wolfgang, Japanese earthquake,
Windstorm Klaus, Typhoon Ketsana, Asian earthquake and tsunami and Australian
wildfires.
The
Companys loss estimates are based on combinations of its review of individual
treaties and policies expected to be impacted, commercial model outputs, client
data received to the date the estimates are made, and consideration of
expectations of total insured market loss estimates if available, both from
published sources and the Companys internal analysis. The Companys loss
estimates involve the exercise of considerable judgment due to the complexity
and scale of the insured events, and are, accordingly, subject to revision as
additional information becomes available. Actual losses may differ materially
from these preliminary estimates.
57
The
following are analyses of the financial impact on the Companys results of
operations for the three months and year ended December 31, 2011 from natural
catastrophes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2011
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands, except ratios)
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe reinstatement premium earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia floods
|
|
$
|
|
|
$
|
(475
|
)
|
$
|
(475
|
)
|
$
|
|
|
$
|
475
|
|
$
|
475
|
|
New Zealand earthquake
|
|
|
|
|
|
1,960
|
|
|
1,960
|
|
|
|
|
|
602
|
|
|
602
|
|
Japan earthquake and tsunami
|
|
|
|
|
|
518
|
|
|
518
|
|
|
|
|
|
17,148
|
|
|
17,148
|
|
U.S. Storms
|
|
|
|
|
|
91
|
|
|
91
|
|
|
|
|
|
1,160
|
|
|
1,160
|
|
Atlantic Hurricanes (1)
|
|
|
258
|
|
|
|
|
|
258
|
|
|
(7,242
|
)
|
|
929
|
|
|
(6,313
|
)
|
Thailand floods
|
|
|
(3,403
|
)
|
|
6,044
|
|
|
2,641
|
|
|
(3,403
|
)
|
|
6,044
|
|
|
2,641
|
|
Other natural catastrophes (2) (3)
|
|
|
|
|
|
504
|
|
|
504
|
|
|
|
|
|
2,880
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
$
|
(3,145
|
)
|
$
|
8,642
|
|
$
|
5,497
|
|
$
|
(10,645
|
)
|
$
|
29,238
|
|
$
|
18,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross losses and loss expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia floods
|
|
$
|
(630
|
)
|
$
|
3
|
|
$
|
(627
|
)
|
$
|
(80,855
|
)
|
$
|
(15,623
|
)
|
$
|
(96,478
|
)
|
New Zealand earthquake
|
|
|
|
|
|
(2,204
|
)
|
|
(2,204
|
)
|
|
(5,000
|
)
|
|
(99,198
|
)
|
|
(104,198
|
)
|
Japan earthquake and tsunami
|
|
|
(4,585
|
)
|
|
7,549
|
|
|
2,964
|
|
|
(93,185
|
)
|
|
(179,085
|
)
|
|
(272,270
|
)
|
U.S. Storms
|
|
|
(56
|
)
|
|
(16,625
|
)
|
|
(16,681
|
)
|
|
(5,660
|
)
|
|
(79,278
|
)
|
|
(84,938
|
)
|
Atlantic Hurricanes (1)
|
|
|
(60,902
|
)
|
|
3,869
|
|
|
(57,033
|
)
|
|
(192,893
|
)
|
|
(15,335
|
)
|
|
(208,228
|
)
|
Thailand floods
|
|
|
(123,237
|
)
|
|
(61,643
|
)
|
|
(184,880
|
)
|
|
(123,237
|
)
|
|
(61,643
|
)
|
|
(184,880
|
)
|
Other natural catastrophes (2) (3)
|
|
|
(7,833
|
)
|
|
(141
|
)
|
|
(7,974
|
)
|
|
(21,243
|
)
|
|
(23,823
|
)
|
|
(45,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross losses and loss expenses
|
|
$
|
(197,243
|
)
|
$
|
(69,192
|
)
|
$
|
(266,435
|
)
|
$
|
(522,073
|
)
|
$
|
(473,985
|
)
|
$
|
(996,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses recoverable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia floods
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
27,525
|
|
$
|
|
|
$
|
27,525
|
|
New Zealand earthquake
|
|
|
|
|
|
(2,082
|
)
|
|
(2,082
|
)
|
|
|
|
|
32,017
|
|
|
32,017
|
|
Japan earthquake and tsunami
|
|
|
472
|
|
|
(200
|
)
|
|
272
|
|
|
14,072
|
|
|
|
|
|
14,072
|
|
U.S. Storms
|
|
|
|
|
|
1,128
|
|
|
1,128
|
|
|
315
|
|
|
5,952
|
|
|
6,267
|
|
Atlantic Hurricanes (1)
|
|
|
39,709
|
|
|
(79
|
)
|
|
39,630
|
|
|
105,359
|
|
|
508
|
|
|
105,867
|
|
Thailand floods
|
|
|
24,483
|
|
|
|
|
|
24,483
|
|
|
24,483
|
|
|
|
|
|
24,483
|
|
Other natural catastrophes (2) (3)
|
|
|
2,642
|
|
|
|
|
|
2,642
|
|
|
5,708
|
|
|
400
|
|
|
6,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss expenses recoverable
|
|
$
|
67,306
|
|
$
|
(1,233
|
)
|
$
|
66,073
|
|
$
|
177,462
|
|
$
|
38,877
|
|
$
|
216,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss - P&C Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia floods
|
|
$
|
(630
|
)
|
$
|
(472
|
)
|
$
|
(1,102
|
)
|
$
|
(53,330
|
)
|
$
|
(15,148
|
)
|
$
|
(68,478
|
)
|
New Zealand earthquake
|
|
|
|
|
|
(2,326
|
)
|
|
(2,326
|
)
|
|
(5,000
|
)
|
|
(66,579
|
)
|
|
(71,579
|
)
|
Japan earthquake and tsunami
|
|
|
(4,113
|
)
|
|
7,867
|
|
|
3,754
|
|
|
(79,113
|
)
|
|
(161,937
|
)
|
|
(241,050
|
)
|
U.S. Storms
|
|
|
(56
|
)
|
|
(15,406
|
)
|
|
(15,462
|
)
|
|
(5,345
|
)
|
|
(72,166
|
)
|
|
(77,511
|
)
|
Atlantic Hurricanes (1)
|
|
|
(20,935
|
)
|
|
3,790
|
|
|
(17,145
|
)
|
|
(94,776
|
)
|
|
(13,898
|
)
|
|
(108,674
|
)
|
Thailand floods
|
|
|
(102,157
|
)
|
|
(55,599
|
)
|
|
(157,756
|
)
|
|
(102,157
|
)
|
|
(55,599
|
)
|
|
(157,756
|
)
|
Other natural catastrophes (2) (3)
|
|
|
(5,191
|
)
|
|
363
|
|
|
(4,828
|
)
|
|
(15,535
|
)
|
|
(20,543
|
)
|
|
(36,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting loss
|
|
$
|
(133,082
|
)
|
$
|
(61,783
|
)
|
$
|
(194,865
|
)
|
$
|
(355,256
|
)
|
$
|
(405,870
|
)
|
$
|
(761,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio impact for the three months and year
ended December 31, 2011
|
|
|
13.9
|
%
|
|
15.0
|
%
|
|
14.2
|
%
|
|
9.6
|
%
|
|
25.2
|
%
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Atlantic
Hurricanes refers to Hurricane Irene and Tropical Storm Lee.
|
(2)
|
For the Insurance
segment, for the year ended December 31, 2011, Other natural catastrophes
include U.S. windstorms, Missouri River flooding, Mississippi floods and
Storm Rolf.
|
(3)
|
For the
Reinsurance segment for the year ended December 31, 2011, Other natural catastrophes
include Cyclone Yasi in Australia, the Slave Lake fire in Canada, Texas
wildfires and the Danish floods.
|
|
|
|
For further details see the
segment results in the Income Statement Analysis below.
|
2. Continuing competitive factors impacting the underwriting
environment
Soft
market conditions were experienced across most lines of business throughout
2009, 2010 and 2011. This resulted in an overall decrease in gross and net
premiums written in 2010 and 2009 but these amounts increased in 2011 due to
new strategic initiatives. For further information in relation to the
underwriting environment, including details relating to rates and retention,
see Executive Overview Underwriting Environment, above.
58
3. Net favorable prior year loss development
Net
favorable prior year loss development occurs when there is a decrease to loss
reserves recorded at the beginning of the year, resulting from actual or
reported loss development for prior years that is less than expected loss
development. Net prior year adverse loss development occurs when there is an
increase to loss reserves recorded at the beginning of the year, resulting from
actual or reported loss development for prior years exceeding expected loss
development.
The
following table presents the net (favorable) adverse prior year loss
development of the Companys loss and loss expense reserves for its property
and casualty operations which include the Insurance and Reinsurance segments for
each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in
millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Insurance segment
|
|
$
|
(76.5
|
)
|
$
|
(127.4
|
)
|
$
|
(62.9
|
)
|
Reinsurance segment
|
|
|
(208.4
|
)
|
|
(245.5
|
)
|
|
(221.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284.9
|
)
|
$
|
(372.9
|
)
|
$
|
(284.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
Company is a major writer of large, complex energy-related (re)insurance
coverages and manages its exposure through, among other items, the purchase of
reinsurance. Recent developments have reduced
some of the uncertainty surrounding the Companys third party liability
exposure to losses arising from the Deepwater Horizon oil rig explosion,
including settlements by companies subject to lawsuits and judicial rulings in
respect of the applicability and extent of contractual indemnities. In 2011,
the Company strengthened its overall net incurred position relating to
Deepwater Horizon across insurance and reinsurance segments by $72.7 million
for a total net incurred to date of $165.7 million as at year end including
both property damage and liability exposures. Very recent judicial decisions
upholding indemnities owing from BP p.l.c. to other companies subject to
lawsuits may be favorable to the Companys overall position. Despite the level of
strengthening incurred resulting from this unusual event, the Companys
total net reserves developed favorably by $285 million during 2011 as shown in
the above table.
See
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and Item 8, Note 10 to the Consolidated Financial
Statements, Losses and Loss Expenses, for further information regarding the
developments in prior year loss reserve estimates for each of the years
indicated within each of the Companys operating segments.
4.
Market movement impacts on
the Companys investment portfolio
During
the year ended December 31, 2011, credit spreads widened, particularly
in Euro-zone, offset by decreasing interest rates. The net impact of the market
conditions on the Companys investment portfolio for the year ended December
31, 2011 was favorable
and resulted in an increase in the net unrealized position of on available for
sale investments as compared to December 31, 2010 of $558.1 million. This
represents approximately a 2.0% appreciation on average available for sale
assets for the year ended December 31, 2011.
The
following table provides further detail regarding the movements in the global
credit markets, as well as in government interest rates using some sample
market indices:
|
|
|
|
|
|
|
Interest Rate Movement for the year
ended December 31, 2011 (1)
(+/- represents increases / decreases
in interest rates)
|
|
Credit Spread Movement for the year ended
December 31, 2011 (2)
(+/- represents widening / tightening of credit
spreads)
|
|
|
|
|
|
United
States
|
|
-118 basis
points (5 year Treasury)
|
|
+94 basis
points (US Corporate A rated)
+6 basis points (US Mortgage Master Index)
+23 basis points (US CMBS, AAA rated)
|
United
Kingdom
|
|
-142 basis
points (10 year Gilt)
|
|
+72 basis
points (UK Corporate, AA rated)
|
Euro-zone
|
|
-108 basis
points (5 year Bund)
|
|
+122 basis
points (Europe Corporate, A rated)
|
|
|
|
|
|
(1)
|
Source: Bloomberg Finance
L.P.
|
(2)
|
Source: Merrill Lynch
Global Indices.
|
Net
realized losses on investments in the year ended December 31, 2011 totaled
$188.4 million, including net realized losses of approximately $160.2 million related
to the impairment of certain of the Companys fixed income investments, where
the Company determined that there was an other-than-temporary decline in the
value of those investments related to credit. For further analysis of this, see Results of Operations below.
59
5. Goodwill impairment charge recorded in
the fourth quarter of 2011
The Company
performs periodic impairment testing related to goodwill as circumstances
require, in addition to its annual testing as of June 30 each year. The interim
impairment test completed during the fourth quarter of 2011 resulted in a
non-cash goodwill impairment charge of $429.0 million. The charge relates to
the Insurance segment. The impairment was determined using the methodologies as
described within Critical Accounting Policies and Estimates below, which
includes discounted cash flow analyses and comparison with similar companies
using their publicly traded price multiples as the basis for valuation.
Continued low valuations in the insurance industry as a whole combined with
several years of poor underwriting performance in the segment have impacted the
technical valuations; however, management continues to see significant value in
the Companys global insurance platform. For further information, see Item 8,
Note 8 to the Consolidated Financial Statements, Goodwill and Other Intangible
Assets and see further discussion under Critical Accounting Policies and
Estimates.
O
THER
K
EY
F
OCUSES OF
M
ANAGEMENT
Throughout
2011 and into 2012, the Company remained focused on, among other things,
managing its capital, tailoring the Companys business model to focus on core
P&C business, optimizing the P&C investment portfolio, and enhancing
its enterprise risk management capabilities. The Company continues to focus on
those lines of business within its Insurance and Reinsurance segments that
provide the best return on capital. Details of these and other initiatives are
outlined below.
Capital Management
Fundamental
to supporting the Companys business model is its ability to underwrite
business, which is largely dependent upon the quality of its claims paying and
financial strength ratings as evaluated by independent rating agencies. As a
result, in the event that the Company is downgraded, its ability to write
business, as well as its financial condition and/or results of operations,
could be adversely affected.
Buybacks of Ordinary Shares
On
September 24, 2007, the Companys Board of Directors approved a share buyback
program, authorizing the Company to purchase up to $500.0 million of its
ordinary shares. As of January 1, 2010, $375.4 million ordinary shares remained
available for purchase under that program. During 2010, the Company purchased
and canceled 18.8 million ordinary shares under the program for $375.4 million,
the full amount that had remained under that buyback program.
On
November 2, 2010, the Company announced that its Board of Directors approved a
share buyback program, authorizing the Company to purchase up to $1.0 billion
of its ordinary shares. During 2010, the Company purchased and canceled 6.9
million ordinary shares under this program for $144.0 million. During 2011, the
Company purchased and canceled 31.7 million ordinary shares under this program
for $665.5 million. All share buybacks were carried out by way of redemption in
accordance with Irish law and the Companys constitutional documents. All
shares so redeemed were canceled upon redemption. At December 31, 2011, $190.5
million remained available to be used for purchases under this program.
No further buybacks have been made as of February 24, 2012.
Sale of 5.75% Senior Notes
On
September 30, 2011, XL-Cayman completed the public sale of $400 million
aggregate principal amount of 5.75% Senior Notes (the 5.75% Senior Notes)
due 2021 at the issue price of 100% of the principal amount. The 5.75% Senior
Notes are fully and unconditionally guaranteed by XL-Ireland. The 5.75% Senior
Notes bear interest at a rate of 5.75% per annum, payable semiannually, beginning
on April 1, 2012, and mature on October 1, 2021. XL-Cayman may redeem the 5.75%
Senior Notes, in whole or part, from time to time in accordance with the terms
of the indenture pursuant to which the 5.75% Senior Notes were issued.
XL-Cayman received net proceeds of approximately $395.9 million from the
offering, which were used to partially repay the $600 million principal amount
outstanding of the 6.5% Guaranteed Senior Notes due January 2012 (the XLCFE
Notes),
which were issued by XL Capital Finance (Europe) plc (XLCFE).
Repayment of the XLCFE Notes
On
January 15, 2012, the $600 million principal amount outstanding of the XLCFE
Notes was repaid at maturity.
Equity Security Units
In
August 2011, in accordance with the terms of the 10.75% Units, XL-Cayman
purchased and retired all of the 8.25% senior notes due August 2021 (the 8.25%
Senior Notes) for $575 million in a remarketing. These notes comprised a part
of the 10.75% Units. The proceeds from the remarketing were used to satisfy the
purchase price for XL-Irelands ordinary shares issued to holders of the 10.75%
Units pursuant to the forward purchase contracts comprising a part of the
10.75% Units. Each forward purchase contract provided for the issuance of
1.3242 ordinary shares of XL-Ireland at a price of $25 per share. The
settlement of the forward purchase
60
contracts
resulted in XL-Irelands issuance of an aggregate of 30,456,600 ordinary shares
for an aggregate purchase price of $575 million. As a result of the settlement
of the forward purchase contracts, the 10.75% Units ceased to exist and are no
longer traded on the NYSE.
Series C Preference Ordinary Shares
On
March 26, 2009, the Company completed a cash tender offer for a portion its
outstanding Redeemable Series C preference ordinary shares that resulted in approximately
12.7 million Redeemable Series C preference ordinary shares with a liquidation
value of $317.3 million being purchased by the Company for approximately $104.7
million plus accrued and unpaid dividends, combined with professional fees
totaling $0.8 million. As a result, a book value gain to ordinary shareholders
of approximately $211.8 million was recorded in the first quarter of 2009.
On
February 12, 2010, the Company repurchased a portion of its outstanding
Redeemable Series C preference ordinary shares, which resulted in approximately
4.4 million Redeemable Series C preference ordinary shares with a liquidation
value of $110.8 million being purchased by the Company for approximately $94.2
million. As a result, a book value gain of approximately $16.6 million was
recorded in the first quarter of 2010 to ordinary shareholders.
On
February 16, 2011, the Company repurchased 30,000 of the outstanding Redeemable
Series C preference ordinary shares with a liquidation preference value of
$0.75 million for $0.65 million.
On
August 15, 2011, XL-Cayman completed a cash tender offer for its outstanding
Redeemable Series C preference ordinary shares that resulted in 2,811,000
Redeemable Series C preference ordinary shares with a liquidation value of $25
per share being repurchased and canceled by XL-Cayman for approximately $71.0
million including accrued and unpaid dividends and professional fees.
Subsequent to the expiration of the tender offer, and on the same terms as the
offer, XL-Cayman repurchased and canceled the remaining outstanding Redeemable
Series C preference ordinary shares for approximately $0.9 million plus accrued
and unpaid dividends. As of December 31, 2011, no Redeemable Series C
preference ordinary shares were outstanding.
Series D Preference Ordinary Shares
On
October 15, 2011, XL-Cayman issued 350,000 non-cumulative Series D Preference
Ordinary Shares for $350 million of cash and liquid investments that were held
in a trust account that was part of the Stoneheath Re (Stoneheath) facility.
Holders of the non-cumulative perpetual preferred securities (Stoneheath
Securities) issued by Stoneheath in December 2006 received one Series D
Preference Ordinary Share in exchange for each Stoneheath Security. Dividends
on the non-cumulative Series D Preference Ordinary Shares are declared and paid
quarterly at a floating rate of three-month LIBOR plus 3.120% on the
liquidation preference. The Series D Preference Ordinary Shares are perpetual
securities with no fixed maturity dates and are not convertible into any of the
Companys other securities.
On
December 5, 2011, the Company repurchased 5,000 of the outstanding Series D
Preference Ordinary Shares with a liquidation preference value of $5.0 million
for $3.7 million, including accrued dividends. As a result of these
repurchases, the Company recorded a gain of approximately $1.3 million through
Non-controlling interests in the Consolidated Statement of Income in the fourth
quarter of 2011.
Series E Preference Ordinary Shares
On
March 15, 2007, the Company issued 1.0 million Fixed/Floating Series E
Perpetual Non-Cumulative preference ordinary shares, par value $0.01 each, with
liquidation preference $1,000 per share (the Series E preference ordinary
shares). The Company received net proceeds of approximately $983.8 million
from the offering. The Series E preference ordinary shares are perpetual
securities with no fixed maturity date and are not convertible into any of the
Companys other securities.
On
February 16, 2011, the Company repurchased 500 of the outstanding Series E
preference ordinary shares with a liquidation preference value of $0.50 million
for $0.47 million. As a result of these repurchases, the Company recorded a
reduction in Non-controlling interests of approximately $0.13 million in the
first quarter of 2011.
61
Risk Management
The
Companys risk management and risk appetite framework is detailed at Item 1,
Business - Enterprise Risk Management. The table below shows the
Companys estimated per event net 1% and 0.4% exceedance probability exposures
for certain peak natural catastrophe peril regions. These estimates assume that
amounts due from reinsurance and retrocession purchases are 100% collectible.
There may be credit or other disputes associated with these potential
receivables. Finally, the probable maximum losses in the table below were
derived by application of a new vendor model that was released during the first
quarter of 2011 and, accordingly, could be more unreliable than the model that
was used historically.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-in-100 Event
|
|
1-in-250 Event
|
|
|
|
|
|
|
|
|
|
|
|
Geographical
Zone
(U.S. dollars in millions)
|
|
Peril
|
|
Measurement
Date
of In-Force
Exposures (1)
|
|
Probable
Maximum
Loss (2)
|
|
Percentage of
Tangible
Shareholders
Equity at
December 31,
2011
|
|
Probable
Maximum
Loss (2)
|
|
Percentage of
Tangible
Shareholders
Equity at
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
Earthquake
|
|
October
1, 2011
|
|
$
|
785
|
|
|
7.6
|
%
|
$
|
1,263
|
|
|
12.2
|
%
|
North Atlantic
|
|
Windstorm
|
|
October
1, 2011
|
|
|
1,338
|
|
|
12.9
|
%
|
|
1,710
|
|
|
16.5
|
%
|
U.S.
|
|
Windstorm
|
|
October
1, 2011
|
|
|
1,319
|
|
|
12.7
|
%
|
|
1,695
|
|
|
16.4
|
%
|
Europe
|
|
Windstorm
|
|
October
1, 2011
|
|
|
474
|
|
|
4.6
|
%
|
|
636
|
|
|
6.1
|
%
|
Japan
|
|
Earthquake
|
|
October
1, 2011
|
|
|
240
|
|
|
2.3
|
%
|
|
323
|
|
|
3.1
|
%
|
Japan
|
|
Windstorm
|
|
October
1, 2011
|
|
|
131
|
|
|
1.3
|
%
|
|
193
|
|
|
1.9
|
%
|
|
|
|
|
|
(1)
|
Detailed analyses of
aggregated in-force exposures and maximum loss levels are done periodically.
The measurement dates represent the date of the last completed detailed
analysis by geographical zone.
|
(2)
|
Probable maximum losses
include secondary uncertainty which incorporates variability around the
expected probable maximum loss for each event, does not represent the
Companys maximum potential exposures and are pre-tax.
|
See
Significant Items Affecting the Results of Operations - 1) The impact of
significant large natural catastrophe activity above.
Regulatory Change
Management
continues to actively monitor the various regulatory bodies and initiatives
that impact the Company globally and assess the potential for significant
impact on results or operations. The European Commission is in the process of
implementing changes to the prudential regulation of European insurers, known
as Solvency II, with a timeline to achieve full compliance by January 1, 2014.
Solvency II is designed to impose economic risk-based solvency requirements
across all EU Member States. Advice and implementation consists of three pillars:
(1) Pillar I quantitative capital requirements, based on a valuation of the
entire balance sheet; (2) Pillar II qualitative regulatory review, which
includes governance, internal controls, enterprise risk management and
supervisory review process, and (3) Pillar III market discipline, which is
accomplished through reporting of the insurers financial condition to
regulators and the public. Other jurisdictions such as Bermuda and Canada are
in the process of implementing consistent changes to strengthen their capital
and risk management requirements in order to be considered equivalent for
purposes of group regulatory considerations. The Company has significant
resources supporting the regulatory process, such as the Solvency II
Quantitative Impact Studies and Bermuda Monetary Authority regulatory data
calls, and these resources are also actively engaged in the implementation of
Solvency II related measures across the Company.
62
C
RITICAL
A
CCOUNTING
P
OLICIES AND
E
STIMATES
The
following are considered to be the Companys critical accounting policies and
estimates due to the judgments and uncertainties affecting the application of
these policies and/or the likelihood that materially different amounts would be reported under
different conditions or using different assumptions. If actual events differ
significantly from the underlying assumptions or estimates applied for any or
all of the accounting policies (either individually or in the aggregate), there
could be a material adverse effect on the Companys results of operations,
financial condition and liquidity. These critical accounting policies have been
discussed by management with the Audit Committee of the Companys Board of
Directors.
Other
significant accounting policies are nevertheless important to an understanding
of the Companys Consolidated Financial Statements. Policies such as those
related to revenue recognition, financial instruments and consolidation require
difficult judgments on complex matters that are often subject to multiple
sources of authoritative guidance. See Item 8, Note 2 to the Consolidated
Financial Statements, Significant Accounting Policies.
1) Unpaid Loss and Loss Expenses and Unpaid
Loss and Loss Expenses Recoverable
As the Company earns
premiums for the underwriting risks it assumes, it also establishes an estimate
of the expected ultimate losses related to the premium. Loss reserves for
unpaid loss and loss expenses are established due to the significant periods of
time that may elapse between the occurrence, reporting and settlement of a
loss. The process of establishing reserves for unpaid property and casualty
claims can be complex and is subject to considerable variability, as it
requires the use of informed estimates and judgments. These estimates and
judgments are based on numerous factors, and may be revised as additional
experience and other data become available and are reviewed, as new or improved
methodologies are developed or as current laws change. Loss reserves include:
|
|
|
|
a)
|
Case reserves reserves
for reported losses and loss expenses that have not yet been settled; and
|
|
|
|
|
b)
|
IBNR reserves reserves
for incurred but not reported losses or for reported losses over and above
the amount of case reserves.
|
Case
Reserves
Case
reserves for the
Companys property and casualty operations are established by management based
on amounts reported from insureds or ceding companies and consultation with
legal counsel, and represent the estimated ultimate cost of events or conditions
that have been reported to or specifically identified by the Company. The
method of establishing case reserves for reported claims differs among the
Companys operations.
With
respect to the Companys insurance operations, the Company is notified of
insured losses and records a case reserve for the estimated amount of the
settlement, if any. The estimate reflects the judgment of claims personnel
based on general reserving practices, the experience and knowledge of such
personnel regarding the nature of the specific claim and, where appropriate,
advice of legal counsel. Reserves are also established to provide for the
estimated expense of settling claims, including legal and other fees and the
general expenses of administering the claims adjustment process. With respect
to the Companys reinsurance operations, case reserves for reported claims are
generally established based on reports received from ceding companies.
Additional case reserves may be established by the Company to reflect the estimated
ultimate cost of a loss. The uncertainty in the reserving process for
reinsurers is due, in part, to the time lags inherent in reporting from the
original claimant to the primary insurer to the reinsurer. As a predominantly
broker market reinsurer for both excess-of-loss and proportional contracts, the
Company is subject to a potential additional time lag in the receipt of
information as the primary insurer reports to the broker who in turn reports to
the Company. As of December 31, 2011, the Company did not have any significant
backlog related to its processing of assumed reinsurance information.
Since
the Company relies on information regarding paid losses, case reserves and IBNR
provided by ceding companies in order to assist it in estimating its liability
for unpaid losses and LAE, the Company maintains certain procedures in order to
help determine the completeness and accuracy of such information. Periodically,
management assesses the reporting activities of its ceding companies on the basis
of qualitative and quantitative criteria. In addition to conferring with ceding
companies or brokers on claims matters, the Companys claims personnel conduct
periodic audits of specific claims and the overall claims procedures of its
ceding companies at their offices. The Company relies on its ability to
effectively monitor the claims handling and claims reserving practices of
ceding companies in order to help establish the proper reinsurance premium for
reinsurance agreements and to establish proper loss reserves. Disputes with
ceding companies have been rare and generally have been resolved through
negotiation.
In
addition to information received from ceding companies on reported claims, the
Company also utilizes information on the pattern of ceding company loss
reporting and loss settlements from previous catastrophic events in order to
estimate the Companys ultimate liability related to catastrophic events such
as hurricanes. Commercial catastrophe model analyses and zonal aggregate exposures
are utilized to assess potential client loss before and after an event. Initial
cedant loss reports are generally obtained shortly after a catastrophic event,
with subsequent updates received as new information becomes available. The
Company actively requests
63
loss updates from cedants
periodically whilst there is still considerable uncertainty for an event, often
for the first year following an event. The Companys claim settlement processes
also incorporate an update to the total loss reserve at the time a claim
payment is made to a ceding company.
While
the reliance on loss reports from ceding companies may increase the level of
uncertainty associated with the estimation of total loss reserves for property
catastrophe reinsurance relative to direct property insurance, there are
several factors which serve to reduce the uncertainty in loss reserve estimates
for property catastrophe reinsurance. First, for large natural catastrophe
events, aggregate limits in property catastrophe reinsurance contracts are
generally fully exhausted by the loss reserve estimates. Second, as a
reinsurer, the Company has access to information from a broad cross section of
the insurance industry. The Company utilizes such information in order to
perform consistency checks on the data provided by ceding companies and is able
to identify trends in loss reporting and settlement activity and incorporate
such information in its estimate of IBNR reserves. Finally, the Company also
supplements the loss information received from cedants with loss estimates
developed by market share techniques and/or from third party catastrophe models
applied to exposure data supplied by cedants.
IBNR Reserves
IBNR
reserves represent
managements best estimate, at a given point in time, of the amount in excess
of case reserves that is needed for the future settlement and loss adjustment
costs associated with claims incurred. It is possible that the ultimate
liability may differ materially from these estimates. Because the ultimate
amount of unpaid losses and LAE is uncertain, the Company believes that
quantitative techniques to estimate these amounts are enhanced by professional
and managerial judgment. Management reviews the IBNR estimates produced by the
Companys actuaries who determine the best estimate of the liabilities to
record in the Companys financial statements. The Company considers this single
point estimate to be the mean expected outcome.
IBNR
reserves are estimated by the Companys actuaries using several standard
actuarial methodologies including the loss ratio method, the loss development
or chain ladder method, the Bornhuetter-Ferguson (BF) method and frequency
and severity approaches. IBNR related to a specific event may be based on the Companys
estimated exposure to an industry loss and may include the use of catastrophe
modeling software. On a quarterly basis, IBNR reserves are reviewed by the
Companys actuaries, and are adjusted as new information becomes available. Any
such adjustments are accounted for as changes in estimates and are reflected in
the results of operations in the period in which they are made.
The
Companys actuaries use one set of assumptions in calculating the single point
estimate, which includes actual loss data, loss development factors, loss
ratios, reported claim frequency and severity. The actuarial reviews and
documentation are completed in accordance with professional actuarial standards
with reserves established on a basis consistent with GAAP. The selected
assumptions reflect the actuarys judgment based on historical data and
experience combined with information concerning current underwriting, economic,
judicial, regulatory and other influences on ultimate claim settlements.
When
estimating IBNR reserves, each of the Companys insurance and reinsurance
business units segregate business into exposure classes. Within each class, the
business is further segregated by either the year in which the contract
incepted (underwriting year), the year in which the claim occurred (accident
year), or the year in which the claim is reported (report year). The
majority of the Insurance segment is reviewed on an accident year basis.
Professional lines insurance business is reviewed on a report year basis due to
the claims made nature of the underlying policies. The majority of the
Reinsurance segment is reviewed on an underwriting year basis.
Generally,
initial actuarial estimates of IBNR reserves not related to a specific event
are based on the loss ratio method applied to each class of business. Actual
paid losses and case reserves (reported losses) are subtracted from expected
ultimate losses to determine IBNR reserves. The initial expected ultimate
losses involve management judgment and are based on historical information for
that class of business; which includes loss ratios, market conditions, changes
in pricing and conditions, underwriting changes, changes in claims emergence,
and other factors that may influence expected ultimate losses.
Over
time, as a greater number of claims are reported, actuarial estimates of IBNR
are based on the BF method and loss development techniques. The BF method
utilizes actual loss data and the expected patterns of loss emergence, combined
with an initial expectation of ultimate losses to determine an estimate of
ultimate losses. This method may be appropriate when there is limited actual
loss data and a relatively less stable pattern of loss emergence. The chain
ladder method utilizes actual loss and expected patterns of loss emergence to
determine an estimate of ultimate losses that is independent of the initial
expectation of ultimate losses. This method may be appropriate when there is a
relatively stable pattern of loss emergence and a relatively larger number of
reported claims. Multiple estimates of ultimate losses using a variety of
actuarial methods are calculated for each of the Companys classes of business
for each year of loss experience. The Companys actuaries look at each class
and determine the most appropriate point estimate based on the characteristics
of the particular class and other relevant factors, such as historical ultimate
loss ratios, the presence of individual large losses, and known occurrences
that have not yet resulted in reported losses. Once the Companys actuaries
make their determination of the most appropriate point estimate for each class,
this information is aggregated and presented to management for review and
approval.
64
The
pattern of loss emergence is determined using actuarial analysis, including
judgment, and is based on the historical patterns of the recording of paid and
reported losses by the Company, as well as industry information. Information
that may cause historical patterns to differ from future patterns is considered
and reflected in expected patterns as appropriate. For property, marine and
aviation insurance, losses are generally reported within 2 to 3 years from the
beginning of the accident year. For casualty insurance, loss emergence patterns
can vary from 3 years to over 20 years depending on the type of business. For
other insurance, loss emergence patterns fall between the property and casualty
insurance. For reinsurance business, loss reporting lags the corresponding insurance
classes often by at least one quarter due to the need for loss information to
flow from the ceding companies to the Company generally via reinsurance
intermediaries. Such lags in loss reporting are reflected in the actuarys
selections of loss reporting patterns used in establishing the Companys
reserves.
Such
estimates are not precise because, among other things, they are based on
predictions of future developments and estimates of future trends in claim
severity, claim frequency, and other issues. In the process of estimating IBNR
reserves, provisions for economic inflation and changes in the social and legal
environment are considered, but involve considerable judgment. When estimating
IBNR reserves, more judgment is typically required for lines of business with
longer loss emergence patterns.
Due
to the low frequency and high severity nature of some of the business
underwritten by the Company, the Companys reserve estimates are highly
dependent on actuarial and management judgment and are therefore uncertain. In
property classes, there can be additional uncertainty in loss estimation
related to large catastrophe events. With wind events, such as hurricanes, the
damage assessment process may take more than a year. The cost of claims is
subject to volatility due to supply shortages for construction materials and
labor. In the case of earthquakes, the damage assessment process may take
several years as buildings are discovered to have structural weaknesses not
initially detected. The uncertainty inherent in IBNR reserve estimates is
particularly pronounced for casualty coverages, such as excess liability,
professional liability coverages, and workers compensation, where information
emerges relatively slowly over time.
The
Companys three types of property and casualty reserve exposure with the
longest tails are:
|
|
|
|
(1)
|
high layer excess casualty
insurance;
|
|
|
|
|
(2)
|
casualty reinsurance; and
|
|
|
|
|
(3)
|
discontinued asbestos and
long-tail environmental business.
|
Certain
aspects of the Companys casualty operations complicate the actuarial process
for establishing reserves. Certain casualty business written by the Companys
insurance operations is high layer excess casualty business, meaning that the
Companys liability attaches after large deductibles including self insurance
or insurance from sources other than the Company. The Company commenced writing
this type of business in 1986 and issued policies in forms that were different
from traditional policies used by the industry at that time. Initially, there
was a lack of industry data available for this type of business. Consequently,
the basis for establishing loss reserves by the Company for this type of
business was largely judgmental and based upon the Companys own reported loss
experience which was used as a basis for determining ultimate losses, and
therefore IBNR reserves. Over time, the amount of available historical loss
experience data has increased. As a result, the Company has obtained a larger
statistical base to assist in establishing reserves for these excess casualty
insurance claims.
High
layer excess casualty insurance claims typically involve claims relating to (i) a shock loss such as
an explosion or transportation accident causing severe damage to persons and/or
property over a short period of time, (ii) a non-shock loss where a large
number of claimants are exposed to injurious conditions over a longer period of
time, such as exposure to chemicals or pharmaceuticals or (iii) a professional
liability loss such as a medical malpractice claim. In each case, these claims
are ultimately settled following extensive negotiations and legal proceedings.
This process typically takes 5 to 15 years following the date of loss.
Reinsurance
operations by their
nature add further complications to the reserving process, particularly for
casualty business written, in that there is an inherent lag in the timing and
reporting of a loss event from an insured or ceding company to the reinsurer.
This reporting lag creates an even longer period of time between the policy
inception and when a claim is finally settled. As a result, more judgment is
required to establish reserves for ultimate claims in the Companys reinsurance
operations.
In
the Companys reinsurance operations, case reserves for reported claims are
generally established based on reports received from ceding companies.
Additional case reserves may be established by the Company to reflect the
Companys estimated ultimate cost of a loss.
Casualty
reinsurance business involves reserving methods that generally include
historical aggregated claim information as reported by ceding companies,
combined with the results of claims and underwriting reviews of a sample of the
ceding companys claims and underwriting files. Therefore, the Company does not
always receive detailed claim information for this line of business.
Discontinued
asbestos and long-tail environmental business were contained within certain policies
previously written by NAC Re Corp. (now known as XL Reinsurance America Inc.),
prior to its acquisition by the Company. At December 31, 2011, total gross
unpaid losses and loss expenses in respect of this business represented less
than 1% of unpaid losses and loss expenses.
65
Except
for certain workers compensation (including long-term disability) and certain
U.K. motor liabilities, the Company does not discount its unpaid losses and
loss expenses. The Company utilizes tabular reserving for workers compensation
unpaid losses that are considered fixed and determinable. For further
discussion see the Consolidated Financial Statements.
Loss
and loss expenses are charged to income as they are incurred. These charges
include loss and loss expense payments and any changes in case and IBNR
reserves. During the loss settlement period, additional facts regarding claims
are reported. As these additional facts are reported, it may be necessary to
increase or decrease the unpaid losses and loss expense reserves. The actual
final liability may be significantly different than prior estimates.
The
amount of the Companys net unpaid losses and loss expenses relating to the
Companys operating segments at December 31, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Insurance
|
|
$
|
11,374
|
|
$
|
11,240
|
|
Reinsurance
|
|
|
5,610
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
Net
unpaid loss and loss expense reserves
|
|
$
|
16,984
|
|
$
|
16,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unpaid Losses and Loss Expenses
as at December 31, 2011
|
|
Net Unpaid Losses and Loss Expenses
as at December 31, 2010
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Case
Reserves
|
|
IBNR
Reserves
|
|
Total
Reserves
|
|
Case
Reserves
|
|
IBNR
Reserves
|
|
Total
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines
|
|
$
|
1,244
|
|
$
|
3,175
|
|
$
|
4,419
|
|
$
|
1,280
|
|
$
|
3,093
|
|
$
|
4,373
|
|
Casualty other lines
|
|
|
1,180
|
|
|
2,628
|
|
|
3,808
|
|
|
1,392
|
|
|
2,454
|
|
|
3,846
|
|
Property
|
|
|
475
|
|
|
308
|
|
|
783
|
|
|
414
|
|
|
96
|
|
|
510
|
|
Marine, energy, aviation, and satellite
|
|
|
534
|
|
|
439
|
|
|
973
|
|
|
514
|
|
|
447
|
|
|
961
|
|
Other specialty lines (1)
|
|
|
413
|
|
|
675
|
|
|
1,088
|
|
|
375
|
|
|
630
|
|
|
1,005
|
|
Other (2)
|
|
|
196
|
|
|
66
|
|
|
262
|
|
|
341
|
|
|
144
|
|
|
485
|
|
Structured indemnity
|
|
|
|
|
|
41
|
|
|
41
|
|
|
|
|
|
60
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,042
|
|
$
|
7,332
|
|
$
|
11,374
|
|
$
|
4,316
|
|
$
|
6,924
|
|
$
|
11,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty (3)
|
|
$
|
1,501
|
|
$
|
1,999
|
|
$
|
3,500
|
|
$
|
1,606
|
|
$
|
2,122
|
|
$
|
3,728
|
|
Property catastrophe (4)
|
|
|
180
|
|
|
197
|
|
|
377
|
|
|
146
|
|
|
192
|
|
|
338
|
|
Other property
|
|
|
410
|
|
|
467
|
|
|
877
|
|
|
322
|
|
|
397
|
|
|
719
|
|
Marine, energy, aviation, and satellite
|
|
|
399
|
|
|
71
|
|
|
470
|
|
|
367
|
|
|
30
|
|
|
397
|
|
Other (2)
|
|
|
163
|
|
|
174
|
|
|
337
|
|
|
201
|
|
|
202
|
|
|
403
|
|
Structured indemnity
|
|
|
|
|
|
49
|
|
|
49
|
|
|
|
|
|
57
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,653
|
|
|
2,957
|
|
|
5,610
|
|
$
|
2,642
|
|
|
3,000
|
|
|
5,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
6,695
|
|
$
|
10,289
|
|
$
|
16,984
|
|
$
|
6,958
|
|
$
|
9,924
|
|
$
|
16,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and other lines.
|
(3)
|
Within the Reinsurance
segment, casualty-other and casualty-professional lines of business are shown
in the aggregate.
|
(4)
|
Property catastrophe IBNR
includes event specific reserves for losses that the Companys insureds and
cedants have informed the Company they expect to incur but have not yet had
reported known claims.
|
As
noted above, management reviews the IBNR estimates produced by the Companys
actuaries who determine
the best estimate of the liabilities to record in the Companys financial
statements. The Company considers
this single point estimate to be the mean expected outcome. Management believes
that the actuarial methods utilized adequately provide for loss
development.
Management
does not build in a provision for uncertainty outside of the estimates prepared
by the Companys actuaries.
While
the proportion of unpaid losses and loss expenses represented by IBNR is
sensitive to a number of factors, the most significant ones have historically
been accelerated business growth and changes in business mix. Other factors
that have affected the ratio in the past include additions to prior period
reserves, catastrophic occurrences, settlement of large claims and changes in
claims settlement patterns.
66
The
ratio of IBNR to total reserves has increased in recent years, with the
increase attributable to professional lines of business where we continue to
hold IBNR for subprime and related credit crisis claims and other potential
clash exposures in recent years while these claims develop at a relatively slow
pace. Additionally, the ratio of IBNR to total reserves has increased this year
for the property lines due to late 2011 catastrophe activity. Typically, the
ratio of IBNR to total reserves is greater for casualty (including
professional) lines (which are longer-tail in nature) than for property lines
due to the policy forms utilized and timing of loss reporting and settlement.
IBNR
reserves are calculated by the Companys actuaries using standard actuarial
methodologies as discussed above. Since the year ended December 31, 2003, the
Company adopted a methodology that provides a single point reserve estimate
separately for each line of business and also a range of possible outcomes
across each single point reserve estimate. This is discussed further below.
The
following table shows the recorded estimate and the high and low ends of the
range of the Companys net unpaid losses and loss expenses for each of the
lines of business noted above at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unpaid
Losses and Loss
Expenses
Recorded as at
December 31,
2011
|
|
Range of Net
Unpaid Losses &
Loss Expenses
Estimated as at
December 31,
2011
|
|
Range of Net
Unpaid Losses &
Loss Expenses
Estimated as at
December 31,
2011
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
Casualty
professional lines
|
|
$
|
4,419
|
|
$
|
4,977
|
|
$
|
3,893
|
|
Casualty
other lines
|
|
|
3,808
|
|
|
4,288
|
|
|
3,353
|
|
Property
|
|
|
783
|
|
|
856
|
|
|
711
|
|
Marine,
energy, aviation, and satellite
|
|
|
973
|
|
|
1,079
|
|
|
872
|
|
Other
specialty lines (1)
|
|
|
1,088
|
|
|
1,205
|
|
|
977
|
|
Other (2)
|
|
|
262
|
|
|
296
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(3)
|
|
$
|
11,333
|
|
$
|
12,372
|
|
$
|
10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
Casualty (4)
|
|
$
|
3,500
|
|
$
|
3,866
|
|
$
|
3,152
|
|
Property
catastrophe
|
|
|
377
|
|
|
467
|
|
|
295
|
|
Other
property
|
|
|
877
|
|
|
1,027
|
|
|
738
|
|
Marine,
energy, aviation, and satellite
|
|
|
470
|
|
|
549
|
|
|
394
|
|
Other (2)
|
|
|
337
|
|
|
389
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (3)
|
|
$
|
5,561
|
|
$
|
6,068
|
|
$
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured
Indemnity (3)
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other specialty lines
within the Insurance segment includes: environmental, programs, equine,
warranty, and excess and surplus lines.
|
(2)
|
Other includes credit and
surety, whole account contracts and other lines.
|
(3)
|
The range for the total
Insurance and Reinsurance segment reserves is narrower than the sum of the
ranges for the lines of business shown in the table due to diversification
benefits across the lines of business. In addition, the total for each of the
Insurance and Reinsurance segments does not include reserves relating to
structured indemnity business as the Company does not develop reserve ranges
for this line of business.
|
(4)
|
Within the Reinsurance
segment, casualty-other and casualty-professional lines of business are shown
in the aggregate.
|
There
are factors that would cause reserves to increase or decrease within the
context of the range provided. The magnitude of any change in ultimate losses
would be determined by the magnitude of any changes to the Companys
assumptions or combined impact of changes in assumptions. Factors that would
increase reserves include, but are not limited to, increases in claim severity,
increases in expected level of reported claims, changes to the regulatory
environment which expand the exposure insured by the Company, changes in the
litigation environment that increase claim awards, filings or verdicts,
unexpected increases in loss inflation, and/or new types of claims being
pursued against the Company. Factors that would decrease reserves include, but
are not limited to, decreases in claim severity, reductions in the expected
level of reported claims, changes to the regulatory environment which contract
the exposure insured by the Company, changes in the litigation environment that
decrease claim awards, filings or verdicts, and/or unexpected decreases in loss
inflation.
The
Companys methodology in 2011 for calculating reserve ranges around its single
point reserve estimate is consistent with that used in 2010. The Company
modeled a statistical distribution of potential reserve outcomes over a one
year run-off period for each of the approximately 35 lines of business. In
doing so the Company evaluated a number of alternative models, and for each
line of business the Companys actuaries selected the distribution parameters
deemed to be most appropriate. Factors affecting this decision included an
assessment of the model fit, availability and relevance of data and the impact
of changes in business mix. The Company used the modeled statistical
distribution to calculate an 80% confidence interval for the potential reserve
outcomes over this
67
one year
run-off period. The high and low end points of the ranges set forth in the
above table are such that there is a 10% modeled probability that the reserve
will develop higher than the high point and a 10% modeled probability that the
reserve will develop lower than the low point.
The
development of a reserve range models the uncertainty of the claim environment
as well as the limited predictive power of past loss data. These uncertainties
and limitations are not specific to the Company. The ranges represent an
estimate of the range of possible outcomes over a one year development period.
A range of possible outcomes should not be confused with a range of best
estimates. The range of best estimates will generally be much narrower than the
range of possible outcomes as it will reflect reasonable actuarial best
estimates of the expected reserve.
Reserve
volatility was analyzed for each line of business (excluding structured
indemnity) within both the Reinsurance and Insurance segments using the
Companys historical data, supplemented by industry data. These ranges were
then aggregated to the lines of business shown above taking into account
correlation between lines of business. The practical result of the correlation
approach to aggregation is that the ranges by line of business disclosed above
are narrower than the sum of the ranges of the individual lines of business.
Similarly, the range for the Companys total reserves in the aggregate, is
narrower than the sum of the ranges for the lines of business disclosed above.
On
an annual basis, the Company reviews the correlation assumptions between its
various lines of business. Since 2006, the Company has utilized a simplified
approach of assigning ratings of low, medium or high to its correlation
assumptions for each line of business pairing based on the judgment of the
reserving actuaries. This simplified approach has been utilized due to the
limited amount of historical experience within the Companys portfolio as well
as limited applicable industry data. However, the Companys actual historical
experience and industry data were used to judgmentally select a range of values
for the low, medium and high correlations, respectively, of 15%, 30% and 50%.
It should be noted that both the Companys own experience and the industry data
exhibit negative correlations in reserve developments between certain lines of
business. However, as a measure of prudence in evaluating the reserve ranges,
the Company has used a minimum of 15% correlation between any two lines of
business. The analysis of correlations and the reflection of potential diversification
benefits across lines of business represent another area of uncertainty in the
development of estimated reserve ranges.
The
Company is not aware of any generally accepted model to perform the reserve
range analysis described above. However, other models may be employed to
develop these ranges.
See
Segments, below for further discussion on prior year development of loss
reserves.
Unpaid losses and loss expenses recoverable
The
recognition of unpaid losses and loss expenses recoverable requires two key
judgments. The first judgment involves the Companys estimation of the amount
of gross IBNR to be ceded to reinsurers. Ceded IBNR is generally developed as
part of the Companys loss reserving process and, consequently, its estimation
is subject to similar risks and uncertainties as the estimation of gross IBNR
(see Critical Accounting Policies and Estimates Unpaid losses and loss
expenses and unpaid loss and loss expense recoverable). The second judgment involves
the Companys estimate of the amount of the reinsurance recoverable balance
that the Company will ultimately be unable to recover from related reinsurers
due to insolvency, contractual dispute, or for other reasons. Amounts estimated
to be uncollectible are reflected in a bad debt provision that reduces the
reinsurance recoverable balance. Changes in the bad debt provision are
reflected in net income. See Item 8, Note 9 to the Consolidated Financial
Statements, Reinsurance, for further information.
The
Company uses a default analysis to estimate uncollectible reinsurance. The
primary components of the default analysis are reinsurance recoverable balances
by reinsurer, net of collateral, estimated recovery rates and default factors
used to determine the portion of a reinsurers balance deemed uncollectible.
The definition of collateral for this purpose requires some judgment and is
generally limited to assets held in trust, letters of credit, and liabilities
held by the Company with the same legal entity for which the Company believes
there is a right of offset. Default factors require considerable judgment and
are determined using the current rating, or rating equivalent, of each
reinsurer as well as other key considerations and assumptions.
2) Future Policy Benefit Reserves
Future
policy benefit reserves relate to the Companys Life operations and are
estimated using assumptions for investment yields, mortality, expenses and
provisions for adverse loss deviation. Uncertainties related to interest rate
volatility and mortality experience make it difficult to project and value the
ultimate benefit payments.
Most
of the Companys future policy benefit reserves relate to annuity portfolio
reinsurance contracts under which the Company makes annuity payments throughout
the term of the contract for a specified portfolio of policies.
For
certain of these contracts, a single premium is paid at inception of the
contract by way of a transfer of cash and investments to the Company.
68
The
reserving methodology for these annuity portfolio reinsurance contracts is
described in the authoritative guidance issued by the FASB for accounting and
reporting by insurance for certain long-duration contracts as well as
authoritative guidance over realized gains and losses from the sale of
investments. These contracts subject the Company to risks arising from
policyholder mortality over a period that extends beyond the periods in which
premiums are collected. Liabilities for future policy benefit reserves are
established in accordance with the provisions of this guidance.
Claims
and expenses for individual policies within these annuity reinsurance contracts
are projected over the lifetime of the contract to calculate a net present value
of future cash flows. Assumptions for each element of the basis (mortality,
expenses and interest) are determined at the issue of the contract and these
assumptions are locked-in throughout the term of the contract unless a premium
deficiency exists. The assumptions are best estimate assumptions plus
provisions for adverse deviations on the key risk elements (i.e., mortality and
interest). Provisions for adverse deviation are designed to cover reasonable
deviations from the best estimate outcome of the contract. As the experience on
the contracts emerges, the assumptions are reviewed. This occurs at least
annually and includes both an analysis of experience and review of likely
future experience. If such review would produce reserves in excess of those
currently held then lock-in assumptions will be revised and a loss recognized.
During the years ended December 31, 2011, 2010 and 2009, there were no
adjustments to the locked-in assumptions for these annuity reinsurance
contracts.
The
future policy benefit reserves for these annuity portfolio reinsurance
contracts amounted to $4.0 billion and $4.3 billion at December 31, 2011 and
2010 respectively. The Company holds the investment assets backing these
liabilities. These investments are primarily fixed income securities with
maturities that closely match the expected claims settlement profile. A 0.1%
decrease in the investment yield assumption would result in approximately a $31
million increase in the value of future claims related to annuity portfolio
reinsurance.
As
stated above, the future policy benefit reserves include provisions for adverse
deviation in excess of best estimate assumptions consistent with the underlying
pricing that amounted to approximately $36 million and $193 million at December
31, 2011 and 2010, respectively. The reduction in 2011 has arisen as the
Company has taken a more conservative view of future mortality improvements in
its best estimate assumptions. The future policy benefit reserves would only be
increased if these provisions for adverse deviation became insufficient in the
light of emerging claims experience. The present value of future claims would
increase by approximately $19 million if mortality rates were to decrease by 1%
in all future years, relative to the reserving assumptions.
The
Company also provides reinsurance of disability income protection, for an
in-force block of business. The future policy benefit reserves for these
contracts amounted to approximately $99 million and $96 million at December 31,
2011 and 2010, respectively. Future policy benefit reserves include the lock-in
of assumptions at inception with periodic review against experience. The
liabilities relate to in-force blocks of business, comprising underlying
insurance policies that provide an income if the policyholder becomes sick or
disabled. The liabilities are therefore driven mainly by the rates at which
policyholders become sick (where sickness is defined by the policy conditions)
and by the rates at which these policyholders recover or die. A 1% increase in
the incidence rate would increase the value of future claims by approximately
$2.3 million, while a 1% decrease in the termination rate would increase the
value of future claims by approximately $4.1 million. While no changes to the
locked-in assumptions were made in 2011 or in 2009, a review of lapse
experience in 2010 led to an increase in the reserve of $2.2 million.
The
Company also provides reinsurance of term assurance and critical illness
policies written in the U.K., Ireland and the U.S. The future policy benefit
reserves for these contracts amounted to approximately $241 million and $220
million at December 31, 2011 and 2010, respectively. This increase was caused
by ageing of the portfolio, which was marginally offset by movements of the
U.K. Pound sterling and Euro against the U.S. dollar over 2011. Future policy
benefit reserves include the lock-in of assumptions at inception with periodic
review against experience. The provisions for adverse deviation in these
reserves amounted to approximately $22 million and $20 million at December 31,
2011 and 2010, respectively.
The
liabilities relate to in-force blocks of business and to treaties accepting new
business up until the end of 2009, comprising underlying insurance policies
that provide mainly lump sum benefits if the policyholder dies or becomes sick.
For term assurance, the liabilities are therefore driven by the rates of
mortality and for critical illness cover, the liabilities are driven
predominantly by the rates at which policyholders become sick, where sickness
is defined by the treaty conditions (i.e., the morbidity rates). A 1% increase
in the mortality rate relative to the reserving assumption would increase the
value of future claims by approximately $2.4 million, and a 1% increase in the
morbidity rate would increase the value of future claims by approximately $0.9
million.
The
term assurance and critical illness treaties have been written using a variety
of structures, some of which incur acquisition costs during an initial period.
For such treaties, a deferred acquisition cost (DAC) asset has been
established and an increase in future lapse rates could impact the
recoverability of such costs from future premiums. The recoverability will also
be influenced by the impact of lapses on future claims. An increase in the
annual lapse rates by 1% could lead to a 5%-10% reduction in future margins
available for amortizing the DAC asset.
The
Company also provided reinsurance of a block of U.S. based term assurance,
which was novated to the Company from an insurance affiliate in December 2002.
The future policy benefit reserves for these contracts amounted to
approximately $258 million and $261 million at December 31, 2011 and 2010,
respectively. Future policy benefit reserves are established in accordance
69
with the
provisions of general authoritative guidance on accounting for insurance
enterprises, including the lock-in of assumptions at inception with periodic
review against experience.
The
liabilities relate to in-force blocks of business, which are comprised of
underlying insurance policies that provide mainly lump sum benefits if the
policyholder dies. The liabilities are therefore driven by the rates of
mortality, and a 1% increase in the mortality rate relative to the reserving
assumption would increase the value of future claims by approximately $7
million. The liabilities are also affected by lapse experience, and a 1%
decrease in lapse rates relative to the reserving assumption would increase the
reserve by approximately $0.8 million. No changes to the locked-in assumptions
were made in 2011, 2010 or 2009.
For
further information see Item 8, Note 12 to the Consolidated Financial Statements,
Future Policy Benefit Reserves.
3) Other-Than-Temporary Declines in
Investments (OTTI)
The
Companys process for identifying declines in the fair value of investments
that are other-than-temporary involves consideration of several factors. These
primary factors include (i) an analysis of the liquidity, business prospects
and financial condition of the issuer including consideration of credit
ratings, (ii) the significance of the decline, (iii) an analysis of the
collateral structure and other credit support, as applicable, of the securities
in question, and (iv) for debt securities, whether the Company intends to sell
such securities. In addition, the authoritative guidance requires that OTTI for
certain asset backed and mortgage backed securities are recognized if the fair
value of the security is less than its discounted cash flow value and there has
been a decrease in the present value of the expected cash flows since the last
reporting period. Where the Companys analysis of the above factors results in
the Companys conclusion that declines in fair values are other-than-temporary,
the cost of the security is written down to discounted cash flow and a portion
of the previously unrealized loss is therefore realized in the period such determination
is made.
If
the Company intends to sell an impaired debt security, or it is more likely
than not that it will be required to sell the security before recovery of its
amortized cost basis, the impairment is other-than-temporary and is recognized
in earnings in an amount equal to the entire difference between fair value and
amortized cost.
There
are risks and uncertainties associated with determining whether declines in the
fair value of investments are other-than-temporary. These include subsequent
significant changes in general economic conditions as well as specific business
conditions affecting particular issuers, the Companys liability profile,
subjective assessment of issue-specific factors (seniority of claims, collateral
value, etc.), future financial market effects, stability of foreign governments
and economies, future rating agency actions and significant disclosure of
accounting, fraud or corporate governance issues that may adversely affect
certain investments. In addition, significant assumptions and management
judgment are involved in determining if the decline is other-than-temporary. If
management determines that a decline in fair value is temporary, then a
securitys value is not written down at that time. However, there are potential
effects upon the Companys future earnings and financial position should
management later conclude that some of the current declines in the fair value
of the investments are other-than-temporary declines. See Investment Activities
herein for further information on other-than-temporary declines in the value of
investments and unrealized loss on investments.
Key
Assumptions used in determination of credit losses related to fixed maturities
The
Company reviews, on a quarterly basis, the entirety of the securities in its
investment portfolio that are in a gross unrealized loss position to assess
whether it believes a credit loss, relative to the current amortized cost of
the security, exists. The Company utilizes specific screening criteria to
identify securities at risk for a credit loss, and if any of these conditions
exists, subject the individual security to a detailed review to determine if a
credit loss exists. The screening criteria used by the Company include the
absolute degree of impairment of the security as a percentage of amortized
cost, the credit rating of the security and the market yield-to-maturity of the
security. Any securities that have previously been identified as impaired due
to credit losses are at elevated risk of further impairments. In addition, on a
quarterly basis, the Company reviews any current market developments and
identifies any new issues that may adversely impact the Companys investment
portfolio, and reviews any impacted holdings.
Credit
loss methodology structured credit
Credit
loss on structured credit securities is determined through a comparison of the
securitys discounted cash flow to the amortized cost of the security. To the
extent that the discounted cash flow is estimated to be lower than the
amortized cost of the security, the security is impaired to the discounted cash
flow value of all security cash flows, including both coupon and principal
repayment, discounted using the forward curve.
The
Company, in conjunction with its third-party investment management service
providers, makes significant assumptions in its impairment analysis and these
assumptions are subject to changes in both economic fundamentals and
managements estimates in future periods.
(1) Non-Agency RMBS
The
Company utilizes assumptions specific to its individual holdings and,
accordingly, individual assumptions will differ on a security by security basis
depending on the quality of the collateral and the performance of the
underlying pools. In general, the
70
Company
projects that future defaults will develop based on the performance of the
underlying collateral, measured by the number of loans currently in arrears.
|
|
|
Loans <
30 days in arrears
|
|
50% will
ultimately default
|
Loans 30-60
days in arrears
|
|
60% will
ultimately default
|
Loans 60-90
days in arrears
|
|
75% will
ultimately default
|
Bank held
|
|
100% default
rate
|
Loans in
foreclosure
|
|
100% default
rate
|
The
Company estimates that the cumulative losses on the mortgage structures it owns
will vary depending on the vintage and collateral of the underlying loans in
the holdings. Cumulative deal loss expectations are projected based on the
number of loans expected to take a loss and the severity of loss upon default.
Loan loss severities depend on the borrower, geographic location and loan to
value characteristics of the underlying collateral. The Company estimates that
loss severities will range from 35-75% for sub-prime and Alt-A loans and 20-40%
for Prime loans. These cumulative losses results are then compared to the level
of subordination within the Companys holdings to measure if impairment exists.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Cumulative Losses by Vintage
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A non
option ARM
|
|
|
33
|
%
|
|
27
|
%
|
|
16
|
%
|
|
7
|
%
|
Alt-A Option
ARM
|
|
|
43
|
%
|
|
36
|
%
|
|
20
|
%
|
|
11
|
%
|
Prime
|
|
|
12
|
%
|
|
12
|
%
|
|
6
|
%
|
|
3
|
%
|
Subprime
|
|
|
50
|
%
|
|
44
|
%
|
|
26
|
%
|
|
14
|
%
|
(2) Core CDOs
The
Company utilizes a scenario based approach to reviewing the majority of its CDO
portfolio, which consists primarily of collateralized loan obligations. The
five significant scenarios utilized in the model consist of:
|
|
|
|
|
2 base cases
assuming asset defaults are equivalent to either the expected corporate
default probabilities, or the cumulative default rates for similar time
frames from the period of 1983 to 2010.
|
|
|
|
|
|
Optimistic/pessimistic
cases assuming assets have a default rate equivalent to 1 rating notch
higher/ lower than their current rating and if on positive/negative watch
then 2 notches higher/lower than their current rating.
|
|
|
|
|
|
A market
implied scenario based on the current asset market price, assuming that lower
priced loans have a higher default rate.
|
The
weighted scenario of the five scenarios above is used for the determination of
a potential impairment. If losses are forecast to be below the subordination
level for the tranche held by the Company, the security is determined not to be
impaired. The weighting between these scenarios varies over time depending on
market conditions, but the weighting used for the year end 2011 evaluation
consisted of 45% to the base cases noted above, 5% to the optimistic case, 10%
to the pessimistic case, and 40% to the market implied case. For the non-CLO
portion of the core CDO portfolio, the Company utilizes specific default
scenarios related to the particular underlying assets.
(3) Other structured credit assets
classes
The
remainder of the gross unrealized losses related to the Companys structured
credit portfolio are concentrated in the following significant asset classes:
71
|
|
|
|
|
Other ABS,
which is a mix of mostly investment grade credit card, auto and non-U.S. ABS
structures that have risk and performance characteristics unrelated to the
U.S. housing market. In cases where these sectors have met Company screens,
the individual securities are evaluated based on fundamental credit analysis
of the underlying structure.
|
|
|
|
|
|
CMBS, which
are dominated by AAA rated holdings which generally have high levels of
credit subordination, are highly diversified and priced reasonably close to
par. The gross unrealized losses on CMBS are spread evenly across the credit
rating buckets. The Company reviews these holdings on an individual security
basis to the extent they meet the screens noted above, but generally does not
believe these securities to have a high risk of credit loss given their high
subordination levels.
|
Credit loss analysis
corporate
sector securities
Credit
losses on corporate securities are determined on an individual security basis.
The Company reviews the circumstances and conditions associated with its credit
issuers, including considering credit rating and forecast operating and
financing activities of the issuer, and will make a determination as to whether
it believes the issuer is likely to fully meet its contractual principal and
interest obligations. To the extent the Company does not believe the issuers
will meet these obligations, it recognizes a credit loss as the difference
between amortized cost and the estimated present value of cash flows expected
to be received. The Company reviews the ability to pay at the lowest tier
(i.e., most subordinated) of the capital structure at which it holds
securities, and, to the extent it is satisfied in the performance of the lower
tier, concludes that any more senior tiers are also likely to meet obligations.
The
Company evaluates the credit losses associated with its medium term notes,
which generally represent notes backed primarily by investment grade European
credit. The Company evaluates the cash flows expected from the notes over their
remaining expected life, including an evaluation of the likelihood of current
holdings to meet their principal and interest obligations, and incorporates
current reinvestment assumptions on any security maturities or reinvestment of
cash flows. These cash flows are discounted at the current yield, adjusted for
changes in interest rates for floating rate securities expected from these
securities, and, to the extent the discounted cash flow value is below the
amortized cost, recognizes an impairment charge.
4) Income Taxes
The
Company utilizes the asset and liability method of accounting for income taxes.
Under this method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The Company had net operating tax loss carry forward balances of $263.6 million
and $282.2 million against which a valuation allowance of $239.1 million and
$240.0 million at December 31, 2011 and 2010, respectively, was established.
The Company had realized capital loss carry forward balances of approximately
$237.2 million and $261.0 million against which a valuation allowance of
approximately $237.2 million and $261.0 million at December 31, 2011 and 2010,
respectively, was established. Included within these realized capital losses
are $117.9 million and $142.3 million of losses arising from the intercompany
sale of investments, against which a valuation allowance of $117.9 million and
$142.3 million has been established. The deferral of benefits from tax losses
is evaluated based upon managements estimates of the future profitability of
the Companys taxable entities based on current forecasts, the character of
income and the period for which losses may be carried forward. A valuation
allowance may have to be established for any portion of a deferred tax asset
that management believes will not be realized. Should the future income of
these entities fall below expectations, a further valuation allowance would
have to be established, which could be significant. In addition, if any further
losses are generated by these entities, these losses may not be tax affected.
For
further information see Other Revenues and Expenses and Item 8, Note 22 to
the Consolidated Financial Statements, Taxation.
72
5) Goodwill and Other Intangible Assets
The
Company has recorded goodwill in connection with various acquisitions in prior
years. Goodwill represents the excess of the purchase price over the fair value
of net assets acquired. In accordance with FASB issued final authoritative
guidance on goodwill and other intangible assets, the Company tests goodwill
for potential impairment annually as of June 30 and between annual tests if an
event occurs or circumstances change that may indicate that potential exists
for the fair value of a reporting unit to be reduced to a level below its
carrying amount. The Company tests for impairment at the reporting unit level
in accordance with the authoritative guidance on intangibles and goodwill. For
the reinsurance segment, a reporting unit is one level below the business
segment, while for insurance, the segment is also the reporting unit. The first
step is to identify potential impairment by comparing the estimated fair value
of a reporting unit to the estimated book value, including goodwill. The fair
value of each reporting unit is derived based upon valuation techniques and
assumptions the Company believes market participants would use to value the
business and this is then compared to the book value of the business. The
Company derives the net book value of its reporting units by estimating the
amount of shareholders equity required to support the activities of each
reporting unit. The estimated fair values of the reporting units are generally
determined utilizing methodologies that incorporate price-to-net-tangible-book
and price-to-earnings multiples of certain comparable companies, from an
operational and economic standpoint. If such estimated fair value, combined
with an estimate of an appropriate control premium, indicates a close call or
potential impairment, further analysis using discounted cash flows is performed
and the results of the various valuation methodologies are weighted to arrive
at the estimated fair value for each reporting unit. A control premium
represents the value an investor would pay above minority interest transaction
prices in order to obtain a controlling interest in the respective company. If
the estimated fair value exceeds the book value, goodwill at the reporting unit
level is not deemed to be impaired. If the book value exceeds the estimated
fair value, the second step of the process is performed to measure the amount
of impairment.
The
Company completed an interim impairment test during the fourth quarter of 2011
which resulted in a non-cash goodwill impairment charge of $429.0 million. The
charge relates to the insurance segment. The impairment was determined using
the methodologies as described above, which included discounted cash flow
analyses and comparison with similar companies using their publicly traded
price multiples as the basis for valuation. Continued low valuations in the
insurance industry as a whole combined with several years of poor underwriting
performance in the segment have impacted the technical valuations; however,
management continues to see significant value in the Companys global insurance
platform.
For
further detailed information, see Item 8, Note 8 to the Consolidated Financial
Statements, Goodwill and Other Intangible Assets.
6) Reinsurance Premium Estimates
The
Company writes business on both an excess of loss and proportional basis. In
the case of excess of loss contracts, the subject written premium is generally
outlined within the treaty and the Company receives a minimum and/or deposit
premium on a quarterly basis which is normally followed by an adjustment
premium based on the ultimate subject premium for the contract. The Company
estimates the premium written on the basis of the expected subject premium and
regularly reviews this against actual quarterly statements to revise the
estimate based on the information provided by the cedant. An estimate of
premium is recorded at the inception of the contract.
On
proportional contracts, written premiums are estimated based on expected
ultimate premiums using information provided by the ceding companies. The
ceding companys premium estimate may be adjusted based on its history of
providing accurate premium estimates. When the actual premium is reported by
the ceding company, normally on a quarterly basis, it may be materially higher
or lower than the estimate. Adjustments arising from the reporting of actual
premium by the ceding companies are recorded at the earliest point in time that
the supporting information indicates an adjustment is appropriate.
Written
premiums on excess of loss contracts are earned in accordance with the loss
occurring period defined within the treaty, normally 12 months following
inception of the contract. Written premiums on proportional contracts are
earned over the risk periods of the underlying policies issued and renewed,
normally 24 months. For both excess of loss and proportional contracts, the
earned premium is recognized ratably over the earning period, namely 12-24 months.
The portion of the premium related to the unexpired portion of the policy at
the end of any reporting period is reflected in unearned premiums.
Reinstatement
premiums are recognized at the time a loss event occurs where coverage limits
for the remaining life of the contract are reinstated under pre-defined
contract terms and are fully earned when recognized. Recognition of
reinstatement premiums is based on the Companys estimate of loss and loss
adjustment expense reserves, which involves management judgment.
Reinsurance
business by its nature can add further complications since, generally, the
ultimate premium due under a specific contract will not be known at the time
the contract is entered into. As a result, more judgment and ongoing monitoring
is required to establish premiums written and earned in the Companys
reinsurance operations.
73
At
December 31, 2011 and 2010, the amount of premiums receivable related to the
Companys reinsurance operations amounted to $1.1 billion and $1.2 billion,
respectively.
A
significant portion of amounts included as premiums receivable, which represent
estimated premiums written, net of commissions, are not currently due based on
the terms of the underlying contracts. Management reviews the premiums
receivable balance at least quarterly and provides a provision for amounts
deemed to be uncollectible. The Company recorded a provision for uncollectible
premiums receivable related to its reinsurance operations at December 31, 2011
and 2010 of $1.9 million and $4.4 million, respectively.
The
amount of proportional and excess of loss reinsurance gross premiums written
and gross acquisition expenses recognized by the Companys reinsurance
operations for each line of business for the years ended December 31, 2011,
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportional Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
other lines
|
|
$
|
115,835
|
|
$
|
30,657
|
|
$
|
38,671
|
|
$
|
9,945
|
|
$
|
44,924
|
|
$
|
12,075
|
|
Casualty
professional lines
|
|
|
65,492
|
|
|
19,422
|
|
|
51,922
|
|
|
14,604
|
|
|
41,195
|
|
|
12,652
|
|
Other
property
|
|
|
693,825
|
|
|
145,367
|
|
|
651,733
|
|
|
168,981
|
|
|
703,219
|
|
|
164,094
|
|
Marine,
energy, aviation and satellite
|
|
|
50,438
|
|
|
12,556
|
|
|
49,105
|
|
|
14,106
|
|
|
34,636
|
|
|
8,116
|
|
Other (1)
|
|
|
90,845
|
|
|
25,796
|
|
|
86,303
|
|
|
22,745
|
|
|
144,116
|
|
|
40,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Proportional contracts
|
|
$
|
1,016,436
|
|
$
|
233,798
|
|
$
|
877,734
|
|
$
|
230,381
|
|
$
|
968,090
|
|
$
|
237,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
Gross
Premiums
Written
|
|
Gross
Acquisition
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of Loss Contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
catastrophe
|
|
$
|
461,742
|
|
$
|
43,705
|
|
$
|
370,266
|
|
$
|
37,720
|
|
$
|
357,267
|
|
$
|
33,074
|
|
Casualty
other lines
|
|
|
176,673
|
|
|
26,602
|
|
|
190,864
|
|
|
30,764
|
|
|
173,853
|
|
|
34,383
|
|
Casualty
professional lines
|
|
|
151,897
|
|
|
28,055
|
|
|
166,379
|
|
|
30,969
|
|
|
129,733
|
|
|
26,241
|
|
Other
property
|
|
|
153,991
|
|
|
17,659
|
|
|
150,762
|
|
|
16,363
|
|
|
159,091
|
|
|
12,892
|
|
Marine,
energy, aviation and satellite
|
|
|
105,724
|
|
|
9,267
|
|
|
68,333
|
|
|
6,066
|
|
|
54,463
|
|
|
5,429
|
|
Other (1)
|
|
|
11,338
|
|
|
3,399
|
|
|
17,655
|
|
|
6,361
|
|
|
11,978
|
|
|
2,642
|
|
Structured
Indemnity
|
|
|
(4,182
|
)
|
|
1,257
|
|
|
957
|
|
|
2,380
|
|
|
4,948
|
|
|
2,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Excess
of loss contracts
|
|
$
|
1,057,183
|
|
$
|
129,944
|
|
$
|
965,216
|
|
$
|
130,623
|
|
$
|
891,333
|
|
$
|
117,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other includes credit and
surety, whole account contracts and other lines.
|
74
S
egments
Following
a streamlining of the Companys operating segments in the first quarter of
2009, the Company is organized into three operating segments: Insurance,
Reinsurance and Life operations. The Companys 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 and the performance of the Life
operations segment based on its contribution to net income. Other items of
revenue and expenditure of the Company are not evaluated at the segment level
for reporting purposes. In addition, the Company does not allocate investment
assets by segment for its P&C operations. Investment assets related to the
Companys Life operations and certain structured products included in the
Insurance and Reinsurance segments and in 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. See Item 8, Note 4 to
the Consolidated Financial Statements, Segment Information, for a
reconciliation of segment data to the Companys consolidated financial
statements.
I
ncome Statement
Analysis
I
nsurance
The
following table summarizes the underwriting profit (loss) for the Insurance
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
4,824,665
|
|
|
9.2
|
%
|
$
|
4,418,380
|
|
|
3.9
|
%
|
$
|
4,251,888
|
|
Net premiums written
|
|
|
3,707,664
|
|
|
7.1
|
%
|
|
3,461,150
|
|
|
5.7
|
%
|
|
3,273,380
|
|
Net premiums earned
|
|
|
3,663,727
|
|
|
3.8
|
%
|
|
3,529,138
|
|
|
(0.9
|
)%
|
|
3,559,793
|
|
Net losses and loss
expenses
|
|
|
(2,951,413
|
)
|
|
17.8
|
%
|
|
(2,505,502
|
)
|
|
4.4
|
%
|
|
(2,399,747
|
)
|
Acquisition costs
|
|
|
(461,965
|
)
|
|
10.5
|
%
|
|
(418,146
|
)
|
|
(2.6
|
)%
|
|
(429,170
|
)
|
Operating expenses
|
|
|
(683,814
|
)
|
|
6.5
|
%
|
|
(642,103
|
)
|
|
(6.8
|
)%
|
|
(689,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss)
|
|
$
|
(433,465
|
)
|
|
NM
|
*
|
$
|
(36,613
|
)
|
|
NM
|
*
|
$
|
41,745
|
|
Net results structured
products
|
|
$
|
10,976
|
|
|
(25.3
|
)%
|
$
|
14,696
|
|
|
(11.8
|
)%
|
$
|
16,660
|
|
Net fee income and other
|
|
|
(16,370
|
)
|
|
5.2
|
%
|
|
(15,564
|
)
|
|
9.3
|
%
|
|
(14,241
|
)
|
Gross
premiums written increased by 9.2% during the year ended December 31, 2011
compared to the same period of 2010 and, when evaluated in local currency,
increased by 6.8%. The IPC, NAPC and Specialty business groups all experienced
increased gross premiums written which were partially offset by declines from
the Professional business group. The growth in premium is driven by new
business growth across (i) all lines in NAPC; (ii) property and middle market
lines in IPC; and (iii) general aviation and specie lines in Specialty. In
addition to the new business growth outlined above, favorable foreign exchange
and the renewal of long term agreements as annual policies in IPC Primary
Casualty, partially offset by a large multi-year program written in the fourth
quarter of 2010 (discussed below), contributed to increased premiums for the
segment. For the Professional business group, a reduction in gross premiums
written was attributable to lower multi-year deals and lower new business in
U.S. Professional partially offset by new business in professional lines in
international markets.
Gross
premiums written increased by 3.9% during the year ended December 31, 2010
compared to the same period of 2009 and, when evaluated in local currency,
increased by 4.2%. A large proportion of the gross and net premiums
written increase related to a multi-year agreement with gross written premium
of $126.5 million written in primary casualty during the fourth quarter of
2010. Excluding this multi-year program, across most lines of business, premium
levels were flat, having been maintained despite continued challenging market
conditions and strong competition, which continue to negatively impact new
business and pricing. In addition, there have been improved retention rates
across most lines of business as a result of the Companys stronger financial
condition and market position since the end of 2009. New business growth in
upper middle market, marine and offshore energy, active programs, U.S. general
aviation, and select professional businesses has been offset by decreases in
North America environmental and excess and surplus lines, the run-off of a
large U.S. automobile warranty program, the termination of a specialty lines
aviation program in 2009 and decreases in U.S.-based professional lines due to
continued market pressures and pricing.
Net
premiums written increased by 7.1% during the year ended December 31, 2011 as
compared to the same period of 2010. The increase resulted from the gross
premiums written increases outlined above partially offset by an increase in
ceded premiums written of 16.7%. The increase in ceded premiums written relates
to increased utilization of facultative reinsurance, primarily in IPC property,
the unfavorable impact of foreign exchange rates, higher reinsurance premiums
on certain excess of loss treaties and reinstatement premiums related to
catastrophe, property and marine losses.
75
Net
premiums written increased by 5.7% during the year ended December 31, 2010 as
compared to the same period of 2009. The increase resulted from a reduction in
ceded written premiums partially offset by the increase in gross premiums
written noted above. The decrease in ceded written premiums is largely related
to Specialty due to cost savings from a restructuring of the marine and specie
global, and property excess of loss reinsurance treaties, as well as certain
adjustments to premium estimates in aviation and property which gave rise to a
positive variance over 2009.
Net
premiums earned increased by 3.8% during the year ended December 31, 2011 as
compared to the same period of 2010. The increase primarily resulted from
higher net written premiums earned through primary casualty, property, programs
and middle markets and favorable foreign exchange impacts offset by the ceded
catastrophe, property and marine reinstatement premiums noted above and the
earn-out of lower net premiums written in U.S. Professional and certain
discontinued and environmental lines. Net premiums earned decreased by 0.9% in 2010
as compared to 2009 which was primarily a reflection of the overall reduction
of net premiums written over the previous 12 to 24 months.
The
following table presents the ratios for the Insurance segment for the last
three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Loss and loss expense
ratio
|
|
|
80.6
|
%
|
|
71.0
|
%
|
|
67.4
|
%
|
Underwriting expense ratio
|
|
|
31.2
|
%
|
|
30.0
|
%
|
|
31.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio
|
|
|
111.8
|
%
|
|
101.0
|
%
|
|
98.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The
loss and loss expense ratio noted above includes net losses incurred for both
the reported year and any favorable or adverse prior year development of loss
and loss expense reserves held at the beginning of the year.
The
following table summarizes the net (favorable) adverse prior year development
by line of business relating to the Insurance segment for the last three years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Property
|
|
$
|
(8.9
|
)
|
$
|
(23.5
|
)
|
$
|
(50.7
|
)
|
Casualty and Professional
|
|
|
(47.1
|
)
|
|
(105.2
|
)
|
|
(41.0
|
)
|
Specialty and Other
|
|
|
(20.5
|
)
|
|
2.1
|
|
|
28.8
|
|
Structured Indemnity
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(76.5
|
)
|
$
|
(127.4
|
)
|
$
|
(62.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense
ratio excluding prior year development
|
|
|
82.6
|
%
|
|
74.6
|
%
|
|
69.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
In
addition, the following tables present the prior year (favorable) adverse
development of the Companys gross and net loss and loss expense reserves
within the Insurance segment for the last three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Gross:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves at the beginning of the year
|
|
$
|
14,325
|
|
$
|
14,157
|
|
$
|
14,373
|
|
Gross (favorable) adverse
development of those reserves during the year
|
|
|
23
|
|
|
(31
|
)
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves re-estimated one year later
|
|
$
|
14,348
|
|
$
|
14,126
|
|
$
|
14,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves at the beginning of the year
|
|
$
|
11,240
|
|
$
|
11,129
|
|
$
|
11,126
|
|
Net (favorable) adverse
development of those reserves during the year
|
|
|
(77
|
)
|
|
(127
|
)
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expense reserves re-estimated one year later
|
|
$
|
11,163
|
|
$
|
11,002
|
|
$
|
11,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
prior year development, the loss ratio for the year ended December 31, 2011 increased by 8.0 loss percentage points
as compared to the same period in 2010 due to higher levels of catastrophe
losses occurring in the year ended December 31, 2011. Catastrophe losses net of
reinsurance recoveries and including reinstatement premiums were $219.5 million
higher for year ended December 31, 2011 compared to the same period of 2010.
For further details on these catastrophe losses in 2011 see Significant Items
affecting the Results of Operations 1) The impact of significant large
natural catastrophe activity above. Excluding favorable prior year development
and net catastrophe losses in both periods, the current accident year loss
ratio increased by 2.2 points from 2010 to 2011 due to higher large loss
activity in energy, property and marine businesses.
Excluding
prior year development, the loss ratio for the year ended December 31, 2010
increased by 5.4 loss percentage points as compared to the same period in 2009
due primarily to higher levels of natural catastrophe losses occurring in 2010.
Excluding favorable prior year development, natural catastrophe losses and
reinstatement premiums in both periods, the loss ratio increased by 1.9 points
year over year largely due to several individual large loss events in property
and excess casualty, adverse experience in exited lines of business and the
impact of flat to slightly negative rate changes partially offset by changes in
business mix and improved loss experience in aerospace.
76
For
further information on the net favorable prior year reserve development for the
years ended December 31, 2011, 2010 and 2009, see Item 8, Note 10 to the
Consolidated Financial Statements, Losses and Loss Expenses.
The
increase in the underwriting expense ratio for the year ended December 31, 2011 as compared to the same period of 2010
was due to an increase in the acquisition expense ratio of 0.8 points (12.6% as
compared to 11.8%) and an increase in the operating expense ratio of 0.4 points
(18.6% as compared to 18.2%). The increase in the acquisition expense ratio was
primarily from favorable adjustment to guaranty fund assessments in 2010,
higher commissions and lower amounts of fee based business in excess casualty
and aerospace, as well as the impact of the catastrophe, property and marine
reinstatement premiums on the ratio. The increase in the operating expense
ratio was mainly as a result of increased compensation costs from certain
severance costs, higher number of employees, and unfavorable foreign exchange
impacts.
The
decrease in the underwriting expense ratio for the year ended December 31, 2010
compared to the same period in 2009 was due to a decrease in the operating
expense ratio of 1.1 points (18.2% as compared to 19.3%), and a decrease in the
acquisition expense ratio of 0.3 points (11.8% as compared to 12.1%). The
decrease in the operating expense ratio was as a result of costs savings
associated with the Companys expense reduction initiatives announced in the
third quarter of 2008 and first quarter of 2009, including changes to the
Companys previously communicated operational transformation program. The
decrease in the acquisition expense ratio is attributable to changes in
business mix partially offset by the impact of higher commission rates in
certain professional, casualty and middle market lines.
Net
results from structured insurance products include certain structured indemnity
contracts that are accounted for as deposit contracts. Net results from these
contracts decreased 25.3% during the year ended December 31,
2011 as compared to the same period of 2010. The decrease reflects the overall
run-off nature of this line of business combined with a change in the interest
rate hedging strategy on one of the larger transactions during 2010. Net results from these contracts for the year
ended December 31, 2010 decreased compared to the same period in 2009, again
reflecting the overall run-off
nature of this line of business.
Net
fee income and other improved during the year ended December 31, 2011 as
compared to the same period of 2010 mainly as a result of higher fee income in
Specialty partially offset by higher expenses related to the Companys loss
prevention consulting services. Net fee income and other decreased in the year
ended December 31, 2010 compared to the same period in 2009 mainly as a result
of lower engineering fee income associated with the Companys loss prevention
consulting services business coupled with other expenses in professional lines
related to the cost of an endorsement facility with National Indemnity Company,
under which National Indemnity Company issued endorsements to certain Side A
directors and officers liability insurance policies underwritten by XL
Specialty Insurance Company. For further information, see Item 8, Note 7 to the
Consolidated Financial Statements, Other Investments. During the first
quarter of 2010, management concluded that it did not require the $100 million
extension to this endorsement facility and did not purchase the related payment
obligation.
77
R
einsurance
The
following table summarizes the underwriting profit (loss) for this segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
2,073,619
|
|
|
12.5
|
%
|
$
|
1,842,951
|
|
|
(0.9
|
)%
|
$
|
1,859,423
|
|
Net premiums written
|
|
|
1,725,724
|
|
|
12.2
|
%
|
|
1,538,438
|
|
|
4.6
|
%
|
|
1,470,332
|
|
Net premiums earned
|
|
|
1,663,385
|
|
|
10.7
|
%
|
|
1,501,999
|
|
|
(5.7
|
)%
|
|
1,591,946
|
|
Net losses and loss
expenses
|
|
|
(1,126,978
|
)
|
|
59.6
|
%
|
|
(706,298
|
)
|
|
(8.2
|
)%
|
|
(769,090
|
)
|
Acquisition costs
|
|
|
(324,128
|
)
|
|
1.0
|
%
|
|
(321,008
|
)
|
|
(7.4
|
)%
|
|
(346,699
|
)
|
Operating expenses
|
|
|
(176,167
|
)
|
|
0.3
|
%
|
|
(175,586
|
)
|
|
(7.9
|
)%
|
|
(190,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit
|
|
$
|
36,112
|
|
|
(87.9
|
)%
|
$
|
299,107
|
|
|
4.7
|
%
|
$
|
285,561
|
|
Net results structured
products
|
|
|
12,053
|
|
|
NM
|
*
|
|
3,075
|
|
|
NM
|
*
|
|
26,374
|
|
Fee income and other
|
|
|
3,903
|
|
|
56.9
|
%
|
|
2,488
|
|
|
NM
|
*
|
|
6,209
|
|
Gross
premiums written increased by 12.5% during the year ended December 31, 2011 compared
to the same period of 2010 and, when evaluated in local currency, increased by
8.9%. Premium growth was most significant in the International unit and was due
to new motor and marine business, as well as positive amendments to prior year
premium estimates. In addition, there were increased premiums in North America
property on a U.S. agricultural program due to rising commodity prices in 2011,
partially offset by decreases in North America casualty due to current market
conditions and the non-renewal of certain treaties. The growth in property
catastrophe gross premiums written was through price and capacity increases,
from new business in the year and from natural catastrophe reinstatement
premiums partially offset by the non-renewal of certain property treaties.
Gross
premiums written decreased by 0.9% while net premiums written increased by 4.6%
during the year ended December 31, 2010 compared with the same period of 2009.
Gross premiums written decreased by 2.2% when evaluated in the local currency.
The gross premium written decrease was mainly from the North America property
business where there have been lower premiums on a U.S. agricultural program
due to a fall in commodity prices. In addition, the exit of certain casualty
facultative markets, non renewed business, cancelations and certain reductions
in price and capacity also contributed to the marginal reduction in gross
premiums written. Offsetting the reduction was premium growth from the
recapture of business lost during 2009 following ratings actions as well as new
business in Europe, Bermuda and Asia and loss related premium adjustments in
Europe. The increase in net premiums written was mainly due to the reduction in
ceded written premiums as a result of a reduction in volume associated with the
U.S. agricultural program already mentioned above, of which a significant
portion was retroceded.
Net
premiums earned increased by 10.7% during the year ended December 31, 2011 as
compared to the same period of 2010. The increase is a reflection of the
overall growth in net premiums written in 2011. In addition, reinstatement
premiums on catastrophe losses, increased during the year ended December 31,
2011 compared to the same period of 2010. Net premiums earned
decreased by 5.7% in 2010 as compared to 2009 which is primarily a reflection
of the overall reduction of net premiums written over the previous three years.
The
following table presents the ratios for the Reinsurance segment for the last
three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Loss and loss expense
ratio
|
|
|
67.8
|
%
|
|
47.0
|
%
|
|
48.3
|
%
|
Underwriting expense ratio
|
|
|
30.0
|
%
|
|
33.1
|
%
|
|
33.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio
|
|
|
97.8
|
%
|
|
80.1
|
%
|
|
82.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The
loss and loss expense ratio includes net losses incurred in the reported year
and any favorable or adverse prior year development of loss reserves held at
the beginning of the year.
78
The
following table summarizes the net (favorable) adverse prior year development
by line of business relating to the Reinsurance segment for the last three
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Property and
other short-tail lines
|
|
$
|
(64.3
|
)
|
$
|
(145.8
|
)
|
$
|
(142.5
|
)
|
Casualty and
other
|
|
|
(144.1
|
)
|
|
(99.7
|
)
|
|
(80.3
|
)
|
Structured
Indemnity
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(208.4
|
)
|
$
|
(245.5
|
)
|
$
|
(221.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss and
loss expense ratio excluding prior year development
|
|
|
80.3
|
%
|
|
63.4
|
%
|
|
62.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
In
addition, the following tables present the prior year (favorable) adverse
development of the Companys gross and net loss and loss expense reserves
within the Reinsurance segment for the last three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Gross:
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves at the beginning of the year
|
|
$
|
6,206
|
|
$
|
6,667
|
|
$
|
7,278
|
|
Gross (favorable)
adverse development of those reserves during the year
|
|
|
(297
|
)
|
|
(284
|
)
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves re-estimated one year later
|
|
$
|
5,909
|
|
$
|
6,383
|
|
$
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net:
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves at the beginning of the year
|
|
$
|
5,642
|
|
$
|
6,138
|
|
$
|
6,559
|
|
Net
(favorable) adverse development of those reserves during the year
|
|
|
(208
|
)
|
|
(245
|
)
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
losses and loss expense reserves re-estimated one year later
|
|
$
|
5,434
|
|
$
|
5,893
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding
prior year development, the loss ratio for the year ended December 31, 2011
increased by 16.9 loss percentage points as compared to the same period in 2010
due to higher levels of catastrophe losses occurring in the year ended December
31, 2011. Catastrophe losses net of reinsurance recoveries and including
reinstatement premiums were $247.3 million higher for the year ended December
31, 2011 compared to the same period of 2010. For further details on these
catastrophe losses in 2011 see Significant Items affecting the Results of
Operations 1) The impact of significant large natural catastrophe activity
above. Excluding favorable prior year development, net catastrophe losses and
reinstatement premiums in both periods, the loss ratio increased by 2.3 points
from 2010 to 2011 mainly due to higher levels of large loss events in U.S. property including a deterioration in the performance
of a large U.S. agricultural program, higher attritional losses and
business mix changes.
Excluding
prior year development, the loss ratio for the year ended December 31, 2010
increased by 1.2 loss percentage points as compared with the same period of
2009 attributable primarily to the impact of natural catastrophe losses and
large loss events in 2010 compared to 2009. Excluding favorable prior year
development, natural catastrophe losses and associated reinstatement premiums
in both years ending December 31, the loss ratio decreased by 6.7 percentage
points from 2009 to 2010. This improvement relates to changes in business mix
as well as a lower level of loss activity in 2010 relative to 2009 in several
lines including property, discontinued financial lines, and the professional
and trade credit business related to the credit crisis.
For
further information on the net favorable prior year reserve development of
$208.4 million and $245.5 million for the years ended December 31, 2011 and
2010 see Item 8, Note 10 to the Consolidated Financial Statements, Losses and
Loss Expenses.
The
decrease in the underwriting expense ratio during the year ended December 31,
2011 as compared to the same period of 2010 was due to a decrease in the
operating expense ratio of 1.2 points (10.5% as compared to 11.7%) and a
reduction in the acquisition expense ratio of 1.9 points (19.5% as compared to
21.4%). The decrease in the operating expense ratio was due to lower
compensation costs in the year ended December 31, 2011 partially offset by
increased information technology expenses associated with projects such as
Solvency II. The decrease in the acquisition expense ratio was mainly due to
the U.S. crop program where fees received were higher and profit commissions
paid were lower in the year ended December 31, 2011 as compared to the same
period of 2010 and profit and sliding scale commissions associated with
development in Latin America.
The
decrease in the underwriting expense ratio for the year ended December 31, 2010
compared to the same period in 2009 was due to a decrease in the acquisition
expense ratio of 0.4 points (21.4% as compared to 21.8% in 2009), and by a
decrease in the operating expense ratio of 0.3 points (11.7% as compared to
12.0% in 2009). The decrease in the acquisition expense ratio was a result of
reduced net earned premiums in relation to the credit and bond book of business
in Europe following a decision to exit these lines in 2010, which carries very
high acquisition costs combined with reinstatement premium adjustments. The
decrease in the operating expense ratio was as a result of cost savings
associated with the Companys expense reduction initiatives announced in the
third quarter of 2008 and first quarter of 2009.
79
Net
results from structured reinsurance products include certain structured
indemnity contracts that are accounted for as deposit contracts. Net results
from these contracts have increased during the year ended December 31, 2011 as
compared to the same period of 2010 due to higher interest expense in the prior
year. This higher interest expense was due to an accretion rate adjustment
recorded in the third quarter of 2010 based on changes in expected cash flows
and payout patterns on one of the larger structured indemnity contracts. Net
results from these products for the year ended December 31, 2010 decreased
compared to the same period in 2009. This decrease was mainly due to lower net
investment income as a result of lower yields and a smaller investment base,
which is reflective of the run off nature of this line of business, combined
with the higher 2010 year interest expense already outlined above.
Fee
income and other increased during the year ended December 31, 2011 as compared
to same period of 2010 due in part to the amendment to the sales proceeds for
the renewal rights of the European life, accident and health business,
resulting in a charge for the prior year period. In addition, fees earned in
Latin America increased during 2011 due to the extension in
duration for some treaties. Fee income and other decreased by $3.7 million in
2010 as compared to 2009, which included the sale of underwriting year 2009
renewal rights for the European life, accident and health business.
L
ife Operations
During
2009, the Company completed a strategic review of its life reinsurance
business. In relation to this initiative, the Company sold the renewal rights
to its Continental European short-term life, accident and health business in
December 2008. The Company also announced in March 2009 that it would run-off
its existing book of U.K. and Irish traditional life and annuity business, and
not accept new business. In addition, during July 2009, the Company entered
into an agreement to sell its U.S. life reinsurance business. The transaction
closed during the fourth quarter of 2009. In December 2009, the Company entered
into an agreement to novate and recapture a number of U.K. and Irish term
assurance and critical illness treaties. The transaction closed during the
fourth quarter of 2009. During the first quarter of 2010, the Company entered
into an agreement to recapture three U.K. and Irish term assurance treaties,
and this transaction closed in March 2010. An agreement to recapture future
premiums and liabilities on two retro pool treaties was consummated in November
2010.
Prior
to the decision being made to run-off the business, products offered included a
broad range of underlying lines of life reinsurance business, including term
assurances, group life, critical illness cover, immediate annuities and
disability income. In addition, prior to selling the renewal rights, the
products offered included short-term life, accident and health business. The segment
also covers a range of geographic markets, with an emphasis on the U.K., U.S.,
Ireland and Continental Europe.
The
following table summarizes the contribution from the Life operations segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$
|
394,555
|
|
|
(4.2
|
)%
|
$
|
411,938
|
|
|
(28.5
|
)%
|
$
|
576,162
|
|
Net premiums
written
|
|
|
362,362
|
|
|
(5.2
|
)%
|
|
382,075
|
|
|
(28.3
|
)%
|
|
532,852
|
|
Net premiums
earned
|
|
|
363,018
|
|
|
(5.2
|
)%
|
|
382,924
|
|
|
(31.0
|
)%
|
|
555,101
|
|
Claims and
policy benefits
|
|
|
(535,074
|
)
|
|
4.1
|
%
|
|
(513,833
|
)
|
|
(24.2
|
)%
|
|
(677,562
|
)
|
Acquisition
costs
|
|
|
(40,318
|
)
|
|
(17.9
|
)%
|
|
(49,104
|
)
|
|
(36.8
|
)%
|
|
(77,689
|
)
|
Operating
expenses
|
|
|
(9,311
|
)
|
|
(11.1
|
)%
|
|
(10,470
|
)
|
|
(34.6
|
)%
|
|
(16,009
|
)
|
Net
investment income
|
|
|
318,061
|
|
|
1.6
|
%
|
|
313,172
|
|
|
(5.8
|
)%
|
|
332,425
|
|
Net fee
income and other
|
|
|
219
|
|
|
(12.0
|
)%
|
|
249
|
|
|
(14.1
|
)%
|
|
290
|
|
Realized and
unrealized (losses) on investments
|
|
|
(89,999
|
)
|
|
65.3
|
%
|
|
(54,444
|
)
|
|
(76.6
|
)%
|
|
(232,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from Life operations
|
|
$
|
6,596
|
|
|
(90.4
|
)%
|
$
|
68,494
|
|
|
NM
|
*
|
$
|
(115,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table is an analysis of the Life operations gross premiums written,
net premiums written and net premiums earned for the last three years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
Gross
Premiums
Written
|
|
Net
Premiums
Written
|
|
Net
Premiums
Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life
|
|
$
|
232,754
|
|
$
|
230,130
|
|
$
|
230,786
|
|
$
|
256,703
|
|
$
|
255,056
|
|
$
|
255,905
|
|
$
|
413,831
|
|
$
|
400,345
|
|
$
|
422,594
|
|
Annuity
|
|
|
161,801
|
|
|
132,232
|
|
|
132,232
|
|
|
155,235
|
|
|
127,019
|
|
|
127,019
|
|
|
162,331
|
|
|
132,507
|
|
|
132,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
394,555
|
|
$
|
362,362
|
|
$
|
363,018
|
|
$
|
411,938
|
|
$
|
382,075
|
|
$
|
382,924
|
|
$
|
576,162
|
|
$
|
532,852
|
|
$
|
555,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written decreased by 4.2% during the year ended December 31, 2011
compared to the same period of 2010, driven predominantly by the Other Life
business. The decrease was in line with the run-off expectations following the
recapture of a number of term assurance treaties during the first and fourth
quarters of 2010, partially offset by favorable foreign exchange movements.
Gross premiums written relating to annuity business increased due to favorable
foreign exchange rate movements. Ceded premiums written increased due to
foreign exchange movements. Gross premiums written relating to total life business decreased by
80
$164.2 million
in the year ended December 31, 2010 as compared to the same period in 2009
mainly due to a $122.1 million decrease as a result of the novation of a
long-term care treaty and the novation/recapture of a number of term assurance
treaties during the second half of 2009 and during the first and fourth
quarters of 2010, together with the sale of the U.S. business during the fourth
quarter of 2009 Ceded premiums written decreased by $13.4 million due to
run-off of the short-term life, accident and health business, and following the
closure of the U.S. business in 2009.
Net
premiums earned decreased by 5.2% during the year ended December 31, 2011
compared to the same period of 2010 and in the year ended December 31, 2010
decreased by 31.0% as compared to the same period in 2009. The decreases in
2011 and 2010 were consistent with the movements in total gross and net
premiums written as described above.
Claims
and policy benefit reserves were higher by 4.1% during the year ended December 31, 2011,
compared to the same period of 2010, primarily due to adverse foreign exchange
impacts and due to the prior year experiencing reserve releases on recaptured
treaties that were not repeated this year. Claims and policy benefit
reserves decreased by 24.2% in the year ended December 31, 2010 as compared to
the same period in 2009, primarily as a result of the factors noted above
affecting gross and net premiums written.
Acquisition
costs decreased by 17.9% during the year ended December 31, 2011 compared to
the same period of 2010, largely due to the recaptured treaties in the prior
year and run-off expectations outlined above. Acquisition costs decreased by 36.8% during the year ended December 31, 2010 as
compared to the same period in 2009, largely as a result of the absence of
novated/recaptured treaties from the core long-term portfolio and the absence
of the U.S. business; as well as decreases in line with run-off expectations.
Operating
expenses decreased by 11.1% during the year ended December 31, 2011 compared to
the same period of 2010 due mainly to lower compensation expenses as a result
of severance costs in 2010 following the decision to place this business into
run-off. Operating
expenses decreased by 34.6% in the twelve months ended December 31, 2010 as compared
to the same period in the prior year mainly due to lower compensation expenses
resulting from lower headcount and lower costs related to acquisition of new
business.
Net
investment income is included in the calculation of contribution from Life
operations, as it
relates to income earned on portfolios of separately identified and managed
life investment assets and other allocated assets. Net investment income
increased by 1.6% in the year ended December 31, 2011 compared to the same
period of 2010, primarily due to positive foreign exchange impact, but was
broadly in line with expected returns in underlying currencies. Net
investment income decreased by 5.8% in the year ended December 31, 2010, as
compared to the same period in 2009, primarily as a result of negative exchange
impact, as well as the absence of U.S. business in 2010.
The
realized losses on investments within the Life portfolio relate primarily to
the sale of European hybrids and subordinated debt in European financial institutions.
See Net Realized Gains and Losses and Other-than-Temporary Declines in the
Value of Investments below for an analysis of the Companys total realized
losses on investments during the year ended December 31, 2011.
I
nvestment
Activities
The
following table illustrates the change in net investment income from P&C
operations, net income (loss) from investment fund affiliates, net realized
(losses) on investments, and net realized and unrealized (losses) on investment
and other derivative instruments for each of the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income P&C operations
(2)
|
|
$
|
819,708
|
|
|
(7.4
|
)%
|
$
|
884,866
|
|
|
(10.4
|
)%
|
$
|
987,398
|
|
Net income (loss) from investment fund
affiliates (3)
|
|
|
26,253
|
|
|
(48.6
|
)%
|
|
51,102
|
|
|
(35.2
|
)%
|
|
78,867
|
|
Net realized (losses) on investments (4)
|
|
|
(188,359
|
)
|
|
30.4
|
%
|
|
(270,803
|
)
|
|
NM
|
*
|
|
(921,437
|
)
|
Net realized and unrealized (losses) on
investment and other derivative instruments (5)
|
|
|
(10,738
|
)
|
|
(68.3
|
)%
|
|
(33,843
|
)
|
|
0.6
|
%
|
|
(33,647
|
)
|
|
|
|
|
|
(1)
|
Certain reclassifications
have been made to conform to current year presentation.
|
(2)
|
Net investment income
relating to P&C operations includes the net investment income related to
the net results from structured products.
|
(3)
|
The Company generally
records the income related to alternative fund affiliates on a one-month lag
and the private investment fund affiliates on a three-month lag in order for
the Company to meet the filing deadlines for its periodic reports.
|
(4)
|
Results up to and including
March 31, 2009 include charges for OTTI related to the non-credit impairment
of unrealized losses. From April 1, 2009, the non-credit impairment is
excluded from realized losses.
|
(5)
|
For a summary of realized
and unrealized gains and losses on all derivative instruments, see Item 8,
Note 14 to the Consolidated Financial Statements, Derivative Instruments.
|
*
|
NM Not meaningful
|
81
Net
investment income related to P&C operations decreased in the year ended
December 31, 2011 by $65.2 million as compared to the same period of 2010 due
to decreasing portfolio yields and cash outflows from the investment portfolio.
Overall, portfolio yields have decreased due to declining interest rates across
the Companys major jurisdictions. Net investment income related to P&C
operations decreased in the year ended December 31, 2010 by $102.5 million as
compared to the same period in 2009 due primarily to declining portfolio
yields, as a result of the impact of declines in U.S. interest rates.
Net
income from investment fund affiliates includes earnings from the Companys
investments in closed-end investment funds and partnerships and similar
vehicles that are accounted for under the equity method. Net income from
investment fund affiliates decreased in the year ended December 31, 2011
compared to the same period of 2010. However, these results reflect weaker
performance from the Companys alternative and private investment portfolios
for 2011 given difficult market conditions. Performance in alternative and
private funds in 2011 was challenged by volatile capital markets and the
generally weaker returns to risk assets during 2011 as compared to the prior
year. Net income from investment fund affiliates decreased in the year ended
December 31, 2010 compared to the same period of 2009. These results reflect
solid results from the Companys private investment portfolio for 2010, as compared
to a loss during 2009, offset by earnings from alternative funds, which were
lower than the results during 2009. Performance in alternative funds in 2009
was particularly strong.
I
nvestment
Performance
The
Company manages its fixed income securities in accordance with investment
authorities approved by the Risk and Finance Committee of the Board of
Directors. The following is a summary of the investment portfolio returns for
the years ended December 31, 2011 and 2010 of the fixed income portfolio and
non-fixed income portfolios:
|
|
|
|
|
|
|
|
|
|
2011 (1)
|
|
2010 (1)
|
|
|
|
|
|
|
|
P&C - Fixed income Portfolio
|
|
|
|
|
|
|
|
USD fixed
income portfolio
|
|
|
4.7
|
%
|
|
6.6
|
%
|
GBP fixed
income portfolio
|
|
|
4.4
|
%
|
|
5.7
|
%
|
EUR fixed
income portfolio
|
|
|
3.2
|
%
|
|
5.1
|
%
|
Life - Fixed income Portfolio
|
|
|
|
|
|
|
|
USD fixed
income portfolio
|
|
|
11.8
|
%
|
|
11.1
|
%
|
GBP fixed
income portfolio
|
|
|
9.5
|
%
|
|
9.5
|
%
|
EUR fixed
income portfolio
|
|
|
7.6
|
%
|
|
8.4
|
%
|
Other Portfolios
|
|
|
|
|
|
|
|
Alternative
portfolio (2)
|
|
|
3.4
|
%
|
|
6.2
|
%
|
Equity
portfolio (3)
|
|
|
(6.4
|
)%
|
|
NM
|
*
|
High-Yield
fixed income portfolio
|
|
|
1.5
|
%
|
|
8.4
|
%
|
|
|
|
|
|
(1)
|
Portfolio returns are
calculated by dividing the sum of the net investment income or net income
from investment fund affiliates, realized gains (losses) and unrealized gains
(losses) by the average market value of each portfolio. Performance is
measured in either the underlying asset currency or the functional currency.
|
(2)
|
Performance on the
alternative portfolio reflects the year ended November 30, 2011 and 2010,
respectively.
|
(3)
|
Investment returns for the
equity portfolio were negligible in 2010 and, accordingly, performance
returns were not presented.
|
*
|
NM Not meaningful
|
Ne
t Realized
Gains and Losses on Investments and Other-than-Temporary Declines in the Value
of Investments
Net
realized losses on investments for the year ended December 31, 2011 included
net realized losses of approximately $160.2 million related to the write-down
of certain of the Companys fixed income investments. In addition, included in
the net realized losses noted above are net realized losses of $28.2 million
due primarily to losses from sales of investments, principally, on European
financials and non-Agency RMBS offset partially by gains from sales of Agency
MBS and Government and Government Related and Supported securities.
The
significant components of the net impairment charges of $160.2 million were:
|
|
|
|
|
For structured credit
securities, the Company recorded net impairments of $78.7 million for the
year ended December 31, 2011. 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 of
these securities.
|
|
|
|
|
|
The Company recorded impairments
totaling $31.0 million for the year ended December 31, 2011 related to medium
term notes backed primarily by investment grade European investment grade
credit. The Company adjusted the estimated remaining holding period of
certain notes resulting in a shorter reinvestment spectrum.
|
|
|
|
|
|
For corporate securities,
excluding medium term notes, the Company recorded net impairments totaling
$6.5 million, principally on hybrid securities, for the year ended December
31, 2011.
|
82
|
|
|
|
|
The Company recorded
impairments of $44.0 million related primarily to foreign exchange losses
arising on U.S. dollar denominated securities held in a Swiss franc
functional currency entity and foreign exchange losses on U.K. sterling
denominated securities held in U.S. dollar portfolios. The foreign exchange
losses are recorded as part of the foreign currency revaluation process;
however, because the Companys consolidated reporting currency is U.S.
dollars, the foreign exchange impairment recorded on these securities is
fully offset by a cumulative foreign currency translation adjustment gain
recorded upon the consolidation of the foreign currency entity.
|
Net
realized losses in the year ended December 31, 2010 included net realized
losses of $205.1 million related to the write-down of certain of the Companys
fixed income, equity and other investments with respect to which the Company
determined that there was an other-than-temporary decline in the value of those
investments as well as $65.7 million from sales of investments.
N
et Realized and
Unrealized Gains and Losses on Derivatives
Net
realized and unrealized losses on investment derivatives for the years ended
December 31, 2011, 2010 and 2009 resulted from the Companys investment
strategy to manage interest rate risk, foreign exchange risk and credit risk,
and to replicate permitted investments. For a further discussion see Item
8, Note 2(h) to the Consolidated Financial Statements, Significant Accounting
Policies Other-Than-Temporary Impairments (OTTI) of Available for Sale and
Held to Maturity Securities, and
Note 14, Derivative Instruments.
O
ther Revenues
and Expenses
The following
table sets forth other revenues and expenses of the Company for each of the
three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operating affiliates
(1)
|
|
$
|
76,786
|
|
|
(36.7
|
)%
|
$
|
121,372
|
|
|
NM
|
*
|
$
|
60,480
|
|
Exchange gains (losses)
|
|
|
40,640
|
|
|
NM
|
*
|
|
10,161
|
|
|
NM
|
*
|
|
(84,813
|
)
|
Corporate operating expenses
|
|
|
(159,158
|
)
|
|
75.2
|
%
|
|
(90,686
|
)
|
|
(15.9
|
)%
|
|
(107,877
|
)
|
Interest expense (2)
|
|
|
(154,084
|
)
|
|
3.2
|
%
|
|
(159,118
|
)
|
|
(7.9
|
)%
|
|
(172,764
|
)
|
Impairment of goodwill
|
|
|
(429,020
|
)
|
|
NM
|
*
|
|
|
|
|
NM
|
*
|
|
|
|
Loss on settlement of guarantee
|
|
|
|
|
|
NM
|
*
|
|
(23,500
|
)
|
|
NM
|
*
|
|
|
|
Amortization of intangible assets
|
|
|
(1,438
|
)
|
|
22.6
|
%
|
|
(1,858
|
)
|
|
1.2
|
%
|
|
(1,836
|
)
|
Income tax expense
|
|
|
(59,707
|
)
|
|
(63.3
|
)%
|
|
(162,737
|
)
|
|
35.3
|
%
|
|
(120,307
|
)
|
|
|
|
|
|
(1)
|
The Company generally records
the income related to certain operating affiliates on a three-month lag in
order for the Company to meet the filing deadlines for its periodic reports.
|
(2)
|
Interest expense does not
include interest expense related structured products as reported within the
Insurance and Reinsurance segments.
|
*
|
NM Not
meaningful
|
The
following table sets forth the net income (loss) from operating affiliates for
each of the three years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
% Change
2011 vs 2010
|
|
2010
|
|
% Change
2010 vs 2009
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from financial operating
affiliates
|
|
$
|
(1,018
|
)
|
|
NM
|
*
|
$
|
53,031
|
|
|
NM
|
*
|
$
|
3,629
|
|
Net income from investment manager
affiliates
|
|
|
56,913
|
|
|
41.6
|
%
|
|
40,180
|
|
|
127.0
|
%
|
|
17,698
|
|
Net income from other strategic operating
affiliates
|
|
|
20,891
|
|
|
25.8
|
%
|
|
28,161
|
|
|
(28.1
|
)%
|
|
39,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,786
|
|
|
(36.7
|
)%
|
$
|
121,372
|
|
|
100.7
|
%
|
$
|
60,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
financial operating affiliate loss in the year ended December 31, 2011 reflects
a write down in value of one investment following a restructuring. Financial
operating affiliate income increased during the year ended December 31, 2010
as compared to the same period of 2009 due to the sale of a significant portion
of the Companys
shareholding in Primus Guaranty Ltd. For further information on the sale of
Primus shares, see Item 8, Note 6 to the Consolidated Financial Statements,
Investments in Affiliates.
Investment
manager affiliate income increased substantially in the year ended December 31,
2011 as compared to the same period of 2010, reflecting the positive impact of
the sale of the Companys ownership stake in Finisterre, and strong results
from certain investment manager affiliates in the current year, compared to
solid broad-based results in the same period of 2010. Investment manager affiliate income
increased during the year ended December 31, 2010 as compared to the same period
of 2009 primarily as a result of positive capital market conditions since the
fourth quarter of 2009 compared to the challenging conditions for alternative
asset managers reported in the fourth quarter of 2008 and first two quarters of
2009. Finally, the Company also benefited in 2010 from a $4.4 million gain
associated with the sale of its stake in one of the investment manager
affiliates.
83
Strategic
operating affiliate income decreased in the year ended December 31, 2011 as
compared to the same period of 2010 due to current year losses from an
insurance affiliate catastrophe bond fund and from the Companys Brazilian
joint venture ITAÚ XL Seguros Corporativos S.A. (ITAU), which was sold during
the second quarter of 2010. Income from other strategic operating affiliates decreased
during the year ended December 31, 2010 as compared to the same period of 2009
mainly due to lower earnings in 2010 relating to an insurance affiliate which
largely writes direct U.S. homeowners insurance and lower earnings due to the
sale of ITAU during the second quarter of 2010.
For
the full year of 2011, foreign exchange gains were produced as a result of a
stronger U.S. dollar against U.K. sterling, the Brazilian real and the Swiss
franc, which more than offset losses that were driven by a stronger Australian
dollar. In the year ended December 31, 2010, foreign exchange gains were
marginal as a result of a limited overall movement in the value of the U.S.
dollar during the period.
Foreign
exchange gains in the year ended December 31, 2011 were produced as a result of
a stronger U.S. dollar against U.K. sterling, the Euro, the Brazilian real and
the Swiss franc, which more than offset losses that were driven by a stronger
Australian dollar. Foreign exchange gains in the year ended December 31, 2010 were marginal
as a result of a limited overall movement in the value of the U.S. dollar
during the period. The U.S. dollar was stronger against the Euro, while
weakening against the Swiss franc, Canadian dollar and Brazilian real. In the
year ended December 31, 2009, the U.S. dollar weakened against all of the
Companys major currency exposures, particularly the Canadian dollar and U.K.
sterling, generating a loss for that period.
Corporate
operating expenses increased by 75.2% in the year ended December 31, 2011 as
compared to the same period in 2010 primarily as a result of certain strategic
corporate initiatives taking place in 2011. Corporate operating expenses
decreased by 15.9% during the year ended December 31, 2010 as compared to 2009
primarily as a result of the restructuring costs incurred during 2009.
Interest
expense includes costs related to the Companys debt and collateral facilities
as well as certain deposit liability accretion which is not included in Net
investment results structured products. Interest expense decreased in the
year ended December 31, 2011 as compared to the same period in 2010 as a result
of the overall reduction in the Companys debt following the purchase and
retirement of the $500 million 8.25% Senior Notes in August 2011 and the sale
of $400 million 5.75% Senior Notes in September 2011. In June 2010, interest
rate contracts designed as fair value hedges of certain issues of the Companys
notes payable and debt were settled. Interest expense for the year ended
December 31, 2010 as compared to the same period in 2009 decreased as a result
of the Companys debt hedging activities where the effective portion of the
hedging relationship is amortizing through interest expense over the remaining
term of the debt.
Due
in part to continued losses in certain businesses within the Insurance segment
and continued low industry market valuations, which impacts certain assumptions
used in the goodwill discounted cash flow valuation test such as the selected
discount rate and related risk premium, the Company performed an interim
impairment test for goodwill subsequent to its annual testing date of June 30.
The interim impairment test resulted in a non-cash goodwill impairment charge
of $429.0 million recorded representing a write-off of all goodwill associated
with the Insurance segment. For further information, see Item 8, Note 6 to the
Consolidated Financial Statements, Goodwill and Other Intangible Assets, and
see further discussion under Critical Accounting Policies and Estimates.
Amortization
of intangible assets was flat for the year ended December 31, 2011 as compared
to the same period in 2010 and 2009.
The
tax charge of $59.7 million recognized in the year ended December 31, 2011
included a benefit of $11.9 million arising as a result of a change in an
overseas tax rule adopted in the quarter ended June 30, 2011. The Company has
incurred a tax charge in 2011 notwithstanding reporting net losses due to the
distribution of operating profits across the organization and the impact of
internal reinsurance. In addition, net profits were recorded in certain
jurisdictions due to the distribution of prior year development. A tax benefit
of $11.5 million was recognized in the fourth quarter of 2011 in respect of the
non-cash goodwill impairment charge of $429.0 million. The increase in the
Companys income taxes in 2010 as compared to 2009 arose principally from the
increase in the profitability of the Companys U.S. and European operations in
2010. See Critical Accounting Policies and Estimates and Item 8, Note 22 to
the Consolidated Financial Statements, Taxation.
84
B
ALANCE
S
HEET
A
NALYSIS
I
nvestments
At
December 31, 2011 and 2010, total investments, cash and cash equivalents,
accrued investment income and net receivable for investments sold were $35.9
billion and $35.8 billion, respectively. The following table summarizes the
Companys total investment and cash and cash equivalents at December 31, 2011
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
Carrying Value
December 31,
2011
(1)
|
|
Percent of
Total
|
|
Carrying Value
December 31,
2010 (1)
|
|
Percent of
Total
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
3,825,125
|
|
|
10.7
|
%
|
$
|
3,022,868
|
|
|
8.4
|
%
|
Net receivable/ (payable) for investments
sold/ (purchased)
|
|
|
1,233
|
|
|
0.0
|
%
|
|
(12,599
|
)
|
|
0.0
|
%
|
Accrued investment income
|
|
|
331,758
|
|
|
0.9
|
%
|
|
350,091
|
|
|
1.0
|
%
|
Short-term investments
|
|
|
359,063
|
|
|
1.0
|
%
|
|
450,681
|
|
|
1.3
|
%
|
Fixed maturities - AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported (2)
|
|
|
1,990,983
|
|
|
5.5
|
%
|
|
2,565,444
|
|
|
7.2
|
%
|
Corporate Financials (3) (4)
|
|
|
3,392,291
|
|
|
9.5
|
%
|
|
3,985,889
|
|
|
11.1
|
%
|
Corporate Non-Financials (4)
|
|
|
7,070,224
|
|
|
19.7
|
%
|
|
6,983,082
|
|
|
19.5
|
%
|
Residential mortgage-backed securities
Agency
|
|
|
5,379,406
|
|
|
15.0
|
%
|
|
5,203,711
|
|
|
14.5
|
%
|
Residential mortgage-backed securities
Non-Agency
|
|
|
641,815
|
|
|
1.8
|
%
|
|
1,021,823
|
|
|
2.9
|
%
|
Commercial mortgage-backed securities
|
|
|
974,835
|
|
|
2.7
|
%
|
|
1,172,507
|
|
|
3.3
|
%
|
Collateralized debt obligations
|
|
|
658,602
|
|
|
1.8
|
%
|
|
734,138
|
|
|
2.1
|
%
|
Other asset-backed securities
|
|
|
986,356
|
|
|
2.8
|
%
|
|
960,532
|
|
|
2.7
|
%
|
U.S. States and political subdivisions of
the States
|
|
|
1,797,378
|
|
|
5.0
|
%
|
|
1,360,456
|
|
|
3.8
|
%
|
Non-U.S. Sovereign Government,
Supranational and Government-Related (2)
|
|
|
3,298,135
|
|
|
9.2
|
%
|
|
3,154,523
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities - AFS
|
|
$
|
26,190,025
|
|
|
73.0
|
%
|
$
|
27,142,105
|
|
|
75.9
|
%
|
Fixed maturities - HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government-Related/Supported
(2)
|
|
|
10,399
|
|
|
0.0
|
%
|
|
10,541
|
|
|
0.0
|
%
|
Corporate Financials (3) (4)
|
|
|
313,179
|
|
|
0.9
|
%
|
|
319,333
|
|
|
0.9
|
%
|
Corporate Non-Financials (4)
|
|
|
985,087
|
|
|
2.7
|
%
|
|
1,018,464
|
|
|
2.8
|
%
|
Residential mortgage-backed securities
Non-Agency
|
|
|
80,955
|
|
|
0.2
|
%
|
|
82,763
|
|
|
0.2
|
%
|
Other asset-backed securities
|
|
|
280,684
|
|
|
0.8
|
%
|
|
287,109
|
|
|
0.8
|
%
|
Non-U.S. Sovereign Government,
Supranational and Government-Related (2)
|
|
|
998,674
|
|
|
2.8
|
%
|
|
1,010,125
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities - HTM
|
|
$
|
2,668,978
|
|
|
7.4
|
%
|
$
|
2,728,335
|
|
|
7.5
|
%
|
Equity securities (5)
|
|
|
468,197
|
|
|
1.3
|
%
|
|
84,767
|
|
|
0.2
|
%
|
Investments in affiliates
|
|
|
1,052,729
|
|
|
2.9
|
%
|
|
1,127,181
|
|
|
3.1
|
%
|
Other investments
|
|
|
985,262
|
|
|
2.8
|
%
|
|
893,570
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash
equivalents
|
|
$
|
35,882,370
|
|
|
100.0
|
%
|
$
|
35,786,999
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Carrying values represents
the fair value for available for sale fixed maturities and amortized cost for
held to maturity securities.
|
(2)
|
U.S. Government and
Government-Related/Supported and Non U.S. Sovereign Government, Provincials,
Supranational and Government-Related include 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.
|
(3)
|
Included in Corporate -
Financials are gross unrealized losses of $108.8 million on Tier One and
upper Tier Two securities of financial institutions (Hybrids) with fair
value of $386.1 million, as well as gross unrealized losses of $70.1 million
on subordinated debt (including lower Tier Two securities) with a fair value
of $701.3 million.
|
(4)
|
Included within Corporate
are certain floating rate 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 securities have been allocated ratings of the underlying pool of securities.
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.
|
(5)
|
Included within equity
securities are investments in fixed income funds of $91.6 million and nil at
December 31, 2011 and 2010, respectively.
|
85
The
Company reviews on a regular basis its corporate debt investments to consider
its concentration, credit quality and compliance with established guidelines.
At both December 31, 2011 and 2010, the average credit quality of the Companys
total fixed income portfolio (including fixed maturities, short-term
investments, cash and cash equivalents and net receivable/(payable) for investment
sold/(purchased)) was Aa2/AA. Included in the table below are the credit
ratings of the fixed income portfolio excluding operating cash at December 31,
2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
Investments by Credit Rating (1)(2)
|
|
Carrying Value
|
|
Percent of
Total
|
|
Carrying Value
|
|
Percent of
Total
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
$
|
16,276
|
|
|
51.1
|
%
|
$
|
16,944
|
|
|
52.0
|
%
|
AA
|
|
|
5,266
|
|
|
16.6
|
%
|
|
5,058
|
|
|
15.5
|
%
|
A
|
|
|
7,098
|
|
|
22.3
|
%
|
|
7,288
|
|
|
22.3
|
%
|
BBB
|
|
|
2,418
|
|
|
7.6
|
%
|
|
2,182
|
|
|
6.7
|
%
|
BB and below
|
|
|
718
|
|
|
2.3
|
%
|
|
1,142
|
|
|
3.5
|
%
|
Not rated
|
|
|
39
|
|
|
0.1
|
%
|
|
6
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,815
|
|
|
100.0
|
%
|
$
|
32,620
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in the above are
$266.0 million or 0.8% of the portfolio that represents medium term notes
rated at the average credit rating of the underlying asset pools backing the
notes.
|
(2)
|
The credit rating for each
asset reflected above was principally determined based on the weighted
average rating of the individual securities from Standard & Poors,
Moodys Investors Service and Fitch Ratings. U.S. agencies paper, whether
with implicit or explicit government support, reflect the credit quality
rating of the U.S. government for the purpose of these calculations.
|
G
ross and Net
Unrealized Gains and Losses on Investments
At
December 31, 2011, the Company had net unrealized gains on available for sale
fixed maturities and short-term investments of $418.0 million. Gross unrealized
losses on these investments were $776.6 million. The information presented
below for the gross unrealized losses on the Companys investments at December
31, 2011 shows the potential effect upon future earnings and financial position
should management later conclude that some of the current declines in the fair
value of these investments are other-than-temporary. Realized losses or
impairments, depending on their magnitude, may have a material adverse effect
on the Companys operations. The decrease in net unrealized losses on
investments during the year ended December 31, 2011 was primarily due to losses
realized during the year and marginally favorable market movements. See Item
7A, Quantitative and Qualitative Disclosures about Market RiskCredit Risk.
The
following is the maturity profile of the available for sale fixed income
securities that were in a gross unrealized loss position at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
Type of
Securities
(U.S.
dollars in thousands)
|
|
Length of time in a continual
unrealized loss position
|
|
Amount of
unrealized loss at
December 31, 2011
|
|
Fair Value of
Securities in
an unrealized loss
position at
December 31, 2011
|
|
|
|
|
|
|
|
|
|
Fixed-Maturities and Short-Term Investments
|
|
Less than
six months
|
|
$
|
(43,802
|
)
|
$
|
2,084,310
|
|
|
|
At least 6 months
but less than 12 months
|
|
|
(44,451
|
)
|
|
290,865
|
|
|
|
At least 12
months but less than 2 years
|
|
|
(41,690
|
)
|
|
495,270
|
|
|
|
2 years or
more
|
|
|
(646,619
|
)
|
|
2,287,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(776,562
|
)
|
$
|
5,158,084
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
Less than
six months
|
|
$
|
(39,445
|
)
|
$
|
352,371
|
|
|
|
At least 6
months but less than 12 months
|
|
|
(990
|
)
|
|
9,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(40,435
|
)
|
$
|
361,585
|
|
|
|
|
|
|
|
|
|
|
|
86
The
following is the maturity profile of the AFS fixed income securities that were
in a gross unrealized loss position at December 31, 2011:
|
|
|
|
|
|
|
|
Maturity
profile in years of fixed income
securities in a gross unrealized loss position
(U.S. dollars in
thousands)
|
|
Amount of
unrealized loss at
December 31, 2011
|
|
Fair value of
securities in
an unrealized loss
position at
December 31, 2011
|
|
|
|
|
|
|
|
Less than 1
year remaining
|
|
$
|
(16,378
|
)
|
$
|
525,466
|
|
At least 1
year but less than 5 years remaining (1)
|
|
|
(108,617
|
)
|
|
1,439,912
|
|
At least 5
years but less than 10 years remaining (1)
|
|
|
(91,136
|
)
|
|
647,381
|
|
More than 10
years but less than 20 years remaining (1)
|
|
|
(60,551
|
)
|
|
269,142
|
|
At least 20
years or more remaining (1)
|
|
|
(37,271
|
)
|
|
281,486
|
|
Residential
mortgage-backed securities Agency
|
|
|
(3,849
|
)
|
|
347,278
|
|
Residential
mortgage-backed securities Non-Agency
|
|
|
(229,409
|
)
|
|
555,432
|
|
Commercial
mortgage-backed securities
|
|
|
(9,553
|
)
|
|
108,553
|
|
Collateralized
debt obligations
|
|
|
(191,717
|
)
|
|
639,719
|
|
Other
asset-backed securities
|
|
|
(28,081
|
)
|
|
343,715
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(776,562
|
)
|
$
|
5,158,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Tier One and Upper Tier Two
securities, representing committed term debt and hybrid instruments senior to
the common and preferred equities of the financial institutions, are
allocated based on the call date and medium term notes supported primarily by
pools of European investment grade credit with varying degrees of leverage
are allocated on contractual maturity.
|
The
following is the maturity profile of the HTM fixed income securities that were
in a gross unrealized loss position at December 31, 2011:
|
|
|
|
|
|
|
|
Maturity
profile in years of held to maturity
securities in a gross unrealized loss position
(U.S. dollars in
thousands)
|
|
Amount of
unrealized loss at
December 31, 2011
|
|
Fair value of
securities in
an unrealized loss position at
December 31, 2011
|
|
|
|
|
|
|
|
Less than 1
year remaining
|
|
$
|
(30
|
)
|
$
|
7,021
|
|
At least 1
year but less than 5 years remaining
|
|
|
(565
|
)
|
|
29,631
|
|
At least 5
years but less than 10 years remaining
|
|
|
(5,292
|
)
|
|
74,229
|
|
More than 10
years but less than 20 years remaining
|
|
|
(14,810
|
)
|
|
204,613
|
|
Residential
mortgage-backed securities Non-Agency
|
|
|
(32
|
)
|
|
9,372
|
|
Other
asset-backed securities
|
|
|
(6
|
)
|
|
1,106
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(20,735
|
)
|
$
|
325,972
|
|
|
|
|
|
|
|
|
|
Factors
considered in determining that additional OTTI charges were not warranted
include managements consideration of current and near term liquidity needs
along with other available sources, and in certain instances an evaluation of
the factors and time necessary for recovery. For further information, see Item
8, Note 5, Investments, to the Consolidated Financial Statements.
As
noted in Item 8, Note 2, to the Consolidated Financial Statements Significant
Accounting Policies, the determination of the amount of OTTI varies by
investment type and is based upon managements periodic evaluation and
assessment of known and inherent risks associated with the respective asset
class. Such evaluations and assessments are revised as conditions change and
new information becomes available. Management considers a wide range of factors
about the securities and uses its best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the
prospects for near-term recovery. Inherent in managements evaluation of the
security are assumptions and estimates about the operations of the issuer and
its future earnings potential. Management updates its evaluations regularly and
reflects additional impairments in net income as determinations are made.
Managements determination of the amount of the impairment taken on investments
is highly subjective and could adversely impact the Companys results of
operations. There can be no assurance that management has accurately assessed
the level of OTTI taken and reflected in the Companys financial statements.
Furthermore, additional impairments may need to be taken in the future.
Historical trends may not be indicative of future impairments.
Levels
of write down or OTTI are also impacted by the Companys assessment of the
intent to sell securities that have declined in value prior to recovery. If,
due to changes in circumstances, the Company determines to reposition or
realign portions of the portfolio and the Company determines not to hold
certain securities in an unrealized loss position to recovery, then the Company
will incur OTTI charges, which could be significant.
87
Gross
Unrealized Gains and Losses
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 $84.4
million, with a fair value of $39.6 million, which at December 31, 2011 had
cumulative fair value declines of greater than 50% of amortized costs. All of
these are mortgage and asset-backed securities. The Company has evaluated each
of these securities in conjunction with its investment manager service
providers and believes it is more likely than not that the issuer will be able
to fund sufficient principal and interest payments to support the current
amortized cost. These securities include gross unrealized losses of $61.2
million on non-Agency RMBS, $22.6 million on Core CDOs and $0.7 million on CMBS
holdings.
Net Unrealized Gains and Losses
Corporate Financial Sector Securities
At
December 31, 2011, approximately $1.2 billion of the Companys $3.7 billion in
corporate financial sector securities was held in the portfolios supporting the
Companys Life operations portfolio representing 91.1% of the net unrealized
losses on this asset class. The assets associated with that business are more
heavily weighted towards longer term securities from financial institutions,
including a significant portion of the Companys Tier 1 and Upper Tier 2
securities, representing committed term debt and hybrid instruments senior to
the common and preferred equity of the financial institutions. Financials held
in Life portfolios accounted for $115.8 million of the Companys net unrealized
loss at December 31, 2011. At December 31, 2011, approximately 43% of the
overall sensitivity to interest rate risk and 35% to credit risk was related to
the Life operations portfolio, despite these portfolios accounting for only 21%
of the fixed income portfolio.
88
Net Unrealized Gains and Losses
Structured Securities
The
following table details the current exposures to structured credit portfolios
excluding Agency MBS within the Companys fixed income portfolio as well as the
current net unrealized (loss) gain position at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
Holding at
Carrying Value
|
|
Percent
of Fixed
Income
Portfolio
|
|
Net
Unrealized
(Loss) Gain
|
|
Holding
at Carrying
Value
|
|
Percent
of Fixed
Income
Portfolio
|
|
Net
Unrealized
(Loss) Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency RMBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-prime first lien mortgages
|
|
$
|
295.5
|
|
|
1.0
|
%
|
$
|
(137.0
|
)
|
$
|
395.1
|
|
|
1.2
|
%
|
$
|
(142.4
|
)
|
Alt-A mortgages
|
|
|
114.5
|
|
|
0.4
|
%
|
|
(39.7
|
)
|
|
198.0
|
|
|
0.6
|
%
|
|
(53.7
|
)
|
Second lien mortgages (including sub-prime
second lien mortgages)
|
|
|
26.5
|
|
|
0.1
|
%
|
|
(6.1
|
)
|
|
33.1
|
|
|
0.1
|
%
|
|
(7.8
|
)
|
Prime RMBS
|
|
|
158.3
|
|
|
0.5
|
%
|
|
(26.3
|
)
|
|
311.6
|
|
|
0.9
|
%
|
|
(28.2
|
)
|
Other assets
|
|
|
128.0
|
|
|
0.4
|
%
|
|
5.8
|
|
|
169.7
|
|
|
0.5
|
%
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exposure to Non-Agency RMBS
|
|
|
722.8
|
|
|
2.4
|
%
|
|
(203.3
|
)
|
|
1,107.5
|
|
|
3.3
|
%
|
|
(235.4
|
)
|
Commercial Mortgage
Backed Securities
|
|
|
974.8
|
|
|
3.3
|
%
|
|
47.2
|
|
|
1,172.5
|
|
|
3.5
|
%
|
|
37.4
|
|
Core CDOs (1)
|
|
|
662.9
|
|
|
2.3
|
%
|
|
(185.6
|
)
|
|
733.5
|
|
|
2.2
|
%
|
|
(186.6
|
)
|
Other Structured
|
|
|
1,266.8
|
|
|
4.3
|
%
|
|
11.8
|
|
|
1,245.4
|
|
|
3.7
|
%
|
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Agency Structured Securities
|
|
$
|
3,627.3
|
|
|
12.3
|
%
|
$
|
(329.9
|
)
|
$
|
4,258.9
|
|
|
12.7
|
%
|
$
|
(403.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company defines Core
CDOs as investments in non-subprime collateralized debt obligations, which
primarily consisted of collateralized loan obligations.
|
At
December 31, 2011, the Companys sub-prime and Alt-A exposures had adequate
underlying loan characteristics and the Company believed at such date that the
current amortized cost levels were at or below the discounted cash flow value
of the holdings, based on an analysis of subordination levels relative to
current expectations of house price declines, loss severities and default
levels. The Company had approximately $340.9 million of Non-Agency RMBS
downgraded during the year ended December 31, 2011. However, 55.2% of the Companys
holdings remain rated investment grade at December 31, 2011.
Refer
to Significant Items Affecting the Results of Operations for further
discussion surrounding the impact of credit market movements on the Companys
investment portfolio.
European Sovereign Debt Crisis
The
ongoing global financial crisis has led to the deterioration of economies
globally, as sovereign governments have reacted to the crisis by further
increasing public expenditures in order to provide stimulus and security, which
has created significant budgetary shortfalls. Several key nations within the
European Union particularly the GIIPS countries have suffered a high
level of fiscal distress and economic vulnerability due to overreliance on external
credit sources and imprudent borrowing and other monetary practices. This has
raised doubts within the global financial community as to whether these sovereign
nations will remain able to service their own debt obligations both at a national
and local level.
The
Companys primary exposure to this European sovereign debt crisis is from
direct investment in fixed maturity securities issued by GIIPS national and
local governments, as well as from fixed maturity securities issued by certain
financial and non-financial corporate entities operating within GIIPS. The
Company continues to monitor its financial exposure to this crisis, and
continually assesses the impact of a potential default by any of GIIPS on their
respective debt issuances, including the associated impact on non-sovereign
entities in these nations in the event of such a default. With regard to
non-sovereign securities, the Company considers a security to be at risk if the
security issuers main operations are physically located within GIIPS, as
opposed to where the issuer is legally domiciled.
The
Company currently has no unfunded investment exposures or commitments to either
sovereign or non-sovereign entities within these EU nations. The Company does
invest in various alternative and private investment funds that from time to
time may invest in securities or investments related to these five EU nations.
Currently these are not material exposures.
89
The
following is an analysis of the Companys AFS and HTM fixed maturity investment
exposures related to this GIIPS crisis at December 31, 2011 and the contractual maturities of these securities.
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.
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
Fixed
maturities GIIPS - AFS
|
|
|
|
|
|
|
|
Sovereign investments
National Governments
|
|
$
|
6,601
|
|
$
|
5,927
|
|
Non-Sovereign investments
Financial Institutions
|
|
|
23,396
|
|
|
20,847
|
|
Non-Sovereign investments
Non-Financial Institutions
|
|
|
138,834
|
|
|
131,890
|
|
|
|
|
|
|
|
|
|
Total
fixed maturities GIIPS - AFS
|
|
$
|
168,831
|
|
$
|
158,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less than one year
|
|
$
|
13,824
|
|
$
|
14,028
|
|
Due after 1 through 5 years
|
|
|
32,069
|
|
|
30,395
|
|
Due after 5 through 10
years
|
|
|
72,988
|
|
|
70,651
|
|
Due after 10 years
|
|
|
49,950
|
|
|
43,590
|
|
|
|
|
|
|
|
|
|
|
|
$
|
168,831
|
|
$
|
158,664
|
|
|
|
|
|
|
|
|
|
Fixed
maturities GIIPS HTM
|
|
|
|
|
|
|
|
Sovereign investments
National Governments
|
|
$
|
11,738
|
|
$
|
8,739
|
|
Sovereign investments
Local Governments
|
|
|
9,360
|
|
|
7,649
|
|
Non-Sovereign investments
Non-Financial Institutions
|
|
|
72,782
|
|
|
65,380
|
|
|
|
|
|
|
|
|
|
Total
fixed maturities GIIPS - HTM
|
|
$
|
93,880
|
|
$
|
81,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less than one year
|
|
$
|
6,264
|
|
$
|
6,233
|
|
Due after 1 through 5 years
|
|
|
4,199
|
|
|
4,110
|
|
Due after 5 through 10
years
|
|
|
20,705
|
|
|
18,260
|
|
Due after 10 years
|
|
|
62,712
|
|
|
53,165
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,880
|
|
$
|
81,768
|
|
|
|
|
|
|
|
|
|
The
following table details the gross and net unrealized (loss) gain position at
December 31, 2011 relating to GIIPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Greece
|
|
Italy
|
|
Ireland
|
|
Portugal
|
|
Spain
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized (Losses) - GIIPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign investments
National Governments
|
|
$
|
|
|
$
|
(698
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(698
|
)
|
Non-Sovereign investments
Financial Institutions
|
|
|
|
|
|
|
|
|
(2,762
|
)
|
|
|
|
|
(1,317
|
)
|
|
(4,079
|
)
|
Non-Sovereign investments
Non-Financial Institutions
|
|
|
(38
|
)
|
|
(5,527
|
)
|
|
|
|
|
(111
|
)
|
|
(3,592
|
)
|
|
(9,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross unrealized gains (losses) relating to GIIPS
|
|
$
|
(38
|
)
|
$
|
(6,225
|
)
|
$
|
(2,762
|
)
|
$
|
(111
|
)
|
$
|
(4,909
|
)
|
$
|
(14,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains (Losses) - GIIPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sovereign investments
National Governments
|
|
$
|
|
|
$
|
(698
|
)
|
$
|
|
|
$
|
|
|
$
|
24
|
|
$
|
(674
|
)
|
Non-Sovereign investments
Financial Institutions
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
|
|
|
|
(1,317
|
)
|
|
(2,550
|
)
|
Non-Sovereign investments
Non-Financial Institutions
|
|
|
332
|
|
|
(4,181
|
)
|
|
|
|
|
(111
|
)
|
|
(2,984
|
)
|
|
(6,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net unrealized gains (losses) relating to GIIPS
|
|
$
|
332
|
|
$
|
(4,879
|
)
|
$
|
(1,233
|
)
|
$
|
(111
|
)
|
$
|
(4,277
|
)
|
$
|
(10,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the direct investment portfolio considerations discussed above, as
an international (re)insurance company, European credit exposures may exist for
the Company within unpaid losses and loss expenses recoverable and reinsurance
balances receivable. For further details on these balances including the names
of the Companys most significant reinsurance counterparties see Item 8, Note 9
to the Consolidated Financial Statements, Reinsurance. Other sources of
potential exposure to European credit issues may exist within certain lines of
insurance or reinsurance business written (including but not limited to lines
such as surety, business interruption, and political risk), or within
underlying investments held in securitized financial instruments or in
structured transactions in which the Company has an interest. Management
considers these potential exposures as part of its ongoing enterprise risk
management processes.
F
air
Value Measurements of Assets and Liabilities
As
described in Note 3 to the Consolidated Financial Statements, Fair Value
Measurements, effective January 1, 2008, the Company adopted the authoritative
guidance on fair value measurements and accordingly has provided required
disclosures by level within the fair value hierarchy of the Companys assets
and liabilities that are carried at fair value. As defined in the hierarchy,
those assets and liabilities categorized as Level 3 have valuations determined
using unobservable inputs. Unobservable inputs may include the entitys own
assumptions about market participant assumptions, applied to a modeled
valuation however, this is not the case with respect to the Companys Level 3
assets and liabilities. The vast majority of the assets and liabilities
classified as Level 3 are made up of those securities for which the 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 were not obtained to support a Level 2 classification or the Company
utilized internal valuation models.
During
the years ended December 31, 2011 and 2010, certain collateralized debt
obligations (CDOs) that were previously classified as Level 2 due to
sufficient market data being available to allow a price to be determined and
provided by third party pricing vendors, were transferred to Level 3 because
third party vendor prices were no longer believed to be the most appropriate
pricing source. Broker quotes, for which sufficient information regarding the
specific inputs utilized by the broker was not available to support a Level 2
classification, are the primary source of the valuations for these CDO
securities.
90
Controls over Valuation of Financial
Instruments
The
Company performs quarterly 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.
In
addition, the Company relies on valuation controls performed by external
parties responsible for sourcing appropriate valuations from third parties on
the Companys behalf. The approaches taken by these external parties to gain
comfort include, but are not limited to, comparing valuations between external
sources, completing recurring reviews of third party pricing services
methodologies and reviewing controls of the third party service providers to
support the completeness and accuracy of the prices received.
Valuation Methodology of Level 3 Assets and
Liabilities
Refer
to Item 8, Notes 2 and 3 of the Consolidated Financial Statements, Significant
Accounting Policies and Fair Value Measurements for a description
of the valuation methodology utilized to value Level 3 assets and liabilities,
how the valuation methodology is validated as well as further details associated
with various assets classified as Level 3. At December 31, 2011, the Company
did not have any liabilities that were carried at fair value based on Level 3
inputs other than derivative instruments in a liability position at December
31, 2011.
Fair Value of Level 3 Assets and Liabilities
At
December 31, 2011, the fair value of Level 3 assets and liabilities as a
percentage of the Companys total assets and liabilities that are carried at
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Total Assets and
Liabilities Carried
at Fair Value at
December 31, 2011
|
|
Fair Value of
Level 3 Assets
and Liabilities
|
|
Level 3 Assets
and Liabilities as
a Percentage of
Total Assets and
Liabilities
Carried at Fair
Value, by class
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government
agency-Related/Supported
|
|
$
|
1,990,983
|
|
$
|
|
|
|
|
%
|
Corporate
|
|
|
10,462,515
|
|
|
23,818
|
|
|
0.2
|
%
|
Residential mortgage-backed securities
Agency
|
|
|
5,379,406
|
|
|
32,041
|
|
|
0.6
|
%
|
Residential mortgage-backed securities
Non-Agency
|
|
|
641,815
|
|
|
|
|
|
|
%
|
Commercial mortgage-backed securities
|
|
|
974,835
|
|
|
|
|
|
|
%
|
Collateralized debt obligations
|
|
|
658,602
|
|
|
650,851
|
|
|
98.8
|
%
|
Other asset-backed securities
|
|
|
986,356
|
|
|
16,552
|
|
|
1.7
|
%
|
U.S. States and political subdivisions of
the States
|
|
|
1,797,378
|
|
|
|
|
|
|
%
|
Non-U.S. Sovereign Government,
Supranational and Government-Related
|
|
|
3,298,135
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed maturities, at fair value
|
|
|
26,190,025
|
|
$
|
723,262
|
|
|
2.8
|
%
|
Equity securities, at fair value
|
|
|
468,197
|
|
|
|
|
|
|
%
|
Short-term investments, at fair value
|
|
|
359,063
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale
|
|
$
|
27,017,285
|
|
$
|
723,262
|
|
|
2.7
|
%
|
Cash equivalents (1)
|
|
|
2,754,365
|
|
|
|
%
|
|
|
|
Other investments (2)
|
|
|
661,557
|
|
|
113,959
|
|
|
17.2
|
%
|
Other assets (3)
|
|
|
65,734
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total assets carried at fair value
|
|
$
|
30,498,941
|
|
$
|
837,221
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, but not yet
purchased (4)
|
|
$
|
20,844
|
|
$
|
|
|
|
|
%
|
Other liabilities (5)
|
|
|
58,706
|
|
|
42,644
|
|
|
72.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities carried at fair value
|
|
$
|
79,550
|
|
$
|
42,644
|
|
|
53.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash equivalents balances
subject to fair value measurements include certificates of deposit and money
market funds.
|
91
|
|
|
(2)
|
The Other investments
balance excludes certain structured transactions including certain
investments in project finance transactions and a payment obligation (as
described in Note 7, Other Investments), that has provided liquidity
financing to a structured credit vehicle as a part of a third party medium
term note facility. These Other investments are carried at amortized cost
that totaled $323.7 million at December 31, 2011 and $327.7 million at
December 31, 2010.
|
(3)
|
Other assets include
derivative instruments, reported on a gross basis.
|
(4)
|
Financial instruments sold,
but not yet purchased are included within Net payable for investments
purchased on the balance sheet.
|
(5)
|
Other liabilities include
derivative instruments, reported on a gross basis.
|
At
December 31, 2011, the Companys Level 3 assets represented approximately 2.7%
of assets that are measured at fair value and less than 2% of total assets. The
Companys Level 3 liabilities represented approximately 53.6% of liabilities
that are measured at fair value and less than 1% of total liabilities at
December 31, 2011.
Changes in the Fair Value of Level 3
Assets and Liabilities
See
Item 8, Note 3 to the Consolidated Financial Statements, Fair Value
Measurements, for
an analysis of the change in fair value of Level 3 Assets and Liabilities.
U
npaid Losses and
Loss Expenses
The
Company establishes reserves to provide for estimated claims, the general
expenses of administering the claims adjustment process and losses incurred but
not reported. These reserves are calculated using actuarial and other reserving
techniques to project the estimated ultimate net liability for losses and loss
expenses. The Companys reserving practices and the establishment of any
particular reserve reflects managements judgment concerning sound financial
practice and do not represent any admission of liability with respect to any
claims made against the Company.
Unpaid
losses and loss expenses totaled $20.6 billion and $20.5 billion at December
31, 2011 and 2010, respectively. The table below represents a reconciliation of
the Companys P&C unpaid losses and loss expenses for the year ended
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Gross unpaid
losses and loss
expenses
|
|
Unpaid
losses and
loss expenses
recoverable
|
|
Net
unpaid losses
and loss
expenses
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2010
|
|
$
|
20,531,607
|
|
$
|
(3,649,290
|
)
|
$
|
16,882,317
|
|
Losses and
loss expenses incurred
|
|
|
5,172,367
|
|
|
(1,093,976
|
)
|
|
4,078,391
|
|
Losses and
loss expenses paid/recovered
|
|
|
(4,911,737
|
)
|
|
1,065,535
|
|
|
(3,846,202
|
)
|
Foreign
exchange and other
|
|
|
(178,336
|
)
|
|
47,803
|
|
|
(130,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2011
|
|
$
|
20,613,901
|
|
$
|
(3,629,928
|
)
|
$
|
16,983,973
|
|
|
|
|
|
|
|
|
|
|
|
|
While
the Company reviews the adequacy of established reserves for unpaid losses and
loss expenses regularly, no assurance can be given that actual claims made and
payments related thereto will not be in excess of the amounts reserved. In the
future, if such reserves develop adversely, such deficiency would have a
negative impact on future results of operations. See Unpaid Losses and Loss
Expenses and Critical Accounting Policies and Estimates above and Item 8,
Note 10 to the Consolidated Financial Statements, Losses and Loss Expenses,
for further discussion.
U
npaid Losses and
Loss Expenses Recoverable and Reinsurance Balances Receivable
In
the normal course of business, the Company seeks to reduce the potential amount
of loss arising from claims events by reinsuring certain levels of risk assumed
in various areas of exposure with other insurers or reinsurers. While reinsurance
agreements are designed to limit the Companys losses from large exposures and
permit recovery of a portion of direct unpaid losses, reinsurance does not
relieve the Company of its ultimate liability to the Companys insureds.
Accordingly, the losses and loss expense reserves on the balance sheet
represent the Companys total unpaid gross losses. Unpaid losses and loss
expense recoverable relates to estimated reinsurance recoveries on the unpaid
loss and loss expense reserves.
92
The
table below presents the Companys net paid and unpaid losses and loss expenses
recoverable and reinsurance balances receivable at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Reinsurance balances receivable
|
|
$
|
263,877
|
|
$
|
225,129
|
|
Reinsurance recoverable on future policy benefits
|
|
|
25,020
|
|
|
22,597
|
|
Reinsurance recoverable on unpaid losses and loss expenses
|
|
|
3,685,260
|
|
|
3,717,405
|
|
Bad debt reserve on unpaid losses and loss expenses recoverable and
reinsurance balances receivable
|
|
|
(99,192
|
)
|
|
(121,917
|
)
|
|
|
|
|
|
|
|
|
Net paid and unpaid losses and loss expenses recoverable and
reinsurance balances receivable
|
|
$
|
3,874,965
|
|
$
|
3,843,214
|
|
|
|
|
|
|
|
|
|
The
Company has credit risk should any of its reinsurers be unable or unwilling to
settle amounts due. Of the $3.9 billion total unpaid losses and loss expenses
recoverable and reinsurance balances receivable at December 31, 2011, one
individual reinsurer accounted for greater than 15% of the total. The Company
is the beneficiary of letters of credit, trust accounts and funds withheld in
the aggregate amount of $1.7 billion at December 31, 2011, collateralizing
reinsurance recoverables with respect to certain reinsurers. The provision for
uncollectible reinsurance is required principally due to the failure of
reinsurers to indemnify the Company primarily because of disputes under
reinsurance contracts and insolvencies. As at December 31, 2011 and 2010, the
Company had a reserve for potential non-recoveries from reinsurers of $99.2
million and $121.9 million, respectively.
Approximately
92.2% of the total net unpaid loss and loss expense recoverable and reinsurance
balances receivable (net of collateral held) outstanding at December 31, 2011,
were due from reinsurers with a financial strength rating of A or better. The
following is an analysis of the total recoverable and reinsurance balances
receivable at December 31, 2011, by reinsurers owing more than 3% of such
total:
|
|
|
|
|
|
|
|
Name of
reinsurer
|
|
Reinsurer Financial
Strength Rating
|
|
% of total
|
|
|
|
|
|
|
|
Munich
Reinsurance Company
|
|
|
AA-/Stable
|
|
|
22.8
|
%
|
Swiss
Reinsurance Company
|
|
|
AA-/Stable
|
|
|
12.2
|
%
|
Swiss Re
Europe S.A.
|
|
|
AA-/Stable
|
|
|
5.1
|
%
|
Transatlantic
Reinsurance Company
|
|
|
A+/Stable
|
|
|
3.7
|
%
|
Everest
Reinsurance Company
|
|
|
A+/Stable
|
|
|
3.0
|
%
|
The
following table sets forth the ratings profile of the reinsurers that support
the unpaid loss and loss expense recoverable and reinsurance balances
receivable:
|
|
|
|
|
Reinsurer
Financial
Strength Rating
|
|
% of total
|
|
|
|
|
|
AAA
|
|
|
1.3
|
%
|
AA
|
|
|
58.4
|
%
|
A
|
|
|
32.3
|
%
|
BBB
|
|
|
0.4
|
%
|
BB and below
|
|
|
0.1
|
%
|
Captives
|
|
|
4.8
|
%
|
Not Rated
|
|
|
0.2
|
%
|
Other
|
|
|
2.5
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
93
L
IQUIDITY AND
C
APITAL
R
ESOURCES
Liquidity
is a measure of the Companys ability to generate sufficient cash flows to meet
the short-and long-term cash requirements of the Companys business operations.
As a global insurance and reinsurance company, one of the Companys principal
responsibilities to its clients is to ensure that the Company has ready access
to funds with which to settle large unforeseen claims. The Company would
generally expect that positive cash flow from operations (underwriting
activities and investment income) will be sufficient to cover cash outflows under
most future loss scenarios. However, there is a possibility that unforeseen
demands could be placed on the Company due to extraordinary events and as such
the Companys liquidity needs may change. Such events include, among other
things, several significant catastrophes occurring in a relatively short period
of time resulting in material incurred losses; rating agency downgrades of the
Companys core insurance and reinsurance subsidiaries that would require
posting of collateral in connection with the Companys letter of credit and
revolving credit facilities, return of unearned premium and/or the settlement
of derivative transactions and large scale uncollectible reinsurance
recoverables on paid losses (as a result of coverage disputes, reinsurers
credit problems or decreases in the value of collateral supporting reinsurance
recoverables), etc. Any one or a combination of such events may cause a
liquidity strain for the Company. In addition, a liquidity strain could also
occur in an illiquid market, such as that which was experienced in 2008.
Investments that may be used to meet liquidity needs in the event of a
liquidity strain may not be liquid, given inactive markets, or may have to be
sold at a significant loss as a result of depressed prices. Because each
subsidiary focuses on a more limited number of specific product lines than is
collectively available from the consolidated group of companies, the mix of
business tends to be less diverse at the subsidiary level. As a result, the
probability of a liquidity strain, as described above, may be greater for
individual subsidiaries than when liquidity is assessed on a consolidated
basis. If such a liquidity strain were to occur in a subsidiary, XL-Ireland may
be required to contribute capital to the particular subsidiary and/or curtail
dividends from the subsidiary to support holding company operations which may
be difficult given that XL-Ireland is a holding company and has limited
liquidity.
A
downgrade below A of the Companys principal insurance and reinsurance
subsidiaries by either S&P or A.M. Best, which is two notches below the
current S&P financial strength rating of A (Stable) and the A.M. Best
financial strength rating of A (Stable) of these subsidiaries, may trigger
cancelation provisions in a significant amount of the Companys assumed
reinsurance agreements and may potentially require the Company to return
unearned premiums to cedants. In addition, due to collateral posting
requirements under the Companys letter of credit and revolving credit
facilities, such a downgrade may require the posting of cash collateral in
support of certain in use portions of these facilities. Specifically, a
downgrade below A by A.M. Best would constitute an event of default under
the Companys three largest credit facilities and may trigger such collateral
requirements. In certain limited instances, such downgrades may require the
Company to return cash or assets to counterparties or to settle derivative
and/or other transactions with the respective counterparties. See Item 1A,
Risk Factors A downgrade or potential downgrade in our financial strength
and credit ratings by one or more rating agencies could materially and
negatively impact our business, financial condition, results of operations and/or
liquidity.
H
olding Company
Liquidity
As
holding companies, XL-Ireland and XL-Cayman have no operations of their own and
their assets consist primarily of investments in subsidiaries. Accordingly,
XL-Irelands and XL-Caymans future cash flows largely depend on the
availability of dividends or other statutorily permissible payments from
subsidiaries. The ability to pay such dividends is limited by the applicable
laws and regulations of the various countries and states in which these subsidiaries
operate, including, among others, the Cayman Islands, Bermuda, the U.S., New
York, Ireland, Switzerland and the U.K. See Item 8, Note 23 to the
Consolidated Financial Statements, Statutory Financial Data, for
further discussion and details regarding dividend capacity of the Companys
major operating subsidiaries. See Risk Factors Our holding company
structure and certain regulatory and other constraints affect our ability to
pay dividends, make payments on our debt securities and make other payments. The
ability to pay such dividends is also limited by the regulations of the Society
of Lloyds
and certain contractual provisions. No assurance can be given that the
Companys subsidiaries will pay dividends in the future to XL-Ireland or
XL-Cayman.
Under
Irish law, share premium was required to be converted to distributable
reserves for the Company to have the ability to pay cash dividends and redeem
and buyback shares following the Redomestication. On July 23, 2010, the Irish
High Court approved XL-Irelands conversion of share premium to $5.0 billion of
distributable reserves, subject to the completion of certain formalities under
Irish Company law. These formalities were completed in early August 2010. As of
December 31, 2011 and 2010 XL-Ireland had $4.1 billion and $4.8 billion,
respectively, in distributable reserves.
During
2009, management changed the internal ownership structure of certain of the
Companys operating subsidiaries in Bermuda and Ireland in order to more efficiently
utilize capital and to improve overall liquidity. In connection with these
changes, certain dividends were paid to XL-Cayman by operating subsidiaries. At
December 31, 2011, XL-Ireland and XL-Cayman held cash and investments, net of
liabilities associated with cash sweeping arrangements, of $1.6 million and
$2.0 billion, respectively, compared to $2.8 million and $1.7 billion,
respectively, at December 31, 2010.
94
XL-Irelands
principal uses of liquidity are ordinary share related transactions including
dividend payments to holders of its ordinary shareholders as well as share
buybacks, capital investments in its subsidiaries and certain corporate
operating expenses.
XL-Caymans
principal uses of liquidity are preference share related transactions including
dividend payments to its preference shareholders as well as preference share
buybacks from time to time, interest and principal payments on debt and certain
corporate operating expenses.
All
outstanding debt of the Company at December 31, 2011 and 2010 was issued by
XL-Cayman except for the $600 million XLCFE Notes which were issued by XLCFE
and were repaid at maturity on January 15, 2012. Both XL-Cayman and XLCFE are
wholly-owned subsidiaries of XL-Ireland. Certain of XL-Caymans outstanding
debt is fully and unconditionally guaranteed by XL-Ireland. The Companys
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. At December 31, 2011 and 2010, required statutory capital and
surplus for the principal operating subsidiaries of the Company was $6.7
billion and $6.5 billion, respectively.
XL-Ireland
and its subsidiaries provide no guarantees or other commitments (express or
implied) of financial support to the Companys subsidiaries or affiliates, except
for such guarantees or commitments that are in writing.
See
Consolidated Statements of Cash Flows in Item 8, Financial Statements and
Supplementary Data.
S
ources of
Liquidity for the Company
At
December 31, 2011, the consolidated Company had cash and cash equivalents of
approximately $3.8 billion as compared to approximately $3.0 billion at
December 31, 2010. There are three main sources of cash flows for the Company
those provided by operations, investing activities and financing activities.
Operating
Cash Flows
Historically,
cash receipts from operations, consisting of premiums and investment income,
generally have provided sufficient funds to pay losses as well as operating
expenses of the Companys subsidiaries and to fund dividends to XL-Ireland.
However, as a result of the combination of current soft market conditions, the
decision to put the Life operations segment and certain P&C lines into
run-off and lower investment yields, operating cash flows are lower in 2011
than in the prior year. Cash receipts from operations are generally derived
from the receipt of investment income on the Companys investment portfolio as
well as the net receipt of premiums less claims and expenses related to the
Companys underwriting activities in its P&C operations as well as its Life
operations segment. The Companys operating subsidiaries provide liquidity in
that premiums are generally received months or even years before losses are
paid under the policies related to such premiums. Premiums and acquisition
expenses are settled based on terms of trade as stipulated by an underwriting
contract, and generally are received within the first year of inception of a
policy when the premium is written, but can be up to three years on certain
reinsurance business assumed. Operating expenses are generally paid within a
year of being incurred. Claims, especially for casualty business, may take a
much longer time before they are reported and ultimately settled, requiring the
establishment of reserves for unpaid losses and loss expenses. Therefore, the
amount of claims paid in any one year is not necessarily related to the amount
of net losses incurred, as reported in the consolidated statement of income.
During
the year ended December 31, 2011, net cash flows provided by operating activities were $327.2 million
compared to net cash flows provided by operating activities of $594.8 million
for the same period in 2010. This reduction was primarily due to P&C net
loss and loss expenses paid of $3.8 billion in the year ended December 31,
2011, compared with $3.5 billion for the same period in 2010. This increase was
due primarily to higher loss payments in the insurance segment in 2011 relating
to the prior and current year catastrophes and other individual large property
and excess casualty loss payments.
During
the year ended December 31, 2010, net cash flows provided by operating
activities were $594.8 million compared to net cash flows used of $42.8 million
for the same period in 2009. The cash flows provided in 2010 resulted primarily
from lower levels of cash payments for claims from previous underwriting years
being offset by cash received as premium. In 2009, the cash flows used in
operating activities were primarily as a result of cash payments for claims
associated with Hurricanes Ike and Gustav losses.
Investing Cash Flows
Generally,
positive cash flow from operations and financing activities is invested in the
Companys investment portfolio, including affiliates or acquisition of
subsidiaries.
95
Net
cash provided by investing activities was $832.1 million in the year ended
December 31, 2011 compared to net cash provided of $261.5 million for the same
period in 2010. The 2011 cash inflow was mainly associated with the normal
purchase and sale of portfolio investments.
Net
cash provided by investing activities was $261.5 million in 2010 compared to
net cash provided of $214.6 million for 2009. The 2010 cash inflow was mainly
associated with normal purchase and sale of portfolio investments.
Certain
of the Companys invested assets are held in trust and pledged in support of
insurance and reinsurance liabilities. Such pledges are largely required by the
Companys 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. As further outlined in Item 8, Note 17(f) to
the Consolidated Financial Statements, Commitments and Contingencies Letters
of Credit, certain assets of the investment portfolio are collateralized for
the Companys letter of credit facilities. At December 31, 2011 and 2010, the
Company had $17.2 billion and $16.1 billion in pledged assets,
respectively.
Financing Cash Flows
Cash
flows related to financing activities include ordinary and preferred share
related transactions, the payment of dividends, the issue or repayment of debt
and deposit liability transactions.
On
November 2, 2010, the Company announced that its Board of Directors approved a
share buyback program, authorizing the Company to purchase up to $1.0 billion
of its ordinary shares. During 2010, the Company purchased and canceled 6.9
million ordinary shares under this program for $144.0 million. During 2011, the
Company purchased and canceled 31.7 million ordinary shares under this program
for $665.5 million. All share buybacks were carried out by way of redemption in
accordance with Irish law and the Companys constitutional documents. All
shares so redeemed were canceled upon redemption. At both December 31, 2011 and
February 24, 2012, $190.5 million remained available to be used for purchases
under this program.
During
the third quarter of 2007, the Companys Board of Directors approved a share
buyback program, authorizing the Company to purchase up to $500.0 million of
its ordinary shares. During 2010, the Company purchased and canceled 18.8
million ordinary shares for $375.4 million under this program which was the
full amount that had been remaining at January 1, 2010 under this program.
On
September 30, 2011, XL-Cayman completed the sale of $400 million aggregate
principal amount of 5.75% Senior Notes due 2021 at the issue price of 100% of
the principal amount. The 5.75% Senior Notes are fully and unconditionally
guaranteed by XL-Ireland. The 5.75% Senior Notes bear interest at a rate of
5.75% per annum, payable semiannually, beginning on April 1, 2012, and mature
on October 1, 2021. XL-Cayman may redeem the 5.75% Senior Notes, in whole or
part, from time to time in accordance with the terms of the indenture pursuant
to which the 5.75% Senior Notes were issued. XL-Cayman received net proceeds of
approximately $395.9 million from the offering, which were used to partially
repay the $600 million XLCFE Notes.
On
October 15, 2011, XL-Cayman issued 350,000 non-cumulative Series D Preference
Ordinary Shares for $350 million of cash and liquid investments that were held
in a trust account that was part of the Stoneheath facility. Holders of the Stoneheath
Securities received one Series D Preference Ordinary Share in exchange for each
Stoneheath Security. See Contingent Capital below.
During
the year ended December 31, 2011, net cash flows used in financing activities
were $358.7 million compared to net cash outflows of $1.5 billion for the same
period in 2010. The 2011 net cash outflows related primarily to the buybacks of
the Companys ordinary shares, as outlined above, the repurchase of all
outstanding Redeemable Series C preference ordinary shares, the payment of
ordinary and preferred share dividends and the repayment of deposit liabilities,
partially offset by the proceeds of issuance of the 5.75% Senior Notes and the
proceeds of issuance of the Series D Preference Ordinary Shares, as described
above.
Net
cash used in financing activities was $1.5 billion in 2010 compared to net cash
used of $1.0 billion in 2009. The 2010 net cash outflows related primarily to
the redemption of Redeemable Series C preference ordinary shares, purchase of
the Companys ordinary shares as outlined above, settlement of $450 million of
outstanding funding agreement liabilities, repayment of other deposit
liabilities and the payment of ordinary and preferred dividends. For more
information on the repurchase of debt, see Item 1, Note 18 to the Consolidated
Financial Statements, Share Capital.
During
the year ended December 31, 2009, net cash outflows related primarily to the
repayment of debt and deposit liabilities and the payment of common and
preferred dividends. Following the settlement of the purchase contracts
associated with the 7.0% equity security units in February 2009, the Company
issued 11,461,080 ordinary shares for net proceeds of approximately $743.1
million, which was used to retire the senior notes previously due February
2011, which had a fixed coupon of 5.25%.
On
March 26, 2009, the Company completed a cash tender offer for a portion of its
outstanding Redeemable Series C preference ordinary shares that resulted
in approximately 12.7 million Redeemable Series C preference ordinary shares
with a liquidation value of $317.3
96
million being purchased by
the Company for approximately $104.7 million plus accrued and unpaid dividends,
combined with professional fees totaling $0.8 million.
The
Company is a Well Known Seasoned Issuer (WKSI) as defined by the rules and regulations
of the SEC. The Company maintains a shelf registration statement on Form S-3
and is eligible to file automatically effective registration statements in the
future for the potential offering and sale of an unlimited amount of debt and
equity securities. The registration statement allows for various types of
securities to be offered, including the following (i) ordinary shares,
preference shares, debt securities, ordinary share warrants, ordinary share
purchase contracts and ordinary share purchase units of XL-Ireland, (ii)
guarantees by XL-Ireland of XL-Cayman debt securities and (iii) debt securities
of XL-Cayman.
In
addition the Company maintains letter of credit facilities which provide
liquidity. Details of these facilities are described below in Capital
Resources.
C
apital Resources
At
December 31, 2011 and 2010, the Company had total shareholders equity of $10.8
billion and $10.6 billion, respectively. In addition to ordinary share capital,
the Company depends on external sources of financing to support its
underwriting activities in the form of:
|
|
|
|
a.
|
debt;
|
|
|
|
|
b.
|
preference shares;
|
|
|
|
|
c.
|
letter of credit
facilities and other sources of collateral; and
|
|
|
|
|
d.
|
revolving credit
facilities.
|
|
|
|
|
In particular, the Company
requires, among other things:
|
|
|
|
|
|
sufficient capital to
maintain its financial strength and credit ratings, as issued by several
ratings agencies, at levels considered necessary by management to enable the
Companys key operating subsidiaries to compete;
|
|
|
|
|
|
sufficient capital to
enable its regulated subsidiaries to meet the regulatory capital levels
required in the United States, the U.K., Bermuda, Ireland, Switzerland and
other key markets;
|
|
|
|
|
|
letters of credit and
other forms of collateral that are required to be posted or deposited, as the
case may be, by the Companys 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. The Company also uses letters of
credit to support its operations at Lloyds; and
|
|
|
|
|
|
revolving credit to meet
short-term liquidity needs.
|
|
|
|
|
The following risks are
associated with the Companys requirement to renew its credit facilities:
|
|
|
|
|
|
the credit available from
banks may be reduced, resulting in the Companys need to pledge its
investment portfolio to customers. This could result in a lower investment
yield;
|
|
|
|
|
|
the Company may be
downgraded by one or more rating agencies, which could materially and
negatively impact the Companys business, financial condition, results of
operations and/or liquidity; and
|
|
|
|
|
|
the volume of business
that the Companys subsidiaries that are not admitted in the United States
are able to transact could be reduced if the Company is unable to renew its
letter of credit facilities at an appropriate amount.
|
Continued
consolidation within the banking industry may result in the aggregate amount of
credit provided to the Company being reduced. The Company attempts to mitigate
this risk by identifying and/or selecting additional banks that can participate
in the credit facilities upon renewal. See Item 1A, Risk Factors.
97
The
following table summarizes the components of the Companys current capital
resources at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Redeemable Series C preference ordinary
shares
|
|
$
|
|
|
$
|
71,900
|
|
Series D preference ordinary shares
|
|
|
345,000
|
|
|
|
|
Series E preference ordinary shares
|
|
|
999,500
|
|
|
1,000,000
|
|
Ordinary share capital
|
|
|
9,424,910
|
|
|
9,613,049
|
|
|
|
|
|
|
|
|
|
Total
ordinary and non-controlling interests capital
|
|
$
|
10,769,410
|
|
$
|
10,684,949
|
|
Notes
payable and debt
|
|
|
2,264,618
|
|
|
2,446,735
|
|
|
|
|
|
|
|
|
|
Total
capital
|
|
$
|
13,034,028
|
|
$
|
13,131,684
|
|
|
|
|
|
|
|
|
|
Ordinary Share Capital
The
following table reconciles the opening and closing ordinary share capital
positions at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Ordinary
share equity beginning of period
|
|
$
|
9,613,049
|
|
$
|
8,432,417
|
|
Net income
(loss) attributable to XL Group plc
|
|
|
(474,760
|
)
|
|
603,550
|
|
Share
buybacks
|
|
|
(667,022
|
)
|
|
(521,920
|
)
|
Share issues
|
|
|
573,015
|
|
|
1,109
|
|
Ordinary share
dividends
|
|
|
(138,978
|
)
|
|
(134,238
|
)
|
Preferred
share dividends
|
|
|
|
|
|
(34,694
|
)
|
Gain on
redemption of Series C preference ordinary shares
|
|
|
|
|
|
16,616
|
|
Change in
accumulated other comprehensive income
|
|
|
482,269
|
|
|
1,243,262
|
|
Impact of
adoption of new authoritative embedded derivative guidance, net of tax
|
|
|
|
|
|
(31,917
|
)
|
Share based
compensation and other
|
|
|
37,337
|
|
|
38,864
|
|
|
|
|
|
|
|
|
|
Ordinary
share equity end of period
|
|
$
|
9,424,910
|
|
$
|
9,613,049
|
|
|
|
|
|
|
|
|
|
Debt
The
following tables present the Companys debt under outstanding securities and
lenders commitments as at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Notes Payable
and Debt
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Commitment/
Debt
|
|
In Use/
Outstanding
|
|
Year of
Expiry
|
|
Less than
1 Year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
After 5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4-year
revolver
|
|
$
|
1,000,000
|
|
$
|
|
|
|
2015
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
6.50% XLCFE
Notes (1)
|
|
|
600,000
|
|
|
599,971
|
|
|
2012
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
5.25% Senior
Notes
|
|
|
600,000
|
|
|
597,501
|
|
|
2014
|
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
5.75% Senior
Notes
|
|
|
400,000
|
|
|
395,963
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
6.375%
Senior Notes
|
|
|
350,000
|
|
|
348,592
|
|
|
2024
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
6.25% Senior
Notes
|
|
|
325,000
|
|
|
322,591
|
|
|
2027
|
|
|
|
|
|
|
|
|
|
|
|
325,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,275,000
|
|
$
|
2,264,618
|
|
|
|
|
$
|
600,000
|
|
$
|
600,000
|
|
$
|
|
|
$
|
1,075,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to carrying value impact of fair value hedges
|
|
|
|
|
|
10,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value
|
|
|
|
|
$
|
2,275,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The XLCFE Notes were repaid
at maturity on January 15, 2012.
|
In
Use and Outstanding data represent December 31, 2011 accreted values.
Payments Due by Period data represent ultimate redemption values.
In
addition, see Item 8, Note 13 to the Consolidated Financial Statements, Notes
Payable and Debt Financing Arrangements, for further information.
At
December 31, 2011, banks and investors provided the Company and its
subsidiaries with $3.3 billion of debt capacity, of which $2.3 billion was
utilized by the Company. These facilities consist of:
|
|
|
|
|
a revolving
credit facility of $1.0 billion.
|
98
|
|
|
|
|
|
senior
unsecured notes of approximately $2.3 billion. These notes require the
Company to pay a fixed rate of interest during their terms. At December 31,
2011, there were five outstanding issues of senior unsecured notes:
|
|
|
|
|
|
|
|
$600 million
XLCFE Notes due January 2012, with a fixed coupon of 6.5%. These notes were
repaid at maturity on January 15, 2012. The notes were issued at 99.469% and
gross proceeds were $596.8 million. Related expenses of the offering amounted
to $7.9 million.
|
|
|
|
|
|
|
|
$600 million
senior notes due September 2014, with a fixed coupon of 5.25%. The security
is publicly traded. The notes were issued in two tranches of $300 million
aggregate principal amount each one tranche at 99.432% and the other at
98.419%. Aggregate gross proceeds were $593.6 million. Related expenses of
the offering amounted to $4 million.
|
|
|
|
|
|
|
|
$400 million
senior notes due October 2021, with a fixed coupon of 5.75%. The security is
publicly traded. The notes were issued at 100.0% and gross proceeds were
$395.9 million. Related expenses of the offering amounted to $4.1 million.
|
|
|
|
|
|
|
|
$350 million
senior notes due November 2024, with a fixed coupon of 6.375%. The security is
publicly traded. The notes were issued at 100.0% and gross proceeds were $350
million. Related expenses of the offering amounted to $2 million.
|
|
|
|
|
|
|
|
$325 million
of senior notes due May 2027, with a fixed coupon of 6.25%. The security is
publicly traded. The notes were issued at 99.805% and gross proceeds were
$324.4 million. Related expenses of the offering amounted to $2.5 million.
|
Preferred Shares and Non-controlling
Interest in Equity of Consolidated Subsidiaries
Neither
the Redeemable Series C preference ordinary shares nor the Series E preference
ordinary shares were transferred from XL-Cayman to XL-Ireland in the
Redomestication. Accordingly, subsequent to July 1, 2010, these instruments
represent non-controlling interests in the consolidated financial statements of
the Company and have been reclassified to non-controlling interest in equity of
consolidated subsidiaries. See Item 8, Note 1, General to Consolidated
Financial Statements for further information. During the third quarter of 2011,
all Redeemable Series C preference ordinary shares were purchased and canceled.
See Key Focuses of Management Capital Management herein. At December 31,
2011, the face value of the outstanding Series E preference ordinary shares was
$999.5 million.
On
October 15, 2011, XL-Cayman issued 350,000 non-cumulative Series D Preference
Ordinary Shares for $350 million of cash and liquid investments that were held
in a trust account that was part of the Stoneheath facility. Holders of the
Stoneheath Securities received one Series D Preference Ordinary Share in
exchange for each Stoneheath Security. See Contingent Capital below.
On
December 5, 2011, the Company repurchased 5,000 of the outstanding Series D
Preference Ordinary Shares with a liquidation preference value of $5.0 million
for $3.7 million, including accrued dividends. As a result of these
repurchases, the Company recorded a gain of approximately $1.3 million through
Non-controlling interests in the Consolidated Statement of Income in the fourth
quarter of 2011. At
December 31, 2011, the face value of the outstanding Series D Preference
Ordinary Shares was $345.0 million.
In
August 2011, in accordance with the terms of the 10.75% Units, XL-Cayman purchased
and retired all of the 8.25% Senior Notes for $575 million in a remarketing.
These notes comprised a part of the 10.75% Units. The proceeds from the
remarketing were used to satisfy the purchase price for XL-Irelands ordinary
shares issued to holders of the 10.75% Units pursuant to the forward purchase
contracts comprising a part of the 10.75% Units. Each forward purchase contract
provided for the issuance of 1.3242 ordinary shares of XL-Ireland at a price of
$25 per share. The settlement of the forward purchase contracts resulted in
XL-Irelands issuance of an aggregate of 30,456,600 ordinary shares for an
aggregate purchase price of $575 million. As a result of the settlement of the
forward purchase contracts, the 10.75% Units ceased to exist and are no longer
traded on the NYSE.
In
August 2011, XL-Cayman completed a cash tender offer for its outstanding
Redeemable Series C preference ordinary shares that resulted in 2,811,000
Redeemable Series C preference ordinary shares with a liquidation value of
$25.00 being repurchased and canceled by XL-Cayman for approximately $71.0
million including accrued and unpaid dividends and professional fees.
Subsequent to the expiration of the tender offer, and on the same terms as the
offer, XL-Cayman repurchased and canceled the remaining outstanding Redeemable
Series C preference ordinary shares with a liquidation value of $25.00 for
approximately $0.9 million plus accrued and unpaid dividends. Therefore, no
Redeemable Series C preference ordinary shares were outstanding at December 31,
2011.
On
February 16, 2011, the Company repurchased 30,000 of the outstanding Redeemable
Series C preference ordinary shares with a liquidation preference value of
$0.75 million for $0.65 million. In addition, the Company repurchased 500 of
the outstanding Series E preference ordinary shares with a liquidation
preference value of $0.50 million for $0.47 million. As a result of these
99
repurchases,
the Company recorded a reduction in Non-controlling interests of approximately
$0.13 million in the first quarter of 2011.
On
February 12, 2010, the Company repurchased and canceled approximately 4.4
million Redeemable Series C preference ordinary shares with a liquidation
preference value of $110.8 million for approximately $94.2 million, which was a
portion of its outstanding Redeemable Series C preference ordinary shares. As a
result, a book value gain of approximately $16.6 million to ordinary
shareholders was recorded in the first quarter of 2010.
On
March 26, 2009, the Company completed a cash tender offer for its outstanding
Redeemable Series C preference ordinary shares that resulted in approximately
12.7 million Redeemable Series C preference ordinary shares with a liquidation
value of $317.3 million being purchased by the Company for approximately $104.7
million plus accrued and unpaid dividends, combined with professional fees
totaling $0.8 million. As a result, a book value gain of approximately $211.8
million was recorded in the first quarter of 2009 to ordinary shareholders. In
addition, see Item 8, Note 18 to the Consolidated Financial Statements, Share
Capital, for further information.
Contingent Capital
At
December 31, 2011, the Company did not have any contingent capital
transactions. At December 31, 2010, the Company had one contingent
capital transaction where the outstanding put option had not been exercised, as
discussed below.
On
December 5, 2006, the Company and certain operating subsidiaries (Ceding
Insurers) entered into a securities issuance agreement (the Securities
Issuance Agreement), and certain of the Companys foreign insurance and
reinsurance subsidiaries (Ceding Insurers) entered into an excess of loss
reinsurance agreement (the Reinsurance Agreement), with Stoneheath. The net
effect of these agreements to the Company was the creation of a contingent put
option to issue $350.0 million of preference ordinary shares in the aggregate
of XL-Cayman. The agreements provided the Company with a Reinsurance Collateral
Account in support of certain covered perils named in the Reinsurance
Agreement. The covered perils included United States wind, European wind,
California earthquake and terrorism worldwide. After an initial three-month
period, the covered perils as well as the attachment points and aggregate
retention amounts could be changed by the Ceding Insurers in their sole
discretion, which could have resulted in a material increase or decrease in the
likelihood of payment under the Reinsurance Agreement. On each date on which a
Ceding Insurer withdrew funds from the Reinsurance Collateral Account, the
Company would have been required to issue and deliver to Stoneheath an amount
of Series D Preference Ordinary Shares having an aggregate liquidation
preference that is equal to the amount of funds so withdrawn from the
Collateral Account. The Company was obligated to reimburse Stoneheath for
certain fees and ordinary expenses. The initial term of the Reinsurance
Agreement was for the period from the December 5, 2006 through June 30, 2007,
with four annual mandatory extensions through June 30, 2011 (unless coverage is
exhausted thereunder prior to such date). At the Ceding Insurers option, the
Reinsurance Agreement was extended to December 31, 2011.
On
October 15, 2011, the Company announced that the Stoneheath facility would be
terminated and, as a result, XL-Cayman would issue Series D Preference Ordinary
Shares. Under the terms of the Securities Issuance Agreement, XL-Cayman was
required upon the occurrence of certain conditions to issue and deliver to
Stoneheath for distribution to the holders of the Stoneheath Securities, Series
D Preference Ordinary Shares having an aggregate liquidation preference equal
to the remaining assets in the Reinsurance Collateral Account in exchange for a
distribution of such assets from the Reinsurance Collateral Account to
XL-Cayman. One such condition, the termination of an asset swap agreement
covering the assets held under the Reinsurance Collateral Account, occurred in
accordance with the terms of the swap agreement because Stoneheath did not seek
to extend or replace it prior to its termination date. As a result, on November
16, 2011, Stoneheath redeemed the Stoneheath Securities and distributed the
Series D Preference Ordinary Shares it received from XL-Cayman in exchange for
the $350 million in assets from the Reinsurance Collateral Account.
Letter of Credit Facilities and
other sources of collateral
At
December 31, 2011, the Company had five letter of credit facilities in place
with total availability of $4.0 billion, of which $1.9 billion was utilized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment
Expiration per period
|
|
Other Commercial
Commitments
(U.S.
dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Commitment
|
|
In Use
|
|
Year of
Expiry
|
|
Less than
1 Year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
After 5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letter of
Credit Facility (1)
|
|
$
|
1,000,000
|
|
$
|
805,770
|
|
|
2014
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Letter of
Credit Facility (2) (3)
|
|
|
1,350,000
|
|
|
116,664
|
|
|
2015
|
|
|
|
|
|
|
|
|
1,350,000
|
|
|
|
|
Letter of
Credit Facility (3)
|
|
|
650,000
|
|
|
487,851
|
|
|
2015
|
|
|
|
|
|
|
|
|
650,000
|
|
|
|
|
Letter of
Credit Facility
|
|
|
750,000
|
|
|
344,659
|
|
|
Continuous
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letter of
Credit Facility
|
|
|
250,000
|
|
|
116,248
|
|
|
Continuous
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five letter
of credit facilities
|
|
$
|
4,000,000
|
|
$
|
1,871,192
|
|
|
|
|
$
|
|
|
$
|
1,000,000
|
|
$
|
2,000,000
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company has the option
to increase the size of the March 2011 Credit Agreement by an additional $500
million.
|
100
|
|
(2)
|
This letter of credit
facility includes $1.0 billion that is also included in the 4-year revolver
listed under Notes Payable and Debt.
|
(3)
|
The Company has the option
to increase the size of the facilities under the December 2011 Credit
Agreements by an additional $500 million across both such facilities.
|
In
2011, the Company and certain of its subsidiaries (i) entered into three new
credit agreements, which provided for an aggregate amount of outstanding
letters of credit and revolving credit loans up to $3 billion, subject to
certain options to increase the size of the facilities, and (ii) terminated the
five-year credit agreement dated June 21, 2007 (the 2007 Credit Agreement),
which had provided for an aggregate amount of outstanding letters of credit and
revolving credit loans up to $4 billion.
On
March 25, 2011, the Company and certain of its subsidiaries entered into a
secured credit agreement (the March 2011 Credit Agreement) that currently
provides for issuance of letters of credit up to $1 billion with the option to
increase the size of the facility by an additional $500 million. Concurrent
with the effectiveness of the 2011 Credit Agreement, the commitments of the
lenders under the 2007 Credit Agreement were reduced from $4 billion to $3
billion. The commitments under the March 2011 Credit Agreement will expire on,
and the credit facility is available on a continuous basis until, the earlier
of (i) March 25, 2014 and (ii) the date of termination in whole of the
commitments upon an optional termination or reduction of the commitments by the
account parties or upon an event of default.
On
December 9, 2011, the Company and certain of its subsidiaries entered into (i)
a new secured credit agreement (the December 2011 Secured Credit Agreement)
and (ii) a new unsecured credit agreement (the December 2011 Unsecured Credit
Agreement and together with the December 2011 Secured Credit Agreement, the
December 2011 Credit Agreements). In connection with the December 2011 Credit
Agreements, the 2007 Credit Agreement was terminated. The March 2011 Credit
Agreement continues in force, but was amended to conform certain of its terms
to those of the December 2011 Secured Credit Agreement.
The
2007 Credit Agreement had provided for letters of credit and for revolving
credit loans of up to $750 million with the aggregate amount of outstanding
letters of credit and revolving credit loans thereunder not to exceed $3
billion. At the time at which it was terminated and the December 2011 Credit
Agreements became effective, there were no outstanding revolving credit loans
under the 2007 Credit Agreement. A portion of the letters of credit outstanding
under the 2007 Credit Agreement at the time of its termination were continued
under the March 2011 Credit Agreement and the remainder were continued under
the December 2011 Credit Agreements.
The
December 2011 Secured Credit Agreement provides for issuance of letters of
credit up to $650 million. The December 2011 Unsecured Credit Agreement is a
$1.35 billion facility that provides for issuance of letters of credit and up
to $1 billion of revolving credit loans. The Company has the option to increase
the maximum amount of letters of credit available by an additional $500 million
across the facilities under the December 2011 Credit Agreements.
The
commitments under each December 2011 Credit Agreement expire on, and such
credit facilities are available until, the earlier of (i) December 9, 2015 and
(ii) the date of termination in whole of the commitments upon an optional
termination or reduction of the commitments by the account parties or upon an
event of default.
The
availability of letters of credit under the December 2011 Secured Credit
Agreement and the March 2011 Credit Agreements is subject to a borrowing base
requirement, determined on the basis of specified percentages of the face value
of eligible categories of assets varying by type of collateral. In the event
that such credit support is insufficient, the Company could be required to
provide alternative security to cedants. This could take the form of insurance
trusts supported by the Companys investment portfolio or funds withheld
(amounts retained by ceding companies to collateralize loss or premium
reserves) using the Companys cash resources or combinations thereof. The face
amount of letters of credit required is driven by, among other things, loss
development of existing reserves, the payment pattern of such reserves, the
expansion of business written by the Company and the loss experience of such
business. In addition to letters of credit, the Company has established
insurance trusts in the United States that provide cedants with statutory
credit for reinsurance under state insurance regulation in the United States.
The
Company reviews current and projected collateral requirements on a regular
basis, as well as new sources of collateral. Managements objective is to
maintain an excess amount of collateral sources over expected uses. The Company
also reviews its liquidity needs on a regular basis.
In
October 2011, the $75,000 letter of credit facility that was supporting a subsidiary
of the Company terminated.
On
June 22, 2010, a $2.3 billion five-year letter of credit facility expired and
was not replaced.
101
C
ovenants
The
Companys Credit Facilities contains a number of financial covenants that must
be met and maintained, and that among other things, could restrict, subject to
certain exceptions, our financial flexibility including the ability to:
|
|
|
|
|
engage in
mergers or consolidations;
|
|
|
|
|
|
dispose of
assets outside of the ordinary course of business;
|
|
|
|
|
|
create liens
on assets; and
|
|
|
|
|
|
engage in
certain transactions with affiliates.
|
The
following outlines the covenant requirements and actual amounts as of December
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenant Requirement
|
|
Actual Ratio or
Balance at
December 31,
2011
|
|
Margin of Adverse
Development from
December 31, 2011
Levels
|
|
Ratio of
Total Funded Debt to Total Capitalization (1)
|
|
|
Less than
0.35:1.00
|
|
|
0:18:1.00
|
|
|
$2.1 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
Secured Indebtedness (2)
|
|
|
Less than
15% of consolidated net worth
|
|
|
$345 million
|
|
|
$1.2 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Net Worth (3)
|
|
|
$6.5 billion
|
|
|
$10.3 billion
|
|
|
$3.8 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Strength Ratings (4)
|
|
|
A- or better from A.M. Best
|
|
|
A(Stable)
|
|
|
Two notches
|
|
|
|
|
|
|
(1)
|
The ratio of total funded
debt to total capitalization not to be greater than 0.35:1.00. This ratio is
defined as total funded debt to the sum of total funded debt plus
consolidated net worth.
|
(2)
|
Secured indebtedness
excludes secured letter of credit facilities as permitted under the schedules
to the credit facilities. At December 31, 2011, such secured letter of credit
facilities amounted to $1.75 billion.
|
(3)
|
Consolidated net worth
means, at any time, the consolidated stockholders equity of the Company
excluding (a) the effect of any adjustments required under the authoritative
accounting guidance for accounting for certain investments in debt and equity
securities; and (b) any exempt indebtedness (and the assets relating thereto)
in the event such exempt indebtedness is consolidated on the consolidated
balance sheet the Company.
|
(4)
|
Covenants require that none
of XL Insurance (Bermuda) Ltd, XL Re Ltd or XL Re Europe Ltd has a financial
strength ratings of less than A from A.M. Best. At December 31, 2011, the
Company was in compliance with such covenants.
|
As
noted in the table above, at December 31, 2011, the Company was in compliance
with all covenants by significant margins, and the Company currently remains in
compliance.
C
ROSS
-D
EFAULT
AND
O
THER
P
ROVISIONS IN
D
EBT
I
NSTRUMENTS
The
following describes certain terms of the documents referred to below. All
documents referred to below have been filed with the SEC and should be referred
to for an assessment of the complete contractual obligations of the Company.
In
general, all of the Companys bank facilities, indentures and other documents
relating to the Companys outstanding indebtedness, including the credit
facilities discussed above (collectively, the Companys Debt Documents),
contain cross default provisions to each other and the Companys Debt Documents
contain affirmative covenants. These covenants provide for, among other things,
minimum required ratings of the Companys insurance and reinsurance operating
subsidiaries and minimum required levels of secured indebtedness in the future.
In addition, generally each of the Companys Debt Documents provide for an
event of default in the event of a change of control of the Company or certain
events involving bankruptcy, insolvency or reorganization of the Company.
A
downgrade below A of the Companys principal insurance and reinsurance
subsidiaries by either S&P or A.M. Best, which is two notches below the
current S&P financial strength rating of A (Stable) and the A.M. Best
financial strength rating of A (Stable) of these subsidiaries, may trigger
cancelation provisions in a significant amount of the Companys assumed
reinsurance agreements and may potentially require the Company to return unearned
premiums to cedants. In addition, due to collateral posting requirements under
the Companys letter of credit and revolving credit facilities, such a
downgrade may require the posting of cash collateral in support of certain in
use portions of these facilities (see Liquidity and Capital Resources). In
certain limited instances, such downgrades may require the Company to return
cash or assets to counterparties or to settle derivative and/or other
transactions with the respective counterparties. See Item 1A, Risk Factors,
A downgrade or potential downgrade in our financial strength and credit
ratings by one or more rating agencies could materially and negatively impact
our business, financial condition, results of operations and/or liquidity.
102
Under
the March 2011 Credit Agreement and December 2011 Credit Agreements, in the
event that XL Insurance (Bermuda) Ltd, XL Re Ltd or XL Re Europe Ltd fail to
maintain a financial strength rating of at least A from A.M. Best, an event
of default would occur.
Given
that all of the Companys Debt Documents contain cross default provisions, this
may result in all holders declaring such debt due and payable and an
acceleration of all debt due under those documents. If this were to occur, the
Company may not have funds sufficient at that time to repay any or all of such
indebtedness.
L
ONG
-T
ERM
C
ONTRACTUAL
O
BLIGATIONS
The
following table presents the Companys long term contractual obligations and
related payments as at December 31, 2011, due by period. This table excludes
further commitments of $135.2 million to the Companys related investment funds
and certain limited partnerships, and letter of credit facilities of $1.9
billion. See Item 8, Note 14 to the Consolidated Financial Statements,
Derivative Instruments, and Note 17 to the Consolidated Financial Statements,
Commitments and Contingencies. See Item 8, Note 13 to the Consolidated
Financial Statements, Notes Payable and Debt and Financing Arrangements, for
further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
(U.S.
dollars in thousands)
|
|
Total
|
|
Less than
1 year
|
|
1 to 3
years
|
|
3 to 5
years
|
|
More than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
2,275,000
|
|
$
|
600,000
|
|
$
|
600,000
|
|
$
|
|
|
$
|
1,075,000
|
|
Interest on long-term debt
|
|
|
944,910
|
|
|
100,294
|
|
|
263,453
|
|
|
198,607
|
|
|
382,556
|
|
Operating lease obligations
|
|
|
180,936
|
|
|
34,867
|
|
|
56,877
|
|
|
33,413
|
|
|
55,779
|
|
Capital lease obligations
|
|
|
224,645
|
|
|
11,169
|
|
|
23,183
|
|
|
24,356
|
|
|
165,937
|
|
Deposit liabilities (1)
|
|
|
2,419,629
|
|
|
165,270
|
|
|
245,552
|
|
|
314,663
|
|
|
1,694,144
|
|
Future policy benefits (2)
|
|
|
7,806,322
|
|
|
387,336
|
|
|
754,256
|
|
|
743,967
|
|
|
5,920,763
|
|
Unpaid losses and loss expenses property
and casualty operations (3)
|
|
|
20,960,825
|
|
|
4,810,155
|
|
|
5,775,328
|
|
|
3,401,607
|
|
|
6,973,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,812,267
|
|
$
|
6,109,091
|
|
$
|
7,718,649
|
|
$
|
4,716,613
|
|
$
|
16,267,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Deposit liabilities on the
Companys Consolidated Balance Sheet at December 31, 2011 were $1,608,108.
The difference from the amount included above relates to the discount on
payments due in the future. The payment related to these liabilities varies
primarily based on interest rates. The ultimate payments associated with
these liabilities could differ from the Companys estimate. See Item 8, Note
11 to the Consolidated Financial Statements, Deposit Liabilities, for
further information.
|
|
|
(2)
|
Future policy benefit
reserves related to Life operations were $4,845,394 on the Companys
Consolidated Balance Sheet at December 31, 2011. Amounts reflected above
include an allowance for future premiums in respect of contracts under which
premiums are payable throughout the life of the underlying policy. The value
of the discount is also included for those lines of business that have
reserves where future claim payments and future premium receipts can be
estimated using actuarial principles. The timing and amounts of actual claims
payments and premium receipts related to these reserves vary based on the underlying
experience of the portfolio. Typical elements of the experience include
mortality, morbidity and persistency. The ultimate amount of the claims
payments and premium receipts could differ materially from the Companys
estimated amounts.
|
|
|
(3)
|
The unpaid loss and loss
expenses were $20,613,901 on the Companys Consolidated Balance Sheet at
December 31, 2011. The difference from the amount included above relates to
the discount on payments due in the future for certain workers compensation
lines. The timing and amounts of actual claims payments related to these
P&C reserves vary based on many factors including large individual
losses, changes in the legal environment, as well as general market
conditions. The ultimate amount of the claims payments could differ
materially from the Companys estimated amounts. For information regarding
the estimates for unpaid loss and loss expenses as well as factors effecting
potential payment patterns of reserves for actual and potential claims
related the Companys different lines of business see Critical Accounting
Policies and Estimates above. Certain lines of business written by the
Company, such as excess casualty, have loss experience characterized as low
frequency and high severity. This may result in significant variability in
loss payment patterns and, therefore, may impact the related asset/liability
investment management process. In order to be in a position, if necessary, to
make these payments, the Companys liquidity requirements are supported by
having revolving lines of credit facilities available to the Company and
significant reinsurance programs, in addition to the Companys general high
grade fixed income investment portfolio.
|
103
V
ARIABLE
I
NTEREST
E
NTITIES
(VIE
S
)
AND
O
THER
O
FF
-B
ALANCE
S
HEET
A
RRANGEMENTS
At
times, the Company has utilized VIEs both indirectly and directly in the
ordinary course of the Companys business.
The
Company invests in CDOs, and other investment vehicles that are issued through
variable interest entities as part of the Companys investment portfolio. The
activities of these VIEs are generally limited to holding the underlying
collateral used to service investments therein. Our involvement in these
entities is passive in nature and we are not the arranger of these entities.
The Company has not been involved in establishing these entities. The Company
is not the primary beneficiary of these variable interest entities 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 variable interest entities. The Company is not the primary beneficiary
of these variable interest entities as contemplated in current authoritative
accounting guidance. For further details on the nature of the obligations and
the size of the Companys maximum exposure see Item 8, Note 14, Derivative
Instruments, and Note 17(h), Commitments and Contingencies Financial and
Other Guarantee Exposures, and to the Consolidated Financial Statements.
The
Company has utilized variable interest entities in certain instances as a means
of accessing contingent capital. The Company has utilized unconsolidated
entities in the formation of contingent capital facilities.
At
December 31, 2011, the Company did not have any contingent capital facilities.
The following description is of the contingent capital facility that was
terminated in the fourth quarter of 2011.
On
December 5, 2006, the Company and ceding insurers entered into a securities
issuance agreement, and certain of the Companys ceding insurers entered into a
reinsurance agreement, with Stoneheath. The net effect of these agreements to
the Company was the creation of a contingent put option in the amount of $350.0
million in the aggregate. The Companys interests in Stoneheath represented an
interest in a variable interest entity under current authoritative accounting
guidance, however, the Company was not the primary beneficiary as contemplated
in that guidance.
The
agreements provided the Company with a Reinsurance Collateral Account in
support of certain covered perils named in the Reinsurance Agreement. The
covered perils include U.S. wind, European wind, California earthquake and
terrorism worldwide. The contingent put option was recorded at fair value with
changes in fair value recognized in earnings.
R
ECENT
A
CCOUNTING
P
RONOUNCEMENTS
See
Item 8, Note 2 to the Consolidated Financial Statements, Significant
Accounting Policies, for a discussion of recent accounting pronouncements.
R
ETURN ON
O
RDINARY
S
HAREHOLDERS
E
QUITY
C
ALCULATION
The
following is a reconciliation of the Companys annualized return on ordinary
shareholders equity for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Opening shareholders equity
|
|
$
|
10,613,049
|
|
$
|
9,432,417
|
|
$
|
6,116,831
|
|
Less: Non-controlling interest in equity of
consolidated subsidiaries
|
|
|
(1,002,296
|
)
|
|
(2,305
|
)
|
|
(1,598
|
)
|
Less: Series E preference ordinary shares
|
|
|
|
|
|
(1,000,000
|
)
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Opening ordinary shareholders equity
|
|
$
|
9,610,753
|
|
$
|
8,430,112
|
|
$
|
5,115,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing shareholders equity
|
|
|
10,769,410
|
|
|
10,613,049
|
|
|
9,432,417
|
|
Less: Non-controlling interest in equity of
consolidated subsidiaries
|
|
|
(1,344,472
|
)
|
|
(1,002,296
|
)
|
|
(1,002,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Closing ordinary shareholders equity
|
|
$
|
9,424,938
|
|
$
|
9,610,753
|
|
$
|
8,430,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Average ordinary shareholders equity
|
|
|
9,517,845
|
|
|
9,020,432
|
|
|
6,772,673
|
|
Net income (loss) attributable to ordinary
shareholders
|
|
|
(474,760
|
)
|
|
585,472
|
|
|
206,607
|
|
Return on ordinary shareholders equity
Net income (loss) attributable to ordinary shareholders
|
|
|
(5.0
|
)%
|
|
6.5
|
%
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
104
C
AUTIONARY
N
OTE
R
EGARDING
F
ORWARD
-L
OOKING
S
TATEMENTS
The
Private Securities Litigation Reform Act of 1995 (PSLRA) provides a safe
harbor for forward-looking statements. Any prospectus, prospectus supplement,
the Companys Annual Report to ordinary shareholders, any proxy statement, any
other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or
oral statements made by or on behalf of the Company may include forward-looking
statements that reflect the Companys current views with respect to future
events and financial performance. Such statements include forward-looking
statements both with respect to the Company in general, and to the insurance
and reinsurance sectors in particular (both as to underwriting and investment
matters). Statements that include the words expect, intend, plan,
believe, project, anticipate, will, may and similar statements of a
future or forward-looking nature identify forward-looking statements for
purposes of the PSLRA or otherwise.
All
forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these factors include, but are not
limited to, the following: (i) changes in the size of the Companys claims
relating to natural or man-made catastrophe losses due to the preliminary
nature of some reports and estimates of loss and damage to date; (ii) trends in
rates for property and casualty insurance and reinsurance; (iii) the timely and
full recoverability of reinsurance placed by the Company with third parties, or
other amounts due to the Company; (iv) changes in ratings, rating agency
policies or practices; (v) changes in the projected amount of ceded reinsurance
recoverables and the ratings and creditworthiness of reinsurers; (vi) the
timing of claims payments being faster or the receipt of reinsurance
recoverables being slower than anticipated by the Company; (vii) the Companys
ability to successfully implement its business strategy especially during a
soft market cycle; (viii) increased competition on the basis of pricing,
capacity, coverage terms or other factors, which could harm the Companys
ability to maintain or increase its business volumes or profitability; (ix)
greater frequency or severity of claims and loss activity than the Companys
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (x) changes in general economic conditions,
including the effects of inflation on the Companys business, including on
pricing and reserving, and changes in interest rates, credit spreads, foreign
currency exchange rates and future volatility in the worlds credit, financial
and capital markets that adversely affect the performance and valuation of the
Companys investments or access to such markets; (xi) developments, including
uncertainties related to the ability of Euro-zone countries to service existing
debt obligations and the strength of the Euro as a currency and to the
financial condition of counterparties, reinsurers and other companies that are
at risk of bankruptcy to affect the Companys business; (xii) the potential
impact on the Company from government-mandated insurance coverage for acts of
terrorism; (xiii) the potential for changes to methodologies, estimations and
assumptions that underlie the valuation of the Companys financial instruments
that could result in changes to investment valuations; (xiv) changes to the
Companys assessment as to whether it is more likely than not that the Company
will be required to sell, or has the intent to sell, available for sale debt
securities before their anticipated recovery; (xv) availability of borrowings
and letters of credit under the Companys credit facilities; (xvi) the ability
of the Companys subsidiaries to pay dividends to XL Group plc and XLIT Ltd.;
(xvii) the potential effect of regulatory developments in the jurisdictions in
which the Company operates, including those which could impact the financial
markets or increase the Companys business costs and required capital levels;
(xviii) changes in regulation or laws applicable to XL Group plc or its
subsidiaries, brokers or customers; (xix) acceptance of the Companys products
and services, including new products and services; (xx) changes in the
availability, cost or quality of reinsurance; (xxi) changes in the distribution
or placement of risks due to increased consolidation of insurance and
reinsurance brokers; (xxii) loss of key personnel; (xxiii) changes in
accounting policies or practices or the application thereof; (xxiv) legislative
or regulatory developments including, but not limited to, changes in regulatory
capital balances that must be maintained by the Companys operating
subsidiaries and governmental actions for the purpose of stabilizing the
financial markets; (xxv) the effects of mergers, acquisitions and divestitures;
(xvi) developments related to bankruptcies of companies insofar as they affect
property and casualty insurance and reinsurance coverages or claims that the
Company may have as a counterparty; (xxvii) changes in applicable tax laws, tax
treaties or tax regulations or the interpretation or enforcement thereof;
(xxviii) the effects of business disruption or economic contraction due to war,
terrorism or other hostilities; (xxix) the Companys ability to realize the
expected benefits from the redomestication; and (xxx) the other factors set
forth in Item 1A, Risk Factors, and the Companys other documents on file
with the SEC. The foregoing review of important factors should not be construed
as exhaustive and should be read in conjunction with the other cautionary
statements that are included herein or elsewhere. The Company undertakes no
obligation to update publicly or revise any forward-looking statement, whether
as a result of new information, future developments or otherwise, except as
required by the federal securities laws.
105
|
|
|
|
I
TEM 7A.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
The
following risk management discussion and the estimated amounts generated from
the sensitivity and value-at-risk (VaR) analyses presented in this document
are forward-looking statements of market risk assuming certain adverse market
conditions occur. Actual results in the future may differ materially from these
estimated results due to, among other things, actual developments in the global
financial markets and changes in the composition of the Companys investment
portfolio. The results of analysis used by the Company to assess and mitigate
risk should not be considered projections of future events of losses. See Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations Cautionary Note Regarding Forward-Looking Statements.
Market
risk represents the potential for loss due to adverse changes in the fair value
of financial and other instruments. The Company is principally exposed to the
following market risks: interest rate risk, foreign currency exchange rate
risk, equity price risk, and credit risk. For a discussion of related risks,
see the risk factor titled We are exposed to significant capital markets risk
related to changes in interest rates, credit spreads, equity prices and foreign
exchange rates as well as other investment risks, which may adversely affect
our results of operations, financial condition or cash flows in Item 1A, Risk
Factors, above.
The
majority of the Companys market risk arises from its investment portfolio
which consists of fixed income securities, alternative investments, public
equities, private investments, derivatives, other investments, and cash,
denominated in both U.S. and foreign currencies, which are sensitive to changes
in interest rates, credit spreads, equity prices, foreign currency exchange
rates and other related market risks. The Companys fixed income and equity
securities are primarily classified as available for sale; accordingly market
related changes will have an immediate effect on comprehensive income and
shareholders equity but will not ordinarily have an immediate effect on net
income. Nevertheless, market related changes affect consolidated net income
when, and if, a security is sold or is impaired.
On
a limited basis the Company may enter into derivatives and other financial
instruments primarily for risk management purposes. For example, the Company
may use derivatives to hedge foreign exchange and interest rate risk related to
its consolidated net exposures. From time to time, the Company may also use
instruments such as futures, options, interest rate swaps, credit default swaps
and foreign currency forward contracts to manage the risk of interest rate
changes, credit deterioration, foreign currency exposures, and other market
related exposures and also to obtain exposure to a particular financial market.
Historically, the Company entered into credit derivatives outside of the
investment portfolio in conjunction with the legacy financial guarantee and
financial products operations. The Company attempts to manage the risks
associated with derivative use with guidelines established by senior
management. Derivative instruments are carried at fair value with the resulting
changes in fair value recognized in income in the period in which they occur.
See Item 8, Note 14 to the Consolidated Financial Statements, Derivative
Instruments, for further information.
This
risk management discussion and the estimated amounts generated from the
sensitivity and VaR analyses presented in this document are forward-looking
statements of market risk assuming certain adverse market conditions occur.
Actual results in the future may differ materially from these estimated results
due to, among other things, actual developments in the global financial markets
and changes in the composition of the Companys investment portfolio. The
results of analysis used by the Company to assess and mitigate risk should not
be considered projections of future events of losses. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements.
Interest Rate Risk
Interest
rate risk is the price sensitivity of a fixed income security to changes in
interest rates. The Companys fixed income portfolio is exposed to interest
rate risk. The Companys liabilities are accrued at a static rate from an
accounting standpoint. However, management considers the liabilities to have an
economic exposure to interest rate risk and manages the net economic exposure
to interest rate risk considering both assets and liabilities. Interest rate
risk is managed within the context of its SAA process by specifying SAA
Benchmarks relative to the estimated duration of its liabilities and managing
the fixed income portfolio relative to the Benchmarks such that the overall
economic effect of interest rate risk is within managements risk tolerance.
Nevertheless, the Company remains exposed to interest rate risk with respect to
the Companys overall net asset position and more generally from an accounting
standpoint since the assets are marked to market, while liabilities are accrued
at a static rate.
In
addition, while the Companys debt is not carried at fair value and not
adjusted for market changes, changes in market interest rates could have an
impact on debt values at the time of any refinancing.
106
Foreign Currency Exchange Rate Risk
Many
of the Companys non-U.S. subsidiaries maintain both assets and liabilities in
local currencies, therefore, foreign exchange risk is generally limited to net
assets denominated in foreign currencies.
Foreign
currency exchange rate gains and losses in the Companys Statement of Income
arise for accounting purposes when net assets or liabilities are denominated in
foreign currencies that differ from the functional currency of those
subsidiaries. While unrealized foreign exchange gains and losses on
underwriting balances are reported in earnings, the offsetting unrealized gains
and losses on invested assets are recorded as a separate component of
shareholders equity, to the extent that the asset currency does not match that
entitys functional currency. This results in an accounting mismatch that will
result in foreign exchange gains or losses in the consolidated statements of
income depending on the movement in certain currencies. The Company has formed
several branches with Euro and U.K. sterling functional currencies and
continues to focus on attempting to limit exposure to foreign exchange risk.
Foreign
currency exchange rate risk in general is reviewed as part of the Companys
risk management framework. Within its asset liability framework for the
investment portfolio, the Company pursues a general policy of holding the
assets and liabilities in the same currency and as such the Company is not
generally exposed to the risks associated with foreign exchange movements
within its investment portfolio as currency impacts on the assets are generally
matched by corresponding impacts on the related liabilities. However,
locally-required capital levels are invested in local currencies in order to
satisfy regulatory requirements and to support local insurance operations and
are not matched by related liabilities. Foreign exchange contracts within the
investment portfolio may be utilized to manage individual portfolio foreign
exchange exposures, subject to investment management service providers
guidelines established by management. These contracts are generally 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 three months or less. The Company may also attempt to manage the
foreign exchange volatility arising on certain transactions denominated in
foreign currencies. These include, but are not limited to, premium receivable,
reinsurance contracts, claims payable and investments in subsidiaries.
The
principal currencies creating foreign exchange risk for the Company are the
U.K. sterling, the Euro, the Swiss franc and the Canadian dollar. The following
table provides more information on the Companys net exposures to its principal
foreign currencies at December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
(Foreign
Currency in Millions)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Euro
|
|
|
52.0
|
|
|
90.3
|
|
U.K. Sterling
|
|
|
35.1
|
|
|
2.1
|
|
Swiss Franc
|
|
|
153.7
|
|
|
268.4
|
|
Canadian Dollar
|
|
|
222.5
|
|
|
247.8
|
|
Credit Risk
Credit
risk relates to the uncertainty of an obligors continued ability to make
timely payments in accordance with the contractual terms of the instrument or
contract. The Company is exposed to direct credit risk within its investment
portfolio as well as through general counterparties, including customers and
reinsurers. The Company manages credit risk within its investment portfolio
through its Strategic Asset Allocation framework and its established investment
credit policies, which address quality of obligors and counterparties, industry
limits, and diversification requirements. The Companys exposure to market
credit spreads primarily relates to market price and cash flow variability
associated with changes in credit spreads.
Certain
of the Companys underwriting activities expose it to indirect credit risk in
that profitability of certain strategies can correlate with credit events at
the issuer level, industry level or country level. The Company manages these
risks through established underwriting policies which operate in accordance
with established limit and escalation frameworks.
The
Company has an established credit risk governance process delegated to the
Credit Sub-Committee of the Enterprise Risk Management Committee. The
governance process is designed to ensure that transactions and activities,
individually and in the aggregate, are carried out within managements risk
tolerances.
Credit Risk Investment Portfolio
Credit
risk in the investment portfolio is the exposure to adverse changes in the
creditworthiness of individual investment holdings, issuers, groups of issuers,
industries and countries. A widening of credit spreads will increase the net
unrealized loss position, will increase losses associated with credit based
non-qualifying derivatives where the Company assumes credit exposure, and, if
issuer credit spreads increase significantly for an extended period of time and
in a period of increasing defaults, would also likely result in higher
other-than-temporary impairments. All else held equal, credit spread tightening
will reduce net investment income associated with new purchases of fixed
maturities. In addition, market volatility can make it difficult to value
certain of the Companys securities if trading becomes less frequent. As such,
valuations may include assumptions or estimates that may have significant
period to period changes that could have a material adverse effect on the
Companys consolidated results of operations or
107
financial
condition. The credit spread duration in the Companys fixed income portfolio,
excluding the impact of the HTM election, was 3.7 years at December 31, 2011.
The
Company manages credit risk in the investment portfolio, including fixed
income, alternative and short-term investment through the credit research
performed primarily by the investment management service providers. The
management of credit risk in the investment portfolio is also fully integrated
in the Companys credit risk management governance framework and the management
of credit exposures and concentrations within the investment portfolio are
carried out in accordance with the Companys risk policies, philosophies,
appetites, limits and risk concentrations delegated to the investment
portfolio. In the investment portfolio, the Company reviews on a regular basis
its asset concentration, credit quality and adherence to the Companys credit
limit guidelines. Any issuer over its credit limits, experiencing financial
difficulties, material credit quality deterioration or potentially subject to
forthcoming credit quality deterioration is placed on a watch list for closer
monitoring. Where appropriate, exposures are reduced or prevented from
increasing.
The
table below shows the Companys aggregate fixed income portfolio by credit
rating in percentage terms of the Companys aggregate fixed income exposure
(including fixed maturities, short-term investments, cash and cash equivalents
and net payable for investments purchased) as at December 31, 2011:
|
|
|
|
|
|
|
Percentage of
Aggregate Fixed
Income Portfolio (1) (2)
|
|
|
|
|
|
AAA
|
|
|
51.1
|
%
|
AA
|
|
|
16.6
|
%
|
A
|
|
|
22.3
|
%
|
BBB
|
|
|
7.6
|
%
|
BB &
below
|
|
|
2.3
|
%
|
Not rated
|
|
|
0.1
|
%
|
|
|
|
|
|
Total (1)
|
|
|
100.0
|
%
|
|
|
|
|
|
(1)
|
Included in the above are
$266.0 million or 0.8% of the portfolio that represents medium term notes
rated at the average credit rating of the underlying asset pools backing the
notes.
|
|
|
(2)
|
The credit rating for each
asset reflected above was principally determined based on the weighted
average rating of the individual securities from Standard & Poors,
Moodys Investors Service and Fitch Ratings. U.S. agencies paper, whether
with implicit or explicit government support, reflect the credit quality
rating of the U.S. government for the purpose of these calculations.
|
At
December 31, 2011 and 2010, the average credit quality of the Companys
aggregate fixed income investment portfolio was Aa2/AA, excluding operating
cash. The Companys $10.7 billion portfolio of government and government
related, agency, sovereign and cash holdings were rated AAA at
December 31, 2011. The Companys $11.8 billion portfolio of corporates is
rated A. The Companys $9.0 billion structured credit portfolio is AA+
rated.
The
Company is closely monitoring its corporate financial bond holdings given the
events of the past four years. The table below summarizes the Companys
significant exposures (defined as bonds issued by financial institutions with
an amortized cost in excess of $50.0 million) to corporate bonds of financial
issuers held within its available for sale and HTM investment portfolio at
December 31, 2011, representing both amortized cost and net unrealized gains
(losses):
108
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer (by
Global Ultimate Parent)
|
Weighted Average
Credit Quality (1)
|
|
Amortized Cost
December 31, 2011 (2)
|
|
Unrealized Gain/ (Loss)
December 31, 2011
|
|
|
|
|
|
|
|
|
Rabobank Nederland NV
|
AA+
|
|
$
|
169.8
|
|
$
|
(2.3
|
)
|
The Goldman Sachs Group,
Inc.
|
A-
|
|
|
153.8
|
|
|
(8.7
|
)
|
Lloyds Banking Group plc
|
AA
|
|
|
146.4
|
|
|
(0.4
|
)
|
Bank Of America Corporation
|
A-
|
|
|
128.0
|
|
|
(12.8
|
)
|
JPMorgan Chase & Co.
|
A
|
|
|
125.6
|
|
|
(6.6
|
)
|
National Australia Bank
Limited
|
AA-
|
|
|
118.5
|
|
|
(3.9
|
)
|
HSBC Holdings plc
|
A+
|
|
|
117.3
|
|
|
(9.3
|
)
|
Citigroup Inc.
|
BBB+
|
|
|
108.4
|
|
|
(6.1
|
)
|
The Bank Of Nova Scotia
|
AA
|
|
|
101.6
|
|
|
3.0
|
|
Morgan Stanley
|
A
|
|
|
97.4
|
|
|
(3.1
|
)
|
Wells Fargo & Company
|
A+
|
|
|
93.5
|
|
|
2.3
|
|
Australia And New Zealand
Banking Group Limited
|
AA-
|
|
|
89.9
|
|
|
(0.5
|
)
|
H M Government Cabinet
Office (RBS Group plc)
|
AA
|
|
|
85.5
|
|
|
4.1
|
|
Westpac Banking Corporation
|
AA-
|
|
|
83.1
|
|
|
1.3
|
|
Canadian Imperial Bank Of
Commerce
|
AA
|
|
|
80.9
|
|
|
2.0
|
|
Standard Chartered plc
|
A
|
|
|
72.7
|
|
|
(3.5
|
)
|
Nordea Bank AB
|
AA-
|
|
|
70.9
|
|
|
(1.7
|
)
|
Credit Suisse Group AG
|
A+
|
|
|
70.4
|
|
|
(1.8
|
)
|
UBS AG
|
A+
|
|
|
70.4
|
|
|
(2.4
|
)
|
The Bank Of New York Mellon
Corporation
|
AA-
|
|
|
68.7
|
|
|
1.5
|
|
BNP Paribas
|
AA-
|
|
|
68.4
|
|
|
(3.5
|
)
|
Nationwide Building Society
|
AA-
|
|
|
67.3
|
|
|
(8.5
|
)
|
Barclays plc
|
BBB
|
|
|
64.8
|
|
|
(18.5
|
)
|
Commonwealth Bank Of
Australia
|
AA-
|
|
|
63.9
|
|
|
(0.8
|
)
|
Royal Bank Of Canada
|
AA
|
|
|
61.7
|
|
|
1.5
|
|
U.S. Bancorp
|
A+
|
|
|
60.3
|
|
|
1.1
|
|
Bank Of Montreal
|
AA
|
|
|
58.4
|
|
|
2.0
|
|
Svenska Handelsbanken AB
|
A+
|
|
|
57.7
|
|
|
(2.1
|
)
|
BPCE
|
AAA
|
|
|
55.4
|
|
|
0.1
|
|
Legal & General Group
plc
|
BBB+
|
|
|
55.2
|
|
|
(7.6
|
)
|
|
|
|
|
|
(1)
|
The credit rating for each
asset reflected above was principally determined based on the weighted
average rating of the individual securities from Standard & Poors,
Moodys Investors Service and Fitch Ratings. U.S. agencies paper, whether
with implicit or explicit government support, reflect the credit quality
rating of the U.S. government for the purpose of these calculations.
|
|
|
(2)
|
Government-guaranteed paper
has been excluded from the above figures. Included within all financial bond
exposures are covered bonds with a fair value of $368.7 million and amortized
cost of $360.2 million.
|
Within
the Companys corporate financial bond holdings, the Company is further
monitoring its exposures to hybrid securities, representing Tier One and Upper
Tier Two securities of various financial institutions. The following table
summarizes the top ten exposures to hybrid securities, listed by amortized cost
representing both amortized cost and unrealized (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer (by
Global Ultimate Parent)
|
|
Tier One
Amortized Cost
at December 31,
2011
|
|
Upper Tier Two
Amortized Cost
at December 31,
2011
|
|
Total
Amortized Cost
at December 31,
2011
|
|
Net Unrealized
(Loss)
at December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
Barclays, Plc
|
|
$
|
|
|
$
|
50.6
|
|
$
|
50.6
|
|
$
|
(13.2
|
)
|
Zurich Financial Services.
|
|
|
|
|
|
25.6
|
|
|
25.6
|
|
|
(4.7
|
)
|
Aviva PLC
|
|
|
5.4
|
|
|
19.7
|
|
|
25.1
|
|
|
(8.4
|
)
|
Nationwide Building Society
|
|
|
24.6
|
|
|
|
|
|
24.6
|
|
|
(8.5
|
)
|
Legal & General Group PLC
|
|
|
|
|
|
24.6
|
|
|
24.6
|
|
|
(5.7
|
)
|
Standard Life PLC
|
|
|
|
|
|
21.3
|
|
|
21.3
|
|
|
(5.0
|
)
|
RSA Insurance Group PLC
|
|
|
|
|
|
20.5
|
|
|
20.5
|
|
|
(3.2
|
)
|
Mitsubishi UFJ Financial Group, Inc.
|
|
|
20.5
|
|
|
|
|
|
20.5
|
|
|
(1.1
|
)
|
The British United Provident Association
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
|
|
|
|
|
|
20.1
|
|
|
20.1
|
|
|
(5.7
|
)
|
Danske Bank A/S
|
|
|
8.9
|
|
|
11.1
|
|
|
20.0
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59.4
|
|
$
|
193.5
|
|
$
|
252.9
|
|
$
|
(58.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
At
December 31, 2011, the top 10 corporate holdings, which exclude government
guaranteed and government sponsored enterprises, represented approximately 5.0%
of the aggregate fixed income portfolio and approximately 13.2% of all
corporate holdings. The top 10 corporate bond holdings listed below represent
the direct exposure to the corporations listed below, including their subsidiaries,
and excludes any securitized, credit enhanced and collateralized asset or
mortgage-backed securities, cash and cash equivalents, pooled notes and any
over-the-counter (OTC) derivative counterparty exposures, if applicable but
does include covered bonds.
|
|
|
|
Top 10 Corporate
Holdings (1)
|
|
Percentage of Aggregate
Fixed Income Portfolio
|
|
|
|
|
|
Wal-Mart Stores, Inc.
|
|
0.6
|
%
|
Pfizer Inc.
|
|
0.6
|
%
|
General Electric Company
|
|
0.5
|
%
|
Rabobank Nederland NV
|
|
0.5
|
%
|
The Proctor & Gamble
Company
|
|
0.5
|
%
|
AT&T Inc.
|
|
0.5
|
%
|
Lloyds Banking Group PLC
|
|
0.5
|
%
|
The Goldman Sachs Group,
Inc.
|
|
0.5
|
%
|
BP PLC
|
|
0.4
|
%
|
Glaxosmithkline PLC
|
|
0.4
|
%
|
|
|
|
|
|
(1)
|
Corporate issuers exclude
government related/government guaranteed and supported enterprises and cash
and cash equivalents.
|
As
at December 31, 2011, the top 5 corporate sector exposures listed below
represented 28.2% of the aggregate fixed income investment portfolio and 78.4%
of all corporate holdings.
(U.S. dollars in millions)
|
|
|
|
|
|
|
|
|
Top 5 Sector
Exposures
|
|
|
Fair Value
|
|
Percentage of
Aggregate
Fixed Income
Portfolio
|
|
|
|
|
|
|
|
|
Financials (1)
|
|
$
|
3,737.3
|
|
|
11.2
|
%
|
Consumer, Non-Cyclical
|
|
|
2,273.4
|
|
|
7.1
|
%
|
Utilities
|
|
|
1,473.8
|
|
|
4.6
|
%
|
Communications
|
|
|
985.2
|
|
|
3.0
|
%
|
Industrial
|
|
|
938.7
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,408.4
|
|
|
28.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Government-guaranteed paper
has been excluded from the above figures.
|
Within
the Companys fixed income portfolios, the Company is further monitoring its
exposures to holdings representing risk in certain Euro-zone countries (Greece,
Italy, Ireland, Portugal and Spain). In particular, the Company has government
holdings of $27.0 million, corporate holdings of $225.5 million (financials
$20.8 million, non-financials $204.7 million) and structured credit holdings
totaling $3.2 million in GIIPS. The non-financial corporate holdings primarily
consist of securities issued by multinational companies with low reliance on
local economics and systemically important industries such as utilities and
telecoms. For further detail on the Companys exposure to the Euro-zone
sovereign debt crisis please refer to Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations Balance Sheet
Analysis.
110
The
Company also has exposure to credit risk associated with its mortgage-backed
and asset-backed securities. The table below shows the breakdown of the $9.0
billion structured credit portfolio, of which 78.2% is AAA rated:
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
Fair Value
|
|
Percentage of
Structured
Portfolio
|
|
|
|
|
|
|
|
CMBS
|
|
$
|
974.8
|
|
|
10.8
|
%
|
Non-Agency RMBS
|
|
|
722.8
|
|
|
8.0
|
%
|
Core CDO (non-ABS CDOs and
CLOs)
|
|
|
662.9
|
|
|
7.4
|
%
|
Other ABS
|
|
|
1,266.8
|
|
|
14.1
|
%
|
Agency RMBS
|
|
|
5,381.3
|
|
|
59.7
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,008.6
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Credit
Risk Other
Credit
derivatives are purchased within the Companys investment portfolio, have been
sold through a limited number of contracts written as part of the Companys
previous financial lines business, and were previously entered into through the
Companys prior reinsurance agreements with Syncora. From time to time, the
Company may purchase credit default swaps to hedge an existing position or
concentration of holdings. The credit derivatives are recorded at fair value.
See Item 8, Note 14 to the Consolidated Financial Statements, Derivative
Instruments, for further information.
The
Company has exposure to many different industries and counterparties, and
routinely executes transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, investment banks,
alternatives and other investment funds and other institutions. Many of these
transactions expose the Company to credit risk in the event of default of the
Companys counterparty. In addition, with respect to secured transactions, the
Companys credit risk may be exacerbated when the collateral held by the
Company cannot be sold or is liquidated at prices not sufficient to recover the
full amount of the loan or derivative exposure that is due. The Company also
has exposure to financial institutions in the form of unsecured debt
instruments, derivative transactions, revolving credit facility and letter of
credit commitments and equity investments. There can be no assurance that any
such losses or impairments to the carrying value of these assets would not
materially and adversely affect the Companys business and results of
operations.
With
regards to unpaid losses and loss expenses recoverable and reinsurance balances
receivable, the Company has credit risk should any of its reinsurers be unable
or unwilling to settle amounts due to the Company; however, these exposures are
not marked to market. For further information relating to reinsurer credit
risk, see Managements Discussion and Analysis of Financial Condition and
Results of Operations Unpaid Losses and Loss Expenses Recoverable and
Reinsurance Balances Receivable.
The
Company is exposed to credit risk in the event of non-performance by the other
parties to its derivative instruments in general; however, the Company does not
anticipate non-performance. The difference between the notional principal
amounts and the associated market value is the Companys maximum credit exposure.
Equity Price Risk
Equity
price risk is the potential loss arising from changes in the market value of
equities. The Companys equity investment portfolio is exposed to equity price
risk. At December 31, 2011, the Companys equity portfolio was approximately
$376.6 million as compared to $84.8 million at December 31, 2010. This excludes
fixed income fund investments of $91.6 million that generally do not have the
risk characteristics of equity investments but are treated as equity investments
under GAAP. At December 31, 2011 and 2010, the Companys direct allocation to
equity securities was 1.1% and a negligible percentage, respectively, of the
total investment portfolio (including cash and cash equivalents, accrued
investment income and net payable for investments purchased). The Company also
estimates the equity risk embedded in certain alternative and private
investments. Such estimates are derived from market exposures provided to the
Company by certain individual fund investments and/or internal statistical
analyses.
111
Other Market Risks
The
Companys private investment portfolio is invested in limited partnerships and
other entities which are not publicly traded. In addition to normal market
risks, these positions may also be exposed to liquidity risk, risks related to
distressed investments, and risks specific to startup or small companies. As at
December 31, 2011, the Companys exposure to private investments, excluding
unfunded commitments, was $288.4 million representing 0.9% of the fixed income
portfolio compared to $331.7 million as at December 31, 2010.
The
Companys alternative investment portfolio, which is exposed to equity and
credit risk as well as certain other market risks, had a total exposure of
$1,027.2 million, representing approximately 3.1% of the investment portfolio
(including cash and cash equivalents, accrued investment income and net payable
for investments purchased) at December 31, 2011, as compared to December 31,
2010, where the Company had a total exposure of $933.5 million representing
approximately 2.8% of the investment portfolio.
At
December 31, 2011, bond and stock index futures outstanding had a net long
position of $12.6 million as compared to a net long position of $14.1 million
at December 31, 2010. The Company may reduce its exposure to these futures
through offsetting transactions, including options and forwards.
As
noted above, the Company also invests in certain derivative positions that can
be impacted by market value movements. For further details on derivative
instruments see Item 8, Note 14, Derivative Instruments, to the Consolidated
Financial Statements.
Sensitivity and Value-at-Risk Analysis
Value-at-Risk
(VaR) is central to the Companys market risk management framework for its
investment portfolio. VaR is a statistical risk measure representing a specific
percentile of estimated potential mark-to-market portfolio returns in normal
market conditions over a specific time horizon.
The
Company estimates the VaR of the investment portfolio, the P&C investment
portfolio and the Life investment portfolio, using a one year holding period
and a 95% level of confidence. This means that, on average, the Company could
expect mark-to-market losses greater than predicted by the VaR results 5% of
the time, or once every 20 years.
The
calculation of VaR is performed monthly using an analytical, or
variance-covariance approach, based on the linear sensitivity of the investment
portfolio and individual securities to a broad set of systematic market risk
factors and idiosyncratic risk factors. The Company estimates the parametric
sensitivity of every security in the investment portfolio to changes in key
interest rates, spreads, implied volatility and equities. The parametric
exposures are summed using the appropriate investment portfolio weights to
compute the investment portfolios exposure to these systematic and
idiosyncratic market risk factors.
The
modeling of risk, as measured by VaR, involves a number of assumptions and
approximations. While the Company believes that its assumptions and
approximations are appropriate, there is no uniform industry methodology for
calculating VaR. The Company notes that different VaR results can be produced
for the same portfolio dependent not only on the approach used but also on the
assumptions employed when implementing the approach.
The
VaR approach uses historical data to determine the sensitivity of each of the underlying
securities to the risk factors incorporated into the pricing models employed in
the VaR estimates. In calculating these sensitivities, greater importance is
placed on the more recent data points and information. Since the VaR approach
is based on historical positions and market data, VaR results should not be
viewed as an absolute and predictive gauge of future financial performance or
as a way for the Company to predict risk. There is no assurance that the
Companys actual future losses will not exceed its VaR and the Company expects
that 5% of the time the VaR will be exceeded.
Additionally,
the Company acknowledges the fact that risks associated with abnormal market
events can be significantly different from the VaR results and these are by
definition not reflected or assessed in the VaR analysis, rather this is
evaluated using the Companys stress testing framework.
The
table below summarizes the Companys assessment of the estimated impact on the
value of the Companys investment portfolio at December 31, 2011 associated
with an immediate and hypothetical: +100bps increase in interest rates, a -10%
decline in equity markets, a +100bps widening in spreads and a +10% widening in
spreads. The table also reports the 95%, 1-year VaRs for the Companys
investment portfolios at December 31, 2011, excluding foreign exchange.
The
interest rate, spread risk, and VaR referenced in the table below include the
impact of market movements on the Companys held to maturity fixed maturities
from the Companys Life investment portfolios. While the market value of these
holdings is sensitive to prevailing interest rates and credit spreads, the
Companys book value is not impacted as these holdings are carried at amortized
cost. At December 31, 2011, if the Company were to exclude these impacts in
order to present the impact of these risks to the Companys book value, the
interest rate risk would be reduced by approximately $302.4 million, absolute
spread risk would be
112
reduced by approximately
$202.1 million, relative spread risk would be reduced by approximately $31.7
million, and VaR would be reduced by approximately $327.1 million.
The
table below excludes the impact of foreign exchange rate risk on the Companys
investment portfolio. The Companys investment portfolio is managed on an
asset-liability matched basis, and, accordingly, any foreign exchange movements
impact the assets and liabilities equally. See foreign exchange rate risk for
further details. The Company considers that the investment portfolio VaR
estimated results as well as the P&C and Life investment portfolios VaR
estimated results excluding foreign exchange rate risk are the more relevant
and appropriate metrics to consider when assessing the actual risk of the
investment portfolio.
The
estimated results below also do not include any risk contributions from our
various operating affiliates (strategic, investment manager or financial
operating affiliates) or certain other investments that are carried at
amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
|
Interest
Rate
Risk(1)
|
|
Equity
Risk
(2)
|
|
Absolute
Spread
Risk (3)
|
|
Relative
Spread
Risk (4)
|
|
VaR
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Portfolio (7)
|
|
$
|
(1,263.9
|
)
|
$
|
(87.9
|
)
|
$
|
(1,220.3
|
)
|
$
|
(241.7
|
)
|
$
|
1,380.3
|
|
A. P&C Investment Portfolio
|
|
$
|
(725.8
|
)
|
$
|
(87.9
|
)
|
$
|
(766.7
|
)
|
$
|
(125.3
|
)
|
$
|
783.6
|
|
(I) P&C Fixed Income Portfolio
|
|
|
(725.8
|
)
|
|
|
|
|
(766.7
|
)
|
|
(125.3
|
)
|
|
824.6
|
|
(a) Cash & Short Term Investments
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
(b) Total Government-Related
|
|
|
(255.8
|
)
|
|
|
|
|
(174.6
|
)
|
|
(8.6
|
)
|
|
249.2
|
|
(c) Total Corporate Credit
|
|
|
(301.7
|
)
|
|
|
|
|
(335.4
|
)
|
|
(61.4
|
)
|
|
399.6
|
|
(d) Total Structured Credit
|
|
|
(160.9
|
)
|
|
|
|
|
(257.5
|
)
|
|
(55.4
|
)
|
|
247.1
|
|
(II) P&C Non-Fixed Income Portfolio
|
|
|
|
|
|
(87.9
|
)
|
|
|
|
|
|
|
|
211.4
|
|
(e) Equity Portfolio
|
|
|
|
|
|
(38.7
|
)
|
|
|
|
|
|
|
|
141.7
|
|
(f) Alternative Portfolio
|
|
|
|
|
|
(19.9
|
)
|
|
|
|
|
|
|
|
61.9
|
|
(g) Private Investments
|
|
|
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
95.3
|
|
B. Life Investment Portfolio
|
|
$
|
(526.2
|
)
|
$
|
|
|
$
|
(416.4
|
)
|
$
|
(113.5
|
)
|
$
|
694.3
|
|
(III) Life Fixed Income Portfolio
|
|
|
(526.2
|
)
|
|
|
|
|
(416.4
|
)
|
|
(113.5
|
)
|
|
694.3
|
|
(i) Cash & Short Term Investments
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
(j) Total Government-Related
|
|
|
(217.1
|
)
|
|
|
|
|
(77.1
|
)
|
|
(5.9
|
)
|
|
318.8
|
|
(k) Total Corporate Credit
|
|
|
(257.3
|
)
|
|
|
|
|
(279.4
|
)
|
|
(85.8
|
)
|
|
359.7
|
|
(l) Total Structured Credit
|
|
|
(51.8
|
)
|
|
|
|
|
(59.9
|
)
|
|
(21.8
|
)
|
|
68.4
|
|
(IV) Life Non-Fixed Income Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The estimated impact on the
fair value of the Companys fixed income portfolio of an immediate
hypothetical +100 bps adverse parallel shift in global bond curves.
|
(2)
|
The estimated impact on the
fair value of the Companys investment portfolio of an immediate hypothetical
-10% change in the value of equity exposures in the Companys equity
portfolio, certain equity-sensitive alternative investments and private
equity investments. This includes the Companys estimate of equity risk
embedded in the alternatives and private investment portfolio with such
estimates utilizing market exposures provided to the Company by certain
individual fund investments, internal statistical analyses, and/or various
assumptions regarding illiquidity and concentrations.
|
(3)
|
The estimated impact on the
fair value of the Companys fixed income portfolio of an immediate
hypothetical +100 basis point increase in all global government-related
corporate and structured credit spreads to which the Companys fixed income
portfolio is exposed. This excludes exposure to credit spreads in the
Companys alternative investments, private investments and counterparty
exposure.
|
(4)
|
The estimated impact on the
fair value of the Companys fixed income portfolio of an immediate
hypothetical +10% increase in all global government-related corporate and
structured credit spreads to which the Companys fixed income portfolio is
exposed. This excludes exposure to credit spreads in the Companys
alternative investments, private investments and counterparty exposure.
|
(5)
|
The VaR results are based
on a 95% confidence interval, with a one year holding period, excluding
foreign exchange rate risk. The Companys investment portfolio VaR at
December 31, 2011 is not necessarily indicative of future VaR levels.
|
(6)
|
The VaR results are the
standalone VaRs, based on the prescribed methodology, for each component of
the Companys Total Investment Portfolio. The standalone VaRs of the
individual components are non-additive, with the difference between the
summation of the individual component VaRs and their respective aggregations
being due to diversification benefits across the individual components. In
the case of the VaR results for the Companys Total Investment Portfolio, the
results also include the impact associated with the Companys Business and
Other Investments.
|
(7)
|
The Companys Total
Investment Portfolio comprises the Companys P&C Investment Portfolio and
Life Investment Portfolio as well as the Companys Business and Other
Investments that do not form part of the Companys P&C Investment
Portfolio or Life Investment Portfolio. The individual results reported in
the above table for the Companys Total Investment Portfolio therefore
represent the aggregate impact on the Companys P&C Investment Portfolio,
Life Investment Portfolio and the majority of the Companys Other Investments.
|
113
Stress Testing
VaR
does not provide the means to estimate the magnitude of the loss in the 5% of
occurrences when the Company expects the VaR level to be exceeded. To
complement the VaR analysis based on normal market environments, the Company
considers the impact on the investment portfolio in several different stress
scenarios to analyze the effect of unusual market conditions. The Company
establishes certain stress scenarios which are applied to the actual investment
portfolio. As these stress scenarios and estimated gains and losses are based
on scenarios established by the Company, they will not necessarily reflect
future stress events or gains and losses from such events. The results of the
stress scenarios are reviewed on a regular basis to ensure they are
appropriate, based on current shareholders equity, market conditions and the
Companys total risk tolerance. It is important to note that when assessing the
risk of the Companys investment portfolio, the Company does not take into
account either the value or risk associated with the liabilities arising from
the Companys operations.
|
|
|
|
I
TEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
|
|
|
|
Index to
Consolidated Financial Statements
|
Page
|
|
|
|
Consolidated
Balance Sheets as at December 31, 2011 and 2010
|
115
|
Consolidated
Statements of Income for the years ended December 31, 2011, 2010 and 2009
|
116
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2011,
2010 and 2009
|
117
|
Consolidated
Statements of Shareholders Equity for the years ended December 31, 2011,
2010 and 2009
|
118
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
|
119
|
Notes to Consolidated Financial Statements for the years ended
December 31, 2011, 2010 and 2009
|
121
|
114
XL GROUP PLC
C
ONSOLIDATED
BALANCE SHEETS AS AT DECEMBER 31, 2011 AND 2010
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except share data)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
Fixed maturities, at fair value (amortized
cost: 2011, $25,771,715; 2010, $27,322,842)
|
|
$
|
26,190,025
|
|
$
|
27,142,105
|
|
Equity securities, at fair value (cost:
2011, $480,685; 2010, $56,737)
|
|
|
468,197
|
|
|
84,767
|
|
Short-term investments, at fair value
(amortized cost: 2011, $359,378; 2010, $450,491)
|
|
|
359,063
|
|
|
450,681
|
|
|
|
|
|
|
|
|
|
Total investments available for sale
|
|
|
27,017,285
|
|
|
27,677,553
|
|
Fixed maturities, held to maturity at
amortized cost (fair value: 2011, $2,895,688; 2010, $2,742,626)
|
|
$
|
2,668,978
|
|
$
|
2,728,335
|
|
Investments in affiliates
|
|
|
1,052,729
|
|
|
1,127,181
|
|
Other investments
|
|
|
985,262
|
|
|
893,570
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
31,724,254
|
|
|
32,426,639
|
|
Cash and cash equivalents
|
|
|
3,825,125
|
|
|
3,022,868
|
|
Accrued investment income
|
|
|
331,758
|
|
|
350,091
|
|
Deferred acquisition costs
|
|
|
668,017
|
|
|
633,035
|
|
Ceded unearned premiums
|
|
|
596,895
|
|
|
625,654
|
|
Premiums receivable
|
|
|
2,411,611
|
|
|
2,414,912
|
|
Reinsurance balances receivable
|
|
|
220,017
|
|
|
171,327
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,654,948
|
|
|
3,671,887
|
|
Receivable from investments sold
|
|
|
59,727
|
|
|
21,716
|
|
Goodwill and other intangible assets
|
|
|
407,321
|
|
|
839,508
|
|
Deferred tax asset
|
|
|
115,601
|
|
|
143,525
|
|
Other assets
|
|
|
610,803
|
|
|
694,782
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
44,626,077
|
|
$
|
45,015,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses
|
|
$
|
20,613,901
|
|
$
|
20,531,607
|
|
Deposit liabilities
|
|
|
1,608,108
|
|
|
1,684,606
|
|
Future policy benefit reserves
|
|
|
4,845,394
|
|
|
5,075,127
|
|
Unearned premiums
|
|
|
3,555,310
|
|
|
3,484,830
|
|
Notes payable and debt
|
|
|
2,275,327
|
|
|
2,457,003
|
|
Reinsurance balances payable
|
|
|
90,552
|
|
|
122,250
|
|
Payable for investments purchased
|
|
|
58,494
|
|
|
34,315
|
|
Deferred tax liability
|
|
|
98,420
|
|
|
105,667
|
|
Other liabilities
|
|
|
711,161
|
|
|
835,590
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
33,856,667
|
|
$
|
34,330,995
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Non-controlling interest - Redeemable
Series C preference ordinary shares, 20,000,000 authorized, par value $0.01;
Issued and outstanding: (2011, nil; 2010, 2,876,000)
|
|
$
|
|
|
$
|
71,900
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
Ordinary shares, 999,990,000 authorized,
par value $0.01; Issued and outstanding: (2011, 315,645,796; 2010,
316,396,289)
|
|
|
3,157
|
|
|
3,165
|
|
Additional paid in capital
|
|
|
8,938,678
|
|
|
8,993,016
|
|
Accumulated other comprehensive income
|
|
|
583,064
|
|
|
100,795
|
|
Retained earnings (deficit)
|
|
|
(99,961
|
)
|
|
513,777
|
|
|
|
|
|
|
|
|
|
Shareholders equity attributable to XL
Group plc
|
|
$
|
9,424,938
|
|
$
|
9,610,753
|
|
Non-controlling interest in equity of
consolidated subsidiaries
|
|
|
1,344,472
|
|
|
1,002,296
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
10,769,410
|
|
$
|
10,613,049
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable preference
ordinary shares and shareholders equity
|
|
$
|
44,626,077
|
|
$
|
45,015,944
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements
115
XL GROUP PLC
C
ONSOLIDATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands, except per share amounts)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
5,690,130
|
|
$
|
5,414,061
|
|
$
|
5,706,840
|
|
Net investment income
|
|
|
1,137,769
|
|
|
1,198,038
|
|
|
1,319,823
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments
sold
|
|
|
(28,187
|
)
|
|
(65,670
|
)
|
|
(108,979
|
)
|
Other-than-temporary impairments on
investments
|
|
|
(174,102
|
)
|
|
(170,643
|
)
|
|
(992,202
|
)
|
Other-than-temporary impairments on
investments transferred to (from) other comprehensive income
|
|
|
13,930
|
|
|
(34,490
|
)
|
|
179,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (losses) on investments
|
|
|
(188,359
|
)
|
|
(270,803
|
)
|
|
(921,437
|
)
|
Net realized and unrealized (losses) on
derivative instruments
|
|
|
(10,738
|
)
|
|
(33,843
|
)
|
|
(33,647
|
)
|
Income (loss) from investment fund
affiliates
|
|
|
26,253
|
|
|
51,102
|
|
|
78,867
|
|
Fee income and other
|
|
|
41,748
|
|
|
40,027
|
|
|
43,201
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
6,696,803
|
|
$
|
6,398,582
|
|
$
|
6,193,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss expenses incurred
|
|
$
|
4,078,391
|
|
$
|
3,211,800
|
|
$
|
3,168,837
|
|
Claims and policy benefits
|
|
|
535,074
|
|
|
513,833
|
|
|
677,562
|
|
Acquisition costs
|
|
|
826,411
|
|
|
788,258
|
|
|
853,558
|
|
Operating expenses
|
|
|
1,082,479
|
|
|
971,105
|
|
|
1,055,823
|
|
Exchange (gains) losses
|
|
|
(40,640
|
)
|
|
(10,161
|
)
|
|
84,813
|
|
Interest expense
|
|
|
205,592
|
|
|
213,643
|
|
|
216,504
|
|
Loss on termination of guarantee
|
|
|
|
|
|
23,500
|
|
|
|
|
Impairment of goodwill
|
|
|
429,020
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,438
|
|
|
1,858
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
7,117,765
|
|
$
|
5,713,836
|
|
$
|
6,058,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax and income
(loss) from operating affiliates
|
|
$
|
(420,962
|
)
|
$
|
684,746
|
|
$
|
134,714
|
|
Provision for income tax
|
|
|
59,707
|
|
|
162,737
|
|
|
120,307
|
|
Income (loss) from operating affiliates
|
|
|
76,786
|
|
|
121,372
|
|
|
60,480
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(403,883
|
)
|
$
|
643,381
|
|
$
|
74,887
|
|
Non-controlling interests
|
|
|
(70,877
|
)
|
|
(39,831
|
)
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to XL Group
plc
|
|
$
|
(474,760
|
)
|
$
|
603,550
|
|
$
|
74,991
|
|
Preference share dividends
|
|
|
|
|
|
(34,694
|
)
|
|
(80,200
|
)
|
Gain
on redemption of Redeemable Series C preference ordinary shares
|
|
|
|
|
|
16,616
|
|
|
211,816
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary
shareholders
|
|
$
|
(474,760
|
)
|
$
|
585,472
|
|
$
|
206,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares and
ordinary share equivalents outstanding basic
|
|
|
312,896
|
|
|
336,283
|
|
|
340,612
|
|
Weighted average ordinary shares and
ordinary share equivalents outstanding diluted
|
|
|
312,896
|
|
|
337,709
|
|
|
340,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per ordinary share and
ordinary share equivalent basic
|
|
$
|
(1.52
|
)
|
$
|
1.74
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per ordinary share and
ordinary share equivalent diluted
|
|
$
|
(1.52
|
)
|
$
|
1.73
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated
Financial Statements
116
XL GROUP PLC
C
ONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to XL Group
plc
|
|
$
|
(474,760
|
)
|
$
|
603,550
|
|
$
|
74,991
|
|
Impact of adoption of new authoritative
OTTI guidance, net of taxes
|
|
|
|
|
|
|
|
|
(229,670
|
)
|
Impact of adoption of new authoritative
embedded derivative guidance, net of taxes
|
|
|
|
|
|
31,917
|
|
|
|
|
Change in net unrealized gains (losses) on
investments, net of tax
|
|
|
446,427
|
|
|
997,066
|
|
|
2,376,556
|
|
Change in net unrealized gains (losses) on
affiliate and other investments, net of tax
|
|
|
25,269
|
|
|
44,314
|
|
|
14,464
|
|
Change in OTTI losses recognized in other
comprehensive income, net of tax
|
|
|
39,456
|
|
|
124,906
|
|
|
(123,343
|
)
|
Change in underfunded pension liability
|
|
|
(2,622
|
)
|
|
(2,619
|
)
|
|
(3,427
|
)
|
Change in value of cash flow hedge
|
|
|
439
|
|
|
439
|
|
|
438
|
|
Change in net unrealized gains (losses) on
future policy benefit reserves
|
|
|
|
|
|
(3,714
|
)
|
|
6,554
|
|
Foreign currency translation adjustments
|
|
|
(26,700
|
)
|
|
50,953
|
|
|
180,888
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
7,509
|
|
$
|
1,846,812
|
|
$
|
2,297,451
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated
Financial Statements
117
XL GROUP PLC
C
ONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Non-controlling
Interest in Equity of Consolidated Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
1,002,296
|
|
$
|
2,305
|
|
$
|
1,598
|
|
Non-controlling interests
|
|
|
(83
|
)
|
|
4
|
|
|
(104
|
)
|
Non-controlling interest share in change in AOCI
|
|
|
(2,241
|
)
|
|
(13
|
)
|
|
811
|
|
Transfer from Series E preference ordinary shares and additional paid
in capital
|
|
|
|
|
|
1,000,000
|
|
|
|
|
Issuance of Series D preference ordinary shares
|
|
|
350,000
|
|
|
|
|
|
|
|
Purchase of Series D preference ordinary shares
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
Purchase of Series E preference ordinary shares
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
1,344,472
|
|
$
|
1,002,296
|
|
$
|
2,305
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E
preference ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
|
|
$
|
10
|
|
$
|
10
|
|
Transfer to non-controlling interest in equity of consolidated
subsidiaries
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
|
|
$
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
3,165
|
|
$
|
3,421
|
|
$
|
3,308
|
|
Issuance of ordinary shares
|
|
|
308
|
|
|
|
|
|
114
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
|
|
|
|
Buybacks of ordinary shares
|
|
|
(317
|
)
|
|
(256
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
3,157
|
|
$
|
3,165
|
|
$
|
3,421
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid in capital:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
8,993,016
|
|
$
|
10,474,688
|
|
$
|
9,792,371
|
|
Issuance of ordinary shares
|
|
|
572,707
|
|
|
1,109
|
|
|
741,177
|
|
Buybacks of ordinary shares
|
|
|
(666,705
|
)
|
|
(521,664
|
)
|
|
(625
|
)
|
Transfer to non-controlling interest in equity of consolidated
subsidiaries
|
|
|
|
|
|
(999,990
|
)
|
|
|
|
Dividends on Series E preference ordinary shares
|
|
|
|
|
|
|
|
|
(42,126
|
)
|
Dividends on ordinary shares
|
|
|
|
|
|
|
|
|
(68,389
|
)
|
Exercise of stock options, net of tax
|
|
|
1,333
|
|
|
1,182
|
|
|
|
|
Share based compensation expense
|
|
|
38,327
|
|
|
37,691
|
|
|
52,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
8,938,678
|
|
$
|
8,993,016
|
|
$
|
10,474,688
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
100,795
|
|
$
|
(1,142,467
|
)
|
$
|
(3,364,927
|
)
|
Impact of adoption of new authoritative OTTI guidance, net of taxes
|
|
|
|
|
|
|
|
|
(229,670
|
)
|
Impact of adoption of new authoritative embedded derivative guidance,
net of taxes
|
|
|
|
|
|
31,917
|
|
|
|
|
Change in net unrealized gains (losses) on investments, net of tax
|
|
|
446,427
|
|
|
997,066
|
|
|
2,376,556
|
|
Change in net unrealized gains (losses) on affiliate and other
investments, net of tax
|
|
|
25,269
|
|
|
44,314
|
|
|
14,464
|
|
Change in OTTI losses recognized in other comprehensive income, net of
tax
|
|
|
39,456
|
|
|
124,906
|
|
|
(123,343
|
)
|
Change in underfunded pension liability
|
|
|
(2,622
|
)
|
|
(2,619
|
)
|
|
(3,427
|
)
|
Change in value of cash flow hedge
|
|
|
439
|
|
|
439
|
|
|
438
|
|
Change in net unrealized gain (loss) on future policy benefit reserves
|
|
|
|
|
|
(3,714
|
)
|
|
6,554
|
|
Foreign currency translation adjustments
|
|
|
(26,700
|
)
|
|
50,953
|
|
|
180,888
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
583,064
|
|
$
|
100,795
|
|
$
|
(1,142,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Retained (Deficit) Earnings:
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
$
|
513,777
|
|
$
|
94,460
|
|
$
|
(315,529
|
)
|
Impact of adoption of new authoritative OTTI guidance, net of tax
|
|
|
|
|
|
|
|
|
229,670
|
|
Impact of adoption of new authoritative embedded derivative guidance,
net of taxes
|
|
|
|
|
|
(31,917
|
)
|
|
|
|
Net income (loss) attributable to XL Group plc
|
|
|
(474,760
|
)
|
|
603,550
|
|
|
74,991
|
|
Dividends on ordinary shares
|
|
|
(138,978
|
)
|
|
(134,238
|
)
|
|
(68,415
|
)
|
Dividends
on Redeemable Series C and Series E preference ordinary shares
|
|
|
|
|
|
(34,694
|
)
|
|
(38,073
|
)
|
Gain
on redemption of Redeemable Series C preference ordinary shares
|
|
|
|
|
|
16,616
|
|
|
211,816
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
$
|
(99,961
|
)
|
$
|
513,777
|
|
$
|
94,460
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
10,769,410
|
|
$
|
10,613,049
|
|
$
|
9,432,417
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
118
XL GROUP PLC
C
ONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Cash Flows Provided by (used in) Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(403,883
|
)
|
$
|
643,381
|
|
$
|
74,887
|
|
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net realized losses on investments
|
|
|
188,359
|
|
|
270,803
|
|
|
921,437
|
|
Net realized and unrealized losses on derivative instruments
|
|
|
10,738
|
|
|
33,843
|
|
|
33,647
|
|
Amortization of premiums (discounts) on fixed maturities
|
|
|
120,130
|
|
|
60,869
|
|
|
(8,183
|
)
|
(Income) loss from investment and operating affiliates
|
|
|
(103,039
|
)
|
|
(172,474
|
)
|
|
(139,347
|
)
|
Impairment of goodwill
|
|
|
429,020
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
29,377
|
|
|
31,291
|
|
|
32,231
|
|
Depreciation
|
|
|
49,800
|
|
|
40,423
|
|
|
56,078
|
|
Accretion of deposit liabilities
|
|
|
82,799
|
|
|
104,311
|
|
|
88,752
|
|
Unpaid losses and loss expenses
|
|
|
243,040
|
|
|
(207,526
|
)
|
|
(1,120,074
|
)
|
Future policy benefit reserves
|
|
|
(171,618
|
)
|
|
(197,570
|
)
|
|
(340,690
|
)
|
Unearned premiums
|
|
|
95,393
|
|
|
(133,955
|
)
|
|
(675,946
|
)
|
Premiums receivable
|
|
|
(31,286
|
)
|
|
94,649
|
|
|
634,893
|
|
Unpaid losses and loss expenses recoverable
|
|
|
(2,168
|
)
|
|
(74,242
|
)
|
|
443,510
|
|
Ceded unearned premiums
|
|
|
21,532
|
|
|
83,246
|
|
|
204,442
|
|
Reinsurance balances receivable
|
|
|
(49,286
|
)
|
|
201,479
|
|
|
191,462
|
|
Deferred acquisition costs
|
|
|
(41,881
|
)
|
|
12,235
|
|
|
64,736
|
|
Reinsurance balances payable
|
|
|
(31,846
|
)
|
|
(253,213
|
)
|
|
(368,928
|
)
|
Deferred tax asset - net
|
|
|
(43,583
|
)
|
|
104,111
|
|
|
(3,959
|
)
|
Derivatives
|
|
|
93,796
|
|
|
123,027
|
|
|
(202,162
|
)
|
Other assets
|
|
|
(10,685
|
)
|
|
(22,483
|
)
|
|
70,331
|
|
Other liabilities
|
|
|
(107,385
|
)
|
|
(78,176
|
)
|
|
(132,951
|
)
|
Other
|
|
|
(40,122
|
)
|
|
(69,273
|
)
|
|
133,074
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
$
|
731,085
|
|
$
|
(48,625
|
)
|
$
|
(117,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
327,202
|
|
$
|
594,756
|
|
$
|
(42,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities and short-term investments
|
|
$
|
5,091,375
|
|
$
|
5,206,690
|
|
$
|
12,049,552
|
|
Proceeds from redemption of fixed maturities and short-term
investments
|
|
|
3,595,922
|
|
|
2,851,815
|
|
|
4,594,672
|
|
Proceeds from sale of equity securities
|
|
|
205,736
|
|
|
115,839
|
|
|
394,002
|
|
Purchases of fixed maturities and short-term investments
|
|
|
(7,529,962
|
)
|
|
(8,098,862
|
)
|
|
(17,481,304
|
)
|
Purchases of equity securities
|
|
|
(631,169
|
)
|
|
(157,963
|
)
|
|
(19,827
|
)
|
Net dispositions of investment affiliates
|
|
|
136,281
|
|
|
319,108
|
|
|
770,883
|
|
(Acquisition) disposition of subsidiaries, net of cash acquired
|
|
|
|
|
|
|
|
|
41,446
|
|
Other investments, net
|
|
|
(36,080
|
)
|
|
24,854
|
|
|
(134,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
832,103
|
|
$
|
261,481
|
|
$
|
214,643
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
119
XL GROUP PLC
CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009 (Continued)
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Cash Flows (Used in) Provided by Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares and exercise of stock
options
|
|
$
|
576,333
|
|
$
|
1,182
|
|
$
|
745,000
|
|
Proceeds from issuance of Series D preference ordinary shares
|
|
|
349,180
|
|
|
|
|
|
|
|
Buybacks of ordinary shares
|
|
|
(667,022
|
)
|
|
(522,024
|
)
|
|
(626
|
)
|
Repurchase of Redeemable Series C preference ordinary shares
|
|
|
(71,801
|
)
|
|
(94,157
|
)
|
|
(104,718
|
)
|
Repurchase of Series D preference ordinary shares
|
|
|
(3,650
|
)
|
|
|
|
|
|
|
Repurchase of Series E preference ordinary shares
|
|
|
(465
|
)
|
|
|
|
|
|
|
Dividends paid on ordinary shares
|
|
|
(138,050
|
)
|
|
(133,748
|
)
|
|
(136,757
|
)
|
Dividends paid on preference ordinary shares
|
|
|
|
|
|
(40,385
|
)
|
|
(88,251
|
)
|
Distributions to non-controlling interests
|
|
|
(71,483
|
)
|
|
(37,392
|
)
|
|
|
|
Proceeds from issuance of debt
|
|
|
395,859
|
|
|
|
|
|
|
|
Repayment of debt
|
|
|
(575,000
|
)
|
|
|
|
|
(745,000
|
)
|
Deposit liabilities
|
|
|
(152,617
|
)
|
|
(646,819
|
)
|
|
(389,575
|
)
|
Collateral received on securities lending
|
|
|
|
|
|
|
|
|
108,906
|
|
Collateral returned on securities lending
|
|
|
|
|
|
|
|
|
(351,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(358,716
|
)
|
$
|
(1,473,343
|
)
|
$
|
(962,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on foreign currency cash
|
|
|
1,668
|
|
|
(3,723
|
)
|
|
80,577
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
802,257
|
|
|
(620,829
|
)
|
|
(710,129
|
)
|
Cash and cash equivalents beginning of year
|
|
|
3,022,868
|
|
|
3,643,697
|
|
|
4,353,826
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
3,825,125
|
|
$
|
3,022,868
|
|
$
|
3,643,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Net taxes paid
|
|
$
|
106,666
|
|
$
|
75,429
|
|
$
|
134,948
|
|
Interest paid on notes payable and debt
|
|
$
|
149,133
|
|
$
|
162,086
|
|
$
|
172,927
|
|
See accompanying Notes to Consolidated Financial Statements
120
XL GROUP PLC
N
OTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
1. G
ENERAL
XL
Group plc, through its operating subsidiaries (collectively the Company or
XL), is a leading provider of insurance and reinsurance coverages to
industrial, commercial and professional firms, insurance companies and other
enterprises on a worldwide basis. The Company and its various subsidiaries
operate globally in 24 countries, through its three business segments:
Insurance, Reinsurance and Life operations. These segments are further
discussed in Note 4, Segment Information.
For
periods prior to July 1, 2010, unless the context otherwise indicates,
references herein to the Company are to, and these financial statements
include the accounts of, XLIT Ltd. (formerly, XL Capital Ltd), a Cayman Islands
exempted company (XL-Cayman), and its consolidated subsidiaries. For periods
subsequent to July 1, 2010, unless the context otherwise indicates, references
herein to the Company are to, and these financial statements include the
accounts of, XL Group plc, an Irish public limited company (XL-Ireland), and
its consolidated subsidiaries.
On
July 1, 2010, XL-Ireland and XL-Cayman completed a redomestication transaction
in which all of the ordinary shares of XL-Cayman were exchanged for all of the
ordinary shares of XL-Ireland (the Redomestication). As a result, XL-Cayman
became a wholly owned subsidiary of XL-Ireland. On July 23, 2010, the Irish
High Court approved XL-Irelands creation of distributable reserves, subject to
the completion of certain formalities under Irish Company law. These
formalities were completed in early August 2010.
As
described initially in the Companys Quarterly Report on Form 10-Q for the
three months ended March 31, 2011, as part of the Redomestication, neither the
Redeemable Series C preference ordinary shares nor the Series E preference
ordinary shares were transferred from XL-Cayman to XL-Ireland. Accordingly,
subsequent to July 1, 2010, these instruments represent non-controlling
interests in the consolidated financial statements of the Company. The
Redeemable Series C preference ordinary shares should have been reclassified as
Non-controlling interest Redeemable Series C preference ordinary shares and
the Series E preference ordinary shares should have been reclassified as
Non-controlling interest in equity of consolidated subsidiaries. As a result,
during the annual period ended December 31, 2010, amounts related to the
Redeemable Series C preference ordinary shares and the Series E preference
ordinary shares were not correctly classified in the consolidated financial
statements of the Company. Management believes that the misclassifications are
not material to the previously issued financial statements and accordingly, the
Company has revised the December 31, 2010 financial statements in this report.
The details of these classification errors are provided below for the annual
period ended December 31, 2010. None of the revised classifications affected
our total shareholders equity, net income or net income attributable to
ordinary shareholders in any period. Details of the reclassifications are as
follows:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet at December 31, 2010
(U.S. dollars in thousands)
:
|
|
Previously
Reported
|
|
Revised
|
|
|
|
|
|
|
|
Series E preference ordinary shares, 1,000,000 authorized, par value
$0.01; Issued and outstanding: (2010, 1,000,000; 2009, 1,000,000)
|
|
$
|
10
|
|
$
|
|
|
Additional paid in capital
|
|
|
9,993,006
|
|
|
8,993,016
|
|
Shareholders equity attributable to XL Group plc
|
|
|
10,610,753
|
|
|
9,610,753
|
|
Non-controlling interest in equity of consolidated subsidiaries
|
|
|
2,296
|
|
|
1,002,296
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income and Comprehensive
Income for the year ended December 31, 2010
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
:
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
$
|
(4
|
)
|
$
|
(39,831
|
)
|
Net income (loss) attributable to XL Group plc
|
|
|
643,377
|
|
|
603,550
|
|
Preference share dividends
|
|
|
(74,521
|
)
|
|
(34,694
|
)
|
Comprehensive income (loss)
|
|
|
1,886,639
|
|
|
1,846,812
|
|
121
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(a) Basis of Preparation and Consolidation
These
consolidated financial statements include the accounts of the Company and all
of its subsidiaries. These consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America (GAAP). To facilitate period-to-period comparisons, certain
reclassifications have been made to prior year consolidated financial statement
amounts to conform to current year presentation. There was no effect on net
income from this change in presentation.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amount 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. The Companys most significant areas of estimation
include:
|
|
|
|
|
unpaid losses and loss
expenses and unpaid losses and loss expenses recoverable;
|
|
|
|
|
|
future policy benefit
reserves;
|
|
|
|
|
|
valuation and
other-than-temporary impairments of investments;
|
|
|
|
|
|
income taxes;
|
|
|
|
|
|
reinsurance premium
estimates; and
|
|
|
|
|
|
goodwill carrying value.
|
While
management believes that the amounts included in the consolidated financial
statements reflect the Companys best estimates and assumptions, actual results
could differ from these estimates.
(b) Fair Value Measurements
Financial Instruments subject to Fair Value
Measurements
Accounting
guidance over fair value measurements requires that a fair value measurement
reflect the assumptions market participants would use in pricing an asset or
liability based on the best information available. Assumptions include the
risks inherent in a particular valuation technique (such as a pricing model)
and/or the risks inherent in the inputs to the model. The fair value of a
financial instrument is the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction
122
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(b) Fair Value Measurements (Continued)
between market participants
at the measurement date (the exit price). Instruments that the Company owns
(long positions) are marked to bid prices and instruments that the Company
has sold but not yet purchased (short positions) are marked to offer prices.
Fair value measurements are not adjusted for transaction costs.
Basis of Fair Value Measurement
Fair
value measurements accounting guidance also establishes a fair value hierarchy
that prioritizes the inputs to the respective valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). An asset or liabilitys classification within the fair value
hierarchy is based on the lowest level of significant input to its valuation.
The three levels of the fair value hierarchy are described further below:
|
|
|
|
|
Level 1
Quoted prices in active markets for
identical assets or liabilities (unadjusted); no blockage factors.
|
|
|
|
|
|
Level 2
Other observable inputs (quoted prices in
markets that are not active or inputs that are observable either directly or
indirectly) include quoted prices for similar assets/liabilities (adjusted)
other than quoted prices in Level 1; quoted prices in markets that are not
active; or other inputs that are observable or can be derived principally
from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
|
|
|
|
|
|
Level 3
Unobservable inputs that are supported by
little or no market activity and are significant to the fair value of the
assets or liabilities. Unobservable inputs reflect the reporting entitys own
assumptions about the assumptions that market participants would use in
pricing the asset or liability. Level 3 assets and liabilities include
financial instruments whose values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation.
|
Details
on assets and liabilities that have been included under the requirements of
authoritative guidance on fair value measurements to illustrate the bases for
determining the fair values of these items held by the Company are detailed in
each respective significant accounting policy section of this note.
Fair
values of investments and derivatives are based on published market values if
available, estimates of fair values of similar issues, or estimates of fair
values provided by independent pricing services and brokers. Fair values of
financial instruments for which quoted market prices are not available or for
which the company believes current trading conditions represent distressed
markets are based on estimates using present value or other valuation
techniques. The fair values estimated using such techniques are significantly
affected by the assumptions used, including the discount rates and the
estimated amounts and timing of future cash flows. In such instances, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and are not necessarily indicative of the amounts that
would be realized in a current market exchange.
(c) Total Investments
Investments Available For Sale
Investments
that are considered available for sale (comprised of the Companys fixed
maturities, equity securities and short-term investments) are carried at fair
value. 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
123
XL GROUP PLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(c) Total Investments (Continued)
bid indications where
pricing services do not provide coverage for a particular security. To the
extent the Company believes current trading conditions represent distressed
transactions, the Company may elect to utilize internally generated models. The
pricing services use market approaches to valuations using primarily Level 2
inputs in the vast majority of valuations, or some form of discounted cash flow
analysis, to obtain investment values for a small percentage of fixed income
securities for which they provide a price. Pricing services indicate that they
will only produce an estimate of fair value if there is objectively verifiable
information available to produce a valuation. Standard inputs to the valuations
provided by the pricing services listed in approximate order of priority for
use when available include: reported trades, benchmark yields, broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers,
and reference data. The pricing services may prioritize inputs differently on
any given day for any security, and not all inputs listed are available for use
in the evaluation process on any given day for each security evaluation;
however, the pricing services also monitor market indicators and industry and
economic events. Information of this nature is a trigger to acquire further
corroborating market data. When these inputs are not available, they identify
buckets of similar securities (allocated by asset class types, sectors, sub-sectors,
contractual cash flows/structure, and credit rating characteristics) and apply
some form of matrix or other modeled pricing to determine an appropriate
security value which represents their best estimate as to what a buyer in the
marketplace would pay for a security in a current sale. While the Company
receives values for the majority of the investment securities it holds from
pricing services, it is ultimately managements responsibility to determine
whether the values received and recorded in the financial statements are
representative of appropriate fair value measurements. It is common industry
practice to utilize pricing services as a source for determining the fair
values of investments where the pricing services are able to obtain sufficient
market corroborating information to allow them to produce a valuation at a
reporting date. In addition, in the majority of cases, although a value may be
obtained from a particular pricing service for a security or class of similar
securities, these values are corroborated against values provided by other
pricing services.
Broker/dealer
quotations are used to value fixed maturities where prices are unavailable from
pricing services due to factors specific to the security such as limited
liquidity, lack of current transactions, or trades only taking place in
privately negotiated transactions. These are considered Level 3 valuations, as
significant inputs utilized by brokers may be 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.
Prices
provided by independent pricing services and independent broker quotes can vary
widely even for the same security. The use of different methodologies and
assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption including periods of significantly rising
or high interest rates, rapidly widening credit spreads or illiquidity, it may
be difficult to value certain of the Companys securities, for example,
collateralized loan obligations (CLOs), Alt-A and sub-prime mortgage backed
securities, if trading becomes less frequent and/or market data becomes less
observable. There may be certain asset classes that were in active markets with
significant observable data that become illiquid due to the current financial
environment. In such cases, more securities may fall to Level 3, meaning that
more subjectivity and management judgment is required with regard to fair
value. As such, valuations may include inputs and assumptions that are less
observable or require greater estimation as well as valuation methods that are
more sophisticated or require greater estimation, thereby resulting in values
that may be different than the value at which the investments may be ultimately
sold.
The
net unrealized gain or loss on investments, net of tax, is included in
accumulated other comprehensive income (loss).
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 income securities.
124
XL GROUP PLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(c) Total Investments (Continued)
Equity
securities include investments in open end mutual funds and shares of publicly
traded alternative funds. The fair value of equity securities is based upon
quoted market values (Level 1), or monthly net asset value statements provided
by the investment managers upon which subscriptions and redemptions can be
executed (Level 2).
All
investment transactions are recorded on a trade date basis. Realized gains and
losses on sales of equities and fixed income investments are determined on a
first-in, first-out basis. Investment income is recognized when earned and
includes interest and dividend income together with the amortization of premium
and discount on fixed maturities and short-term investments. Amortization of
discounts on fixed maturities includes amortization to expected recovery values
for investments that have previously been recorded as other than temporarily
impaired. For mortgage-backed securities, and any other holdings for which
there is a prepayment risk, prepayment assumptions are evaluated and revised as
necessary. Prepayment fees or call premiums that are only payable to the
Company when a security is called prior to its maturity are earned when
received and reflected in net investment income.
Investments Held to Maturity
Investments
classified as held to maturity include securities for which the Company has the
ability and intent to hold to maturity and are carried at amortized cost. For
details see Note 5, Investments.
Investments In Affiliates
Investments
in which the Company has significant influence over the operating and financial
policies of the investee are classified as investments in affiliates on the
Companys balance sheet and are accounted for under the equity method of
accounting. Under this method, the Company records its proportionate share of
income or loss from such investments in its results for the period as well as
its portion of movements in certain of the investee shareholders equity
balances. When financial statements of the affiliate are not available on a
timely basis to record the Companys share of income or loss for the same
reporting periods as the Company, the most recently available financial
statements are used. This lag in reporting is applied consistently.
The
Company generally records its alternative and private equity fund affiliates
on a one month and three month lag, respectively, and its operating affiliates
on a three month lag. Significant influence is generally deemed to exist
where the Company has an investment of 20% or more in the common stock of
a corporation or an investment of 3% or more in closed end funds, limited
partnerships, LLCs or similar investment vehicles. Significant influence
is considered for other strategic investments on a case-by-case basis. Investments
in affiliates are not subject to fair value measurement guidance as they
are not considered to be fair value measured investments under U.S. GAAP.
However, impairments associated with investments in affiliates that are deemed
to be other-than-temporary are calculated in accordance with fair value measurement
guidance and appropriate disclosures included within the financial statements
during the period the losses are recorded.
Other Investments
Contained
within this asset class are equity interests in investment funds, limited
partnerships and unrated tranches of collateralized debt obligations for which
the Company does not have sufficient rights or ownership interests to follow
the equity method of accounting. The Company accounts for equity securities
that do not have readily determinable market values at estimated fair value as
it has no significant influence over these entities. Also included within other
investments are structured transactions which are carried at amortized cost.
125
XL GROUP PLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(c) Total Investments (Continued)
Fair
values for other investments, principally other direct equity investments,
investment funds and limited partnerships, are primarily based on the net asset
value provided by the investment manager, the general partner or the respective
entity, recent financial information, available market data and, in certain
cases, management judgment may be required. These entities generally carry
their trading positions and investments, the majority of which have underlying
securities valued using Level 1 or Level 2 inputs, at fair value as determined
by their respective investment managers; accordingly, these investments are
generally classified as Level 2. Private equity investments are classified as
Level 3. The net unrealized gain or loss on investments, net of tax, is
included in Accumulated other comprehensive income (loss). Any unrealized
loss in value considered by management to be other-than-temporary is charged to
income in the period that it is determined.
Overseas
deposits include investments in private funds related to Lloyds syndicates in
which the underlying instruments are primarily cash equivalents. The funds
themselves do not trade on an exchange and therefore are not included within
available for sale securities. Also included in overseas deposits are
restricted cash and cash equivalent balances held by Lloyds syndicates for
solvency purposes. Given the restricted nature of these cash balances, they are
not included within the cash and cash equivalents line in the balance sheet.
Each of these investment types is considered a Level 2 valuation.
The
Company historically participated in structured transactions that include cash
loans supporting project finance transactions, providing liquidity facility
financing to a structured project deal in 2009 and the Company also invested in
a payment obligation with an insurance company. These transactions are carried
at amortized cost. For further details see Note 3, Fair Value Measurements,
and Note 7, Other Investments.
Cash Equivalents
Cash
equivalents include fixed interest deposits placed with a maturity of under 90
days when purchased. Bank deposits are not considered to be fair value
measurements and as such are not subject to fair value measurement disclosures.
Money market funds are classified as Level 1 as these instruments are
considered actively traded and values are quoted, however, certificates of
deposit are classified as Level 2.
(d) Premiums and Acquisition Costs
Insurance
premiums written are recorded in accordance with the terms of the underlying
policies. Reinsurance premiums written are recorded at the inception of the
policy and are estimated based upon information received from ceding companies
and any subsequent differences arising on such estimates are recorded in the
period they are determined.
Premiums
are earned on a pro-rata basis over the period the coverage is provided.
Unearned premiums represent the portion of premiums written applicable to the
unexpired terms of policies in force. Net premiums earned are presented after
deductions for reinsurance ceded, as applicable.
Mandatory
reinstatement premiums are recognized and earned at the time a loss event
occurs.
Life
and annuity premiums from long duration contracts that transfer significant
mortality or morbidity risks are recognized as revenue and earned when due from
policyholders. Life and annuity premiums from long duration contracts that do
not subject the Company to risks arising from policyholder mortality or
morbidity are accounted for as investment contracts and presented within
deposit liabilities.
126
XL GROUP PLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(d) Premiums and Acquisition Costs
(Continued)
The
Company has periodically written retroactive loss portfolio transfer (LPT)
contracts. These contracts are evaluated to determine whether they meet the
established criteria for reinsurance accounting, and, if so, at inception,
written premiums are fully earned and corresponding losses and loss expense
recognized. The contracts can cause significant variances in gross premiums
written, net premiums written, net premiums earned, and net incurred losses in
the years in which they are written. Reinsurance contracts sold not meeting the
established criteria for reinsurance accounting are recorded using the deposit
method.
Acquisition
costs, which vary with and are directly related to the acquisition of policies,
consist primarily of commissions paid to brokers and cedants, and are deferred
and amortized over the period that the premiums are earned. Acquisition costs
are shown net of commissions earned on reinsurance ceded. Future earned
premiums, the anticipated losses and other costs (and in the case of a premium
deficiency, investment income) related to those premiums, are also considered
in determining the level of acquisition costs to be deferred.
(e) Reinsurance
In
the normal course of business, the Company seeks to reduce the potential amount
of loss arising from claims events by reinsuring certain levels of risk assumed
in various areas of exposure with other insurers or reinsurers. Reinsurance
premiums ceded are expensed (and any commissions recorded thereon are earned)
on a monthly pro-rata basis over the period the reinsurance coverage is
provided. Ceded unearned reinsurance premiums represent the portion of premiums
ceded applicable to the unexpired term of policies in force. Mandatory
reinstatement premiums ceded are recorded at the time a loss event occurs.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Provisions are made
for estimated unrecoverable reinsurance.
(f) Fee Income and Other
Fee
income and other includes fees received for insurance and product structuring
services provided and is earned over the service period of the contract. Any
adjustments to fees earned or the service period are reflected in income in the
period when determined.
(g) OtherThan-Temporary Impairments (OTTI)
of Available for Sale and Held to Maturity Securities
The
Companys process for identifying declines in the fair value of investments
that are other-than-temporary involves consideration of several factors. These
primary factors include (i) an analysis of the liquidity, business prospects
and financial condition of the issuer including consideration of credit
ratings, (ii) the significance of the decline, (iii) an analysis of the
collateral structure and other credit support, as applicable, of the securities
in question, and (iv) for debt securities, whether the Company intends to sell
such securities. In addition, the authoritative guidance requires that OTTI for
certain asset backed and mortgage backed securities is recognized if the fair
value of the security is less than its discounted cash flow value and there has
been a decrease in the present value of the expected cash flows since the last
reporting period. Where the Companys analysis of the above factors results in
the Companys conclusion that declines in fair values are other-than-temporary,
the cost of the security is written down to discounted cash flow and a portion
of the previously unrealized loss is therefore realized in the period such
determination is made.
If
the Company intends to sell an impaired debt security, or it is more likely
than not that it will be required to sell the security before recovery of its
amortized cost basis, the impairment is other-than-temporary and is recognized
currently in earnings in an amount equal to the entire difference between fair
value and amortized cost.
From
April 1, 2009, in instances in which the Company determines that a credit loss
exists but the Company does not intend to sell the security, and it is not more
likely than not that the Company will be required to sell the security before
the anticipated recovery of its remaining amortized cost basis, the OTTI is
separated into (1) the amount of the total impairment related to the credit
loss and (2) the amount of the total impairment related to all other factors
(i.e. the noncredit portion). The amount of the total OTTI related to the
credit loss is recognized in earnings and the amount of the total OTTI related
to all other factors is recognized in accumulated other comprehensive loss. The
total OTTI is presented in the income statement with an offset for the amount
of the total OTTI that is recognized in accumulated other comprehensive loss.
Absent the intent or requirement to sell a security, if a credit loss does not
exist, any impairment is considered to be temporary.
127
XL GROUP PLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(g) Other-Than-Temporary Impairments (OTTI)
of Available for Sale and Held to Maturity Securities (Continued)
The
noncredit portion of any OTTI losses on securities classified as available for
sale is recorded as a component of other comprehensive income with an
offsetting adjustment to the carrying value of the security. The fair value
adjustment could increase or decrease the carrying value of the security. The
noncredit portion of any OTTI losses recognized in accumulated other
comprehensive loss for debt securities classified as held to maturity would be
accreted over the remaining life of the debt security (in a pro rata manner
based on the amount of actual cash flows received as a percentage of total
estimated cash flows) as an increase in the carrying value of the security
until the security is sold, the security matures, or there is an additional
OTTI that is recognized in earnings.
In
periods subsequent to the recognition of an OTTI loss, the
other-than-temporarily impaired debt security is accounted for as if it had
been purchased on the measurement date of the OTTI at an amount equal to the
previous amortized cost basis less the credit-related OTTI recognized in
earnings. For debt securities for which credit-related OTTI is recognized in earnings,
the difference between the new cost basis and the cash flows expected to be
collected is accreted into interest income over the remaining life of the
security in a prospective manner based on the estimated amount and timing of
future estimated cash flows.
With
respect to securities where the decline in value is determined to be temporary
and the securitys amortized cost is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security
sales are made within the context of overall risk monitoring, changing
information, market conditions generally and assessing value relative to other
comparable securities. Day-to-day management of the Companys investment
portfolio is outsourced to third party investment manager service providers.
While these investment manager service providers may, at a given point in time,
believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are
recovered, the dynamic nature of the portfolio management may result in a
subsequent decision to sell the security and realize the loss, based upon a
change in market and other factors described above. The Company believes that
subsequent decisions to sell such securities are consistent with the
classification of the Companys portfolio as available for sale.
There
are risks and uncertainties associated with determining whether declines in the
fair value of investments are other-than-temporary. These include subsequent
significant changes in general economic conditions as well as specific business
conditions affecting particular issuers, the Companys liability profile,
subjective assessment of issue-specific factors (seniority of claims,
collateral value, etc.), future financial market effects, stability of foreign
governments and economies, future rating agency actions and significant
disclosure of accounting, fraud or corporate governance issues that may
adversely affect certain investments. In addition, significant assumptions and
management judgment are involved in determining if the decline is
other-than-temporary. If management determines that a decline in fair value is
temporary, then a securitys value is not written down at that time. However,
there are potential effects upon the Companys future earnings and financial
position should management later conclude that some of the current declines in
the fair value of the investments are other-than-temporary declines. For further
details on the factors considered in evaluation of OTTI see Note 5,
Investments.
128
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(h) Derivative Instruments
The
Company recognizes all derivatives as either assets or liabilities in the
balance sheet and measures those instruments at fair value. The changes in fair
value of derivatives are 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 which are designated as hedging instruments is discussed below.
Changes in fair value of derivatives may create volatility in the Companys
results of operations from period to period. Amounts recognized for the right
to reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) are offset against net fair value amounts recognized in
the consolidated balance sheet for derivative instruments executed with the
same counterparty under the same netting arrangement.
Derivative
contracts can be exchange-traded or over-the-counter (OTC). Exchange-traded
derivatives (futures and options) typically fall within Level 1 of the fair
value hierarchy depending on whether they are deemed to be actively traded or
not. OTC derivatives are valued using market transactions and other market
evidence whenever possible, including market-based inputs to models, model
calibration to market clearing transactions, broker or dealer quotations or
alternative pricing sources where an understanding of the inputs utilized in
arriving at the valuations is obtained. Where models are used, the selection of
a particular model to value an OTC derivative depends upon the contractual
terms and specific risks inherent in the instrument as well as the availability
of pricing information in the market. The Company generally uses similar models
to value similar instruments. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit curves,
measures of volatility, prepayment rates and correlations of such inputs. For
OTC derivatives that trade in liquid markets, such as generic forwards,
interest rate swaps and options, model inputs can generally be verified and
model selection does not involve significant management judgment. Such
instruments comprise the majority of derivatives held by the Company and are
typically classified within Level 2 of the fair value hierarchy.
Certain
OTC derivatives trade in less liquid markets with limited pricing information,
or required model inputs which are not directly market corroborated, which
causes the determination of fair value for these derivatives to be inherently
more subjective. Accordingly, such derivatives are classified within Level 3 of
the fair value hierarchy. The valuations of less standard or liquid OTC
derivatives are typically based on Level 1 and/or Level 2 inputs that can be
observed in the market, as well as unobservable Level 3 inputs. Level 1 and
Level 2 inputs are regularly updated to reflect observable market changes.
Level 3 inputs are only changed when corroborated by evidence such as similar
market transactions, pricing services and/or broker or dealer quotations. The
Company conducts its non-hedging derivatives activities in three main areas:
investment related derivatives, credit derivatives and other non-investment
related derivatives; until early 2009, it also utilized weather and energy
derivatives.
The
Company uses derivative instruments, primarily interest rate swaps, to manage
the interest rate exposure associated with certain assets and liabilities.
These derivatives are recorded at fair value. On the date the derivative
contract is entered into, the Company may designate the derivative as a hedge
of the fair value of a recognized asset or liability (fair value hedge); a
hedge of the variability in cash flows of a forecasted transaction or of
amounts to be received or paid related to a recognized asset or liability
(cash flow hedge); or a hedge of a net investment in a foreign operation; or
the Company may not designate any hedging relationship for a derivative
contract. In addition, the Company previously wrote a number of resettable
strike swaps contracts relating to an absolute return index and diversified
basket of funds, all of which are recorded within Investment Related Derivatives
Financial Market Exposures. These resettable strike swaps have all expired at
December 31, 2011.
129
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(h) Derivative Instruments (Continued)
Fair Value Hedges
Changes
in the fair value of a derivative that is designated and qualifies as a fair
value hedge, along with the changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings (through net realized and unrealized gains and losses on
derivative instruments)
with any differences between the net change in fair value of the derivative and
the hedged item representing the hedge ineffectiveness. Periodic derivative net
coupon settlements are recorded in net investment income with the exception of
hedges of Company issued debt, which are recorded in interest expense. The
Company may designate fair value hedging relationships where interest rate
swaps are used to hedge the changes in fair value of certain fixed rate
liabilities and fixed maturity securities due to changes in the designated
benchmark interest rate.
Cash Flow Hedges
Changes
in the fair value of a derivative that is designated and qualifies as a cash
flow hedge are recorded in accumulated other comprehensive income (AOCI) and
are reclassified into earnings when the variability of the cash flow of the
hedged item impacts earnings. Gains and losses on derivative contracts that are
reclassified from AOCI to current period earnings are included in the line item
in the consolidated statements of operations in which the cash flows of the
hedged item are recorded. Any hedge ineffectiveness is recorded immediately in
current period earnings as net realized and unrealized gains and losses on
derivative instruments. Periodic derivative net coupon settlements are
recorded in net investment income. The Company may designate cash flow hedging
relationships where interest rate swaps are used to mitigate interest rate risk
associated with anticipated issuances of debt or other forecasted transactions.
Hedges of the Net Investment in a
Foreign Operation
Changes
in fair value of a derivative used as a hedge of a net investment in a foreign
operation, to the extent effective as a hedge, are recorded in the foreign
currency translation adjustments account within AOCI. Cumulative changes in
fair value recorded in AOCI are reclassified into earnings upon the sale or
complete or substantially complete liquidation of the foreign entity. Any hedge
ineffectiveness is recorded immediately in current period earnings as net
realized and unrealized gains and losses on derivative instruments.
Hedge Documentation and
Effectiveness Testing
To
qualify for hedge accounting treatment, a derivative must be highly effective
in mitigating the designated changes in value or cash flow of the hedged item.
At hedge inception, the Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective
and strategy for undertaking each hedge transaction. The documentation process
includes linking derivatives that are designated as fair value, cash flow, or
net investment hedges to specific assets or liabilities on the balance sheet or
to specific forecasted transactions. The Company also formally assesses, both
at the hedges inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
fair values or cash flows of hedged items. In addition, certain hedging
relationships are considered highly effective if the changes in the fair value
or discounted cash flows of the hedging instrument are within a ratio of
80-125% of the inverse changes in the fair value or discounted cash flows of
the hedged item. Hedge ineffectiveness is measured using qualitative and
quantitative methods. Qualitative methods may include comparison of critical
terms of the derivative to the hedged item. Depending on the hedging strategy,
quantitative methods may include the Change in Variable Cash Flows Method,
the Change in Fair Value Method, the Hypothetical Derivative Method and the
Dollar Offset Method.
130
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(h) Derivative Instruments (Continued)
Discontinuance of Hedge Accounting
The
Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer highly effective in offsetting changes in the fair
value or cash flows of a hedged item; the derivative is dedesignated as a hedging instrument; or the derivative
expires or is sold, terminated or exercised. When hedge accounting is
discontinued because it is determined that the derivative no longer qualifies
as an effective fair-value hedge, the derivative continues to be carried at
fair value on the balance sheet with changes in its fair value recognized in
current period earnings through net realized and unrealized gains and losses
on derivative instruments. When hedge accounting is discontinued because the
Company becomes aware that it is not probable that the forecasted transaction
will occur, the derivative continues to be carried on the balance sheet at its
fair value, and gains and losses that were accumulated in AOCI are recognized
immediately in earnings.
(i) Cash Equivalents
Cash
equivalents include fixed interest deposits placed with a maturity of under 90
days when purchased. Bank deposits are not considered to be fair value
measurements and as such are not subject to the authoritative guidance on fair
value measurement disclosures. Money market funds are classified as Level 1 as
these instruments are considered actively traded; however, certificates of
deposit are classified as Level 2.
(j) Foreign Currency Translation
Assets
and liabilities of foreign operations whose functional currency is not the U.S.
dollar are translated at prevailing year end exchange rates. Revenue and
expenses of such foreign operations are translated at average exchange rates during
the year. The net effect of the translation adjustments for foreign operations,
net of applicable deferred income taxes, as well as any gains or losses on
intercompany balances for which settlement is not planned or anticipated in the
foreseeable future, are included in accumulated other comprehensive income
(loss).
Monetary
assets and liabilities denominated in currencies other than the functional
currency of the applicable entity are revalued at the exchange rate in effect
at the balance sheet date and revenues and expenses are translated at the
exchange rate on the date the transaction occurs with the resulting foreign
exchange gains and losses on settlement or revaluation recognized in income.
(k) Goodwill and Other Intangible Assets
The
Company has recorded goodwill in connection with various acquisitions in prior
years. Goodwill represents the excess of the purchase price over the fair value
of net assets acquired. In accordance with accounting guidance over goodwill
and other intangible assets, the Company tests goodwill for potential
impairment annually as of June 30 and between annual tests if an event occurs
or circumstances change that may indicate that potential exists for the fair
value of a reporting unit to be reduced to a level below its carrying amount.
For further details on the factors considered in the goodwill impairment
evaluation see Note 8, Goodwill and Other Intangible Assets.
The
Companys other intangible assets consist of both amortizable and non-amortizable
intangible assets. The Companys amortizable intangible assets consist
primarily of acquired customer relationships and acquired software. All of the
Companys amortizable intangible assets are carried at net book value and are
amortized over their estimated useful lives. The amortization periods
approximate the periods over which the Company expects to generate future net
cash inflows from the use of these assets. Accordingly, customer relationships
are amortized over a useful life of 10 years and acquired software is amortized
over a useful life of 5 years. The Companys policy is to amortize intangibles
on a straight-line basis.
131
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(k) Goodwill and Other Intangible Assets
(Continued)
All
of the Companys amortizable intangible assets, as well as other amortizable or
depreciable long-lived assets such as premises and equipment, are subject to
impairment testing in accordance with authoritative guidance for the impairment
or disposal of long-lived assets when events or conditions indicate that the
carrying value of an asset may not be fully recoverable from future cash flows.
A test for recoverability
is done by comparing the assets carrying value to the sum of the undiscounted
future net cash inflows expected to be generated from the use of the asset over
its remaining useful life. In accordance with the authoritative guidance on
property, plant and equipment under GAAP, impairment exists if the sum of the
undiscounted expected future net cash inflows is less than the carrying amount
of the asset. Impairment would result in a write-down of the asset to its
estimated fair value. The estimated fair values of these assets are based on
the discounted present value of the stream of future net cash inflows expected
to be derived over their remaining useful lives. If an impairment write-down is
recorded, the remaining useful life of the asset will be evaluated to determine
whether revision of the remaining amortization or depreciation period is
appropriate.
The
Companys indefinite lived intangible assets consist primarily of acquired
insurance and reinsurance licenses. These assets are deemed to have indefinite
useful lives and are therefore not subject to amortization. In accordance with
the authoritative guidance on intangibles and goodwill and other assets under
GAAP, all of the Companys non-amortized intangible assets are subject to a
test for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Pursuant to the
authoritative guidance, if the carrying value of a non-amortized intangible
asset is in excess of its fair value, the asset must be written down to its
fair value through the recognition of an impairment charge to earnings.
(l) Losses and Loss Expenses
Unpaid
losses and loss expenses include reserves for reported unpaid losses and loss
expenses and for losses incurred but not reported. The reserve for reported
unpaid losses and loss expenses for the Companys property and casualty
operations is established by management based on claims reported from insureds
or amounts reported from ceding companies, and represent the estimated ultimate
cost of events or conditions that have been reported to or specifically
identified by the Company.
The
reserve for losses incurred but not reported is estimated by management based
on loss development patterns determined by reference to the Companys
underwriting practices, the policy form, type of program and historical
experience. The Companys actuaries employ a variety of generally accepted
methodologies to determine estimated ultimate loss reserves, including the
Bornhuetter-Ferguson incurred loss method and frequency and severity
approaches.
Certain
workers compensation and U.K. motor liability claims liabilities are
considered fixed and determinable and are subject to tabular reserving.
Reserves associated with these liabilities are discounted.
Management
believes that the reserves for unpaid losses and loss expenses are sufficient
to cover losses that fall within coverages assumed by the Company. However,
there can be no assurance that losses will not exceed the Companys total
reserves. The methodology of estimating loss reserves is periodically reviewed
to ensure that the assumptions made continue to be appropriate and any
adjustments resulting from such reviews are reflected in income of the year in
which the adjustments are made.
(m) Deposit liabilities
Contracts
entered into by the Company which are not deemed to transfer significant
underwriting and/or timing risk are accounted for as deposits, whereby
liabilities are initially recorded at an amount equal to the assets received.
The Company uses a portfolio rate of return of equivalent duration to the
liabilities in determining risk transfer. An initial accretion rate is
established based on actuarial estimates whereby the deposit liability is
increased to the estimated amount payable over the term of the contract.
The
deposit accretion rate is the rate of return required to fund expected future
payment obligations (this is equivalent to the best estimate of future cash
flows), which are determined actuarially based upon the nature of the
underlying indemnifiable losses. Accretion of the liability is recorded as
interest expense.
132
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(m) Deposit liabilities (Continued)
The
Company periodically reassesses the estimated ultimate liability. Any changes
to this liability are reflected as adjustments to interest expense to reflect
the cumulative effect of the period the contract has been in force, and by an
adjustment to the future accretion rate of the liability over the remaining
estimated contract term.
(n) Future policy benefit reserves
The
Company estimates the present value of future policy benefits related to long
duration contracts using assumptions for investment yields, mortality, and
expenses, including a provision for adverse deviation.
The
assumptions used to determine future policy benefit reserves are best estimate
assumptions that are determined at the inception of the contracts and are
locked-in throughout the life of the contract unless a premium deficiency
develops. As the experience on the contracts emerges, the assumptions are
reviewed. If such review would produce reserves in excess of those currently
held then the lock-in assumptions will be revised and a claim and policy
benefit is recognized at that time.
Certain
life insurance and annuity contracts provide the holder with a guarantee that
the benefit received upon death will be no less than a minimum prescribed
amount. The contracts are accounted for in accordance with the authoritative
guidance on Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Separate Accounts, which requires that the best
estimate of future experience be combined with actual experience to determine
the benefit ratio used to calculate the policy benefit reserve.
(o) Income Taxes
The
Company utilizes the asset and liability method of accounting for income taxes.
Under this method, deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The deferral of tax losses is evaluated based upon managements estimates of
the future profitability of the Companys taxable entities based on current
forecasts and the period for which losses may be carried forward. A valuation
allowance is established for any portion of a deferred tax asset that
management believes will not be realized. The Company continues to evaluate
income generated in future periods by its subsidiaries in different
jurisdictions in determining the recoverability of its deferred tax asset. If
it is determined that future income generated by these subsidiaries is
insufficient to cause the realization of the net operating losses within a
reasonable period, a valuation allowance is established at that time.
133
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(p) Stock Plans
The
Company adopted authoritative guidance on the fair value recognition provisions
for accounting for stock-based compensation, under the prospective method for
options granted subsequent to January 1, 2003. Prior to 2003, the Company
accounted for options under the disclosure-only provisions of the guidance and
no stock-based employee compensation cost was included in net income as all
options granted had an exercise price equal to the market value of the
Companys ordinary shares on the date of the grant. At December 31, 2011, the
Company had several stock based Performance Incentive Programs, which are
described more fully in Item 8, Note 18, Share Capital. Stock-based
compensation issued under these plans generally have a life of not longer than
ten years and vest as set forth at the time of grant. Awards currently vest
annually over three or four years from the date of grant. The Company
recognizes compensation costs for stock-based awards on a straight-line basis
over the requisite service period (usually the vesting period) for each award.
Share-based
payments to employees, including grants of employee stock options, are
recognized in the financial statements over the vesting period based on their
grant date fair values.
Authoritative
guidance requires that compensation costs be recognized for unvested
stock-based compensation awards over the period through the date that the
employee is no longer required to provide future services to earn the award,
rather than over the explicit service period. Accordingly, the Company follows
a policy of recognizing compensation cost to coincide with the date that the
employee is eligible to retire, rather than the actual retirement date, for all
stock based compensation granted.
(q)
Per Share Data
Basic
earnings per ordinary share is based on weighted average ordinary shares
outstanding and excludes any dilutive effects of options and convertible
securities. Diluted earnings per ordinary share assumes the exercise of all
dilutive stock options and conversion of convertible securities where the
contingency for conversion has occurred or been satisfied.
(r) Recent Accounting Pronouncements
In
January 2010, the FASB issued an accounting standards update on Improving
Disclosures about Fair Value Measurements. The provisions of this authoritative
guidance require new disclosure about recurring and nonrecurring fair value
measurements, including significant transfers into and out of Level 1 and Level
2 fair value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. This guidance was effective for the Company beginning on January
1, 2010, except for the Level 3 reconciliation disclosures, which were
effective for annual periods beginning after December 15, 2010. See Note 3,
Fair Value Measurements, for changes to Level 3 reconciliation disclosure.
This standard affects disclosure only and, accordingly, did not have an impact
on the Companys financial condition or results of operations.
In
July 2010, the FASB amended the general accounting principles for receivables
as they relate to the disclosures about the credit quality of financing
receivables and the allowance for credit losses. This amendment requires
additional disclosures that provide a greater level of disaggregated
information about the credit quality of financing receivables and the allowance
for credit losses. It also requires the disclosure of credit quality indicators,
past due information, and modifications of financing receivables. The new
disclosures are required for interim and annual periods ending after December
15, 2010, although the disclosures of reporting period activity (i.e.,
allowance roll-forward and modification disclosures) were required for interim
and annual periods beginning after December 15, 2010. This standard affects
disclosures only and, accordingly, did not have an impact on the Companys
financial condition or results of operations. During the fourth quarter of
2010, the Company recorded a provision of $9.9 million related to two
structured loan investments. This provision was $9.2 million at December 31,
2011. The Company holds investments in six separate structured loans with
aggregate net carrying values of $40.5 million and $42.3 million at December
31, 2011 and December 31, 2010, respectively. In addition, the Company had
gross reinsurance balances receivable and reinsurance recoverables on unpaid
losses and loss expense of $3.9 billion and $3.8 billion at December 31, 2011
and 2010, respectively, against which an allowance of $99.2 million and $121.9
million was recorded at December 31, 2011 and 2010, respectively. There were
no charge offs recorded during the year.
134
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
2. S
IGNIFICANT
A
CCOUNTING
P
OLICIES
(C
ONTINUED
)
(r) Recent Accounting Pronouncements
(Continued)
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 or renewal insurance contracts qualify for deferral. The
provisions of the guidance specify that incremental direct costs of contract
acquisition and certain costs related directly to the acquisition activities
incurred in the acquisition of new or renewal contracts should be capitalized
in accordance with the amendments in the updated guidance. Costs directly
related to those activities include only the portion of an employees total
compensation (excluding any compensation that is capitalized as incremental
direct costs of contract acquisition) and payroll-related fringe benefits
related directly to time spent performing those activities for actual acquired
contracts, and other costs related directly to those activities that would not
have been incurred if the contract had not been acquired. Administrative costs,
rent, depreciation, occupancy, equipment and all other general overhead costs
are considered indirect costs and should be charged to expense as incurred.
This guidance is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2011. The Company will adopt this
guidance on a retrospective basis on January 1, 2012, and expects the impact to
result in a reduction of opening retained earnings by approximately $20 million.
In
May 2011, the FASB issued further updated accounting guidance 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 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 assets 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. This guidance is effective for interim and
annual periods beginning after December 15, 2011 and early application is
prohibited. The Company will adopt this guidance from January 1, 2012. While
the adoption will result in additional disclosures in the area of fair values,
it will not impact the Companys consolidated financial position or results of
operations.
In
June 2011, the FASB issued an accounting standards update on the presentation
of comprehensive income in financial statements. This guidance will allow 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 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. This guidance
must be applied retrospectively and is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011, except for the
provision requiring entities to present components of reclassifications of
other comprehensive income on the face of the income statement, which the FASB
voted to defer indefinitely during the fourth quarter of 2011. The Company will
adopt this standard on a retrospective basis on January 1, 2012. This guidance
affects disclosure only and will not have an impact on the Companys 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
units fair value in certain situations, as previously permitted. The
amendments do not change the current guidance for testing other
indefinite-lived intangible assets for impairment. The new guidance is
effective for annual and interim goodwill tests performed for fiscal years
beginning after December 15, 2011. The Company will adopt this guidance from
January 1, 2012. It will not have an impact on the Companys consolidated
financial condition or results of operations. See Note 8, Goodwill and
Other Intangible Assets, for further information regarding goodwill.
135
XL
GROUP PLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. Fair Value Measurements
(a) Fair Value Summary
The
following tables set forth the Companys assets and liabilities that were
accounted for at fair value as of December 31, 2011 and December 31, 2010 by
level within the fair value hierarchy (for further information, see Note 2 (b),
Significant Accounting Policies Fair Value Measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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)
|
|
|
|
|
|
10,438,697
|
|
|
23,818
|
|
|
|
|
|
10,462,515
|
|
Residential mortgage-backed securities Agency
|
|
|
|
|
|
5,347,365
|
|
|
32,041
|
|
|
|
|
|
5,379,406
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
|
|
|
641,815
|
|
|
|
|
|
|
|
|
641,815
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
974,835
|
|
|
|
|
|
|
|
|
974,835
|
|
Collateralized debt obligations
|
|
|
|
|
|
7,751
|
|
|
650,851
|
|
|
|
|
|
658,602
|
|
Other asset-backed securities
|
|
|
|
|
|
969,804
|
|
|
16,552
|
|
|
|
|
|
986,356
|
|
U.S. States and political subdivisions of the States
|
|
|
|
|
|
1,797,378
|
|
|
|
|
|
|
|
|
1,797,378
|
|
Non-U.S. Sovereign Government, Supranational and Government-Related
|
|
|
|
|
|
3,298,135
|
|
|
|
|
|
|
|
|
3,298,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, at fair value
|
|
$
|
|
|
$
|
25,466,763
|
|
$
|
723,262
|
|
$
|
|
|
$
|
26,190,025
|
|
Equity securities, at fair value (2)
|
|
|
239,175
|
|
|
229,022
|
|
|
|
|
|
|
|
|
468,197
|
|
Short-term investments, at fair value (1) (3)
|
|
|
|
|
|
359,063
|
|
|
|
|
|
|
|
|
359,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale
|
|
$
|
239,175
|
|
$
|
26,054,848
|
|
$
|
723,262
|
|
$
|
|
|
$
|
27,017,285
|
|
Cash equivalents (4)
|
|
|
1,686,101
|
|
|
1,068,264
|
|
|
|
|
|
|
|
|
2,754,365
|
|
Other investments (5)
|
|
|
|
|
|
547,598
|
|
|
113,959
|
|
|
|
|
|
661,557
|
|
Other assets (6)(7)
|
|
|
|
|
|
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 (8)
|
|
$
|
|
|
$
|
20,844
|
|
$
|
|
|
$
|
|
|
$
|
20,844
|
|
Other liabilities (6)(7)
|
|
|
|
|
|
16,871
|
|
|
42,644
|
|
|
(809
|
)
|
|
58,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value
|
|
$
|
|
|
$
|
37,715
|
|
$
|
42,644
|
|
$
|
(809
|
)
|
$
|
79,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. Fair Value Measurements (Continued)
(a) Fair Value Summary (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
(U.S.
dollars in thousands)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Collateral and
Counterparty
Netting
|
|
Balance
at
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government-Related/Supported
|
|
$
|
|
|
$
|
2,565,444
|
|
$
|
|
|
$
|
|
|
$
|
2,565,444
|
|
Corporate (1)
|
|
|
|
|
|
10,932,105
|
|
|
36,866
|
|
|
|
|
|
10,968,971
|
|
Residential mortgage-backed securities Agency
|
|
|
|
|
|
5,173,456
|
|
|
30,255
|
|
|
|
|
|
5,203,711
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
|
|
|
1,016,859
|
|
|
4,964
|
|
|
|
|
|
1,021,823
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
1,170,884
|
|
|
1,623
|
|
|
|
|
|
1,172,507
|
|
Collateralized debt obligations
|
|
|
|
|
|
12,566
|
|
|
721,572
|
|
|
|
|
|
734,138
|
|
Other asset-backed securities
|
|
|
|
|
|
935,882
|
|
|
24,650
|
|
|
|
|
|
960,532
|
|
U.S. States and political subdivisions of the States
|
|
|
|
|
|
1,360,456
|
|
|
|
|
|
|
|
|
1,360,456
|
|
Non-U.S. Sovereign Government, Supranational and Government-Related
|
|
|
|
|
|
3,150,856
|
|
|
3,667
|
|
|
|
|
|
3,154,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, at fair value
|
|
$
|
|
|
$
|
26,318,508
|
|
$
|
823,597
|
|
$
|
|
|
$
|
27,142,105
|
|
Equity securities, at fair value (2)
|
|
|
71,284
|
|
|
13,483
|
|
|
|
|
|
|
|
|
84,767
|
|
Short-term investments, at fair value (1) (3)
|
|
|
|
|
|
450,681
|
|
|
|
|
|
|
|
|
450,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments available for sale
|
|
$
|
71,284
|
|
$
|
26,782,672
|
|
$
|
823,597
|
|
$
|
|
|
$
|
27,677,553
|
|
Cash equivalents (4)
|
|
|
1,358,619
|
|
|
540,646
|
|
|
|
|
|
|
|
|
1,899,265
|
|
Other investments (5)
|
|
|
|
|
|
432,166
|
|
|
133,717
|
|
|
|
|
|
565,883
|
|
Other assets (6)(7)
|
|
|
|
|
|
108,056
|
|
|
7,882
|
|
|
(22,995
|
)
|
|
92,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets accounted for at fair value
|
|
$
|
1,429,903
|
|
$
|
27,863,540
|
|
$
|
965,196
|
|
$
|
(22,995
|
)
|
$
|
30,235,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, but not yet purchased (8)
|
|
$
|
256
|
|
$
|
21,270
|
|
$
|
|
|
$
|
|
|
$
|
21,526
|
|
Other liabilities (6)(7)
|
|
|
|
|
|
13,591
|
|
|
47,077
|
|
|
|
|
|
60,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities accounted for at fair value
|
|
$
|
256
|
|
$
|
34,861
|
|
$
|
47,077
|
|
$
|
|
|
$
|
82,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(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 $266.0 million
and $454.8 million and an amortized cost of $297.7 million and $504.6 million
at December 31, 2011 and 2010, 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)
|
Included within equity
securities are investments fixed income funds of $91.6 million and nil at
December 31, 2011 and 2010, respectively.
|
(3)
|
Short-term investments
consist primarily of Corporate securities and U.S. Government and
Government-Related/Supported securities.
|
(4)
|
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.
|
(5)
|
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 $323.7 million and $327.7 million at December 31,
2011 and 2010, respectively.
|
(6)
|
Other assets and other
liabilities include derivative instruments.
|
(7)
|
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 $77.1 million and $23.0 million at
December 31, 2011 and 2010, 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.
|
(8)
|
Financial instruments sold,
but not yet purchased represent short sales and are included within
Payable for investments purchased on the balance sheet.
|
137
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
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
twelve month periods ended December 31, 2011 and 2010 for all financial assets
and liabilities categorized as Level 3 at December 31, 2011 and 2010,
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 December 31, 2011 and 2010. 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
which are considered Level 3.
There
were no transfers between Level 1 and Level 2 during the twelve month periods
ended December 31, 2011 and 2010.
138
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. F
AIR
V
ALUE
M
EASUREMENTS
(C
ONTINUED
)
(b) Level 3 Gains and Losses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities
Year Ended December 31, 2011
|
|
(U.S.
dollars in thousands)
|
|
Corporate
|
|
Residential
mortgage-backed
securities
Agency
|
|
Residential
mortgage-backed
securities Non
Agency
|
|
Commercial
mortgage-backed
securities
|
|
Collateralized debt
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
36,866
|
|
$
|
30,255
|
|
$
|
4,964
|
|
$
|
1,623
|
|
$
|
721,572
|
|
Realized gains (losses)
|
|
|
(276
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
(3,458
|
)
|
Movement in unrealized gains (losses)
|
|
|
92
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
2,404
|
|
Purchases and issuances
|
|
|
14,840
|
|
|
6,176
|
|
|
|
|
|
|
|
|
2,379
|
|
Sales and settlements
|
|
|
(10,049
|
)
|
|
(4,186
|
)
|
|
|
|
|
|
|
|
(68,165
|
)
|
Transfers into Level 3
|
|
|
2,105
|
|
|
2,655
|
|
|
|
|
|
|
|
|
1,886
|
|
Transfers out of Level 3
|
|
|
(19,760
|
)
|
|
(2,703
|
)
|
|
(4,964
|
)
|
|
(1,623
|
)
|
|
(5,767
|
)
|
Fixed maturities to short-term investments classification change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
23,818
|
|
$
|
32,041
|
|
$
|
|
|
$
|
|
|
$
|
650,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total gains (losses) above relating to instruments still
held at the reporting date
|
|
$
|
92
|
|
$
|
(156
|
)
|
$
|
|
|
$
|
|
|
$
|
(6,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities
Year Ended December 31, 2011 (Continued)
|
|
(U.S.
dollars in thousands)
|
|
Other asset
backed
securities
|
|
Non-U.S.
Sovereign
Government
and
Supranationals
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)
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
11,592
|
|
|
|
|
Movement in unrealized gains (losses)
|
|
|
6,896
|
|
|
|
|
|
|
|
|
14,108
|
|
|
(3,173
|
)
|
Purchases and issuances
|
|
|
|
|
|
|
|
|
|
|
|
12,177
|
|
|
|
|
Sales and settlements
|
|
|
(9,114
|
)
|
|
|
|
|
|
|
|
(57,635
|
)
|
|
(276
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
(5,031
|
)
|
|
(3,667
|
)
|
|
|
|
|
|
|
|
|
|
Fixed maturities to short-term investments classification change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
16,552
|
|
$
|
|
|
$
|
|
|
$
|
113,959
|
|
$
|
(42,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total gains (losses) above relating to instruments still
held at the reporting date
|
|
$
|
12,334
|
|
$
|
|
|
$
|
|
|
$
|
23,391
|
|
$
|
(3,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. Fair Value Measurements (Continued)
(b) Level 3 Gains and Losses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities
Year Ended December 31, 2010
|
|
(U.S.
dollars in thousands)
|
|
Corporate
|
|
Residential
mortgage-backed
securities
Agency
|
|
Residential
mortgage-backed
securities Non
Agency
|
|
Commercial
mortgage-backed
securities
|
|
Collateralized debt
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
10,311
|
|
$
|
7,894
|
|
$
|
42,190
|
|
$
|
2,755
|
|
$
|
197,149
|
|
Realized gains (losses)
|
|
|
(7,257
|
)
|
|
(360
|
)
|
|
(1,452
|
)
|
|
(908
|
)
|
|
(28,253
|
)
|
Movement in unrealized gains (losses)
|
|
|
1,748
|
|
|
(74
|
)
|
|
306
|
|
|
1,062
|
|
|
120,932
|
|
Purchases and issuances
|
|
|
20,328
|
|
|
30,689
|
|
|
|
|
|
|
|
|
|
|
Sales and settlements
|
|
|
(2,164
|
)
|
|
|
|
|
(2,226
|
)
|
|
(685
|
)
|
|
(7,525
|
)
|
Transfers into Level 3
|
|
|
14,749
|
|
|
|
|
|
5,601
|
|
|
|
|
|
471,211
|
|
Transfers out of Level 3
|
|
|
(849
|
)
|
|
(7,894
|
)
|
|
(39,455
|
)
|
|
|
|
|
(59
|
)
|
Fixed maturities to short-term investments classification change
|
|
|
|
|
|
|
|
|
|
|
|
(601
|
)
|
|
(31,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
36,866
|
|
$
|
30,255
|
|
$
|
4,964
|
|
$
|
1,623
|
|
$
|
721,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total gains (losses) above relating to instruments still
held at the reporting date
|
|
$
|
1,964
|
|
$
|
(74
|
)
|
$
|
(28
|
)
|
$
|
223
|
|
$
|
117,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities
Year Ended December 31, 2010 (Continued)
|
|
(U.S.
dollars in thousands)
|
|
Other asset
backed
securities
|
|
Non-U.S.
Sovereign
Government
and
Supranationals
and
Government-
Related
|
|
Short-term
Investments
|
|
Other
investments
|
|
Derivative
Contracts - Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
38,179
|
|
$
|
3,217
|
|
$
|
|
|
$
|
75,584
|
|
$
|
100,515
|
|
Realized gains (losses)
|
|
|
(18,107
|
)
|
|
|
|
|
|
|
|
3,677
|
|
|
874
|
|
Movement in unrealized gains (losses)
|
|
|
14,685
|
|
|
34
|
|
|
|
|
|
14,461
|
|
|
57,688
|
|
Purchases and issuances
|
|
|
4,356
|
|
|
|
|
|
|
|
|
15,443
|
|
|
(198,272
|
)
|
Sales and settlements
|
|
|
(1,504
|
)
|
|
|
|
|
|
|
|
(26,180
|
)
|
|
|
|
Transfers into Level 3
|
|
|
1,355
|
|
|
416
|
|
|
|
|
|
18,248
|
|
|
|
|
Transfers out of Level 3
|
|
|
(14,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities to short-term investments classification change
|
|
|
|
|
|
|
|
|
|
|
|
32,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
24,650
|
|
$
|
3,667
|
|
$
|
|
|
$
|
133,717
|
|
$
|
(39,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in total gains (losses) above relating to instruments still
held at the reporting date
|
|
$
|
8,747
|
|
$
|
34
|
|
$
|
|
|
$
|
14,286
|
|
$
|
57,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. Fair Value Measurements (Continued)
(c) Fixed maturities and short-term
investments
During
the year ended December 31, 2010, certain collateralized debt
obligations (CDOs) that were previously classified as Level 2 due to
sufficient market data being available to allow a price to be determined and
provided by third party pricing vendors, were transferred to Level 3 because third
party vendor prices were no longer believed to be the most appropriate pricing
source. Broker quotes, for which sufficient information regarding the specific
inputs utilized by the broker was not available to support a Level 2
classification, are the primary source of the valuations for these CDO
securities.
The
remainder of the Level 3 assets relate to private equity investments where the
nature of the underlying assets held by the investee include positions such as
private business ventures and are such that significant Level 3 inputs are
utilized in the valuation, and certain derivative positions.
(d) Other investments
Included
within the Other investments component of the Companys 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 Companys investment in
each entity is classified within Level 3. The Company also incorporates factors
such as the most recent financial information received, the values at which
capital transactions with the investee take place, and managements 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. See Note 7,
Other Investments, for further details.
(e) Derivative instruments
Derivative
instruments classified within Level 3 include guaranteed minimum income
benefits (GMIB) embedded within a certain reinsurance contract and 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. 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. In addition, see Note 2(h),
Significant Accounting Policies, for a general discussion of types of assets
and liabilities that are classified within Level 3 of the fair value hierarchy
as well as the Companys valuation policies for such instruments.
141
XL
GROUP PLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
3. F
AIR
V
ALUE
M
EASUREMENTS
(C
ONTINUED
)
(f) Non-recurring Fair Value Measurement
During
the year ended December 31, 2011, the Company recorded a non-recurring fair
value measurement relating to a goodwill impairment charge. This is a Level 3
fair value measurement as it reflected the Companys own assumptions about the
assumptions that market participants would use in valuing the carried goodwill
and was determined using a combination of discounted cash flow analysis and
market value multiple based methodologies. See Note 8, Goodwill and Other
Intangible Assets for further information.
(g) 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 December 31, 2011 and
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, held to
maturity
|
|
$
|
2,668,978
|
|
$
|
2,895,668
|
|
$
|
2,728,335
|
|
$
|
2,742,626
|
|
Other investments
structured transactions
|
|
|
323,705
|
|
|
297,124
|
|
|
327,686
|
|
|
317,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Assets
|
|
$
|
2,992,683
|
|
$
|
3,192,792
|
|
$
|
3,056,021
|
|
$
|
3,060,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit Liabilities
|
|
$
|
1,608,108
|
|
$
|
1,809,812
|
|
$
|
1,684,606
|
|
$
|
1,737,107
|
|
Notes payable and debt
|
|
|
2,275,327
|
|
|
2,340,148
|
|
|
2,457,003
|
|
|
2,439,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
$
|
3,883,435
|
|
$
|
4,149,960
|
|
$
|
4,141,609
|
|
$
|
4,176,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable series C
preference ordinary shares
|
|
$
|
|
|
$
|
|
|
$
|
71,900
|
|
$
|
61,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 determined
the estimated fair value of the deposit liabilities by assuming a discount rate
equal to the appropriate U.S. Treasury rate plus 161.8 basis points and the
appropriate U.S. Treasury rate plus 142.3 basis points at December 31, 2011 and
2010, respectively. The discount rate incorporates the Companys own credit
risk into the determination of estimated fair value.
The
fair values of the Companys notes payable and debt outstanding are determined
based on quoted market prices.
The
fair value of the Companys Redeemable Series C preference ordinary shares
outstanding is determined based on indicative quotes provided by brokers.
During the third quarter of 2011 all outstanding Redeemable Series C preference
ordinary shares were repurchased and canceled. At December 31, 2011, no Redeemable Series C
preference ordinary shares were outstanding.
There
are no significant concentrations of credit risk within the Companys 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.
142
XL
GROUP PLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
4. S
EGMENT
I
NFORMATION
The
Company is organized into three operating segments: Insurance, Reinsurance and
Life operations. The Companys general investment and financing operations are
reflected in Corporate.
The
Company evaluates the performance for 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 for reporting purposes. In
addition, the Company does not allocate investment assets by segment for its
Property and Casualty (P&C) operations. Investment assets related to the
Companys 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011:
(U.S.
dollars in thousands, except ratios)
|
|
Insurance
|
|
Reinsurance
|
|
Total P&C
|
|
Life
Operations
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums written
|
|
$
|
4,824,665
|
|
$
|
2,073,619
|
|
$
|
6,898,284
|
|
$
|
394,555
|
|
$
|
|
|
$
|
7,292,839
|
|
Net premiums written
|
|
|
3,707,664
|
|
|
1,725,724
|
|
|
5,433,388
|
|
|
362,362
|
|
|
|
|
|
5,795,750
|
|
Net premiums earned
|
|
|
3,663,727
|
|
|
1,663,385
|
|
|
5,327,112
|
|
|
363,018
|
|
|
|
|
|
5,690,130
|
|
Net losses and loss expenses
|
|
|
(2,951,413
|
)
|
|
(1,126,978
|
)
|
|
(4,078,391
|
)
|
|
(535,074
|
)
|
|
|
|
|
(4,613,465
|
)
|
Acquisition costs
|
|
|
(461,965
|
)
|
|
(324,128
|
)
|
|
(786,093
|
)
|
|
(40,318
|
)
|
|
|
|
|
(826,411
|
)
|
Operating expenses (1)
|
|
|
(683,814
|
)
|
|
(176,167
|
)
|
|
(859,981
|
)
|
|
(9,311
|
)
|
|
|
|
|
(869,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss)
|
|
$
|
(433,465
|
)
|
$
|
36,112
|
|
$
|
(397,353
|
)
|
$
|
(221,685
|
)
|
$
|
|
|
$
|
(619,038
|
)
|
Net investment income
|
|
|
|
|
|
|
|
|
745,138
|
|
|
318,061
|
|
|
|
|
|
1,063,199
|
|
Net results from structured products (2)
|
|
|
10,976
|
|
|
12,053
|
|
|
23,029
|
|
|
|
|
|
|
|
|
23,029
|
|
Net fee income and other (3)
|
|
|
(16,370
|
)
|
|
3,903
|
|
|
(12,467
|
)
|
|
219
|
|
|
|
|
|
(12,248
|
)
|
Net realized gains (losses) on
investments
|
|
|
|
|
|
|
|
|
(98,360
|
)
|
|
(89,999
|
)
|
|
|
|
|
(188,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C, Life Operations and
Corporate
|
|
|
|
|
|
|
|
$
|
259,987
|
|
$
|
6,596
|
|
$
|
|
|
$
|
266,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized gains (losses) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,738
|
)
|
$
|
(10,738
|
)
|
Net income (loss) from investment fund affiliates and operating
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,039
|
|
|
103,039
|
|
Exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,640
|
|
|
40,640
|
|
Corporate operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,158
|
)
|
|
(159,158
|
)
|
Interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,084
|
)
|
|
(154,084
|
)
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,877
|
)
|
|
(70,877
|
)
|
Impairment of
goodwill (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(429,020
|
)
|
|
(429,020
|
)
|
Income taxes & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,145
|
)
|
|
(61,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to XL Group plc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(474,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C
operations: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
80.6
|
%
|
|
67.8
|
%
|
|
76.6
|
%
|
|
|
|
|
|
|
|
|
|
Underwriting expense ratio
|
|
|
31.2
|
%
|
|
30.0
|
%
|
|
30.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
111.8
|
%
|
|
97.8
|
%
|
|
107.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Operating expenses exclude
Corporate operating expenses, shown separately.
|
(2)
|
The net results from
P&C structured products include net investment income, interest expense
and operating expenses of $74.6 million, $51.5 million and nil, respectively.
|
(3)
|
Net fee income and other
includes operating expenses from the Companys loss prevention consulting
services business and expenses related to the cost of an endorsement facility
with National Indemnity Company.
|
(4)
|
Interest expense excludes
interest expense related to deposit liabilities recorded in the Insurance and
Reinsurance segments.
|
(5)
|
Represents goodwill impairment charges
recorded in the fourth quarter of 2011, associated with the Companys
insurance operations.
|
(6)
|
Ratios are based on net
premiums earned from P&C operations.
|
143
XL
GROUP PLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
4. S
EGMENT
I
NFORMATION
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010:
(U.S.
dollars in thousands, except ratios)
|
|
Insurance
|
|
Reinsurance
|
|
Total P&C
|
|
Life
Operations
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
4,418,380
|
|
$
|
1,842,951
|
|
$
|
6,261,331
|
|
$
|
411,938
|
|
$
|
|
|
$
|
6,673,269
|
|
Net premiums written
|
|
|
3,461,150
|
|
|
1,538,438
|
|
|
4,999,588
|
|
|
382,075
|
|
|
|
|
|
5,381,663
|
|
Net premiums earned
|
|
|
3,529,138
|
|
|
1,501,999
|
|
|
5,031,137
|
|
|
382,924
|
|
|
|
|
|
5,414,061
|
|
Net losses and loss expenses
|
|
|
(2,505,502
|
)
|
|
(706,298
|
)
|
|
(3,211,800
|
)
|
|
(513,833
|
)
|
|
|
|
|
(3,725,633
|
)
|
Acquisition costs
|
|
|
(418,146
|
)
|
|
(321,008
|
)
|
|
(739,154
|
)
|
|
(49,104
|
)
|
|
|
|
|
(788,258
|
)
|
Operating expenses (1)
|
|
|
(642,103
|
)
|
|
(175,586
|
)
|
|
(817,689
|
)
|
|
(10,470
|
)
|
|
|
|
|
(828,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss)
|
|
$
|
(36,613
|
)
|
$
|
299,107
|
|
$
|
262,494
|
|
$
|
(190,483
|
)
|
$
|
|
|
$
|
72,011
|
|
Net investment income
|
|
|
|
|
|
|
|
|
803,358
|
|
|
313,172
|
|
|
|
|
|
1,116,530
|
|
Net results from structured products (2)
|
|
|
14,696
|
|
|
3,075
|
|
|
17,771
|
|
|
|
|
|
9,804
|
|
|
27,575
|
|
Net fee income and other (3)
|
|
|
(15,564
|
)
|
|
2,488
|
|
|
(13,076
|
)
|
|
249
|
|
|
2
|
|
|
(12,825
|
)
|
Net realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
(206,877
|
)
|
|
(54,444
|
)
|
|
(9,482
|
)
|
|
(270,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C, Life Operations and
Corporate
|
|
|
|
|
|
|
|
$
|
863,670
|
|
$
|
68,494
|
|
$
|
324
|
|
$
|
932,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized gains (losses) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(33,843
|
)
|
$
|
(33,843
|
)
|
Net income (loss) from investment fund affiliates and operating
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,474
|
|
|
172,474
|
|
Exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,161
|
|
|
10,161
|
|
Corporate operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,686
|
)
|
|
(90,686
|
)
|
Interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,118
|
)
|
|
(159,118
|
)
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,831
|
)
|
|
(39,831
|
)
|
Loss on termination of guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,500
|
)
|
|
(23,500
|
)
|
Income taxes & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164,595
|
)
|
|
(164,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to XL Group plc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
603,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
71.0
|
%
|
|
47.0
|
%
|
|
63.8
|
%
|
|
|
|
|
|
|
|
|
|
Underwriting expense ratio
|
|
|
30.0
|
%
|
|
33.1
|
%
|
|
31.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
101.0
|
%
|
|
80.1
|
%
|
|
94.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
(1)
|
Operating expenses exclude
Corporate operating expenses, shown separately.
|
(2)
|
The net results from
P&C and Corporate structured products include net investment income,
interest expense and operating expenses of $69.0 million, $52.9 million and
$1.6 million (credit) and $12.5 million, $1.7 million and $1.0 million,
respectively.
|
(3)
|
Net fee income and other
includes operating expenses from the Companys loss prevention consulting
services business and expenses related to the cost of an endorsement facility
with National Indemnity Company.
|
(4)
|
Interest expense excludes
interest expense related to deposit liabilities recorded in the Insurance and
Reinsurance segments and Corporate.
|
(5)
|
Ratios are based on net
premiums earned from P&C operations.
|
144
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
4. S
EGMENT
I
NFORMATION
(C
ONTINUED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2009:
(U.S.
dollars in thousands, except ratios)
|
|
Insurance
|
|
Reinsurance
|
|
Total P&C
|
|
Life
Operations
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$
|
4,251,888
|
|
$
|
1,859,423
|
|
$
|
6,111,311
|
|
$
|
576,162
|
|
$
|
|
|
$
|
6,687,473
|
|
Net premiums written
|
|
|
3,273,380
|
|
|
1,470,332
|
|
|
4,743,712
|
|
|
532,852
|
|
|
|
|
|
5,276,564
|
|
Net premiums earned
|
|
|
3,559,793
|
|
|
1,591,946
|
|
|
5,151,739
|
|
|
555,101
|
|
|
|
|
|
5,706,840
|
|
Net losses and loss expenses
|
|
|
(2,399,747
|
)
|
|
(769,090
|
)
|
|
(3,168,837
|
)
|
|
(677,562
|
)
|
|
|
|
|
(3,846,399
|
)
|
Acquisition costs
|
|
|
(429,170
|
)
|
|
(346,699
|
)
|
|
(775,869
|
)
|
|
(77,689
|
)
|
|
|
|
|
(853,558
|
)
|
Operating expenses (1)
|
|
|
(689,131
|
)
|
|
(190,596
|
)
|
|
(879,727
|
)
|
|
(16,009
|
)
|
|
|
|
|
(895,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss)
|
|
$
|
41,745
|
|
$
|
285,561
|
|
$
|
327,306
|
|
$
|
(216,159
|
)
|
$
|
|
|
$
|
111,147
|
|
Net investment income
|
|
|
|
|
|
|
|
|
882,748
|
|
|
332,425
|
|
|
|
|
|
1,215,173
|
|
Net results from structured products (2)
|
|
|
16,660
|
|
|
26,374
|
|
|
43,034
|
|
|
|
|
|
16,609
|
|
|
59,643
|
|
Net fee income and other (3)
|
|
|
(14,241
|
)
|
|
6,209
|
|
|
(8,032
|
)
|
|
290
|
|
|
|
|
|
(7,742
|
)
|
Net realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
(659,687
|
)
|
|
(232,375
|
)
|
|
(29,375
|
)
|
|
(921,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from P&C, Life Operations and
Corporate
|
|
|
|
|
|
|
|
$
|
585,369
|
|
$
|
(115,819
|
)
|
$
|
(12,766
|
)
|
$
|
456,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate & other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized & unrealized gains (losses) on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(33,647
|
)
|
$
|
(33,647
|
)
|
Net income (loss) from investment fund affiliates and operating
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,347
|
|
|
139,347
|
|
Exchange gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,813
|
)
|
|
(84,813
|
)
|
Corporate operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,877
|
)
|
|
(107,877
|
)
|
Interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172,764
|
)
|
|
(172,764
|
)
|
Non-controlling interest in net (income) loss of subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
104
|
|
Loss on termination of guarantee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,143
|
)
|
|
(122,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to XL Group plc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios P&C operations: (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
67.4
|
%
|
|
48.3
|
%
|
|
61.5
|
%
|
|
|
|
|
|
|
|
|
|
Underwriting expense ratio
|
|
|
31.4
|
%
|
|
33.8
|
%
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
98.8
|
%
|
|
82.1
|
%
|
|
93.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Operating expenses exclude
Corporate operating expenses, shown separately.
|
(2)
|
The net results from
P&C and Corporate structured products include net investment income,
interest expense and operating expenses of $79.3 million, $36.3 million and
nil, and $25.3 million, $7.4 million and $1.3 million, respectively.
|
(3)
|
Net fee income and other
includes operating expenses from the Companys loss prevention consulting
services business and expenses related to the cost of an endorsement facility
with National Indemnity Company.
|
(4)
|
Interest expense excludes
interest expense related to deposit liabilities recorded in the Insurance and
Reinsurance segments and Corporate.
|
(5)
|
Ratios are based on net
premiums earned from P&C operations.
|
145
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
4. S
EGMENT
I
NFORMATION
(C
ONTINUED
)
The
following tables summarize the Companys net premiums earned by line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2011:
(U.S. dollars in thousands)
|
|
Insurance
|
|
Reinsurance
|
|
Life
Operations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
P&C Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines
|
|
$
|
1,287,230
|
|
$
|
213,949
|
|
$
|
|
|
$
|
1,501,179
|
|
Casualty other lines
|
|
|
695,094
|
|
|
256,853
|
|
|
|
|
|
951,947
|
|
Property catastrophe
|
|
|
|
|
|
387,523
|
|
|
|
|
|
387,523
|
|
Other property
|
|
|
481,148
|
|
|
587,611
|
|
|
|
|
|
1,068,759
|
|
Marine, energy, aviation and satellite
|
|
|
528,454
|
|
|
130,855
|
|
|
|
|
|
659,309
|
|
Other specialty lines (1)
|
|
|
665,727
|
|
|
|
|
|
|
|
|
665,727
|
|
Other (2)
|
|
|
3,552
|
|
|
90,776
|
|
|
|
|
|
94,328
|
|
Structured indemnity
|
|
|
2,522
|
|
|
(4,182
|
)
|
|
|
|
|
(1,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
P&C Operations
|
|
$
|
3,663,727
|
|
$
|
1,663,385
|
|
$
|
|
|
$
|
5,327,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life
|
|
$
|
|
|
$
|
|
|
$
|
230,786
|
|
$
|
230,786
|
|
Annuity
|
|
|
|
|
|
|
|
|
132,232
|
|
|
132,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life
Operations
|
|
$
|
|
|
$
|
|
|
$
|
363,018
|
|
$
|
363,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,663,727
|
|
$
|
1,663,385
|
|
$
|
363,018
|
|
$
|
5,690,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2010:
(U.S. dollars in thousands)
|
|
Insurance
|
|
Reinsurance
|
|
Life
Operations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
P&C Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines
|
|
$
|
1,316,172
|
|
$
|
222,720
|
|
$
|
|
|
$
|
1,538,892
|
|
Casualty other lines
|
|
|
611,674
|
|
|
219,154
|
|
|
|
|
|
830,828
|
|
Property catastrophe
|
|
|
|
|
|
323,588
|
|
|
|
|
|
323,588
|
|
Other property
|
|
|
416,806
|
|
|
534,422
|
|
|
|
|
|
951,228
|
|
Marine, energy, aviation and satellite
|
|
|
540,319
|
|
|
88,855
|
|
|
|
|
|
629,174
|
|
Other specialty lines (1)
|
|
|
621,839
|
|
|
|
|
|
|
|
|
621,839
|
|
Other (2)
|
|
|
7,577
|
|
|
112,303
|
|
|
|
|
|
119,880
|
|
Structured indemnity
|
|
|
14,751
|
|
|
957
|
|
|
|
|
|
15,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
P&C Operations
|
|
$
|
3,529,138
|
|
$
|
1,501,999
|
|
$
|
|
|
$
|
5,031,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life
|
|
$
|
|
|
$
|
|
|
$
|
255,905
|
|
$
|
255,905
|
|
Annuity
|
|
|
|
|
|
|
|
|
127,019
|
|
|
127,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life
Operations
|
|
$
|
|
|
$
|
|
|
$
|
382,924
|
|
$
|
382,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,529,138
|
|
$
|
1,501,999
|
|
$
|
382,924
|
|
$
|
5,414,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2009:
(U.S. dollars in thousands)
|
|
Insurance
|
|
Reinsurance
|
|
Life
Operations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
P&C Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty professional lines
|
|
$
|
1,276,005
|
|
$
|
196,624
|
|
$
|
|
|
$
|
1,472,629
|
|
Casualty other lines
|
|
|
655,126
|
|
|
257,610
|
|
|
|
|
|
912,736
|
|
Property catastrophe
|
|
|
2,396
|
|
|
312,780
|
|
|
|
|
|
315,176
|
|
Other property
|
|
|
424,045
|
|
|
560,379
|
|
|
|
|
|
984,424
|
|
Marine, energy, aviation and satellite
|
|
|
546,806
|
|
|
83,532
|
|
|
|
|
|
630,338
|
|
Other specialty lines (1)
|
|
|
634,436
|
|
|
|
|
|
|
|
|
634,436
|
|
Other (2)
|
|
|
12,217
|
|
|
172,588
|
|
|
|
|
|
184,805
|
|
Structured indemnity
|
|
|
8,762
|
|
|
8,433
|
|
|
|
|
|
17,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
P&C Operations
|
|
$
|
3,559,793
|
|
$
|
1,591,946
|
|
$
|
|
|
$
|
5,151,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Life
|
|
$
|
|
|
$
|
|
|
$
|
422,594
|
|
$
|
422,594
|
|
Annuity
|
|
|
|
|
|
|
|
|
132,507
|
|
|
132,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life
Operations
|
|
$
|
|
|
$
|
|
|
$
|
555,101
|
|
$
|
555,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,559,793
|
|
$
|
1,591,946
|
|
$
|
555,101
|
|
$
|
5,706,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and other lines.
|
146
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
4. S
EGMENT
I
NFORMATION
(C
ONTINUED
)
The
following table shows an analysis of the Companys net premiums written by
geographical location of subsidiary where the premium is written for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
P&C operations:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
$
|
572,825
|
|
$
|
561,514
|
|
$
|
545,965
|
|
United
States
|
|
|
2,320,274
|
|
|
2,143,240
|
|
|
2,342,656
|
|
Europe and
other
|
|
|
2,540,289
|
|
|
2,294,834
|
|
|
1,855,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Total P&C operations
|
|
$
|
5,433,388
|
|
$
|
4,999,588
|
|
$
|
4,743,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Operations:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
$
|
75,219
|
|
$
|
79,033
|
|
$
|
80,498
|
|
United
States
|
|
|
|
|
|
|
|
|
31,478
|
|
Europe and
other
|
|
|
287,143
|
|
|
303,042
|
|
|
420,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Life Operations
|
|
$
|
362,362
|
|
$
|
382,075
|
|
$
|
532,852
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,795,750
|
|
$
|
5,381,663
|
|
$
|
5,276,564
|
|
|
|
|
|
|
|
|
|
|
|
|
147
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(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 Companys available for sale (AFS) and
held to maturity (HTM) investments at December 31, 2011 and 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other
Comprehensive Income (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
|
|
OTTI
Included In
Other
Comprehensive
Income
(Loss)(1)
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government- Related/Supported (2)
|
|
$
|
1,864,354
|
|
$
|
130,874
|
|
$
|
(4,245
|
)
|
$
|
|
|
$
|
1,990,983
|
|
Corporate (3) (4)
|
|
|
10,212,083
|
|
|
539,389
|
|
|
(237,291
|
)
|
|
(51,666
|
)
|
|
10,462,515
|
|
Residential mortgage-backed securities Agency
|
|
|
5,189,473
|
|
|
193,782
|
|
|
(3,849
|
)
|
|
|
|
|
5,379,406
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
851,557
|
|
|
19,667
|
|
|
(112,867
|
)
|
|
(116,542
|
)
|
|
641,815
|
|
Commercial mortgage-backed securities
|
|
|
927,684
|
|
|
56,704
|
|
|
(2,405
|
)
|
|
(7,148
|
)
|
|
974,835
|
|
Collateralized debt obligations
|
|
|
843,553
|
|
|
6,624
|
|
|
(186,578
|
)
|
|
(4,997
|
)
|
|
658,602
|
|
Other asset-backed securities
|
|
|
995,903
|
|
|
18,534
|
|
|
(21,776
|
)
|
|
(6,305
|
)
|
|
986,356
|
|
U.S. States and political subdivisions of the States
|
|
|
1,698,573
|
|
|
101,025
|
|
|
(2,220
|
)
|
|
|
|
|
1,797,378
|
|
Non-U.S. Sovereign Government, Supranational and
Government-Related/Supported (2)
|
|
|
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 (2) (3)
|
|
$
|
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
|
|
|
1,298,266
|
|
|
91,313
|
|
|
(14,747
|
)
|
|
|
|
|
1,374,832
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
80,955
|
|
|
6,520
|
|
|
(32
|
)
|
|
|
|
|
87,443
|
|
Other asset-backed securities
|
|
|
280,684
|
|
|
20,875
|
|
|
(6
|
)
|
|
|
|
|
301,553
|
|
Non-U.S. Sovereign Government, Supranational and
Government-Related/Supported (2)
|
|
|
998,674
|
|
|
127,227
|
|
|
(5,950
|
)
|
|
|
|
|
1,119,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities HTM
|
|
$
|
2,668,978
|
|
$
|
247,445
|
|
$
|
(20,735
|
)
|
$
|
|
|
$
|
2,895,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of
OTTI losses in AOCI, which from April 1, 2009 was not included in earnings
following authoritative accounting guidance.
|
(2)
|
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.
|
(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.
|
148
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(a) Fixed Maturities, Short-Term Investments
and Equity Securities (Continued)
Amortized Cost and Fair Value Summary (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Accumulated Other
Comprehensive Income (AOCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
(U.S. dollars in thousands)
|
|
Cost or
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Related to
Changes In
Estimated
Fair Value
|
|
OTTI
Included In
Other
Comprehensive
Income
(Loss)(1)
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government-Related/Supported (2)
|
|
$
|
2,499,079
|
|
$
|
102,685
|
|
$
|
(36,320
|
)
|
$
|
|
|
$
|
2,565,444
|
|
Corporate (3) (4)
|
|
|
10,962,804
|
|
|
361,154
|
|
|
(281,849
|
)
|
|
(73,138
|
)
|
|
10,968,971
|
|
Residential mortgage-backed securities Agency
|
|
|
5,059,249
|
|
|
153,106
|
|
|
(8,644
|
)
|
|
|
|
|
5,203,711
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
1,257,474
|
|
|
26,361
|
|
|
(133,761
|
)
|
|
(128,251
|
)
|
|
1,021,823
|
|
Commercial mortgage-backed securities
|
|
|
1,135,075
|
|
|
55,852
|
|
|
(7,960
|
)
|
|
(10,460
|
)
|
|
1,172,507
|
|
Collateralized debt obligations
|
|
|
920,501
|
|
|
11,014
|
|
|
(188,563
|
)
|
|
(8,814
|
)
|
|
734,138
|
|
Other asset-backed securities
|
|
|
979,539
|
|
|
16,111
|
|
|
(26,954
|
)
|
|
(8,164
|
)
|
|
960,532
|
|
U.S. States and political subdivisions of the States
|
|
|
1,379,150
|
|
|
16,755
|
|
|
(35,449
|
)
|
|
|
|
|
1,360,456
|
|
Non-U.S. Sovereign Government, Supranational and
Government-Related/Supported (2)
|
|
|
3,129,971
|
|
|
70,499
|
|
|
(45,947
|
)
|
|
|
|
|
3,154,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities AFS
|
|
$
|
27,322,842
|
|
$
|
813,537
|
|
$
|
(765,447
|
)
|
$
|
(228,827
|
)
|
$
|
27,142,105
|
|
Total short-term investments (2) (3)
|
|
$
|
450,491
|
|
$
|
680
|
|
$
|
(490
|
)
|
$
|
|
|
$
|
450,681
|
|
Total equity securities
|
|
$
|
56,737
|
|
$
|
28,083
|
|
$
|
(53
|
)
|
$
|
|
|
$
|
84,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments AFS
|
|
$
|
27,830,070
|
|
$
|
842,300
|
|
$
|
(765,990
|
)
|
$
|
(228,827
|
)
|
$
|
27,677,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities HTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government- Related/Supported (2)
|
|
$
|
10,541
|
|
$
|
164
|
|
$
|
(9
|
)
|
$
|
|
|
$
|
10,696
|
|
Corporate
|
|
|
1,337,797
|
|
|
6,370
|
|
|
(16,325
|
)
|
|
|
|
|
1,327,842
|
|
Residential mortgage-backed securities Non-Agency
|
|
|
82,763
|
|
|
634
|
|
|
(546
|
)
|
|
|
|
|
82,851
|
|
Other asset-backed securities
|
|
|
287,109
|
|
|
1,134
|
|
|
(1,410
|
)
|
|
|
|
|
286,833
|
|
Non-U.S. Sovereign Government, Supranational and
Government-Related/Supported (2)
|
|
|
1,010,125
|
|
|
30,680
|
|
|
(6,401
|
)
|
|
|
|
|
1,034,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities HTM
|
|
$
|
2,728,335
|
|
$
|
38,982
|
|
$
|
(24,691
|
)
|
$
|
|
|
$
|
2,742,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the amount of
OTTI losses in AOCI, which from April 1, 2009 was not included in earnings
following authoritative accounting guidance.
|
(2)
|
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 $2,101.0 million and
fair value of $2,131.2 million and U.S. Agencies with an amortized cost of
$1,019.2 million and fair value of $1,072.6 million.
|
(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 $454.8 million and an amortized cost of $504.6 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 $757.8
million and an amortized cost of $883.0 million at December 31, 2010.
|
149
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(a) Fixed Maturities, Short-Term Investments
and Equity Securities (Continued)
Amortized
Cost and Fair Value Summary (Continued)
At
December 31, 2011 and 2010, approximately 2.4% and 3.5%, respectively, of the
Companys fixed income investment portfolio at fair value was invested in
securities which were below investment grade or not rated. Approximately 31.4%
and 29.4% of the gross unrealized losses in the Companys fixed income
securities portfolio at December 31, 2011 and 2010, 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 related note disclosures. Short-term
investments under the Companys 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
Companys 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. The Companys new
accounting classification aligns its presentation with that of its peer
companies.
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.
During
2009 and 2010, the Company 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 Companys 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 December 31, 2011, 98.1% 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 $127.4 million in total, with $108.4 million and $119.0
million unamortized at December 31, 2011 and December 31, 2010, respectively.
150
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(a) Fixed Maturities, Short-Term Investments
and Equity Securities (Continued)
Contractual
Maturities Summary
The
contractual maturities of AFS and HTM fixed income securities at December 31,
2011 and 2010 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
(1)
|
|
2010
(1)
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities - AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less than one year
|
|
$
|
2,025,446
|
|
$
|
2,041,814
|
|
$
|
1,583,265
|
|
$
|
1,570,909
|
|
Due after 1 through 5 years
|
|
|
7,874,145
|
|
|
8,049,150
|
|
|
9,021,926
|
|
|
9,118,229
|
|
Due after 5 through 10
years
|
|
|
3,788,673
|
|
|
3,953,496
|
|
|
4,137,260
|
|
|
4,198,362
|
|
Due after 10 years
|
|
|
3,275,281
|
|
|
3,504,551
|
|
|
3,228,553
|
|
|
3,161,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,963,545
|
|
|
17,549,011
|
|
|
17,971,004
|
|
|
18,049,394
|
|
Residential mortgage-backed
securities Agency
|
|
|
5,189,473
|
|
|
5,379,406
|
|
|
5,059,249
|
|
|
5,203,711
|
|
Residential mortgage-backed
securities Non-Agency
|
|
|
851,557
|
|
|
641,815
|
|
|
1,257,474
|
|
|
1,021,823
|
|
Commercial mortgage-backed
securities
|
|
|
927,684
|
|
|
974,835
|
|
|
1,135,075
|
|
|
1,172,507
|
|
Collateralized debt
obligations
|
|
|
843,553
|
|
|
658,602
|
|
|
920,501
|
|
|
734,138
|
|
Other asset-backed
securities
|
|
|
995,903
|
|
|
986,356
|
|
|
979,539
|
|
|
960,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage and
asset-backed securities
|
|
|
8,808,170
|
|
|
8,641,014
|
|
|
9,351,838
|
|
|
9,092,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities - AFS
|
|
$
|
25,771,715
|
|
$
|
26,190,025
|
|
$
|
27,322,842
|
|
$
|
27,142,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities - HTM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due less than one year
|
|
$
|
11,796
|
|
$
|
11,768
|
|
$
|
|
|
$
|
|
|
Due after 1 through 5 years
|
|
|
122,091
|
|
|
123,871
|
|
|
125,449
|
|
|
125,416
|
|
Due after 5 through 10
years
|
|
|
393,865
|
|
|
402,424
|
|
|
348,797
|
|
|
346,494
|
|
Due after 10 years
|
|
|
1,779,587
|
|
|
1,968,629
|
|
|
1,884,217
|
|
|
1,901,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,307,339
|
|
|
2,506,692
|
|
|
2,358,463
|
|
|
2,372,942
|
|
Residential mortgage-backed
securities Non-Agency
|
|
|
80,955
|
|
|
87,443
|
|
|
82,763
|
|
|
82,851
|
|
Other asset-backed
securities
|
|
|
280,684
|
|
|
301,553
|
|
|
287,109
|
|
|
286,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage and
asset-backed securities
|
|
|
361,639
|
|
|
388,996
|
|
|
369,872
|
|
|
369,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities - HTM
|
|
$
|
2,668,978
|
|
$
|
2,895,688
|
|
$
|
2,728,335
|
|
$
|
2,742,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $386.1 million and
$757.8 million at December 31, 2011 and 2010, respectively. These securities
are reflected in the table based on their call date and have net unrealized
losses of $108.8 million and $143.7 million at December 31, 2011 and 2010,
respectively.
|
151
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(a) Fixed Maturities, Short-Term Investments
and Equity Securities (Continued)
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
securitys 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 securitys
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.
Factors
considered in determining that a gross unrealized loss is not
other-than-temporarily impaired include managements 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 Companys invested assets are held in trust and pledged in support of
insurance and reinsurance liabilities. Such pledges are largely required by the
Companys 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. As further outlined in Note 17(f)
Commitments and Contingencies Letters of Credit, certain assets of the
investment portfolio are collateralized for the Companys letter of credit
facilities. At December 31, 2011 and 2010, the Company had $17.2 billion and
$16.1 billion in pledged assets, respectively.
152
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(b) Gross Unrealized Losses
The
following is an analysis of how long the AFS and HTM securities at December 31,
2011 had been in a continual unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (1)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and short-term investments - AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and Government-Related/Supported
|
|
$
|
289,260
|
|
$
|
(332
|
)
|
$
|
43,622
|
|
$
|
(3,984
|
)
|
Corporate (2) (3)
|
|
|
1,108,177
|
|
|
(42,978
|
)
|
|
1,200,717
|
|
|
(246,566
|
)
|
Residential mortgage-backed securities
Agency
|
|
|
310,318
|
|
|
(849
|
)
|
|
36,960
|
|
|
(3,000
|
)
|
Residential mortgage-backed securities
Non-Agency
|
|
|
106,294
|
|
|
(31,714
|
)
|
|
449,138
|
|
|
(197,695
|
)
|
Commercial mortgage-backed securities
|
|
|
69,109
|
|
|
(2,716
|
)
|
|
39,444
|
|
|
(6,837
|
)
|
Collateralized debt obligations
|
|
|
3,357
|
|
|
(2,261
|
)
|
|
636,362
|
|
|
(189,456
|
)
|
Other asset-backed securities
|
|
|
197,585
|
|
|
(2,497
|
)
|
|
146,130
|
|
|
(25,584
|
)
|
U.S. States and political subdivisions of
the States
|
|
|
25,309
|
|
|
(199
|
)
|
|
27,646
|
|
|
(2,021
|
)
|
Non-U.S. Sovereign Government, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Corporate
|
|
|
155,579
|
|
|
(8,084
|
)
|
|
62,343
|
|
|
(6,663
|
)
|
Residential mortgage-backed securities
Non-Agency
|
|
|
9,372
|
|
|
(32
|
)
|
|
|
|
|
|
|
Other asset-backed securities
|
|
|
|
|
|
|
|
|
1,106
|
|
|
(6
|
)
|
Non-U.S. Sovereign Government,
Supranational and Government-Related/Supported
|
|
|
79,242
|
|
|
(1,206
|
)
|
|
18,330
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
HTM
|
|
$
|
244,193
|
|
$
|
(9,322
|
)
|
$
|
81,779
|
|
$
|
(11,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On securities impacted by
the April 1, 2009 changes to OTTI values, length of time of impairment is
measured from the point at which securities returned to a net unrealized loss
position (i.e., from April 1, 2009).
|
|
|
(2)
|
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.
|
|
|
(3)
|
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.
|
|
|
(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.
|
153
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(b) Gross Unrealized Losses
The
following is an analysis of how long the AFS and HTM securities at December 31,
2010 had been in a continual unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
Equal to or greater
than 12 months
|
|
|
|
|
|
|
|
December
31, 2010
(U.S. dollars in thousands)
|
|
Fair Value
|
|
Gross
Unrealized
Losses (1)
|
|
Fair Value
|
|
Gross
Unrealized
Losses (1)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and
short-term investments - AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported
|
|
$
|
307,082
|
|
$
|
(25,482
|
)
|
$
|
117,394
|
|
$
|
(10,417
|
)
|
Corporate (2) (3)
|
|
|
2,271,887
|
|
|
(80,276
|
)
|
|
1,627,083
|
|
|
(275,023
|
)
|
Residential mortgage-backed
securities Agency
|
|
|
280,390
|
|
|
(6,736
|
)
|
|
34,186
|
|
|
(1,913
|
)
|
Residential mortgage-backed
securities Non-Agency
|
|
|
40,052
|
|
|
(2,574
|
)
|
|
843,168
|
|
|
(259,715
|
)
|
Commercial mortgage-backed
securities
|
|
|
46,419
|
|
|
(2,472
|
)
|
|
69,475
|
|
|
(15,967
|
)
|
Collateralized debt obligations
|
|
|
2,500
|
|
|
(51
|
)
|
|
715,295
|
|
|
(197,535
|
)
|
Other asset-backed securities
|
|
|
122,548
|
|
|
(1,619
|
)
|
|
226,946
|
|
|
(33,546
|
)
|
U.S. States and political
subdivisions of the States
|
|
|
734,893
|
|
|
(30,033
|
)
|
|
40,907
|
|
|
(5,452
|
)
|
Non-U.S. Sovereign
Government, Supranational and Government-Related
|
|
|
459,686
|
|
|
(5,116
|
)
|
|
418,322
|
|
|
(40,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities and short-term investments - AFS
|
|
$
|
4,265,457
|
|
$
|
(154,359
|
)
|
$
|
4,092,776
|
|
$
|
(840,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
securities
|
|
$
|
158
|
|
$
|
(53
|
)
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported
|
|
$
|
1,755
|
|
$
|
(9
|
)
|
$
|
|
|
$
|
|
|
Corporate
|
|
|
764,397
|
|
|
(16,325
|
)
|
|
|
|
|
|
|
Residential mortgage-backed
securities Non-Agency
|
|
|
37,899
|
|
|
(546
|
)
|
|
|
|
|
|
|
Other asset-backed securities
|
|
|
232,673
|
|
|
(1,410
|
)
|
|
|
|
|
|
|
Non-U.S. Sovereign
Government, Supranational and Government-Related/Supported
|
|
|
175,382
|
|
|
(6,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed
maturities HTM
|
|
$
|
1,212,106
|
|
$
|
(24,691
|
)
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On securities impacted by
the April 1, 2009 changes to OTTI values, length of time of impairment is
measured from the point at which securities returned to a net unrealized loss
position (i.e., from April 1, 2009).
|
(2)
|
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 $370.8 million and an amortized cost of $423.9 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.
|
(3)
|
Included within Corporate
are Tier One and Upper Tier Two securities, representing committed term debt
and hybrid instruments senior to the common and preferred equities of the
financial institutions. These securities have a fair value of $757.8 million
and an amortized cost of $883.0 million at December 31, 2010.
|
|
|
The
Company had gross unrealized losses totaling $817.0 million on 1,890
securities out of a total of 7,146 held at December 31, 2011 on its available
for sale portfolio and $20.7 million on 36 securities out of a total of 213
held on its held-to-maturity 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.
|
154
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(b) Gross Unrealized Losses (Continued)
Gross
unrealized losses of $817.0 million on available for sale and $20.7 million on
HTM assets at December 31, 2011 can be attributed to the following significant
drivers:
|
|
|
|
|
gross
unrealized losses of $229.4 million related to the Non-Agency residential
mortgage-backed securities (RMBS) portfolio (which consists of the
Companys holdings of sub-prime Non-Agency securities, second liens,
asset-backed securities (ABS) CDOs with sub-prime collateral, Alt-A
mortgage exposures and Prime RMBS), which had a fair value of $722.8 million
at December 31, 2011. 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 recognized
realized losses, consisting of charges for OTTI and realized losses from
sales, of approximately $1.4 billion since the beginning of 2007 through December
31, 2011 on these asset classes.
|
|
|
|
|
|
gross
unrealized losses of $244.3 million related to the Companys Life operations
investment portfolio, which had a fair value of $6.5 billion at December 31,
2011. Of these gross unrealized losses, $144.9 million related to $1.2
billion of exposures to corporate financial institutions, including $301.0
million Tier One and Upper Tier Two securities. At December 31, 2011, this
portfolio had an average interest rate duration of 8.6 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 December 31, 2011 by
approximately $274.5 million and $104.0 million, respectively, on both the
available for sale and HTM portfolios. Given the long term nature of this
portfolio, the level of credit spreads on financial institutions at December
31, 2011 relative to historical averages within the U.K. and Euro-zone, and
the Companys liquidity needs at December 31, 2011, 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 $191.7 million related to the non-life portfolio 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 $662.9 million at December 31, 2011. 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 continually
wide spreads in the CDO market, driven by the level of illiquidity 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 $133.2 million related to the corporate holdings within
the Companys non-life fixed income portfolios, which had a fair value of
$8.3 billion at December 31, 2011. During the year ended December 31, 2011,
as a result of declining credit spreads, the gross unrealized losses on these
holdings has decreased. Of the gross unrealized losses noted above, $72.9
million relate to financial institutions. In addition, $33.3 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 $237.4 million at December 31, 2011. 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 $84.4
million, with a fair value of $39.6 million, which at December 31, 2011 had
cumulative fair value declines of greater than 50% of amortized costs. 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 $61.2 million on non-Agency RMBS,
$22.6 million on Core CDOs and $0.7 million of commercial mortgage-backed
security (CMBS) holdings.
155
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. I
NVESTMENTS
(C
ONTINUED
)
(c) Net Investment Income
Net
investment income is derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Fixed maturities, short-term investments
and cash equivalents
|
|
$
|
1,178,038
|
|
$
|
1,245,185
|
|
$
|
1,369,503
|
|
Equity securities and other investments
|
|
|
17,804
|
|
|
20,693
|
|
|
13,753
|
|
Funds withheld
|
|
|
12,240
|
|
|
12,738
|
|
|
14,649
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross investment income
|
|
|
1,208,082
|
|
|
1,278,616
|
|
|
1,397,905
|
|
Investment expenses
|
|
|
(70,313
|
)
|
|
(80,578
|
)
|
|
(78,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,137,769
|
|
$
|
1,198,038
|
|
$
|
1,319,823
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Net Realized Gains (Losses)
The
following represents an analysis of net realized gains (losses) and the change
in unrealized (losses) gains on investments:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, short-term investments,
cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
185,530
|
|
$
|
133,521
|
|
$
|
349,629
|
|
Gross realized losses on investments sold
|
|
|
(225,360
|
)
|
|
(193,396
|
)
|
|
(405,342
|
)
|
OTTI on investments, net of amounts
transferred to other comprehensive income
|
|
|
(159,435
|
)
|
|
(197,377
|
)
|
|
(811,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses)
|
|
|
(199,265
|
)
|
|
(257,252
|
)
|
|
(867,285
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
2,194
|
|
|
11,605
|
|
|
65,289
|
|
Gross realized losses on investments sold
|
|
|
(4,264
|
)
|
|
(11,195
|
)
|
|
(129,516
|
)
|
OTTI on investments, net of amounts
transferred to other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
(2,070
|
)
|
|
410
|
|
|
(64,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
18,505
|
|
|
4,889
|
|
|
27,647
|
|
Gross realized losses on investments sold
|
|
|
(4,792
|
)
|
|
(11,094
|
)
|
|
(5,763
|
)
|
OTTI on investments, net of amounts
transferred to other comprehensive income
|
|
|
(737
|
)
|
|
(7,756
|
)
|
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
12,976
|
|
|
(13,961
|
)
|
|
20,998
|
|
Realized loss on sale of U.S. life
reinsurance business
|
|
|
|
|
|
|
|
|
(10,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) on investments
|
|
|
(188,359
|
)
|
|
(270,803
|
)
|
|
(921,437
|
)
|
Net realized and unrealized (losses) on
investment related derivative instruments
|
|
|
(22,981
|
)
|
|
(16,321
|
)
|
|
(29,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) on investments and
net realized and unrealized (losses) on investment related derivative
instruments
|
|
|
(211,340
|
)
|
|
(287,124
|
)
|
|
(951,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities and short-term
investments, available for sale
|
|
|
598,542
|
|
|
1,095,762
|
|
|
2,112,244
|
|
Fixed maturities, held to maturity
|
|
|
212,419
|
|
|
30,039
|
|
|
(15,748
|
)
|
Equity securities
|
|
|
(40,518
|
)
|
|
22,595
|
|
|
(18,619
|
)
|
Affiliates and other investments
|
|
|
25,268
|
|
|
44,314
|
|
|
14,464
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) on
investments
|
|
|
795,711
|
|
|
1,192,710
|
|
|
2,092,341
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized
(losses) on investments, net realized and unrealized (losses) on investment
related derivative instruments, and net change in unrealized gains (losses)
on investments
|
|
$
|
584,371
|
|
$
|
905,586
|
|
$
|
1,141,195
|
|
|
|
|
|
|
|
|
|
|
|
|
156
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
5. Investments (Continued)
(d) Net Realized Gains (Losses) (Continued)
The
Company recorded net impairment charges of $160.2 million for the year ended
December 31, 2011. The components of the impairments include:
|
|
|
|
|
For
structured credit securities, the Company recorded net impairments of $78.7
million principally on non-Agency RMBS. The Company determined that the
likely recovery on these securities was below the carrying value, and,
accordingly, recorded an impairment on the securities to the discounted value
of the cash flows of these securities.
|
|
|
|
|
|
For medium
term notes backed primarily by investment grade European investment grade
credit, the Company recorded net impairments of $31.0 million. The Company
adjusted the estimated remaining holding period of certain notes resulting in
a shorter reinvestment spectrum.
|
|
|
|
|
|
For
corporate securities, excluding medium term notes, the Company recorded net
impairments totaling $6.5 million, principally on hybrid securities.
|
|
|
|
|
|
The Company
recorded impairments of $44.0 million primarily related to foreign exchange
losses arising on U.S. dollar denominated securities held in a Swiss franc
functional currency entity. These foreign exchange losses are recorded as
part of the foreign currency revaluation process; however, because the
Companys consolidated reporting currency is U.S. dollars, the foreign
exchange impairment recorded on these securities is fully offset by a
cumulative foreign currency translation adjustment gain recorded upon the
consolidation of the foreign currency entity.
|
As
discussed in Note 2, a portion of certain OTTI losses on fixed income
securities and short-term investments are recognized in Other comprehensive
income (loss) (OCI). Under final authoritative accounting guidance effective
April 1, 2009, other than in a situation in which the Company has the intent to
sell a security or more likely than not will be required to sell a security,
the amount of the OTTI related to a credit loss is recognized in earnings, and
the amount of the OTTI related to other factors (i.e., interest rates, market
conditions, etc.) is recorded as a component of other comprehensive income
(loss). 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. Any
remaining difference between the fair value and amortized cost is recognized in
OCI. 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.
|
|
|
|
|
|
|
|
|
|
OTTI related to
credit losses
recognized in
earnings
|
|
Year Ended
December 31,
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
426,372
|
|
$
|
537,121
|
|
Credit loss impairment recognized in the current period on securities
not previously impaired
|
|
|
28,910
|
|
|
55,515
|
|
Credit loss impairments previously recognized on securities which
matured, paid down, prepaid or were sold during the period
|
|
|
(209,187
|
)
|
|
(125,653
|
)
|
Credit loss impairments previously recognized on securities impaired
to fair value during the period
|
|
|
|
|
|
(130,891
|
)
|
Additional credit loss impairments recognized in the current period
on securities previously impaired
|
|
|
88,016
|
|
|
113,292
|
|
Accretion of credit loss impairments previously recognized due to an
increase in cash flows expected to be collected
|
|
|
(732
|
)
|
|
(23,012
|
)
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
333,379
|
|
$
|
426,372
|
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2011 and 2010, the $209.2 million and $125.7
million, respectively, of credit loss impairment previously recognized on
securities that matured, or were paid down, prepaid or sold, includes $128.9
million and $100.2 million, respectively, of non-Agency RMBS.
157
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
6. Investments in Affiliates
The
Companys investment portfolio includes certain investments over which the
company is considered to have significant influence and which, therefore, are
accounted for using the equity method. Significant influence is generally
deemed to exist where the Company has an investment of 20% or more in the
common stock of a corporation or an investment of 3% or more in closed end
funds, limited partnerships, LLCs or similar investment vehicles. The Company
generally records its alternative and private equity fund affiliates on a one
month and three month lag, respectively, and its operating affiliates on a
three month lag. See Note 7, Other Investments for investments in alternative
and private equity funds in which the Company generally owns less than 3% and are
accounted for as Other Investments.
Investments
in affiliates comprised the following at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Investment fund affiliates
|
|
$
|
768,851
|
|
$
|
829,059
|
|
Operating affiliates
|
|
|
283,878
|
|
|
298,122
|
|
|
|
|
|
|
|
|
|
Total
investment affiliates
|
|
$
|
1,052,729
|
|
$
|
1,127,181
|
|
|
|
|
|
|
|
|
|
(a) Investment Fund Affiliates
The
Company has invested in certain closed end funds, certain limited partnerships,
LLCs and similar investment vehicles, including funds managed by certain of its
investment manager affiliates. Collectively, these investments in funds,
partnerships and other vehicles are classified as investment fund affiliates.
The Companys equity investment in investment fund affiliates and equity in net
income (loss) from such affiliates as well as certain summarized financial
information of the investee as a whole are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2011:
(U.S.
dollars in thousands, except percentages)
|
XL Group
Investment
|
|
Combined
Funds
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Equity in
Net Income
(Loss) for
the Year
|
|
Weighted
Average XL
Percentage
Ownership
|
|
Total Net Assets
(Estimated) (2)
|
|
|
|
|
|
|
|
|
|
|
|
Alternative Funds (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitrage
|
|
$
|
123,969
|
|
$
|
1,291
|
|
|
3.4
|
%
|
$
|
3,678,904
|
|
Directional
|
|
|
217,779
|
|
|
9,154
|
|
|
6.0
|
%
|
|
3,619,272
|
|
Event Driven
|
|
|
229,956
|
|
|
(60
|
)
|
|
3.1
|
%
|
|
7,472,680
|
|
Multi-Style
|
|
|
425
|
|
|
(9
|
)
|
|
17.6
|
%
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alternative funds
|
|
|
572,129
|
|
|
10,376
|
|
|
3.9
|
%
|
|
14,773,266
|
|
Private equity funds (1)
|
|
|
196,722
|
|
|
15,877
|
|
|
5.1
|
%
|
|
3,820,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
768,851
|
|
$
|
26,253
|
|
|
4.1
|
%
|
$
|
18,593,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2010:
(U.S.
dollars in thousands, except percentages)
|
|
XL Group
Investment
|
|
Combined
Funds
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Equity in
Net Income
(Loss) for
the Year
|
|
Weighted
Average XL
Percentage
Ownership
|
|
Total Net Assets
(Estimated) (2)
|
|
|
|
|
|
|
|
|
|
|
|
Alternative Funds (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitrage
|
|
$
|
156,511
|
|
$
|
9,477
|
|
|
4.1
|
%
|
$
|
3,797,962
|
|
Directional
|
|
|
166,644
|
|
|
5,972
|
|
|
5.9
|
%
|
|
2,819,306
|
|
Event Driven
|
|
|
261,252
|
|
|
7,605
|
|
|
2.5
|
%
|
|
10,267,525
|
|
Multi-Style
|
|
|
787
|
|
|
30
|
|
|
8.1
|
%
|
|
9,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alternative funds
|
|
|
585,194
|
|
|
23,084
|
|
|
3.5
|
%
|
|
16,894,481
|
|
Private equity funds (1)
|
|
|
243,865
|
|
|
28,018
|
|
|
5.5
|
%
|
|
4,408,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
829,059
|
|
$
|
51,102
|
|
|
3.9
|
%
|
$
|
21,302,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company generally
records its alternative fund affiliates on a one month lag and its private
equity fund affiliates on a one quarter lag.
|
|
|
(2)
|
Total estimated net assets
are generally as at November 30 and September 30, respectively.
|
158
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
6. Investments in Affiliates (Continued)
(a) Investment Fund Affiliates (Continued)
Certain
funds have a lock-up period. A lock-up period refers to the initial amount of
time an investor is contractually required to invest before having the ability
to redeem. At the point at which funds provide for periodic redemptions, the
funds may, depending on their governing documents, have the ability to deny or
delay a redemption request, called a gate, or suspend redemptions as a whole.
The fund may implement the gate restriction because the aggregate amount of
redemption requests as of a particular date exceeds a specified level,
generally ranging from 15% to 25% of the funds net assets. The gate is a
method for executing an orderly redemption process that reduces the possibility
of adversely affecting the remaining investors in the fund in the event of
substantial redemption requests falling on a single redemption date. Typically,
the imposition of a gate delays a portion of the requested redemption, with the
remaining portion settled in cash shortly after the redemption date.
The
carrying value of the Companys holdings in funds that are subject to lockups
and/or that have gate provisions in their governing documents as at December
31, 2011 and 2010 was $419.4 million and $428.6 million, respectively. The
carrying value of the Companys holdings in funds where a gate was imposed
as at December 31, 2011 and 2010 was nil and $13.5 million, respectively.
Certain
funds may be allowed to invest a portion of their assets in illiquid
securities, such as private equity or convertible debt. In such cases, a common
mechanism used is a side-pocket, whereby the illiquid security is assigned to a
separate memorandum capital account or designated account. Typically, the
investor loses its redemption rights in the designated account. Only when the
illiquid securities in the side-pocket are sold, or otherwise deemed liquid by
the fund, may investors redeem that portion of their interest that has been
side-pocketed. As at December 31, 2011 and 2010, the carrying value of our
funds held in side-pockets were $30.7 million and $31.9 million, respectively.
The underlying assets within these positions are generally expected to be
liquidated over a period of approximately two to four years.
(b) Operating Affiliates
The
Company has invested in investment and (re)insurance affiliates and
investment management companies securities or other forms of
ownership interests. Collectively,
these investments are classified as operating affiliates.
The
Companys equity investment in operating affiliates and equity in net income
(loss) from such affiliates as well as certain summarized financial information
of the investee as a whole are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2011:
(U.S. dollars in
thousands)
|
|
XL
Investment
|
|
Combined Investee Summarized
Financial Data (Estimated) (1)
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Equity in
Net Income
(Loss) for
the Year
|
|
Total
Assets
|
|
Total
Liabilities
|
|
Total
Revenue
(Loss)
|
|
Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial operating
affiliates
|
|
$
|
732
|
|
$
|
(1,018
|
)
|
$
|
11,957,534
|
|
$
|
11,931,662
|
|
$
|
12,564
|
|
$
|
1,115
|
|
Other
strategic operating affiliates
|
|
|
153,955
|
|
|
20,891
|
|
|
1,295,921
|
|
|
967,264
|
|
|
348,831
|
|
|
48,641
|
|
Investment
manager affiliates (2)
|
|
|
129,191
|
|
|
56,913
|
|
|
601,511
|
|
|
38,349
|
|
|
319,984
|
|
|
222,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,878
|
|
$
|
76,786
|
|
$
|
13,854,966
|
|
$
|
12,937,275
|
|
$
|
681,379
|
|
$
|
272,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2010
:
(U.S. dollars in
thousands)
|
|
XL
Investment
|
|
Combined Investee Summarized
Financial Data (Estimated) (1)
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Equity in
Net Income
(Loss) for
the Year
|
|
Total
Assets
|
|
Total
Liabilities
|
|
Total
Revenue
(Loss)
|
|
Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
operating affiliates
|
|
$
|
1,750
|
|
$
|
53,031
|
|
$
|
6,212,583
|
|
$
|
6,179,978
|
|
$
|
(688
|
)
|
$
|
(15,641
|
)
|
Other
strategic operating affiliates
|
|
|
122,266
|
|
|
28,161
|
|
|
1,075,578
|
|
|
772,572
|
|
|
274,786
|
|
|
48,792
|
|
Investment
manager affiliates
|
|
|
174,106
|
|
|
40,180
|
|
|
654,229
|
|
|
70,816
|
|
|
375,384
|
|
|
348,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
298,122
|
|
$
|
121,372
|
|
$
|
7,942,390
|
|
$
|
7,023,366
|
|
$
|
649,482
|
|
$
|
381,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company generally
records its operating affiliates on a one quarter lag. Estimated assets and
liabilities are generally at September 30, 2011 and 2010, respectively.
|
(2)
|
During the year ended
December 31, 201,1 the Company received distributions from its Investment
Manager Affiliates of approximately $23.2 million, sold its interests in
Finisterre for total proceeds of $35.0 million as explained below at
Investment Manager Affiliates, and received $44.2 million as repayment of a
note.
|
159
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
6. Investments in Affiliates (Continued)
(b) Operating Affiliate (Continued)
In
certain investments, the carrying value is different from the share of the
investees underlying net assets. The differences represent goodwill on
acquisition, OTTI recorded with respect to the investment, or differences in
the retained capital accounts of the various equity holders (including the Company).
See
Note 17(c), Commitments and Contingencies Investments in Affiliates, for
further information regarding commitments related to investment in affiliates.
Financial Operating Affiliates
The
Company had no significant financial operating affiliates during 2011 following
the sale, during the fourth quarter of 2010, of approximately 76% of its
investment in Primus Guaranty, Ltd. (Primus), reducing the Companys
ownership interest from 39.7% to 9.8% at December 31, 2010. This sale generated
total proceeds of $51.6 million during the year ended December 31, 2010. Given
managements view of the risk
exposure, expected losses and the uncertainty facing the entire financial
guarantee industry in 2007, the Company had reduced the reported value of its
investment in Primus to nil at December 31, 2007. The Company did not record
any equity earnings during 2010, 2009 or 2008 in relation to Primus because of
the significant losses and negative book value reported by Primus during these
periods. Therefore, the sale in the fourth quarter of 2010 resulted in the
recording of a gain of $51.6 million through Income from operating
affiliates. Subsequent to the sale, the Companys ownership of Primus
shares is accounted for as an available for sale equity security.
Other Strategic Operating Affiliates
The
Companys strategic operating affiliates included an investment in ARX Holding
Corporation of 45.7% at both December 31, 2011 and 2010. During the second
quarter of 2010, the Companys 49.9% investment in the Brazilian joint venture
ITAU XL Seguros Corporativos S.A. (ITAU) was sold.
Investment Manager Affiliates
During
the years ended December 31, 2011, 2010, and 2009, the Companys larger
investment manager affiliates included Highfields Capital, a global equity
investment firm, Polar Capital, an investment firm offering traditional and
alternative products and HighVista Strategies, a diversified wealth management
firm. The Company recorded,
through net income in affiliates, other-than-temporary declines in the values
of certain investment manager affiliates totaling $0.6 million, $4.4 million
and $6.9 million, for the years ended December 31, 2011, 2010 and 2009,
respectively.
During
the third quarter of 2011, the Company sold its interests in Finisterre for total
proceeds of $35.0 million resulting in a gain of $25.3 million. In addition,
this transaction includes the potential for additional amounts to be paid to
the Company during 2013 and 2014 subject to the investment manager meeting
certain performance targets. These amounts, if any, will be recorded when known
with certainty.
160
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
7. Other Investments
Contained
within this asset class are equity interests in investment funds, limited
partnerships and unrated tranches of collateralized debt obligations for which
the Company does not have sufficient rights or ownership interests to follow
the equity method of accounting. The Company accounts for such equity
securities at estimated fair value with changes in fair value recorded through
AOCI as it has no significant influence over these entities. Also included
within other investments are structured transactions which are carried at
amortized cost.
Other
investments comprised the following at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Alternative Investment
Funds:
|
|
|
|
|
|
|
|
Arbitrage
|
|
$
|
132,847
|
|
$
|
73,010
|
|
Directional
|
|
|
228,544
|
|
|
177,785
|
|
Multi-Style
|
|
|
93,664
|
|
|
97,506
|
|
|
|
|
|
|
|
|
|
Total alternative funds
|
|
|
455,055
|
|
|
348,301
|
|
Private investment funds
|
|
|
87,491
|
|
|
79,662
|
|
Overseas deposits
|
|
|
91,425
|
|
|
80,006
|
|
Structured transactions
|
|
|
323,705
|
|
|
330,185
|
|
Other
|
|
|
27,586
|
|
|
55,416
|
|
|
|
|
|
|
|
|
|
Total
other investments
|
|
$
|
985,262
|
|
$
|
893,570
|
|
|
|
|
|
|
|
|
|
(a) Alternative and Private Equity Funds
At
December 31, 2011, the alternative fund portfolio, accounted for as other
investments, employed three strategies invested in 13 underlying funds,
respectively. The Company is able to redeem the hedge funds on the same terms
that the underlying funds can be redeemed. In general, the funds in which the
Company is invested require at least 30 days notice of redemption, and may be
redeemed on a monthly, quarterly, semi-annual, annual, or longer basis,
depending on the fund.
Certain
funds have a lock-up period. A lock-up period refers to the initial amount of
time an investor is contractually required to invest before having the ability
to redeem. At the point at which funds provide for periodic redemptions, the
funds may, depending on their governing documents, have the ability to deny or
delay a redemption request, called a gate, or suspend redemptions as a whole.
The fund may implement the gate restriction because the aggregate amount of
redemption requests as of a particular date exceeds a specified level,
generally ranging from 15% to 25% of the funds net assets. The gate is a
method for executing an orderly redemption process that reduces the possibility
of adversely affecting the remaining investors in the fund in the event of
substantial redemption requests falling on a single redemption date. Typically,
the imposition of a gate delays a portion of the requested redemption, with the
remaining portion settled in cash shortly after the redemption date.
The
fair value of the Companys holdings in funds that may be subject to lockups
and/or that have gate provisions in their governing documents as at December
31, 2011 and 2010 was $240.0 million and $155.1 million, respectively. The
Company did not have any holdings in funds where a gate was imposed as at
December 31, 2011 or 2010.
Certain
funds may be allowed to invest a portion of their assets in illiquid
securities, such as private equity or convertible debt. In such cases, a common
mechanism used is a side-pocket, whereby the illiquid security is assigned to a
separate memorandum capital account or designated account. Typically, the
investor loses its redemption rights in the designated account. Only when the
illiquid securities in the side-pocket are sold, or otherwise deemed liquid by
the fund, may investors redeem that portion of their interest that has been
side-pocketed. As at December 31, 2011 and 2010, the fair value of our funds
held in side-pockets were $28.4 million and $38.8 million, respectively. The
underlying assets within these positions are generally expected to be
liquidated over a period of approximately two to four years.
An
increase in market volatility and an increase in volatility of hedge funds in
general, as well as a decrease in market liquidity, could lead to a higher risk
of a large decline in value of the hedge funds in any given time period.
161
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
7. Other Investments (Continued)
(a) Alternative and Private Equity Funds
(Continued)
The
following represents an analysis of the net realized gains and the net
unrealized gains on the Companys alternative investment funds and private
equity funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains
(Losses)
|
|
Net Realized Gains (Losses)
|
|
|
|
|
|
|
|
December
31, 2011
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative Investment
Funds
|
|
$
|
96,873
|
|
$
|
86,053
|
|
$
|
10,120
|
|
$
|
526
|
|
$
|
21,809
|
|
Private Investment Funds
|
|
|
33,725
|
|
|
18,098
|
|
|
3,585
|
|
|
3,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,598
|
|
$
|
104,151
|
|
$
|
13,705
|
|
$
|
3,575
|
|
$
|
21,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Overseas Deposits
Overseas
deposits include investments in private funds related to Lloyds syndicates in
which the underlying instruments are primarily government and
government-related/supported and corporate fixed income securities. The funds
themselves do not trade on an exchange and therefore are not included within
available for sale securities. Also included in overseas deposits are
restricted cash and cash equivalent balances held by Lloyds syndicates for
solvency purposes. Given the restricted nature of these cash balances, they are
not included within the cash and cash equivalents category in the balance
sheet.
(c) 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 trade
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:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S. dollars in thousands except term to maturity)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Project Finance Loans:
|
|
|
|
|
|
|
|
Aggregate carrying value
|
|
$
|
49,650
|
|
$
|
52,182
|
|
Allowance for loan losses
|
|
|
(9,167
|
)
|
|
(9,900
|
)
|
Amounts charged off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate net carrying
value
|
|
$
|
40,483
|
|
$
|
42,282
|
|
|
|
|
|
|
|
|
|
Number of individual loan
participations
|
|
|
Six
|
|
|
Six
|
|
Number of individual loan
participations relating to the allowance for loan losses
|
|
|
Two
|
|
|
Two
|
|
Weighted average
contractual term to maturity
|
|
|
2.13
years
|
|
|
3.25
years
|
|
Weighted average credit
rating
|
|
|
BB-
|
|
|
BB
|
|
Range of individual credit
ratings
|
|
|
BB+ to CCC
|
|
|
BB+ to B+
|
|
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.
162
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
7. Other Investments (Continued)
(c) Structured Transactions (Continued)
During
the year ended December 31, 2011 and 2010, 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.
At
December 31, 2011, one of the loan participations was being restructured by the
borrower and participating lenders. Management determined the expected recovery
value for this participation based on multiple risk factors, including but not limited to a difficult trading
environment where margins are compressed below the historical mean, a working
capital shortage that has interrupted production and prompted lawsuits from
suppliers, earnings on the project are well below plan, and local bankruptcy
law is untested and may make it difficult to exercise the existing security
package. A second loan participation has credit risk to the operations of a
borrower that is experiencing a difficult trading environment. Management
determined the expected recovery value for this participation based on multiple
risk factors, including but not limited to increased raw material costs
adversely impacting margins, the borrower is currently operating at a net loss
and has high leverage, construction risk remains as the project is behind
schedule, and exposure to natural hazards that have caused a long shut down of
operations.
National Indemnity Endorsement
On
June 9, 2009, XL Specialty Insurance Company (XL Specialty), a wholly-owned
subsidiary of XL Capital Ltd, entered into an agreement with National Indemnity
Company, an insurance company subsidiary of Berkshire Hathaway Inc. (National
Indemnity). Under the agreement, and a related reinsurance agreement, National
Indemnity would issue endorsements (Endorsements) to certain directors and
officers liability insurance policies known as Side A coverage policies
underwritten by XL Specialty (the Facility).
The
Endorsements entitle policyholders to present claims under such D&O
policies directly to National Indemnity in the event that XL Specialty is
unable to meet its obligations due to an order of insolvency, liquidation or an
injunction that prohibits XL Specialty from paying claims. Under the terms of
the Facility, National Indemnity would issue Endorsements with aggregate
premiums of up to $140 million. The Endorsements will terminate on the tenth
anniversary of their issuance. The Facility provided that National Indemnity was
obligated to issue Endorsements on D&O policies issued during an eighteen
month period that commenced on June 8, 2009.
In
connection with the Facility, XL Insurance (Bermuda) Ltd (XLIB) purchased a
payment obligation (the Obligation) in an aggregate principal amount of $150
million from National Indemnity. In addition, XL Specialty established a trust
to hold the premiums (net of commissions) on the D&O policies endorsed by
National Indemnity. XL Specialty also arranged to provide National Indemnity
with a letter of credit in the event the assets in the trust are insufficient
to meet XL Specialtys obligations under the Facility (the Letter of Credit).
The trust, the Letter of Credit and the payment obligations collateralize XL
Specialtys indemnity obligations under the Facility to National Indemnity for
any payments National Indemnity is required to make under the Endorsements.
The
outstanding Obligation was recorded in Other Investments at an estimated fair
value of $128.1 million, pays a coupon of 3.5%, and is being accreted to $150
million over the 11.5 year term of the payment obligation. The difference
between the estimated fair value of the Obligation and the cost of that
Obligation at the time of the transaction was approximately $21.9 million and
was recorded in Other Assets. This difference, together with fees of $2.5
million, was amortized in relation to the earning of the underlying policies
written. During the years ended December 31, 2011, 2010 and 2009, amortization of
$9.4 million, $9.5 million and $5.5 million, respectively, was recorded.
163
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
7. Other Investments (Continued)
(c) Structured Transactions (Continued)
Other
Structured Transactions
On
July 17, 2009, XLIB, a wholly-owned subsidiary of the Company, purchased notes
with an aggregate face amount of $155 million. The carrying value of these
notes at December 31, 2011 and 2010 was $147.5 million and $147.3 million,
respectively. The issuer of the notes is a structured credit vehicle that holds
underlying assets including corporate debt and preferred equity securities,
including some securities issued by European financial institutions, as well as
project finance debt securities. The notes, which are callable under certain
criteria, have a final maturity of July 22, 2039.
These
structured transactions are not considered to be fair value measurements under
U.S. GAAP and accordingly they have been excluded from the fair value
measurement disclosures. See Note 3, Fair Value Measurements for details
surrounding the estimated fair value of these investments.
(d) Other
The
Company regularly reviews the performance of these other investments. The
Company recorded losses of $0.7 million, $7.8 million and $0.9 million in the
years ended December 31, 2011, 2010 and 2009, respectively, due to other than
temporary declines in values of these other investments.
See
Note 17(b), Commitments and Contingencies Other Investments, for further
information regarding commitments related to other investments.
8. Goodwill and Other Intangible Assets
The
following table presents an analysis of intangible assets broken down between
goodwill, intangible assets with an indefinite life and intangible assets with
a definite life for the years ended December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Goodwill
|
|
Intangible
assets with an
indefinite life
|
|
Intangible
assets with a
definite life
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2008
|
|
$
|
824,832
|
|
$
|
18,666
|
|
$
|
10,052
|
|
$
|
853,550
|
|
Reclassification
|
|
|
|
|
|
|
|
|
(4,440
|
)
|
|
(4,440
|
)
|
Amortization
|
|
|
|
|
|
(3,300
|
)
|
|
(1,858
|
)
|
|
(5,158
|
)
|
Foreign Currency Translation
|
|
|
1,177
|
|
|
|
|
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2009
|
|
$
|
826,009
|
|
$
|
15,366
|
|
$
|
3,754
|
|
$
|
845,129
|
|
Amortization
|
|
|
|
|
|
|
|
|
(1,859
|
)
|
|
(1,859
|
)
|
Foreign Currency Translation
|
|
|
(3,762
|
)
|
|
|
|
|
|
|
|
(3,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2010
|
|
$
|
822,247
|
|
$
|
15,366
|
|
$
|
1,895
|
|
$
|
839,508
|
|
Impairment
|
|
|
(429,020
|
)
|
|
|
|
|
|
|
|
(429,020
|
)
|
Amortization
|
|
|
|
|
|
|
|
|
(1,438
|
)
|
|
(1,438
|
)
|
Foreign Currency Translation
|
|
|
(1,729
|
)
|
|
|
|
|
|
|
|
(1,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2011
|
|
$
|
391,498
|
|
$
|
15,366
|
|
$
|
457
|
|
$
|
407,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded a non-cash impairment of $429.0 million during the fourth
quarter of 2011 to write-off all of the goodwill associated with its Insurance
segment reporting unit, as discussed further below. The Companys remaining
goodwill as at December 31, 2011 relates to the reporting units within the
Companys Reinsurance segment. The estimated fair values of these reporting
units exceeded their net book values as of December 31, 2011 and 2010 and
therefore no impairments were recorded. At December 31, 2011, the ending
goodwill balance is comprised of gross goodwill of $1.8 billion, offset by
accumulated impairment charges of $ 1.4 billion. At December 31, 2010, the
accumulated impairment charge was $990 million.
164
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
8. Goodwill and Other Intangible Assets
(Continued)
The
Company tests goodwill for impairment on an annual basis and on an interim
basis when certain events or circumstances exist. The Company tests for
impairment at the reporting unit level in accordance with the authoritative
guidance on intangibles and goodwill. For the Reinsurance segment, a reporting
unit is one level below the business segment, while for Insurance, the segment
is also the reporting unit. The first step is to identify potential impairment
by comparing the estimated fair value of a reporting unit to its estimated book
value, including goodwill. The fair value of each reporting unit is derived
based upon valuation techniques and assumptions the Company believes market
participants would use to value the business and this is then compared to the
book value of the business. The Company derives the net book value of its
reporting units by estimating the amount of shareholders equity required to
support the activities of each reporting unit. The estimated fair values of the
reporting units are generally determined utilizing methodologies that
incorporate price-to-net-tangible-book and price-to-earnings multiples of
certain comparable companies in the industry, from an operational and economic
standpoint. If such individual reporting unit estimated fair values - combined
with an estimate of an appropriate control premium - exceed their related
individual reporting unit net book values, goodwill for those individual
reporting units is not deemed to be impaired. A control premium represents the
value an investor would pay above non-controlling interest transaction prices
in order to obtain a controlling interest in the respective company.
However,
if the margin calculated between the estimated reporting unit fair value and
its net book value indicates a potential impairment or a close call, a
further analysis of the reporting units estimated fair value is performed,
using an entity-specific discounted cash flow methodology. This methodology
establishes fair value by estimating the present value of the projected future
cash flows to be generated from the reporting unit. The discount rate applied
to the projected future cash flows to arrive at the present value is intended
to reflect all risks of ownership and the associated risks of realizing the
stream of projected future cash flows. The discounted cash flow methodology
uses the Companys projections of financial performance for a ten-year period
combined with an estimated terminal value. The most significant assumptions
used in the discounted cash flow methodology are the discount rate, the
terminal value and expected future revenues, gross margins and operating
margins, which vary among reporting units. If the individual reporting unit net
book values exceed their related individual reporting unit estimated fair
values based on this additional methodology, the second step of the goodwill
impairment testing process is performed to measure the amount of impairment.
During
the third quarter of 2011, the Company completed its annual goodwill impairment
testing based on Company and industry data as of June 30, 2011, which
ultimately did not result in any goodwill impairments being recorded by the
Company. Although the results of this analysis did not indicate the need for
any impairment charges, management evaluated the sensitivity of the fair value
calculations in the goodwill impairment test and concluded that relatively
small changes to key assumptions such as discount rate, the terminal value,
expected future revenues, gross margins and operating margins could result in a
calculated fair value insufficient to support the current level of goodwill in
certain businesses. Management also concluded that the prolonged weakened
market conditions resulted in the range of calculated fair values used for
testing impairment in the reporting units being sufficiently close to the
current net book values to warrant quarterly analysis until market conditions
improve.
At
December 31, 2011 the Company updated its impairment analytics utilizing all of
the methodologies discussed above. As a result of the analysis performed, the
Company concluded that the indicated ranges of fair values of the reporting
units within the Reinsurance segment in which goodwill is carried was
sufficient to support their goodwill balances; however, the indicated fair
value of the Insurance segment reporting unit was not sufficient to support its
goodwill balance, and thus did not pass step one of the impairment testing
process. Therefore step two was required to quantify the amount of goodwill
impairment. Following the step two valuation process, the $429 million carrying
value of goodwill was deemed to be impaired. As a result of the continued
losses in certain businesses within the segment and continued low industry market
valuations, the Company increased the rate of return a market participant would
require from that used in previous goodwill testing and decreased the level of
control premiums added to market value multiples for the insurance reporting
unit. These factors taken together, led to the conclusion that the impairment
was required. The assumptions utilized within the Reinsurance Segment reporting
unit valuations were not modified from those utilized during the third quarter
as these units were not impacted by similar underperformance.
During
2009, the Company sold its U.S. life reinsurance business. The transaction
closed during the fourth quarter of 2009. Accordingly, the full value of the
licenses held relating to this business of $3.3 million was removed from
intangible assets with an indefinite life as part of the sale transaction. In
addition, during 2009 certain internal use software acquired as part of the XL
GAPS acquisition, which occurred in late 2007, with a carried value of $4.4
million was reclassified from intangible assets with a definite life into other
assets. No impairments were recorded on intangible assets during any of the
years ended December 2011, 2010 and 2009.
165
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
9. R
EINSURANCE
The
Company utilizes reinsurance and retrocession agreements principally to
increase aggregate capacity and to reduce the risk of loss on business assumed.
The Companys reinsurance and retrocession agreements provide for recovery of a
portion of losses and loss expenses from reinsurers and reinsurance
recoverables are recorded as assets. The Company is liable if the reinsurers
are unable to satisfy their obligations under the agreements. Under its
reinsurance security policy, the Company seeks to cede business to reinsurers
generally with a financial strength rating of A or better. The Company
considers reinsurers that are not rated or do not fall within the above rating
categories and may grant exceptions to the Companys general policy on a
case-by-case basis. The effect of reinsurance and retrocessional activity on
premiums written and earned from property and casualty operations is shown
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Written
Year Ended December 31,
|
|
Premiums
Earned
Year Ended December 31,
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
4,714,588
|
|
$
|
4,398,753
|
|
$
|
4,381,185
|
|
$
|
4,624,557
|
|
$
|
4,535,626
|
|
$
|
4,861,073
|
|
Assumed
|
|
|
2,183,696
|
|
|
1,862,578
|
|
|
1,730,126
|
|
|
2,179,555
|
|
|
1,837,528
|
|
|
1,877,634
|
|
Ceded
|
|
|
(1,464,896
|
)
|
|
(1,261,743
|
)
|
|
(1,367,599
|
)
|
|
(1,477,000
|
)
|
|
(1,342,017
|
)
|
|
(1,586,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
5,433,388
|
|
$
|
4,999,588
|
|
$
|
4,743,712
|
|
$
|
5,327,112
|
|
$
|
5,031,137
|
|
$
|
5,151,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded reinsurance recoveries on losses and loss expenses incurred of
$1.1 billion, $1.0 billion and $0.8 billion for the years ended December 31,
2011, 2010 and 2009, respectively.
The
following table presents an analysis of total unpaid losses and loss expenses
and future policy benefit reserves recoverable for the year ended December 31:
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
P&C operations
|
|
$
|
3,629,928
|
|
$
|
3,649,290
|
|
Life operations
|
|
|
25,020
|
|
|
22,597
|
|
|
|
|
|
|
|
|
|
Total unpaid losses and
loss expenses recoverable
|
|
$
|
3,654,948
|
|
$
|
3,671,887
|
|
|
|
|
|
|
|
|
|
At
December 31, 2011 and 2010, the total reinsurance assets of $3.9 billion and
$3.8 billion, respectively, included reinsurance receivables for paid losses
and loss expenses of $220.0 million and $171.3 million, respectively, with
$3.7 billion relating to the ceded reserve for losses and loss expenses,
including ceded losses incurred but not reported for each year end. Although
the contractual obligation of individual reinsurers to pay their reinsurance
obligations is based on specific contract provisions, the collectability of
such amounts requires significant estimation by management. The majority of the
balance the Company has accrued as recoverable will not be due for collection
until sometime in the future. Over this period of time, economic conditions and
operational performance of a particular reinsurer may impact its ability to
meet these obligations and while it may continue to acknowledge its contractual
obligation to do so, it may not have the financial resources or willingness to
fully meet its obligations to the Company.
At
December 31, 2011 and 2010, the allowance for uncollectible reinsurance
relating to both reinsurance balances receivable and unpaid losses and loss
expenses recoverable were $99.2 million and $121.9 million, respectively. To
estimate the provision for uncollectible reinsurance recoverable, the
reinsurance recoverable must first be allocated to applicable reinsurers. As
part of this process, ceded IBNR is allocated by reinsurer. The allocations are
generally based on historical relationships between gross and ceded losses. If
actual experience varies materially from historical experience, the allocation
of reinsurance recoverable by reinsurer will change.
The
Company uses a default analysis to estimate uncollectible reinsurance
recoverables. The primary components of the default analysis are reinsurance
recoverable balances by reinsurer, net of collateral, and default factors used
to determine the portion of a reinsurers balance deemed uncollectible.
The definition of collateral for this purpose requires some judgment and is generally
limited to assets held in trust, letters of credit, and liabilities held by the
Company with the same legal entity for which the Company believes there is a
right of offset. The Company is the beneficiary of letters of credit, trust accounts
and funds withheld in the aggregate amount of $1.7 billion at December 31, 2011,
collateralizing reinsurance recoverables with respect to certain reinsurers.
Default factors require considerable judgment and are determined using the
current financial strength rating, or rating equivalent, of each reinsurer as
well as other key considerations and assumptions. The total allowance recorded
relating to reinsurance recoverables was $55.3 million and $68.1 million at December
31, 2011 and 2010, respectively.
166
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
9. R
EINSURANCE
(C
ONTINUED
)
The
Company uses an aging analysis to estimate uncollectible reinsurance balances
receivable relating to paid losses in addition to recording allowances relating
to any specific balances with known collectability issues, irrespective of
aging. The balances are aged from the date the expected recovery was billed to
the reinsurer. Provisions are applied at specified percentages of the
outstanding balances based upon the aging profile. Allowances otherwise
required as a result of the aging process may not be recorded to the extent
that specific facts and circumstances exist that lead management to believe
that amounts will ultimately be collectible. The total allowance recorded
relating to reinsurance balances receivable was $43.9 million and $53.8 million
at December 31, 2011 and 2010, respectively.
At
December 31, 2011, the use of different assumptions within the model could have
a material effect on the bad debt provision reflected in the Companys
Consolidated Financial Statements. To the extent the creditworthiness of the
Companys reinsurers was to deteriorate due to an adverse event affecting the
reinsurance industry, such as a large number of major catastrophes, actual
uncollectible amounts could be significantly greater than the Companys bad
debt provision. Such an event could have a material adverse effect on the
Companys financial condition, results of operations, and cash flows.
Approximately
92.2% of the total unpaid loss and loss expense recoverable and reinsurance
balances receivable (net of collateral held) outstanding at December 31, 2011
was due from reinsurers with a financial strength rating of A or
better. The following is an analysis of the total recoverable and reinsurance
balances receivable at December 31, 2011, by reinsurers owing 3% or more of such
total:
|
|
|
|
|
|
|
|
Name of reinsurer
|
|
|
Reinsurer
Financial
Strength Rating
|
|
%
of total
|
|
|
|
|
|
|
|
|
Munich
Reinsurance Company
|
|
AA-/Stable
|
|
|
22.8
|
%
|
Swiss
Reinsurance Company
|
|
AA-/Stable
|
|
|
12.2
|
%
|
Swiss Re
Europe S.A.
|
|
AA-/Stable
|
|
|
5.1
|
%
|
Transatlantic
Reinsurance Company
|
|
A+/Stable
|
|
|
3.7
|
%
|
Everest
Reinsurance Company
|
|
A+/Stable
|
|
|
3.0
|
%
|
The
following table sets forth the ratings profile of the reinsurers that support
the unpaid loss and loss expense recoverable and reinsurance balances
receivable:
|
|
|
|
|
|
Reinsurer Financial
Strength Rating
|
|
|
%
of total
|
|
|
|
|
|
|
AAA
|
|
|
1.3
|
%
|
AA
|
|
|
58.4
|
%
|
A
|
|
|
32.3
|
%
|
BBB
|
|
|
0.4
|
%
|
BB and below
|
|
|
0.1
|
%
|
Captives
|
|
|
4.8
|
%
|
Not Rated
|
|
|
0.2
|
%
|
Other
|
|
|
2.5
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
167
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
Unpaid
losses and loss expenses are comprised of:
|
|
|
|
|
|
|
|
Year Ended December 31
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Reserve for reported
losses and loss expenses
|
|
$
|
8,153,585
|
|
$
|
8,510,605
|
|
Reserve for losses
incurred but not reported
|
|
|
12,460,316
|
|
|
12,021,002
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss
expenses
|
|
$
|
20,613,901
|
|
$
|
20,531,607
|
|
|
|
|
|
|
|
|
|
Net
losses and loss expenses incurred are comprised of:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses
payments
|
|
$
|
4,911,737
|
|
$
|
4,309,523
|
|
$
|
5,138,951
|
|
Change in unpaid losses
and loss expenses
|
|
|
260,631
|
|
|
(141,589
|
)
|
|
(1,148,495
|
)
|
Change in unpaid losses
and loss expenses recoverable
|
|
|
(28,442
|
)
|
|
(117,120
|
)
|
|
441,397
|
|
Paid loss recoveries
|
|
|
(1,065,535
|
)
|
|
(839,014
|
)
|
|
(1,263,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss
expenses incurred
|
|
$
|
4,078,391
|
|
$
|
3,211,800
|
|
$
|
3,168,837
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table represents an analysis of the Companys paid and unpaid losses
and loss expenses incurred and a reconciliation of the beginning and ending
unpaid losses and loss expenses for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses at beginning of year
|
|
$
|
20,531,607
|
|
$
|
20,823,524
|
|
$
|
21,650,315
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,649,290
|
|
|
3,557,391
|
|
|
3,964,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss expenses at beginning of year
|
|
|
16,882,317
|
|
|
17,266,133
|
|
|
17,685,479
|
|
Increase (decrease) in net losses and loss expenses incurred in
respect of losses occurring in:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
4,363,258
|
|
|
3,584,662
|
|
|
3,453,577
|
|
Prior years
|
|
|
(284,867
|
)
|
|
(372,862
|
)
|
|
(284,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred losses and loss expenses
|
|
|
4,078,391
|
|
|
3,211,800
|
|
|
3,168,837
|
|
Exchange rate effects
|
|
|
(130,533
|
)
|
|
(125,107
|
)
|
|
287,752
|
|
Less net losses and loss expenses paid in respect of losses occurring
in:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
589,870
|
|
|
442,262
|
|
|
439,638
|
|
Prior years
|
|
|
3,256,332
|
|
|
3,028,247
|
|
|
3,436,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net paid losses
|
|
|
3,846,202
|
|
|
3,470,509
|
|
|
3,875,935
|
|
Net unpaid losses and loss expenses at end of year
|
|
|
16,983,973
|
|
|
16,882,317
|
|
|
17,266,133
|
|
Unpaid losses and loss expenses recoverable
|
|
|
3,629,928
|
|
|
3,649,290
|
|
|
3,557,391
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses at end of year
|
|
$
|
20,613,901
|
|
$
|
20,531,607
|
|
$
|
20,823,524
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Current
year net losses incurred
Current
year net losses incurred increased by $778.6 million in 2011 as compared to 2010. This was
mainly as a result of the current year loss ratio increasing by 10.7 loss
percentage points due to higher losses from natural catastrophes as compared to
2010, but also from the following: (i) the Insurance segment in 2011
experienced higher large loss activity in the energy, property and marine
businesses, as compared to 2010; and (ii) the Reinsurance segment in 2011
experienced higher levels of large loss events in U.S. property including a
deterioration in the performance of a large U.S. agricultural program, higher
attritional losses as well as business mix changes, as compared to 2010.
168
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(a) Current year net losses incurred
(Continued)
Current
year net losses incurred increased by $131.1 million in 2010 as compared to
2009. This was mainly as a result of the current year loss ratio increasing by
4.2 loss percentage points due to higher losses from natural catastrophes as
compared to 2009, but also from the following: (i) the Insurance segment - in
2010, there were higher large loss events in property and excess casualty,
adverse experience in exited lines of business and the impact of flat to
slightly negative rate changes partially offset by changes in business mix and
improved loss experience in aerospace, as compared to 2009; and (ii) the
Reinsurance segment in 2010, there were large loss events in the marine lines
which were offset by changes in business mix, improved loss experience in
property, discontinued financial lines and the professional and trade credit
business related to the credit crisis, as compared to 2009.
(b) Prior year net losses incurred
The
following table presents the net (favorable) adverse prior year loss
development of the Companys loss and loss expense reserves for its property
and casualty operations by operating segment for each of the years indicated:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Insurance segment
|
|
$
|
(76.5
|
)
|
$
|
(127.4
|
)
|
$
|
(62.9
|
)
|
Reinsurance segment
|
|
|
(208.4
|
)
|
|
(245.5
|
)
|
|
(221.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284.9
|
)
|
$
|
(372.9
|
)
|
$
|
(284.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
significant developments in prior year loss reserve estimates for each of the
years indicated within the Companys Insurance and Reinsurance segments are
discussed below.
Insurance Segment
The
following table summarizes the net (favorable) adverse prior year development
by line of business relating to the Insurance segment for the last three years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Property
|
|
$
|
(8.9
|
)
|
$
|
(23.5
|
)
|
$
|
(50.7
|
)
|
Casualty and Professional
|
|
|
(47.1
|
)
|
|
(105.2
|
)
|
|
(41.0
|
)
|
Specialty and Other
|
|
|
(20.5
|
)
|
|
1.3
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(76.5
|
)
|
$
|
(127.4
|
)
|
$
|
(62.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
favorable prior year reserve development for the Insurance segment of $76.5
million (corresponding gross development was $23.1 million unfavorable) for the
year ended December 31, 2011 and was mainly attributable to the following:
|
|
|
|
|
For property lines, net
prior year development during the year was $8.9 million favorable as a result
of better than expected reported loss activity mainly for the 2010 accident
year of $22.6 million for the international property book of business for the
non-catastrophe exposures, partially offset by adverse development in the
international construction ($5.0 million) and Bermuda property ($4.6 million)
books of business (also primarily attributable to the 2010 accident year) for
non-catastrophe exposures, and an increase in the reinsurance bad debt
reserve ($2.8 million).
|
|
|
|
|
|
For casualty lines, net
prior year development during the year was $40.5 million unfavorable (gross
unfavorable of $158.5 million) mainly related to adverse development on large
excess casualty claims associated with the Deepwater Horizon event in the
2010 accident year totaling $135.6 million gross and $33.4 million net. In
addition, $150.0 million gross and $65.0 million net excess casualty IBNR
reserves were reallocated to the 2010 accident year in respect of Deepwater
Horizon exposures. These IBNR movements were entirely offset by reserve
reductions in older accident years. This activity largely explains the
difference between the gross and net prior year development for the Insurance
segment.
|
|
|
|
|
|
Furthermore, there was
modest adverse loss experience in the workers compensation profiles in the
U.S. risk managment ($7.4 million) and U.S. middle market ($2.6 million)
books of business spread across the 2004 to 2010 accident years. These were
partially offset by the continued benign large loss experience in primary
casualty for the 2002 and prior accident years.
|
169
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(b) Prior year net losses incurred
(Continued)
|
|
|
|
|
For professional lines, the
net prior year development during the year was $87.5 million favorable.
|
|
|
|
|
|
The core professional
business benefited from releases in reserves for clash losses totaling $88.5
million. These were comprised of releases of $45.3 million for the 2006 and
prior report years reflecting favorable development across these years and $54.3
million for report year 2010 to reflect the limited clash events in that
year, partially offset by a modest strengthening of $11.1 million for the
2007 to 2009 report years. The core professional business also benefited from
a $98.7 million favorable movement excluding clash due to better than
expected incurred activity mainly in the 2007 and prior report years.
|
|
|
|
|
|
There was a strengthening
in the U.S. Private Commercial business of $29.2 million reflecting worse
than expected incurred activity primarily in the 2010 report year.
|
|
|
|
|
|
There was a $37.5 million
strengthening in the Design portfolio covering architects and engineers
professional liability across the 2004 to 2010 report years driven by worse than expected reported loss experience.
|
|
|
|
|
|
The Select business
portfolio, which offers lawyers, real estate and miscellaneous professional
liability to small and midsize firms in the U.S., had strengthening of $17.5
million due to worse than expected reported loss experience mainly in the
2009 and 2010 report years.
|
|
|
|
|
|
Finally, there was
strengthening of unallocated loss adjustment expense reserves across all
professional lines totaling $12.9 million.
|
|
|
|
|
|
For specialty and other
lines, net prior year development during the year was $20.5 million favorable
mainly due to better than expected reported loss experience for
non-catastrophe exposures in several books of business, including aerospace
($20.8 million), specie ($7.9 million), international environmental ($7.1
million), marine ($16.9 million) and discontinued lines ($7.8 million). In
addition, there was favorable development from better than expected reported
loss experience in the marine book of business for catastrophe exposures of
$9.7 million and a decrease in the reinsurance bad debt reserve of $8.3
million, which were partially offset by adverse development in the excess and
surplus lines ($27.7 million) and programs ($7.1 million) books of business
and adverse development in the run-off surety book of business of $20.9
million predominantly relating to one discontinued program.
|
Net
favorable prior year reserve development for the Insurance segment of $127.4
million for the year ended December 31, 2010 was mainly attributable to the
following:
|
|
|
|
|
For property lines, net
prior year development during the year was $23.5 million favorable due mainly
to lower than expected actual losses for non-catastrophe exposures for North
America P&C and International P&C business.
|
|
|
|
|
|
For casualty lines, net
prior year development during the year was $13.4 million unfavorable due
mainly to a $45.1 million strengthening in the U.S. risk management lines,
where there has been higher than expected actual losses and reserve
assumptions have been revised to give greater weight to actual experience
relative to industry benchmarks. The unfavorable development was partially
offset by a $26.0 million decrease in the uncollectible reinsurance reserve
from reduced exposures and lower estimated risk levels from the Swiss
operations. On a gross basis, the excess casualty lines have experienced
higher than expected actual losses which have only been partially offset by
lower than expected actual losses in the primary casualty lines. However, the
gross deterioration in excess casualty was heavily ceded so that on a net
basis the strengthening in excess casualty has been almost entirely offset by
the release in primary casualty.
|
|
|
|
|
|
For professional lines, net
prior year development was $118.6 million favorable. This was driven by lower
than expected actual losses in the core U.S. professional business ($89.8
million mainly from report years 2007 and prior) and International ($41.1
million in report year 2006) lines, favorable reserve development in Bermuda
errors and omissions lines ($57.2 million for report years 2003 and prior),
and favorable Clash development ($28.2 million from report years 2006 and
prior). This was partially offset by higher than expected actual losses in
the U.S. Private Commercial lines ($63.7 million), and in the small to
midsize professional services lines, in particular in the miscellaneous
professionals ($21.8 million), architects and engineers ($6.2 million), and
real estate ($5.5 million) books.
|
170
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(b) Prior year net losses incurred
(Continued)
|
|
|
|
|
For specialty and other
lines, net prior year development was $1.3 million unfavorable due mainly to
an unfavorable settlement in the surety lines ($40.4 million), higher than
expected actual losses in the environmental lines ($15.5 million), and an
unfavorable commutation in the financial lines ($9.1 million). This was
mostly offset by lower than expected actual losses in the aerospace ($32.9
million), marine ($7.2 million), specie ($5.5 million) and equine ($3.1
million) lines as well as a reduction in the provision for unrecoverable
reinsurance due to reduced exposures and lower estimated risk levels from the
London Market operations ($13.1 million).
|
Net
favorable prior year reserve development for the Insurance segment of $62.9
million for the year ended December 31, 2009 was mainly attributable to the
following:
|
|
|
|
|
For property lines, net
prior year development during the year was $50.7 million favorable largely as
a result of a lower than expected level of attritional non-catastrophe claims
across older accident years as well as reserve releases in the 2008 European
general property portfolio due to lower than expected reported loss activity.
Prior year catastrophe loss estimates remained stable.
|
|
|
|
|
|
For casualty lines, net
prior year development during the year was $29.4 million unfavorable due to
reserve strengthening on the European excess lines for accident years 2000 to
2004, and the recognition of potential excess casualty exposures on the
discontinued casualty lines. Offsetting this reserve strengthening were
reserve releases from the casualty primary business due to better than
expected loss activity from the more recent accident years, and U.S. risk
management lines due to greater reliance on actual loss experience over
initial target loss ratios.
|
|
|
|
|
|
For professional lines, net
prior year development was $70.4 million favorable, primarily as a result of
lower incurred activity than expected based on the Companys prior valuation
in global D&O lines, primarily for underwriting years 2002 to 2006. This
release was partially offset by strengthening of global E&O reserves
primarily in the 2000 and 2001 years due to large claims. In addition, there
was a reallocation of subprime and related credit crisis reserves from the
2007 to 2008 report year to better reflect the indications of our latest
exposure-based reserve analysis for these years.
|
|
|
|
|
|
For specialty and other
lines, net prior year adverse development was $28.8 million due in part to a
deterioration in environmental lines but mainly from discontinued specialty
lines, specifically, for surety to reflect our assessment of the potential
impact of the economic downturn on ultimate loss activity, the Lloyds
Accident & Health book where incurred development was higher than implied
by the Companys selected benchmarks and the resulting lengthening of loss
reporting patterns, and political risks where there was reserve strengthening
on a specific potential claim. Offsetting the adverse development was
favorable reserve development on the aerospace and marine and offshore energy
lines due to better than expected activity and an update of development
assumptions to reflect recent historical experience.
|
There
is no assurance that conditions and trends that have affected the development
of liabilities in the past will continue. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on the
Companys historical results.
Reinsurance Segment
The
following table summarizes the net (favorable) adverse prior year development
by line of business relating to the Reinsurance segment for the last three
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Property and other
short-tail lines
|
|
$
|
(64.3
|
)
|
$
|
(145.8
|
)
|
$
|
(142.5
|
)
|
Casualty and other
|
|
|
(144.1
|
)
|
|
(99.7
|
)
|
|
(79.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(208.4
|
)
|
$
|
(245.5
|
)
|
$
|
(221.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
171
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(b) Prior year net losses incurred
(Continued)
Net
favorable prior year reserve development for the Reinsurance segment of $208.4
million for the year ended December 31, 2011 was mainly attributable to the
following:
|
|
|
|
|
|
Net favorable prior year
development of $64.3 million for the short-tailed lines in the year ended
December 31, 2011 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
For property catastrophe
lines, net prior year development during the year was $37.3 million favorable with the main components of this being better than
expected loss development of $11.0
million from several European
windstorm losses and $8.0 million from Hurricanes Katrina and Rita.
|
|
|
|
|
|
|
|
For property other lines,
net prior year development during the year was $40.5 million favorable as a result of lower than expected reported losses
across most lines of business and most underwriting years with the exception
of one cedant in Latin America.
|
|
|
|
|
|
|
|
For marine and aviation
lines, net prior year development during the year was $13.5 million unfavorable primarily due to reported claim development being
above expectations mainly in marine lines of business.
|
|
|
|
|
|
|
Net favorable prior year
development of $144.1 million for the long-tailed lines for the year ended
December 31, 2011 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
For casualty lines, net
prior year development during the year was $109.4 million in favorable development primarily related to $56.0 million in
better than expected claim activity in North America, $32.1 million in Europe and $20.0
million related to favorable
development on Enron-related professional liability claims. The favorable
development is primarily for the 1999 to 2006 underwriting years.
|
|
|
|
|
|
|
|
For other lines, net prior
year development during the year was $34.7 million favorable
due to reserve releases on whole account treaties written on Lloyds
syndicates for the 2008 underwriting year as well as releases on large losses
and trade credit.
|
Net
favorable prior year reserve development for the Reinsurance segment of $245.5
million for the year ended December 31, 2010 was mainly attributable to the
following:
|
|
|
|
|
|
Net favorable prior year
development of $145.8 million for the short-tailed lines in the year ended
December 31, 2010 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
$35.6 million in favorable
property catastrophe development primarily due to better than expected
activity in underwriting years 2007 to 2009, lowering of expected loss ratios
to attritional levels on the 2009 underwriting year and reserve releases
related to European windstorms of $7.2 million and Hurricane Katrina of $3.8
million.
|
|
|
|
|
|
|
|
$87.4 million in favorable
property other releases driven by $50.7 million of releases from U.S.
exposures for most underwriting years including $7.9 million from reduced
exposures relating to a U.S agricultural program from underwriting year 2009,
$20.0 million in releases from Latin America proportional exposures primarily
from 2007 to 2009 underwriting years and $16.7 million in releases from
Europe and Asia Pacific exposures from most underwriting years.
|
|
|
|
|
|
|
|
$22.8 million in marine and
aviation lines due to favorable marine development of $10.9 million and
favorable aviation development of $11.9 million due to better than expected
activity in most underwriting years.
|
172
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(b) Prior year net losses incurred
(Continued)
|
|
|
|
|
|
Net favorable prior year
development of $99.7 million for the long-tailed lines for the year ended
December 31, 2010 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
$25.2 million in favorable
casualty and professional development attributable to $33.0 million in
releases due to settlements related to Enron losses, $21.6 million in
releases mainly due to U.S. professional exposures in underwriting years 2005
and prior, $11.9 million primarily due to releases related to revision of
European loss development factors and initial expected loss ratios, $7.1
million related to releases from run-off of Australia casualty exposures in
underwriting years 2005 and prior offset by adverse development of $43.0
million related to Italian hospital medical malpractice exposures written
through a Lloyds syndicate and adverse development of $5.4 million related
to European Financial Institution exposures in underwriting years 2002 and
2004.
|
|
|
|
|
|
|
|
$74.5 million in favorable
other lines development primarily driven by $42.1 million in favorable
development from whole account contracts written in Lloyds syndicates of
which $36.1m in releases related to reinsurance to close (RITC) in years of
account 2007 and prior and $6.0 million due to better than expected activity
in underwriting years 2008 and 2009.Contributions also from North American
bond run-off exposures due to better than expected activity in underwriting years
2006 and prior resulting in releases of $12.6 million, a reduction of $7.5
million on one political risk loss, Latin America Surety releases of $5.6
million related to better than expected loss experience across most
underwriting years, $3.7 million in relation to one specific contract
commutation and $3.0 million in releases primarily due to favorable activity
in European trade credit run-off exposures in most prior underwriting years.
|
Net
favorable prior year reserve development for the Reinsurance segment of $221.8
million for the year ended December 31, 2009 was mainly attributable to the
following:
|
|
|
|
|
|
Net favorable prior year
development of $142.5 million for the short-tailed lines in the year ended
December 31, 2009 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
$46.2 million in favorable
property catastrophe development due to lower than expected loss development,
particularly on the 2008 underwriting year and $12.3 million in reserve
reductions for several 2005 natural catastrophe events including European
floods, windstorm Erwin and California wildfires.
|
|
|
|
|
|
|
|
$88.8 million in favorable
development due primarily to lower than expected claim emergence from
underwriting years 2005 to 2008 in Latin America ($27.5 million), Europe
($21.6 million), Bermuda ($20.6 million) and U.S. ($13.8 million).
|
|
|
|
|
|
|
|
$7.5 million in marine and
aviation lines due to lower than expected claim emergence in the European
marine book for underwriting years 2007 and 2008 offset by minimal net
reserve increases on the aviation book.
|
|
|
|
|
|
|
Net favorable prior year
development of $79.3 million for the long-tailed lines for the year ended
December 31, 2009 and details of these by specific lines are as follows:
|
|
|
|
|
|
|
$21.0 million in favorable
casualty development related primarily to the European General Liability and
U.K. Motor portfolios in underwriting years 2004 to 2007.
|
|
|
|
|
|
|
|
$40.7 million in favorable
professional development due primarily to U.S. exposures for underwriting
years 2002 and prior in addition to professional indemnity exposures
underwritten in Europe in years 2006 and prior.
|
|
|
|
|
|
|
|
$17.6 million in favorable
development in non-casualty long tail lines largely in Latin America due to
favorable emergence from surety exposures.
|
There
is no assurance that conditions and trends that have affected the development
of liabilities in the past will continue. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on the
Companys historical results.
173
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. L
OSSES AND
L
OSS
E
XPENSES
(C
ONTINUED
)
(c) Exchange rate effects
Exchange
rate effects on net loss reserves in each of the three years ended December 31,
2011, 2010 and 2009 related to the global operations of the Company primarily
where reporting units have a functional currency that is not the U.S. dollar.
In 2011, the U.S. dollar was stronger against U.K. sterling, the Euro,
the Brazilian real and the Swiss franc, which more than offset losses that were
driven by a stronger Australian dollar In 2010, the U.S. dollar was stronger against the Euro, while weaker
against the Swiss franc, Canadian dollar and Brazilian real. In 2009, the U.S.
dollar weakened against all of the Companys major currency exposures,
particularly the Canadian dollar and U.K. sterling. These movements in the U.S.
dollar gave rise to translation and revaluation exchange movements related to
carried loss reserve balances of $(130.5) million, $(125.1) million and $287.8
million in the years ended December 31, 2011, 2010 and 2009, respectively.
(d) Net paid losses
Total
net paid losses were $3.8 billion, $3.5 billion and $3.9 billion in each of
2011, 2010 and 2009, respectively.
(e) Other loss information
The
Company did not dispose of or acquire net loss reserves in 2011, 2010 or 2009.
The
Companys net incurred losses and loss expenses include actual and estimates of
potential non-recoveries from reinsurers. As at December 31, 2011 and 2010, the
reserve for potential non-recoveries from reinsurers was $99.2 million and
$121.9 million, respectively. For further information, see Note 9, Reinsurance.
Except
for certain workers compensation (including long term disability) liabilities
and certain U.K. motor liability claims, the Company does not discount its
unpaid losses and loss expenses.
The
Company utilizes tabular reserving for workers compensation (including
long-term disability) unpaid losses that are considered fixed and determinable,
and discounts such losses using an interest rate of 5% in 2011 and 2010. The
interest rate approximates the average yield to maturity on specific fixed
income investments that support these liabilities. The tabular reserving
methodology results in applying uniform and consistent criteria for
establishing expected future indemnity and medical payments (including an
explicit factor for inflation) and the use of mortality tables to determine
expected payment periods. Tabular unpaid losses and loss expenses, net of
reinsurance, at December 31, 2011 and 2010 on an undiscounted basis were $612.9
million and $660.3 million, respectively. The related discounted unpaid losses
and loss expenses were $290.3 million and $311.9 million at December 31, 2011
and 2010, respectively.
The
nature of the Companys high excess of loss liability and catastrophe business
can result in loss events that are both irregular and significant. Similarly,
adjustments to reserves for individual years can be irregular and significant.
Such adjustments are part of the normal course of business for the Company.
Conditions and trends that have affected development of liability in the past
may not continue in the future. Accordingly, it is inappropriate to extrapolate
future redundancies or deficiencies based upon historical experience.
174
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. Losses and Loss Expenses (Continued)
(f) Asbestos and Environmental Related Claims
The
Companys reserving process includes a continuing evaluation of the potential
impact on unpaid liabilities from exposure to asbestos and environmental
claims, including related loss adjustment expenses. Liabilities are established
to cover both known and incurred but not reported claims.
A
reconciliation of the opening and closing unpaid losses and loss expenses
related to asbestos and environmental exposure claims for the years indicated
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss expenses at beginning of year
|
|
$
|
84,075
|
|
$
|
100,922
|
|
$
|
111,860
|
|
Net incurred losses and loss expenses
|
|
|
(41
|
)
|
|
(130
|
)
|
|
(312
|
)
|
Less net paid losses and loss expenses
|
|
|
6,256
|
|
|
16,718
|
|
|
10,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in unpaid losses and loss expenses
|
|
|
(6,297
|
)
|
|
(16,848
|
)
|
|
(10,938
|
)
|
Net unpaid losses and loss expenses at end of year
|
|
|
77,778
|
|
|
84,075
|
|
|
100,922
|
|
Unpaid losses and loss expenses recoverable at end of year
|
|
|
134,323
|
|
|
142,037
|
|
|
151,963
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss expenses at end of year
|
|
$
|
212,101
|
|
$
|
226,112
|
|
$
|
252,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
for incurred but not reported losses, net of reinsurance, included in the above
table were $47.2 million, $54.9 million and $68.5 million in 2011, 2010 and
2009, respectively. Unpaid losses recoverable are net of potential
uncollectible amounts.
As
of December 31, 2011, the Company had 1,038 open claim files for potential
asbestos exposures and 362 open claim files for potential environmental
exposures. Approximately 43%, 44% and 50% of the open claim files are due to
precautionary claim notices in 2011, 2010 and 2009, respectively. Precautionary
claim notices are submitted by the ceding companies in order to preserve their
right to receive coverage under the reinsurance contract.
Such
notices do not contain an incurred loss amount to the Company. The development
of the number of open claim files for potential asbestos and environmental
claims is as follows:
|
|
|
|
|
|
|
|
|
|
Asbestos
Claims
|
|
Environmental
Claims
|
|
|
|
|
|
|
|
Total number of claims outstanding at December 31, 2008
|
|
|
1,546
|
|
|
548
|
|
New claims reported in 2009
|
|
|
221
|
|
|
38
|
|
Claims resolved in 2009
|
|
|
(330
|
)
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
Total number of claims outstanding at December 31, 2009
|
|
|
1,437
|
|
|
484
|
|
New claims reported in 2010
|
|
|
125
|
|
|
31
|
|
Claims resolved in 2010
|
|
|
(362
|
)
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
Total number of claims outstanding at December 31, 2010
|
|
|
1,200
|
|
|
417
|
|
New claims reported in 2011
|
|
|
106
|
|
|
36
|
|
Claims resolved in 2011
|
|
|
(268
|
)
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
Total number of claims outstanding at December 31,
2011
|
|
|
1,038
|
|
|
362
|
|
|
|
|
|
|
|
|
|
175
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
10. Losses and Loss Expenses (Continued)
(f) Asbestos and Environmental Related Claims
(Continued)
The
Companys reserving process includes a continuing evaluation of the potential
impact on unpaid liabilities from exposure to asbestos and environmental
claims, including related loss adjustment expenses. Liabilities are established
to cover both known and incurred but not reported claims.
The
Companys exposure to asbestos and environmental claims arises from the
following three sources:
|
|
|
|
(1)
|
Reinsurance contracts
written, both on a proportional and excess basis, after 1972. The Company
discontinued writing contracts with these exposures in 1985. Business written
was across many different policies, each with a relatively small contract
limit. The Companys reported asbestos claims relate to both traditional
products and premises and operations coverage.
|
|
|
|
|
(2)
|
Winterthur business of
Winterthur purchased by the Company from AXA Insurance (formerly Winterthur
Swiss Insurance Company) in 2001. AXA reimburses the Company for asbestos
claim payments pursuant to the Sale and Purchase Agreement.
|
|
|
|
|
(3)
|
During 2006, the Company
acquired $40.2 million in losses through a loss portfolio transfer contract
of which $18.3 million in losses related to asbestos and environmental
claims. Given the terms of the policy, the combined aggregate limit on the
total acquired reserves is limited to $60.0 million, not including coverage
for claims handling costs over a defined period.
|
The
estimation of loss and loss expense liabilities for asbestos and environmental
exposures is subject to much greater uncertainty than is normally associated
with the establishment of liabilities for certain other exposures due to
several factors, including: (i) uncertain legal interpretation and application
of insurance and reinsurance coverage and liability; (ii) the lack of
reliability of available historical claims data as an indicator of future
claims development; (iii) an uncertain political climate which may impact,
among other areas, the nature and amount of costs for remediating waste sites;
and (iv) the potential of insurers and reinsurers to reach agreements in order
to avoid further significant legal costs. Due to the potential significance of
these uncertainties, the Company believes that no meaningful range of loss and
loss expense liabilities beyond recorded reserves can be established. As the
Companys net unpaid loss and loss expense reserves related to asbestos and
environmental exposures are less than 1% of the total net reserves at December
31, 2011 and 2010, further adverse development is not expected to be material
to the Companys overall net loss reserves. The Company believes it has made
reasonable provision for its asbestos and environmental exposures and is
unaware of any specific issues that would significantly affect its estimate for
loss and loss expenses.
176
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
11. Deposit Liabilities
The
Company has entered into certain insurance and reinsurance policies that
transfer insufficient risk under GAAP to be accounted for as insurance or
reinsurance transactions and are recognized as deposits. These structured
property and casualty agreements have been recorded as deposit liabilities and
are initially matched by an equivalent amount of investments. The Company has
investment risk related to its ability to generate sufficient investment income
to enable the total invested assets to cover the payment of the ultimate
liability. See Note 5, Investments, for further information relating to the
Companys net investment income as well as realized and unrealized investment
(losses) gains. Each deposit liability accrues at a rate equal to the internal
rate of return of the payment receipts and obligations due during the life of
the agreement. Where the timing and/or amount of future payments are uncertain,
cash flows reflecting the Companys actuarially determined best estimates are
utilized. Deposit liabilities are initially recorded at an amount equal to the
assets received.
Total
deposit liabilities for the years ended December 31, 2011 and 2010 were $1.6
billion and $1.7 billion, respectively. Interest expense of $51.3 million,
$54.4 million and $36.2 million was recorded related to the accretion of
deposit liabilities for the years ended December 31, 2011, 2010 and 2009,
respectively.
12. Future Policy Benefit Reserves
The
Company enters into long duration contracts that subject the Company to
mortality and morbidity risks and which were accounted for as life premiums
earned. Future policy benefit reserves were established using appropriate
assumptions for investment yields, mortality, and expenses, including a
provision for adverse deviation. The average interest rate used for the
determination of the future policy benefits for these contracts was 4.5% at
December 31, 2011 and 2010. Total future policy benefit reserves for the year
ended December 31, 2011 and 2010 were $4.8 billion and $5.1 billion,
respectively. The decrease of $232.6 million in the Annuities is mainly due to
foreign exchange movements and the usual releases on single premium annuities
in line with benefits paid and mortality of underlying policyholders.
Future
policy benefit reserves are comprised of the following:
|
|
|
|
|
|
|
|
Year ended
December 31
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Traditional Life
|
|
$
|
812,628
|
|
$
|
809,776
|
|
Annuities
|
|
|
4,032,766
|
|
|
4,265,351
|
|
|
|
|
|
|
|
|
|
Total
future policy benefit reserves
|
|
$
|
4,845,394
|
|
$
|
5,075,127
|
|
|
|
|
|
|
|
|
|
177
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
13. Notes Payable and Debt and Financing
Arrangements
At
December 31, the Companys financing structure, which includes senior unsecured
notes, bank and loan facilities available from a variety of sources, including
commercial banks, and letter of credit facilities was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Commitment/
Debt
|
|
In Use/
Outstanding (1)
|
|
Commitment/
Debt
|
|
In Use/
Outstanding (1)
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5-year revolver expiring 2012 (2)
|
|
$
|
|
|
$
|
|
|
$
|
1,000,000
|
|
$
|
|
|
4-year revolver expiring 2015 (3)
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
6.50% Guaranteed Senior Notes due 2012 (4)
|
|
|
600,000
|
|
|
599,971
|
|
|
600,000
|
|
|
599,294
|
|
5.25% Senior Notes due 2014
|
|
|
600,000
|
|
|
597,501
|
|
|
600,000
|
|
|
596,579
|
|
5.75% Senior Notes due 2021
|
|
|
400,000
|
|
|
395,963
|
|
|
|
|
|
|
|
8.25% Senior Notes due 2021
|
|
|
|
|
|
|
|
|
575,000
|
|
|
572,538
|
|
6.375% Senior Notes due 2024
|
|
|
350,000
|
|
|
348,592
|
|
|
350,000
|
|
|
348,482
|
|
6.25% Senior Notes due 2027
|
|
|
325,000
|
|
|
322,591
|
|
|
325,000
|
|
|
322,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
3,275,000
|
|
$
|
2,264,618
|
|
$
|
3,450,000
|
|
$
|
2,439,328
|
|
Adjustment to carrying value impact of fair value hedge
|
|
|
|
|
|
10,709
|
|
|
|
|
|
17,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
$
|
3,275,000
|
|
$
|
2,275,327
|
|
$
|
3,450,000
|
|
$
|
2,457,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 facilities total
|
|
$
|
4,000,000
|
|
$
|
1,871,192
|
|
$
|
5,000,114
|
|
$
|
2,395,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In Use and Outstanding
data represent December 31, 2011 and 2010 accreted values.
|
(2)
|
The 2012 5-year revolving
credit facilities shared a $1 billion revolving credit sub-limit. This
facility was terminated in December 2011 in connection with entering into new
credit facilities.
|
(3)
|
This credit facility has a
$1 billion revolving credit sub-limit.
|
(4)
|
The 6.50% Guaranteed Senior
Notes were repaid at maturity on January 15, 2012.
|
(a) Notes Payable and Debt
All
outstanding debt of the Company, noted in the table above, at December 31, 2011
and 2010 was issued by 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-Ireland. The XLCFE Notes were fully and unconditionally guaranteed by XL Company
Switzerland GmbH (XL-Switzerland). The Companys 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 and $6.5 billion at December 31, 2011 and 2010,
respectively.
Concurrent
with the issuance of ordinary shares and pursuant to the Companys shelf
registration statement, the Company, in August 2008, issued 23.0 million
10.75% Equity Security Units (the 10.75% Units)
in a public offering in order to fund payments in relation to the Master Commutation
Release and Restructuring Agreement, dated July 28, 2008, as amended among
XL Insurance (Bermuda) Ltd (XLIB) and affiliates
Syncora Holdings Ltd. and its affiliates (Syncora) and certain of
Syncoras credit default
swap counterparties (the Master Agreement) and remaining net proceeds
were used for general corporate purposes. The Company received approximately
$557.0 million in net proceeds from the sale of the 10.75% Units after deducting
underwriting discounts. Each 10.75% Unit had a stated amount of $25 and consisted
of (a) a purchase contract pursuant to which the holder agreed to purchase, for
$25, a variable number of shares of the Companys
Ordinary Shares on August 15, 2011 and (b) a one-fortieth, or 2.5%, ownership
interest in a senior note issued by the Company due August 15, 2021 with a
principal amount of $1,000. The senior notes were pledged by the holders to
secure their obligations under the purchase contract.
178
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
13. Notes Payable and Debt and Financing
Arrangements (Continued)
(a) Notes Payable and Debt (Continued)
The
number of shares issued under the purchase contract was contingently adjustable
based on, among other things, the share price of the Company on the stock
purchase date and the dividend rate of the Company. The Company made quarterly
payments at the annual rate of 2.50% and 8.25% under the purchase contracts and
senior notes, respectively. For all periods reported, the Company had the right
to defer the contract payments on the purchase contract, but not the senior
notes, until the stock purchase date. In August 2011, the senior notes were
remarketed whereby the interest rate on the senior notes was to be reset in
order to generate sufficient remarketing proceeds to satisfy the 10.75% Unit
holders obligations under the purchase contracts.
In
connection with this transaction, $37.9 million, which is the estimated fair
value of the purchase contract, was charged to Additional paid in capital and
a corresponding liability was established. Of the $18.0 million total accrued
costs associated with the issuance of the 10.75% Units, $14.7 million was
charged to Additional paid in capital with the remainder deferred and
amortized over the term of the senior debt.
In
August 2011, in accordance with the terms of the 10.75% Units, XL-Cayman
purchased and retired all of the 8.25% senior notes due August 2021 (the 8.25%
Senior Notes) for $575 million in a remarketing. These notes comprised a part
of the 10.75% Units. The proceeds from the remarketing were used to satisfy the
purchase price for XL-Irelands ordinary shares issued to holders of the 10.75%
Units pursuant to the forward purchase contracts comprising a part of the
10.75% Units. Each forward purchase contract provided for the issuance of
1.3242 ordinary shares of XL-Ireland at a price of $25 per share. The
settlement of the forward purchase contracts resulted in XL-Irelands issuance
of an aggregate of 30,456,600 ordinary shares for an aggregate purchase price
of $575 million. As a result of the settlement of the forward purchase
contracts, the 10.75% Units ceased to exist and are no longer traded on the
NYSE.
On
September 30, 2011, XL-Cayman issued $400 million aggregate principal amount
of 5.75% Senior Notes due 2021 at the issue price of 100% of the principal
amount. The 5.75% Senior Notes are fully and unconditionally guaranteed by
XL-Ireland. The 5.75% Senior Notes bear interest at a rate of 5.75% per annum,
payable semiannually, beginning on April 1, 2012, and mature on October 1,
2021. XL-Cayman may redeem the 5.75% Senior Notes, in whole or part, from
time to time in accordance with the terms of the indenture pursuant to which
the 5.75% Senior Notes were issued. XL-Cayman received net proceeds of approximately
$395.9 million from the offering, which were used to partially repay the
$600 million principal amount outstanding of the XLCFE Notes.
(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 Lloyds. The Companys letter of credit
facilities and revolving credit facilities at December 31, were as follows:
|
|
|
|
|
|
|
|
Year ended
December 31
(U.S. dollars thousands except
percentages)
|
|
2011 (1)
|
|
2010 (2)
|
|
|
|
|
|
|
|
Revolving credit
facilities (3)
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
Available letter of credit
facilities commitment (4)
|
|
$
|
4,000,000
|
|
$
|
5,000,114
|
|
Available letter of credit
facilities in use
|
|
$
|
1,871,192
|
|
$
|
2,395,242
|
|
Collateralized by certain
of the Companys investment portfolio
|
|
|
93.8
|
%
|
|
21.1
|
%
|
|
|
|
|
|
(1)
|
At December 31, 2011 there
were five available letter of credit facilities.
|
(2)
|
At December 31, 2010 there
were five available letter of credit facilities.
|
(3)
|
At December 31, 2011 and
2010 the revolving credit facilities were unutilized.
|
(4)
|
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.
|
179
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
13. Notes Payable and Debt and Financing
Arrangements (Continued)
(b) Letter of Credit Facilities and Other
Sources of Collateral (Continued)
In
2011, the Company and certain of its subsidiaries (i) entered into three new
credit agreements, which are described below and provide for an aggregate
amount of outstanding letters of credit and revolving credit loans up to $3 billion,
subject to certain options to increase the size of the facilities, and (ii)
terminated the five-year credit agreement dated June 21, 2007 (the 2007 Credit
Agreement), which had provided for an aggregate amount of outstanding letters
of credit and revolving credit loans up to $4 billion.
On
March 25, 2011, the Company and certain of its subsidiaries entered into a
secured credit agreement (the March 2011 Credit Agreement) that currently
provides for the issuance of letters of credit of up to $1 billion with the
option to increase the size of the facility by an additional $500 million. The
commitments under the 2011 Credit Agreement will expire on, and the credit
facility is available on a continuous basis until, the earlier of (i) March 25,
2014 and (ii) the date of termination in whole of the commitments upon an
optional termination or reduction of the commitments by the account parties or
upon an event of default.
In
October 2011, the $75,000 letter of credit facility that was supporting a
subsidiary of the Company was terminated.
On
December 9, 2011, the Company and certain of its subsidiaries entered into (i)
a new secured credit agreement (the December 2011 Secured Credit Agreement)
and (ii) a new unsecured credit agreement (the December 2011 Unsecured Credit
Agreement and together with the December 2011 Secured Credit Agreement, the
December 2011 Credit Agreements). In connection with the December 2011 Credit
Agreements, the 2007 Credit Agreement was terminated. The March 2011 Credit
Agreement continues in force, but was amended to conform certain of its terms
to those of the December 2011 Secured Credit Agreement.
The
2007 Credit Agreement had provided for letters of credit and for revolving
credit loans of up to $750 million with the aggregate amount of outstanding
letters of credit and revolving credit loans thereunder not to exceed $3
billion. At the time at which it was terminated and the December 2011 Credit
Agreements became effective, there were no outstanding revolving credit loans
under the 2007 Credit Agreement. A portion of the letters of credit outstanding
under the 2007 Credit Agreement at the time of its termination were continued
under the March 2011 Credit Agreement and the remainder were continued under
the December 2011 Credit Agreements.
The
December 2011 Secured Credit Agreement provides for issuance of letters of
credit up to $650 million. The December 2011 Unsecured Credit Agreement is a
$1.35 billion facility that provides for issuance of letters of credit and up
to $1 billion of revolving credit loans. The Company has the option to increase
the maximum amount of letters of credit available by an additional $500 million
across the facilities under the December 2011 Credit Agreements.
The
commitments under each December 2011 Credit Agreement expire on, and such
credit facilities are available until, the earlier of (i) December 9, 2015 and
(ii) the date of termination in whole of the commitments upon an optional
termination or reduction of the commitments by the account parties or upon an
event of default.
The
availability of letters of credit under the December 2011 Secured Credit
Agreement and the March 2011 Credit Agreements is subject to a borrowing base
requirement, determined on the basis of specified percentages of the face value
of eligible categories of assets varying by type of collateral.
On
August 3, 2010, a $100 million five-year revolving credit facility expired and
was not replaced, and on June 22, 2010, a $2.3 billion five-year letter of
credit facility expired and was not replaced.
On
December 14, 2009, the £450 million letter of credit facility issued on
November 14, 2007 that was supporting the Companys syndicates at Lloyds of
London terminated. This facility was replaced by a $750 million bilateral
secured letter of credit facility.
180
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
13. Notes Payable and Debt and Financing
Arrangements (Continued)
(b) Letter of Credit Facilities and Other
Sources of Collateral (Continued)
In
addition to letters of credit, the Company has established insurance trusts in
the U.S. that provide cedants with statutory relief required under state
insurance regulation in the U.S. It is anticipated that the commercial
facilities may be renewed on expiry but such renewals are subject to the
availability of credit from banks utilized by the Company and may be renewed
with materially different terms and conditions. In the event that such credit
support is insufficient, the Company could be required to provide alternative
security to cedants. This could take the form of additional insurance trusts
supported by the Companys investment portfolio or funds withheld using the
Companys cash resources. The value of letters of credit required is driven by,
among other things, loss development of existing reserves, the payment pattern
of such reserves, the expansion of business written by the Company and the loss
experience of such business.
In
general, all of the Companys bank facilities, indentures and other documents
relating to the Companys outstanding indebtedness (collectively, the
Companys Debt Documents), as described above, contain cross default
provisions to each other and the Companys Debt Documents contain affirmative
covenants. These covenants provide for, among other things, minimum required
ratings of the Companys insurance and reinsurance operating subsidiaries and
the level of secured indebtedness in the future. In addition, generally each of
the Companys Debt Documents provide for an event of default in the event of a
change of control of the Company or some events involving bankruptcy,
insolvency or reorganization of the Company. The Companys credit facilities
also contain minimum consolidated net worth covenants.
Under
the March 2011 Credit Agreement and December 2011 Credit Agreements, in the
event that XL Insurance (Bermuda) Ltd, XL Re Ltd or XL Re Europe Ltd fail to
maintain a financial strength rating of at least A from A.M. Best, an event
of default would occur.
Given
that all of the Companys Debt Documents contain cross default provisions, this
may result in all holders declaring such debt due and payable and an
acceleration of all debt due under those documents. If this were to occur, the
Company may not have funds sufficient at that time to repay any or all of such
indebtedness.
In
addition, the Company maintains off-balance sheet financing arrangements in the
form of a contingent capital facility. For details of this facility, see Note
15, Off-Balance Sheet Arrangements.
181
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. 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. 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 which are designated as hedging
instruments is described in Note 2(h), Significant Accounting Policies
Derivative Instruments. The following table summarizes information on the
location and gross amounts of derivative fair values contained in the
consolidated balance sheet as at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
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 designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (2)
|
|
$
|
156,271
|
|
$
|
109,761
|
|
$
|
|
|
$
|
|
|
$
|
161,028
|
|
$
|
74,368
|
|
$
|
|
|
$
|
|
|
Foreign exchange contracts
|
|
|
2,033,428
|
|
|
25,387
|
|
|
457,892
|
|
|
(4,518
|
)
|
|
1,850,092
|
|
|
43,226
|
|
|
244,731
|
|
|
(12,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
2,189,699
|
|
$
|
135,148
|
|
$
|
457,892
|
|
|
(4,518
|
)
|
$
|
2,011,120
|
|
$
|
117,594
|
|
$
|
244,731
|
|
|
(12,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Related Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure
|
|
$
|
70,978
|
|
$
|
1,946
|
|
$
|
55,033
|
|
$
|
(43
|
)
|
$
|
117,689
|
|
$
|
281
|
|
$
|
41,063
|
|
$
|
|
|
Foreign exchange exposure
|
|
|
232,422
|
|
|
3,759
|
|
|
384,592
|
|
|
(11,737
|
)
|
|
82,395
|
|
|
1,377
|
|
|
272,724
|
|
|
(6,329
|
)
|
Credit exposure
|
|
|
172,500
|
|
|
5,271
|
|
|
449,513
|
|
|
(13,986
|
)
|
|
128,450
|
|
|
8,143
|
|
|
532,000
|
|
|
(5,295
|
)
|
Financial market exposure
|
|
|
19,869
|
|
|
615
|
|
|
14,321
|
|
|
|
|
|
135,912
|
|
|
705
|
|
|
4,575
|
|
|
(27
|
)
|
Commodity futures
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Operations Derivatives:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure
|
|
|
|
|
|
|
|
|
81,678
|
|
|
(10,288
|
)
|
|
|
|
|
|
|
|
246,292
|
|
|
(25,887
|
)
|
Other Non-Investment Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent capital facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
Guaranteed minimum income benefit contract
|
|
|
|
|
|
|
|
|
78,777
|
|
|
(22,490
|
)
|
|
|
|
|
|
|
|
80,025
|
|
|
(21,190
|
)
|
Modified coinsurance funds withheld contract
|
|
|
|
|
|
|
|
|
77,200
|
|
|
|
|
|
|
|
|
|
|
|
72,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging
instruments
|
|
$
|
499,774
|
|
$
|
11,591
|
|
$
|
1,141,114
|
|
$
|
(58,544
|
)
|
$
|
814,446
|
|
$
|
10,506
|
|
$
|
1,249,188
|
|
$
|
(58,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Derivative instruments in
an asset or liability position are included within Other Assets or Other
Liabilities, respectively, in the Balance Sheet.
|
(2)
|
At December 31, 2011 and
December 31, 2010, the Company held net cash collateral related to these
derivative assets of $77.1 million and $23.0 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 16, 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.
182
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. D
ERIVATIVE
I
NSTRUMENTS
(C
ONTINUED
)
(a) Derivative Instruments Designated as Fair
Value Hedges (Continued)
At
December 31, 2011 and 2010, a portion of the Companys 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.
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 years ended December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Items Amount of Gain/(Loss)
Recognized in Income Attributable to Risk
|
|
|
|
|
|
Derivatives
Designated as Fair Value Hedges:
(U.S.
dollars in thousands)
|
|
Gain/(Loss)
Recognized
in Income on
Derivative
|
|
Deposit
Liabilities
|
|
Fixed
Maturity
Investments
|
|
Notes
Payable and
Debt
|
|
Ineffective
Portion of
Hedging
Relationship
Gain/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure
|
|
$
|
25,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange exposure
|
|
|
15,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,815
|
|
$
|
(27,391
|
)
|
$
|
(15,299
|
)
|
$
|
|
|
$
|
(1,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure
|
|
$
|
94,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange exposure
|
|
|
19,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113,924
|
|
$
|
(84,393
|
)
|
$
|
(27,266
|
)
|
$
|
(15,940
|
)
|
$
|
(13,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure
|
|
$
|
(212,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange exposure
|
|
|
7,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(204,689
|
)
|
$
|
201,398
|
|
$
|
1,711
|
|
$
|
1,206
|
|
$
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
183
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. D
ERIVATIVE
I
NSTRUMENTS
(C
ONTINUED
)
(a) Derivative Instruments Designated as Fair
Value Hedges (Continued)
The
periodic coupon settlements resulted in an increase to net investment income of
nil and $2.3 million for years ended December 31, 2011 and 2010, respectively.
The
periodic coupon settlements also resulted in decreases to interest expense of
$10.2 million and $49.8 million for years ended December 31, 2011 and 2010,
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 issues of the Companys
notes payable and debt and also settled three interest rate contracts
designated as fair value hedges of certain of the Companys 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 term of the debt and deposit liability contracts,
respectively. A summary of the fair value hedges that were settled in 2010 and
their results during the years ended December 31, 2011 and 2010, including the
gains on settlements is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of
Fair Values Hedges Summary:
|
|
|
|
|
|
|
|
Fair Value Hedges Notes Payable and Debt (1)
|
|
Fair Value Hedges Deposit Liabilities (2)
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands except years)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlements of
fair value hedges
|
|
$
|
|
|
$
|
21,624
|
|
$
|
|
|
$
|
149,485
|
|
Cumulative reduction to
interest expense
|
|
$
|
10,915
|
|
$
|
3,948
|
|
$
|
9,376
|
|
$
|
1,915
|
|
Remaining balance
|
|
$
|
10,709
|
|
$
|
17,675
|
|
|
140,109
|
|
|
147,570
|
|
Weighted average years
remaining to maturity
|
|
|
2.5
years
|
|
|
3.2
years
|
|
|
30.7
years
|
|
|
36.3
years
|
|
|
|
|
|
|
(1)
|
Two fair
value hedges of certain issues of the Companys notes payable and debt were
settled on June 7, 2010.
|
(2)
|
Three fair value hedges of
certain of the Companys deposit liability contracts were settled on October
27, 2010.
|
(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 2011 and 2010, the Company
entered into foreign exchange contracts that were formally designated as hedges
of the investment in foreign subsidiaries with the majority of which have
functional currencies of either U.K. sterling or the Euro. There was no
ineffectiveness resulting from these transactions.
The
following table provides the weighted average U.S. dollar equivalent of foreign
denominated net assets which were hedged and the resultant gain (loss) which
was recorded in the cumulative translation adjustment account within AOCI for
the years ended December 31, 2011 and 2010.
|
|
|
|
|
|
|
|
Year ended
December 31
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Weighted average of U.S.
dollar equivalent of foreign denominated net assets
|
|
$
|
1,733,555
|
|
$
|
833,491
|
|
Derivative gains (losses)
(1)
|
|
$
|
36,836
|
|
$
|
(16,526
|
)
|
|
|
|
|
|
(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.
|
184
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. D
ERIVATIVE
I
NSTRUMENTS
(C
ONTINUED
)
(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. The impacts are all recorded through Net realized and
unrealized gains (losses) on derivatives in the income statement for years ended
December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Derivatives not
designated as hedging instruments:
|
|
|
|
|
|
|
|
Year Ended
December 31
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Related Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest rate exposure
|
|
$
|
(1,021
|
)
|
$
|
3,511
|
|
$
|
9,124
|
|
Foreign exchange exposure
|
|
|
(302
|
)
|
|
(15,642
|
)
|
|
9,387
|
|
Credit exposure
|
|
|
(16,527
|
)
|
|
(6,315
|
)
|
|
(51,579
|
)
|
Financial market exposure
|
|
|
(4,827
|
)
|
|
2,125
|
|
|
3,359
|
|
Commodity exposure
|
|
|
(304
|
)
|
|
|
|
|
|
|
Financial Operations Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Credit exposure
|
|
|
16,976
|
|
|
(7,281
|
)
|
|
(2,667
|
)
|
Other Non-Investment Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Contingent capital facility
|
|
|
(6,068
|
)
|
|
(8,233
|
)
|
|
(8,132
|
)
|
Guaranteed minimum income benefit contract
|
|
|
(1,300
|
)
|
|
1,719
|
|
|
4,644
|
|
Modified coinsurance funds withheld contract
|
|
|
4,510
|
|
|
9,948
|
|
|
(388
|
)
|
Weather and Energy Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Structured weather risk management products
|
|
|
|
|
|
|
|
|
2,979
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
(8,863
|
)
|
|
(20,168
|
)
|
|
(33,273
|
)
|
Amount of gain (loss) recognized in income from ineffective portion
of fair value hedges
|
|
|
(1,875
|
)
|
|
(13,675
|
)
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses) on derivative instruments
|
|
$
|
(10,738
|
)
|
$
|
33,843
|
|
$
|
(33,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
Companys objectives in using these derivatives are explained below.
(c)(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 certain
of its assets and liabilities primarily in relation 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 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.
185
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. D
ERIVATIVE
I
NSTRUMENTS
(C
ONTINUED
)
(c)(i) Investment Related Derivatives
(Continued)
In
addition, certain of the Companys investment managers may, subject to
investment guidelines, enter into forward contracts where potential gains may
exist. The Company has exposure to foreign currency exchange rate fluctuations
through its operations and in its investment portfolio.
Investment
Related Derivatives Credit Exposure
Credit
derivatives are purchased within the Companys 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 Companys 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. The
Company previously wrote a number of resettable strike swaps contracts relating
to an absolute return index and diversified basket of funds. These resettable
strike swaps have all expired at December 31, 2011. 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.
(c)(ii) Financial Operations Derivatives
Credit Exposure
At
December 31, 2011 and 2010, the Company held two credit derivative exposures
which were written as part of the Companys previous financial lines business
and are outside of the Companys investment portfolio. These two contracts
consisted of: one that provides credit protection on the senior tranches of a
structured finance transaction, and the other, a European project finance loan
participation. An aggregate summary of these credit derivative exposures for
the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
Financial
Operations Derivatives Credit Exposure Summary:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S. dollars in thousands except term to maturity)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Principal outstanding
|
|
$
|
78,425
|
|
$
|
226,429
|
|
Interest outstanding
|
|
|
3,253
|
|
|
19,863
|
|
|
|
|
|
|
|
|
|
Aggregate outstanding
exposure
|
|
$
|
81,678
|
|
$
|
246,292
|
|
|
|
|
|
|
|
|
|
Total liability recorded
|
|
$
|
10,288
|
|
$
|
25,887
|
|
Weighted average
contractual term to maturity
|
|
|
4.6
years
|
|
|
5.3
years
|
|
Underlying obligations
average credit rating
|
|
|
BB
|
|
|
B-
|
|
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 tests. As a result, both interest and principal proceeds
are currently redirected to amortize the most senior notes, which reduces the
Companys exposure sooner than originally anticipated. As a result, in 2011 the
Companys exposure to this transaction reduced by $147.8 million. Management
continues to monitor its underlying performance. The European project finance
loan participation benefits from an 80% deficiency guarantee from the German
state and federal governments.
At
December 31, 2011 and 2010, 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.
186
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
14. D
ERIVATIVE
I
NSTRUMENTS
(C
ONTINUED
)
(c)(iii) Other Non-Investment Derivatives
The
Company entered into derivatives as part of its contingent capital facility,
which was terminated during 2011 as discussed in Note 15, Off-Balance Sheet
Arrangements, including put options, interest rate swaps, and asset return
swaps. These derivatives are recorded at fair value with changes in fair value
recognized in earnings.
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 GMIB over the account balance upon the policyholders 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 instrument.
(d) 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 December 31, 2011
or 2010 was as follows:
|
|
|
|
|
|
|
|
Contingent
Credit Features Summary:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S. dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Aggregate fair value of
derivative agreements with downgrade provisions in a net liability position
|
|
$
|
15,763
|
|
$
|
25,887
|
|
Collateral posted to
counterparty
|
|
$
|
809
|
|
$
|
|
|
15. O
FF
-B
ALANCE
S
HEET
A
RRANGEMENTS
On
December 5, 2006, the Company and certain operating subsidiaries (Ceding
Insurers) entered into a securities issuance agreement (the Securities
Issuance Agreement), and certain of the Companys foreign insurance
and reinsurance subsidiaries (Ceding Insurers) entered into an excess
of loss reinsurance agreement (the Reinsurance Agreement), with Stoneheath
Re (Stoneheath). The net effect of these agreements to the Company was the
creation of a contingent put option to issue $350.0 million of preference ordinary
shares in the aggregate of XL-Cayman. The agreements provided the Company with
a Reinsurance Collateral Account in support of certain covered perils named in
the Reinsurance Agreement. The covered perils included United States wind, European
wind, California earthquake and terrorism worldwide. After an initial three-month
period, the covered perils as well as the attachment points and aggregate
retention amounts could be changed by the Ceding Insurers in their sole
discretion, which could have resulted in a material increase or decrease in the
likelihood of payment under the Reinsurance Agreement. On each date on which
a Ceding Insurer withdrew funds from the Reinsurance Collateral Account, the
Company would have been required to issue and deliver to Stoneheath an amount
of Series D Preference Ordinary Shares having an aggregate liquidation
preference that is equal to the amount of funds so withdrawn from the
Collateral Account. The Company was obligated to reimburse Stoneheath for
certain fees and ordinary expenses. The initial term of the Reinsurance Agreement
was for the period from the December 5, 2006 through June 30, 2007, with four
annual mandatory extensions through June 30, 2011 (unless coverage is exhausted
thereunder prior to such date). At the Ceding Insurers option, the Reinsurance
Agreement was extended to December 31, 2011.
On
October 15, 2011, the Company announced that the Stoneheath facility would be
terminated and, as a result, XL-Cayman would issue Series D Preference Ordinary
Shares. Under the terms of the Securities Issuance Agreement, XL-Cayman was
required upon the occurrence of certain conditions to issue and deliver to
Stoneheath for distribution to the holders of the
non-cumulative perpetual preferred securities of Stoneheath (the Stoneheath
Securities),
Series D Preference Ordinary Shares having an aggregate liquidation preference
equal to the remaining assets in the Reinsurance Collateral Account in exchange
for a distribution of such assets from the Reinsurance Collateral Account to
XL-Cayman. One such condition, the termination of an asset swap agreement
covering the assets held under the Reinsurance Collateral Account, occurred in
accordance with the terms of the swap agreement because Stoneheath did not seek
to extend or replace it prior to its termination date. As a result, on November
16, 2011, Stoneheath redeemed the Stoneheath Securities and distributed the
Series D Preference Ordinary Shares it received from XL-Cayman in exchange for
the $350 million in assets from the Reinsurance Collateral Account.
187
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
16. V
ARIABLE
I
NTEREST
E
NTITIES
At
times, the Company has utilized VIEs both indirectly and directly in the
ordinary course of the Companys business.
The
Company invests in CDOs, and other investment vehicles that are issued through
variable interest entities as part of the Companys investment portfolio. The
activities of these VIEs are generally limited to holding the underlying
collateral used to service investments therein. Our involvement in these
entities is passive in nature and we are not the arranger of these entities.
The Company has not been involved in establishing these entities. The Company
is not the primary beneficiary of these variable interest entities 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 variable interest entities. The Company is not the primary beneficiary
of these variable interest entities 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 entitys economic
performance. For further details on the nature of the obligations
and the size of the Companys maximum exposure, see Note 14, Derivative
Instruments, and Note 17(h), Commitments and Contingencies Financial
and Other Guarantee Exposures.
17. C
OMMITMENTS AND
C
ONTINGENCIES
(a) Concentrations of Credit Risk
The
creditworthiness of any counterparty is evaluated by the Company, taking into
account credit ratings assigned by rating agencies. The credit approval process
involves an assessment of factors including, among others, the counterparty and
country and industry credit exposure limits. Collateral may be required, at the
discretion of the Company, on certain transactions based on the
creditworthiness of the counterparty.
The
areas where significant concentrations of credit risk may exist include unpaid
losses and loss expenses recoverable and reinsurance balances receivable
(collectively, reinsurance assets) and in the investment fixed income portfolio.
Reinsurance
Assets
The
Companys reinsurance assets resulted from reinsurance arrangements in the
course of its operations. A credit exposure exists with respect to reinsurance
assets as they may be uncollectible. The Company manages its credit risk in its
reinsurance relationships by transacting with reinsurers that it considers
financially sound, and if necessary, the Company may hold collateral in the
form of funds, trust accounts and/or irrevocable letters of credit. This
collateral can be drawn on for amounts that remain unpaid beyond specified time
periods on an individual reinsurer basis. For further details regarding the Companys reinsurance assets, see,
Note 9, Reinsurance.
Fixed
Income Portfolio
The
Company did not have an aggregate direct investment in any single corporate
issuer in excess of 5% of shareholders equity at December 31, 2011 or December
31, 2010. Corporate issuers represent only direct exposure to fixed maturities
and short-term investments of the parent issuer and its subsidiaries. These
exposures exclude asset and mortgage back securities that were issued,
sponsored or serviced by the parent and government-guaranteed issues, but does
include covered bonds.
188
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
17. C
OMMITMENTS AND
C
ONTINGENCIES
(C
ONTINUED
)
(a) Concentrations of Credit Risk (Continued)
Broker
credit risk
In
addition, the Company underwrites a significant amount of its insurance and
reinsurance property and casualty business through brokers and a credit risk
exists should any of these brokers be unable to fulfill their contractual
obligations with respect to the payments of insurance and reinsurance balances
to the Company. During the three years ended December 31, 2011, 2010 and 2009,
P&C gross written premiums generated from or placed by the below companies
individually accounted for more than 10% of the Companys consolidated gross
written premiums from P&C operations, as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
(Percentage of consolidated gross
written premiums from P&C operations)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
AON Corporation and
subsidiaries
|
|
|
20
|
%
|
|
21
|
%
|
|
20
|
%
|
Marsh & McLennan
Companies
|
|
|
20
|
%
|
|
21
|
%
|
|
18
|
%
|
Willis Group and
subsidiaries
|
|
|
12
|
%
|
|
11
|
%
|
|
9
|
%
|
These
companies are large, well established companies and there are no indications
that any of them are financially troubled. No other broker and no one insured
or reinsured accounted for more than 10% of gross premiums written from P&C
operations in any of the three years ended December 31, 2011, 2010, or 2009.
(b) Other Investments
The
Company has committed to invest in several limited partnerships and provide
liquidity financing to a structured investment vehicle. At December 31, 2011,
the Company has commitments, which include potential additional add-on clauses
to fund further $100.6 million over approximately the next nine years.
(c) Investments in Affiliates
The
Company owns a minority interest in certain closed-end funds, certain limited
partnerships and similar investment vehicles, including funds managed by those
companies. The Company has commitments, which include potential additional add-on
clauses, to invest a further $34.6 million over approximately the next five
years.
(d) Properties
The
Company rents space for certain of its offices under leases that expire up to
2031. Total rent expense under operating leases for the years ended December
31, 2011, 2010 and 2009 was approximately $32.9 million, $31.8 million and
$34.4 million, respectively. Future minimum rental commitments under existing
operating leases are expected to be as follows:
|
|
|
|
|
Year Ended
December 31,
(U.S. dollars in thousands)
|
|
|
|
|
2012
|
|
$
|
34,867
|
|
2013
|
|
|
32,012
|
|
2014
|
|
|
24,865
|
|
2015
|
|
|
17,409
|
|
2016
|
|
|
16,004
|
|
2017-2031
|
|
|
55,779
|
|
|
|
|
|
|
Total
minimum future rentals
|
|
$
|
180,936
|
|
|
|
|
|
|
189
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
17. C
OMMITMENTS AND
C
ONTINGENCIES
(C
ONTINUED
)
(d) Properties (Continued)
During
2003, the Company entered into a purchase, sale and leaseback transaction to
acquire new office space in London. The Company has recognized a capital lease
asset of $100.7 million and $107.4 million, and deferred a gain of $30.6
million and $32.6 million related to this lease at December 31, 2011 and 2010,
respectively. The gain is being amortized to income in line with the amortization
of the asset. The future minimum lease payments in the aggregate are expected
to be $224.6 million and annually for the next five years are as follows:
|
|
|
|
|
Year Ended
December 31,
(U.S. dollars in thousands)
|
|
|
|
|
2012
|
|
$
|
11,169
|
|
2013
|
|
|
11,448
|
|
2014
|
|
|
11,734
|
|
2015
|
|
|
12,028
|
|
2016
|
|
|
12,328
|
|
2017-2028
|
|
|
165,937
|
|
|
|
|
|
|
Total future minimum lease
payments
|
|
$
|
224,644
|
|
|
|
|
|
|
(e) Tax Matters
The
Company is an Irish corporation and, except as described below, neither it nor
its non-U.S. subsidiaries have paid U.S. corporate income taxes (other than
withholding taxes on dividend income) on the basis that they are not engaged in
a trade or business or otherwise subject to taxation in the U.S. However,
because definitive identification of activities which constitute being engaged
in a trade or business in the U.S. is not provided by the Internal Revenue Code
of 1986, regulations or court decisions, there can be no assurance that the
Internal Revenue Service will not contend that the Company or its non-U.S.
subsidiaries are engaged in a trade or business or otherwise subject to
taxation in the U.S. If the Company or its non-U.S. subsidiaries were
considered to be engaged in a trade or business in the U.S. (and, if the
Company or such subsidiaries were to qualify for the benefits under the income
tax treaty between the U.S. and Bermuda and other countries in which the
Company operates, such businesses were attributable to a permanent
establishment in the U.S.), the Company or such subsidiaries could be subject
to U.S. tax at regular tax rates on its taxable income that is effectively
connected with its U.S. trade or business plus an additional 30% branch
profits tax on such income remaining after the regular tax, in which case
there could be a significant adverse effect on the Companys results of
operations and financial condition.
(f) Letters of Credit
At
December 31, 2011 and 2010, $1.9 billion and $2.4 billion of letters of credit
were outstanding, of which 93.8% and 21.1%, respectively, were collateralized
by the Companys investment portfolios, primarily supporting U.S. non-admitted
business and the Companys Lloyds syndicates capital requirements.
(g) Claims and Other Litigation
The
Company and its subsidiaries are subject to litigation and arbitration in the
normal course of its business. These lawsuits and arbitrations principally
involve claims on policies of insurance and contracts of reinsurance and are
typical for the Company and for the property and casualty insurance and
reinsurance industry in general. Such legal proceedings are considered in
connection with the Companys loss and loss expense reserves. Reserves in
varying amounts may or may not be established in respect of particular claims
proceedings based on many factors, including the legal merits thereof. In
addition to litigation relating to insurance and reinsurance claims, the
Company and its subsidiaries are subject to lawsuits and regulatory actions in
the normal course of business that do not arise from or directly relate to
claims on insurance or reinsurance policies. This category of business
litigation typically involves, among other things, allegations of underwriting
errors or misconduct, employment claims, regulatory activity, shareholder disputes
or disputes arising from business ventures. The status of these legal actions
is actively monitored by management.
190
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
17. C
OMMITMENTS AND
C
ONTINGENCIES
(C
ONTINUED
)
(g) Claims and
Other Litigation (Continued)
Legal
actions are subject to inherent uncertainties, and future events could change
managements assessment of the probability or estimated amount of potential losses
from pending or threatened legal actions. Based on available information, it is
the opinion of management that the ultimate resolution of pending or threatened
legal actions, both individually and in the aggregate, will not result in
losses having a material effect on the Companys financial position or
liquidity at December 31, 2011.
If
management believes that, based on available information, it is at least
reasonably possible that a material loss (or additional material loss in excess
of any accrual) will be incurred in connection with any legal actions or claims,
the Company discloses an estimate of the possible loss or range of loss,
either individually or in the aggregate, as appropriate, if such an estimate
can be made, or discloses that an estimate cannot be made. Based on the Companys
assessment as at December 31, 2011, no such disclosures are considered necessary.
(h) Financial and Other Guarantee Exposures
|
|
|
|
|
|
|
|
Financial and
Other Guarantee Exposures Summary:
|
|
|
|
|
|
|
|
Year ended
December 31,
(U.S. dollars in thousands except number of contracts and
term to maturity)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Number of financial guarantee contracts at January 1
|
|
|
37
|
|
|
41
|
|
Number of financial guarantee contracts matured, prepaid or commuted
during the year
|
|
|
(33
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Number of financial guarantee contracts at December 31
|
|
|
4
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
$
|
115,464
|
|
$
|
198,696
|
|
Interest outstanding
|
|
|
|
|
|
6,119
|
|
|
|
|
|
|
|
|
|
Aggregate outstanding exposure
|
|
$
|
115,464
|
|
$
|
204,814
|
|
|
|
|
|
|
|
|
|
Total gross claim liability recorded
|
|
$
|
1,399
|
|
$
|
23,470
|
|
Total unearned premiums and fees recorded
|
|
$
|
425
|
|
$
|
571
|
|
Weighted average contractual term to maturity
|
|
|
26.7
years
|
|
|
13.2
years
|
|
Financial
Guarantee Exposures
As
part of the Companys legacy financial guarantee business, during January 2011,
the Company commuted 32 of the 37 financial guarantee transactions that were
outstanding at December 31, 2010, including three non-performing transactions.
This commutation eliminated $41.9 million of notional financial guarantee
exposure (including principal and interest) for a payment of $22.1 million. The
$22.1 million was included in the gross claim liability at December 31, 2010.
In addition, during the fourth quarter of 2011, one guarantee was terminated
upon prepayment of the underlying notes.
The
Companys outstanding financial guarantee contracts at December 31, 2011
provide credit support for a variety of collateral types with the exposures
comprised of (i) $108.3 million notional financial guarantee on three notes
backed by zero coupon bonds and bank perpetual securities, including some
issued by European financials; and (ii) $7.2 million notional financial
guarantee relating to future scheduled repayments on a government-subsidized
housing project. At December 31, 2011, there were no reported events of default
on these obligations.
During
2010, in addition to the exposures discussed above, the Company also provided
credit support for $386.5 million of notional financial guarantee exposure
(including principal and interest) on a Chilean toll road structure. This was
eliminated on August 5,
2010, when the issuer decided to prepay the debt. In addition, $47.5 million
notional financial guarantee that was outstanding on a collateralized fund
obligation was eliminated when the fund was wound-up in an orderly manner.
Surveillance
procedures to track and monitor credit deteriorations in the insured financial
obligations are performed by the primary obligors for each transaction on the
Companys behalf. Information regarding the performance status and updated
exposure values is provided to the Company on a quarterly basis and evaluated
by management in recording claims reserves.
191
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
17. C
OMMITMENTS AND
C
ONTINGENCIES
(C
ONTINUED
)
(h) Financial and Other Guarantee Exposures
(Continued)
Other
Guarantee Exposures
On
June 28, 2010, the Companys subsidiary, XLIB,
completed a commutation, termination and release agreement (the Termination
Agreement) with European Investment Bank (EIB) which fully
extinguished and terminated all of the guarantees issued to EIB by XLI in connection
with financial guaranty policies between certain subsidiaries of Syncora Holdings
and EIB.
These guarantees were provided for the benefit of EIB relating to project
finance transactions comprised of transportation, school and hospital projects
with an average rating of BBB, written between 2001 and 2006 with anticipated
maturities ranging between 2027 and 2038. The guarantees had been accounted for
under Accounting Standards Codification (ASC) section 460-10,
Guarantees
(previously
FIN 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.)
Under
the Termination Agreement, XLIB paid $38 million to EIB, and all of XLIBs
exposures under the EIB guarantees, with aggregate par outstanding of
approximately $900 million, were eliminated. In addition, a further $0.5
million was paid to EIB for expenses in relation to the termination. Pursuant
to the obligations of Syncora Holdings and its affiliates (collectively
Syncora) under the Master Agreement, Syncora paid XLIB $15.0 million.
The net cost of this transaction is reflected in the Companys Consolidated
Statement of Income as
Loss on Termination of Guarantee.
192
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital
(a) Authorized and Issued
The
authorized share capital is 999,990,000 ordinary shares of par value $0.01 each,
40,000 ordinary shares of par value 1.00
each, 350,000 Series D preference shares of par value $0.01 each, and 1,000,000
Series E preference ordinary shares of par value $0.01 each. Holders of
ordinary shares are entitled to one vote for each share.
Ordinary Shares
The
following table is a summary of ordinary shares issued and outstanding:
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
(in
thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Balance beginning of year
|
|
|
316,396
|
|
|
342,119
|
|
Exercise of options
|
|
|
72
|
|
|
91
|
|
Net issuance of restricted shares
|
|
|
413
|
|
|
139
|
|
Share buybacks (1)
|
|
|
(31,692
|
)
|
|
(25,953
|
)
|
Issue of shares
|
|
|
30,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of year
|
|
|
315,646
|
|
|
316,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes share buybacks
associated with authorized share buyback programs as well as purchases
related to satisfying tax withholding obligations of employees in connection
with the vesting of restricted shares granted under the Companys restricted
stock plan.
|
Ordinary Share Buybacks
On
September 24, 2007, the Companys Board of Directors approved a share buyback
program, authorizing the Company to purchase up to $500.0 million of its
ordinary shares. As of January 1, 2010, $375.4 million ordinary shares remained
available for purchase under that program. During 2010, the Company purchased
and canceled 18.8 million ordinary shares under the program for $375.4 million,
the full amount that had remained under that buyback program.
On
November 2, 2010, the Company announced that its Board of Directors approved a
share buyback program, authorizing the Company to purchase up to $1.0 billion
of its ordinary shares. During 2010, the Company purchased and canceled 6.9
million ordinary shares under this program for $144.0 million. During 2011, the
Company purchased and canceled 31.7 million ordinary shares under this program
for $665.5 million. All share buybacks were carried out by way of redemption in
accordance with Irish law and the Companys constitutional documents. All
shares so redeemed were canceled upon redemption. At both December 31, 2011 and
February 24, 2012, $190.5 million remained available to be used for purchases
under this program.
193
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital (Continued)
(a) Authorized and Issued (Continued)
Equity Security Units
In
August 2011, in accordance with the terms of the 10.75% equity security units
(the 10.75% Units), XL-Cayman purchased and retired all of the 8.25% senior
notes due August 2021 (the 8.25% Senior Notes) for $575 million in a
remarketing. These notes comprised a part of the 10.75% Units. The proceeds
from the remarketing were used to satisfy the purchase price for XL-Irelands
ordinary shares issued to holders of the 10.75% Units pursuant to the forward
purchase contracts comprising a part of the 10.75% Units. Each forward purchase
contract provided for the issuance of 1.3242 ordinary shares of XL-Ireland at a
price of $25 per share. The settlement of the forward purchase contracts
resulted in XL-Irelands issuance of an aggregate of 30,456,600 ordinary shares
for an aggregate purchase price of $575 million. As a result of the settlement
of the forward purchase contracts, the 10.75% Units ceased to exist and are no
longer traded on the NYSE.
(b) Preferred shares and Non-controlling
Interest in Equity of Consolidated Subsidiaries
Series C Preference Ordinary Shares
On
March 26, 2009, the Company completed a cash tender offer for its outstanding
Redeemable Series C preference ordinary shares that resulted in approximately
12.7 million Series C preference ordinary shares with a liquidation value
of $317.3 million being purchased by the Company for approximately $104.7
million plus accrued and unpaid dividends, combined with professional fees
totaling $0.8 million. As a result, a book value gain to ordinary shareholders
of approximately $211.8 million was recorded in the first quarter of 2009.
On
February 12, 2010, the Company repurchased a portion of its outstanding Redeemable
Series C preference ordinary shares, which resulted in approximately 4.4
million Series C preference ordinary shares with a liquidation value of $110.8
million being purchased by the Company for approximately $94.2 million. As
a result, a book value gain of approximately $16.6 million was recorded in
the first quarter of 2010 to ordinary shareholders.
On
February 16, 2011, the Company repurchased 30,000 of the outstanding Redeemable
Series C preference ordinary shares with a liquidation preference value of
$0.75 million for $0.65 million.
On
August 15, 2011, XL-Cayman completed a cash tender offer for its outstanding
Redeemable Series C preference ordinary shares that resulted in 2,811,000
Redeemable Series C preference ordinary shares with a liquidation value of $25
per share being repurchased and canceled by XL-Cayman for approximately $71.0
million including accrued and unpaid dividends and professional fees.
Subsequent to the expiration of the tender offer, and on the same terms as the
offer, XL-Cayman repurchased and canceled the remaining outstanding Redeemable
Series C preference ordinary shares for approximately $0.9 million plus accrued
and unpaid dividends. As of December 31, 2011, no Redeemable Series C
preference ordinary shares were outstanding.
Series D Preference Ordinary Shares
On
October 15, 2011, XL-Cayman issued $350 million Series D Preference Ordinary
Shares for consideration of cash and liquid investments which were held in a
trust account that was part of the Stoneheath facility.
Holders of the Stoneheath Securities issued by Stoneheath in December 2006
received one Series D Preferred Share in exchange for each Stoneheath Security.
Dividends on the Series D Preference Ordinary Shares are declared and paid
quarterly at a floating rate of three-month LIBOR plus 3.120% on the
liquidation preference. XL-Cayman used the consideration it received as partial
funding for the repayment at maturity of the outstanding $600 million XLCFE
Notes that were issued by XLCFE, with the balance available for general
corporate purposes. For further details regarding Stoneheath, Note 15,
Off-Balance Sheet Arrangements. The Series D Preference Ordinary Shares
represent non-controlling interests in equity of consolidated subsidiaries.
On
December 5, 2011, the Company repurchased and held 5,000 of the outstanding
Series D Preference Ordinary Shares with a liquidation preference value of $5.0
million for $3.7 million, including accrued dividends. As a result of these
repurchases, the Company recorded a gain of approximately $1.3 million through
Non-controlling interests in the Consolidated Statement of Income in the fourth
quarter of 2011.
194
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital (Continued)
(b) Preferred shares and Non-controlling
Interest in Equity of Consolidated Subsidiaries (Continued)
Series E Preference Ordinary Shares
On
March 15, 2007, the Company issued 1.0 million Fixed/Floating Series E
Perpetual Non-Cumulative preference ordinary shares, par value $0.01 each, with
liquidation preference $1,000 per share (the Series E preference ordinary
shares). The Company received net proceeds of approximately $983.8 million
from the offering. The Series E preference ordinary shares are perpetual
securities with no fixed maturity date and are not convertible into any of the
Companys other securities.
On
February 16, 2011, the Company repurchased 500 of the outstanding Series E
preference ordinary shares with a liquidation preference value of $0.50 million
for $0.47 million. As a result of these repurchases, the Company recorded a
reduction in Non-controlling interests of approximately $0.13 million in the
first quarter of 2011.
(c) Stock Plans
The
Companys 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.
In
connection with, and effective upon, the completion of the Redomestication,
XL-Ireland assumed the existing liabilities, obligations and duties of
XL-Cayman under the NAC Re Corp. 1989 Stock Option Plan (the 1989 Plan), the
XL Group plc Amended and Restated 1991 Performance Incentive Program (the 1991
Program), the XL Group plc Amended and Restated 1999 Performance Incentive
Program for Employees (the 1999 Program), the XL Group plc Directors Stock
& Option Plan (the Directors Plan), the XL Group plc 2009 Cash Long-Term
Incentive Program (the 2009 Program), the XL Group plc Supplemental Deferred
Compensation Plan (the DC Plan, and together with the 1989 Plan, 1991
Program, the 1999 Program, the Directors Plan and the 2009 Program, the
Programs). Furthermore, in connection with, and effective upon, the
completion of the Redomestication, the Programs were amended by XL-Cayman,
among other things to, (i) provide that XL-Ireland and its Board of Directors
will succeed to all powers, authorities and obligations of XL-Cayman and its
Board of Directors under each Program, (ii) provide that the securities to be
issued pursuant to each Program will consist of ordinary shares of XL-Ireland
and (iii) otherwise to reflect the completion of the Redomestication.
(d) Options
The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
1.90
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
Risk free interest rate
|
|
|
2.60
|
%
|
|
2.67
|
%
|
|
2.38
|
%
|
Volatility
|
|
|
50.03
|
%
|
|
71.09
|
%
|
|
94.27
|
%
|
Expected lives
|
|
|
6.0 years
|
|
|
6.0
years
|
|
|
6.0
years
|
|
The
risk free interest rate is based on U.S. Treasury rates. The expected lives are
estimated using the historical exercise behavior of grant recipients. The
expected volatility is determined based upon a combination of the historical
volatility of the Companys stock and the implied volatility derived from
publicly traded options.
195
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital (Continued)
(d) Options (Continued)
The
following is a summary of the stock option plans for the three years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(in
thousands except for weighted average fair value)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Options granted to purchase ordinary shares under directors and
employees incentive compensation plans
|
|
|
974
|
|
|
1,023
|
|
|
1,269
|
|
Weighted average grant date fair value
|
|
$
|
9.81
|
|
$
|
9.17
|
|
$
|
2.85
|
|
Total intrinsic value of stock options exercised
|
|
$
|
301
|
|
$
|
667
|
|
$
|
|
|
Options exercised during the year
|
|
|
72
|
|
|
91
|
|
|
|
|
Compensation expense related to stock option plans
|
|
$
|
11,848
|
|
$
|
12,766
|
|
$
|
13,659
|
|
Estimated tax benefit related to stock option plans
|
|
$
|
722
|
|
$
|
2,347
|
|
$
|
3,377
|
|
The
following is a summary of stock options as of December 31, 2011, and related
activity for the year then ended for the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2011
(in
thousands except for option price and term)
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding beginning of
year
|
|
|
13,794
|
|
$
|
50.71
|
|
|
5.1
years
|
|
$
|
30,362
|
|
Granted
|
|
|
974
|
|
|
23.34
|
|
|
|
|
|
|
|
Exercised
|
|
|
(72
|
)
|
|
18.52
|
|
|
|
|
|
|
|
Canceled/Expired
|
|
|
(1,699
|
)
|
|
70.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
12,997
|
|
$
|
46.30
|
|
|
4.9
years
|
|
$
|
20,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
10,933
|
|
$
|
51.54
|
|
|
4.2
years
|
|
$
|
14,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for
grant (1)
|
|
|
22,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Available for grant
includes shares that may be granted as either stock options, restricted
stock, restricted stock units or performance units.
|
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Companys closing stock price on
the last trading day of the 2011 fiscal year and the exercise price, multiplied
by the number of in-the-money-options) that would have been received by the
option holders had all option holders exercised their options on December 31,
2011. Total unrecognized stock based compensation expense related to non-vested
stock options was approximately $9.8 million at December 31, 2011, related to
approximately 2.1 million options, which is expected to be recognized over a
weighted-average period of 1.3 years. The exercise price of the Companys
outstanding options granted is the market price of the Companys ordinary
shares on the grant date, except that during 2004, 295,000 options were granted
with an exercise price of $88.00 when the market price was $77.10.
(e) Restricted Stock, Restricted Stock Units
and Performance Units
Restricted Stock
Restricted
stock awards issued under the 1991 Performance Incentive Program and the
Directors Stock and Option Plan vest as set forth in the applicable award
agreements. Each restricted stock award represents the Companys obligation to
deliver to the holder one ordinary share. The employees and directors who are
granted a restricted stock award shall have all the rights of a shareholder,
including the right to vote and receive dividends. These shares contained
certain restrictions prior to vesting, relating to, among other things,
forfeiture in the event of termination of employment and transferability.
196
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital (Continued)
(e) Restricted Stock, Restricted Stock Units
and Performance Units
Restricted Stock (Continued)
A
summary of the restricted stock awards issued under the 1991 Performance
Incentive Program and the Directors Stock and Option Plan for the three
years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
|
|
|
|
|
|
|
|
|
(in
thousands except for weighted average fair value)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Restricted ordinary shares
granted
|
|
|
49
|
|
|
63
|
|
|
147
|
|
Weighted average grant
date fair value
|
|
$
|
23.33
|
|
$
|
17.26
|
|
$
|
11.24
|
|
Aggregate grant date fair value
|
|
$
|
1,140
|
|
$
|
1,080
|
|
$
|
1,651
|
|
Compensation expense
related to restricted stock awards
|
|
$
|
7,101
|
|
$
|
18,420
|
|
$
|
32,231
|
|
Estimated tax benefit
related to restricted stock awards
|
|
$
|
1,546
|
|
$
|
4,645
|
|
$
|
7,724
|
|
Total
unrecognized stock based compensation expense related to non-vested restricted
stock awards was approximately $4.5 million as of the end of December 31, 2011,
related to approximately 0.4 million restricted stock awards, which is expected
to be recognized over 2.0 years.
Non-vested
restricted stock awards as of December 31, 2011 and for the year then ended for
the Company were as follows:
|
|
|
|
|
|
|
|
(in
thousands except for weighted average fair value)
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
|
|
|
|
|
Unvested at December 31,
2010
|
|
|
549
|
|
$
|
42.86
|
|
Granted
|
|
|
49
|
|
$
|
23.33
|
|
Vested
|
|
|
(208
|
)
|
$
|
38.27
|
|
Forfeited
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31,
2011
|
|
|
390
|
|
$
|
42.86
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
Each
restricted stock unit represents the Companys 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.
A
summary of the restricted stock units issued to officers of the Company
and its subsidiaries for the three years ended December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
2011
|
|
2010
|
|
2009 (1)
|
|
|
|
|
|
|
|
|
|
Restricted stock units
granted
|
|
|
1,318
|
|
|
1,392
|
|
|
|
|
Aggregate grant date fair
value
|
|
$
|
30,027
|
|
$
|
25,887
|
|
$
|
|
|
Compensation expense
related to restricted stock units
|
|
$
|
15,033
|
|
$
|
5,862
|
|
$
|
|
|
Estimated tax benefit
related to restricted stock units
|
|
$
|
3,998
|
|
$
|
1,557
|
|
$
|
|
|
|
|
|
|
|
(1)
|
During the year ended
December 31, 2009, there were no shares granted under the Companys
restricted stock plan.
|
Total
unrecognized stock based compensation expense related to non-vested restricted
stock units was approximately $31.7 million as of the end of December 31, 2011,
related to approximately 2.1 million restricted stock units, which is expected
to be recognized over 1.5 years.
197
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
18. Share Capital (Continued)
(e) Restricted Stock, Restricted Stock Units
and Performance Units (Continued)
Restricted Stock Units (Continued)
Non-vested
restricted stock units as of December 31, 2011 and for the year then ended for
the Company were as follows:
|
|
|
|
|
|
|
|
(in
thousands except for weighted average fair value)
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
|
|
|
|
|
Unvested at December 31,
2010
|
|
|
1,317
|
|
$
|
18.61
|
|
Granted
|
|
|
1,318
|
|
$
|
22.78
|
|
Vested
|
|
|
(447
|
)
|
$
|
18.80
|
|
Forfeited
|
|
|
(125
|
)
|
$
|
20.28
|
|
|
|
|
|
|
|
|
|
Unvested at December 31,
2011
|
|
|
2,063
|
|
$
|
21.13
|
|
|
|
|
|
|
|
|
|
Performance Units
The
performance units vest after three years and entitle the holder to shares of
the Companys 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 employees continued service through the vest date. Performance
targets are based on relative and absolute financial performance metrics. A
summary of the performance units
issued to certain employees of the Company for the three years ended
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
(in thousands except for number of shares and weighted
average fair value)
|
|
2011
|
|
2010 (1)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Performance units granted
|
|
|
1,289
|
|
|
1,579
|
|
|
|
|
Potential maximum share payout
|
|
|
2,578
|
|
|
3,158
|
|
|
|
|
Aggregate grant date fair value
|
|
$
|
28,544
|
|
$
|
27,160
|
|
$
|
|
|
Compensation expense related to performance units
|
|
$
|
7,242
|
|
$
|
7,009
|
|
$
|
|
|
Estimated tax benefit related to performance units
|
|
$
|
1,419
|
|
$
|
1,470
|
|
$
|
|
|
|
|
|
|
|
(1)
|
The performance units plan
was introduced during the year ended December 31, 2010.
|
Total
unrecognized stock based compensation expense related to non-vested performance
units was approximately $21.8 million as of the end of December 31, 2011,
related to approximately 1.7 million performance units, which is expected to be
recognized over 1.9 years. Non-vested restricted performance units as of
December 31, 2011 were as follows:
|
|
|
|
|
|
|
|
(in
thousands except for weighted average fair value)
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
|
|
|
|
|
Unvested at December 31,
2010
|
|
|
1,517
|
|
$
|
17.20
|
|
Granted
|
|
|
1,289
|
|
$
|
22.14
|
|
Forfeited
|
|
|
(213
|
)
|
$
|
19.43
|
|
Performance driven
reduction
|
|
|
(858
|
)
|
$
|
18.37
|
|
|
|
|
|
|
|
|
|
Unvested at December 31,
2011
|
|
|
1,735
|
|
$
|
19.47
|
|
|
|
|
|
|
|
|
|
(f) Voting
XL-Irelands
Articles of Association restrict the voting power of any person to less than
approximately 10% of total voting power.
198
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
19. Retirement Plans
The
Company provides pension benefits to eligible employees through various defined
contribution and defined benefit retirement plans sponsored by the Company,
which vary for each subsidiary. Plan assets are invested principally in equity
securities and fixed maturities.
(a) Defined contribution plans
The
Company has qualified defined contribution plans which are managed externally
and whereby employees and the Company contribute a certain percentage of the
employees gross compensation (base salary and annual bonus) into the plan each
month. The Companys contribution generally vests over five years. The
Companys expenses for its qualified contributory defined contribution
retirement plans were $42.4 million, $37.8 million and $38.6 million at
December 31, 2011, 2010 and 2009, respectively.
(b) Defined benefit plans
The
Company maintains defined benefit plans that cover certain employees as
follows:
U.S. Plan
A
qualified non-contributory defined benefit pension plan exists to cover a
number of its U.S. employees. This plan also includes a non-qualified
supplemental defined benefit plan designed to compensate individuals to the
extent that their benefits under the Companys qualified plan are curtailed due
to IRS Code limitations. Benefits are based on years of service and
compensation, as defined in the plan, during the highest consecutive three
years of the employees last ten years of employment. Under these plans, the
Companys policy is to make annual contributions to the plan that are
deductible for federal income tax purposes and that meet the minimum funding
standards required by law. The contribution level is determined by utilizing
the entry age cost method and different actuarial assumptions than those used
for pension expense purposes.
In
addition, certain former employees have received benefit type guarantees, not
formally a part of any established plan. The liability recorded with respect to
these agreements as at December 31, 2011 and 2010 was $3.3 million and $3.0
million, respectively, representing the entire unfunded projected benefit
obligations.
Several
assumptions and statistical variables are used in the models to calculate the
expenses and liability related to the plans. The Company, in consultation with
its actuaries, determines assumptions about the discount rate, the expected
rate of return on plan assets and the rate of compensation increase. The table
below includes disclosure of these rates on a weighted-average basis,
encompassing all the international plans.
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Net Benefit Cost Weighted-average assumptions for
the years ended December 31
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.6
|
%
|
|
6.0
|
%
|
Expected long-term rate of return on plan assets
|
|
|
8.0
|
%
|
|
8.0
|
%
|
Benefit Obligation Weighted-average assumptions at
December 31
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.4
|
%
|
|
5.6
|
%
|
The
U.S. Retirement plan assets at December 31, 2011 and 2010 consist of two mutual
funds. The first fund employs a core bond portfolio strategy that seeks maximum
current income and price appreciation consistent with the preservation of
capital and prudent risk taking with the focus on intermediate term high
quality bonds.
The
second fund seeks long term growth of capital by investing in a diversified
group of domestic and international companies. Using a quantitative approach,
portfolio managers identify companies that they believe have favorable
prospects for above average growth.
The
fair value of the U.S. Plan assets at December 31, 2011 and 2010 was $25.9
million and $25.1 million, respectively. As both of the retirement plans
investments are mutual funds, they fall within Level 1 in the fair value
hierarchy.
199
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
19. Retirement Plans (Continued)
(b) Defined benefit plans (Continued)
U.K. Plans
A
contributory defined benefit pension plan exists in the U.K., but has been
closed to new entrants since 1996. The Scheme has approximately 90 members, of
whom approximately 57 are active or deferred members of the Scheme. Benefits
are based on length of service and compensation as defined in the Trust Deed
and Rules, and the Plan is subject to triennial funding valuations, the most
recent of which was conducted in 2010 and was reported in 2011. The $2.7
million deficit is being funded over a 10 year period. Current contribution
rates are 24.6% and 3% of pensionable salary for employer and employee
respectively.
The
U.K. pension plan assets are held in a separate Trustee administered fund to
meet long term liabilities to past and present employees. The table below shows
the composition of the Plans assets and the fair value of each major category
of plan assets as of December 31, 2011 and 2010, as well as the potential
returns of the different asset classes. The total of the asset values held in
various externally managed portfolios are provided by third party pricing
vendors. There is no significant concentration of risk within plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets in the scheme
and the expected rates of return
were as follows:
(U.S. dollars in thousands, except percentages)
|
|
Expected
Return on
Assets for
2011
|
|
Value at
December 31,
2011
|
|
Expected
Return on
Assets for
2010
|
|
Value at
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
7.0
|
%
|
$
|
6,351
|
|
|
7.5
|
%
|
$
|
5,542
|
|
Gilts
|
|
|
4.0
|
%
|
|
1,350
|
|
|
4.5
|
%
|
|
1,249
|
|
Corporate Bonds
|
|
|
5.5
|
%
|
|
1,381
|
|
|
5.7
|
%
|
|
1,187
|
|
Other (cash)
|
|
|
4.0
|
%
|
|
12
|
|
|
4.2
|
%
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market value of
assets
|
|
|
|
|
$
|
9,094
|
|
|
|
|
$
|
8,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition, during 2003 six members who are still employed by the Company in the
U.K. transferred from a defined benefit plan into a defined contribution plan.
These employees have a contractual agreement with the Company that provides a
no worse than final salary pension guarantee in the event that they are
employed by the Company until retirement, whereby the Company guarantees to
top-up their defined contribution pension to the level of pension that they
would have been entitled to receive had they remained in the defined benefit
scheme. The pension liability recorded with respect to these individuals was
$3.3 million and $3.4 million at December 31, 2011 and 2010, respectively,
representing the entire unfunded projected obligation.
European Plans
Certain
contributory defined benefit pension plans exist in several European countries,
most notably Germany, which are closed to new entrants. Benefits are generally
based on length of service and compensation defined in the related agreements.
Included in the projected obligation amounts of $72.3 million and $66.3 million
at December 31, 2011 and 2010, respectively, in the table below, are total
unfunded projected obligations in relation to the European defined benefit
schemes of $14.6 million and $16.0 million, respectively.
200
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
19. Retirement Plans (Continued)
(b) Defined benefit plans (Continued)
European Plans (Continued)
As
a part of the purchase of XL GAPS, the Company acquired certain defined benefit
pension liabilities. The related balances are not included in the tables below
as the liabilities are insured under an annuity type contract.
The
status of the above mentioned plans at December 31, 2011 and 2010 is as
follows:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation beginning of year
|
|
$
|
66,327
|
|
$
|
56,998
|
|
Service cost (1)
|
|
|
919
|
|
|
737
|
|
Interest cost
|
|
|
3,393
|
|
|
3,021
|
|
Actuarial (gain) / loss
|
|
|
3,837
|
|
|
8,197
|
|
Benefits and expenses paid
|
|
|
(1,612
|
)
|
|
(1,419
|
)
|
Foreign currency losses / (gains)
|
|
|
(597
|
)
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
Projected benefit obligation end of year
|
|
$
|
72,267
|
|
$
|
66,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Service costs include cost
of living adjustments on curtailed plans.
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets beginning of year
|
|
$
|
33,294
|
|
$
|
29,548
|
|
Actual return on plan assets
|
|
|
969
|
|
|
3,695
|
|
Employer contributions
|
|
|
1,941
|
|
|
1,295
|
|
Benefits and expenses paid
|
|
|
(1,132
|
)
|
|
(995
|
)
|
Foreign currency gains (losses)
|
|
|
(116
|
)
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
Fair value of plan assets end of year
|
|
$
|
34,956
|
|
$
|
33,294
|
|
|
|
|
|
|
|
|
|
Funded status end of year
|
|
$
|
(37,312
|
)
|
$
|
(33,033
|
)
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$
|
37,312
|
|
$
|
33,033
|
|
|
|
|
|
|
|
|
|
The
components of the net benefit cost for the years ended December 31, 2011 and
2010 are as follows:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Components of net benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
919
|
|
$
|
736
|
|
Interest cost
|
|
|
3,337
|
|
|
3,021
|
|
Expected return on plan assets
|
|
|
(1,558
|
)
|
|
(1,576
|
)
|
Amortization of net actuarial loss
|
|
|
373
|
|
|
198
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$
|
3,071
|
|
$
|
2,379
|
|
|
|
|
|
|
|
|
|
201
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
20. Accumulated Other Comprehensive Income
(Loss)
The
related tax effects allocated to each component of the change in accumulated
other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Before Tax
Amount
|
|
Tax (Benefit)
Expense
|
|
Net of Tax
Amount
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investments:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during year
|
|
$
|
281,302
|
|
$
|
(51,418
|
)
|
$
|
332,720
|
|
Less reclassification for (losses) realized in income
|
|
|
(188,359
|
)
|
|
(9,927
|
)
|
|
(178,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investments
|
|
|
469,661
|
|
|
(41,491
|
)
|
|
511,152
|
|
Change in value of cash flow hedge
|
|
|
439
|
|
|
|
|
|
439
|
|
Change in underfunded pension liability
|
|
|
(2,622
|
)
|
|
|
|
|
(2,622
|
)
|
Foreign currency translation adjustments
|
|
|
(27,802
|
)
|
|
(1,102
|
)
|
|
(26,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income
|
|
$
|
439,676
|
|
$
|
(42,593
|
)
|
$
|
482,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investments:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during year
|
|
$
|
885,910
|
|
$
|
(46,859
|
)
|
$
|
932,769
|
|
Less reclassification for (losses) realized in income
|
|
|
(270,803
|
)
|
|
(5,369
|
)
|
|
(265,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investments
|
|
|
1,156,713
|
|
|
(41,490
|
)
|
|
1,198,203
|
|
Change in value of cash flow hedge
|
|
|
439
|
|
|
|
|
|
439
|
|
Change in net unrealized gain on future policy benefit reserves
|
|
|
(3,714
|
)
|
|
|
|
|
(3,714
|
)
|
Change in underfunded pension liability
|
|
|
(2,619
|
)
|
|
|
|
|
(2,619
|
)
|
Foreign currency translation adjustments
|
|
|
47,265
|
|
|
(3,688
|
)
|
|
50,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income
|
|
$
|
1,198,084
|
|
$
|
(45,178
|
)
|
$
|
1,243,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during year
|
|
$
|
1,246,562
|
|
$
|
119,675
|
|
$
|
1,126,887
|
|
Less reclassification for (losses) realized in income
|
|
|
(921,437
|
)
|
|
(10,317
|
)
|
|
(911,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investments
|
|
|
2,167,999
|
|
|
129,992
|
|
|
2,038,007
|
|
Change in value of cash flow hedge
|
|
|
438
|
|
|
|
|
|
438
|
|
Change in net unrealized gain on future policy benefit reserves
|
|
|
6,554
|
|
|
|
|
|
6,554
|
|
Change in underfunded pension liability
|
|
|
(3,427
|
)
|
|
|
|
|
(3,427
|
)
|
Foreign currency translation adjustments
|
|
|
169,261
|
|
|
(11,627
|
)
|
|
180,888
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income (loss)
|
|
$
|
2,340,825
|
|
$
|
118,365
|
|
$
|
2,222,460
|
|
|
|
|
|
|
|
|
|
|
|
|
The
December 31 balance of each component of accumulated other comprehensive income
(loss) for 2011, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Accumulated unrealized
gains (losses) on investments, net of tax
|
|
$
|
721,784
|
|
$
|
238,751
|
|
$
|
(834,546
|
)
|
OTTI losses recognized in
other comprehensive income, net of tax
|
|
|
(199,988
|
)
|
|
(228,107
|
)
|
|
(353,013
|
)
|
Accumulated foreign
currency translation
|
|
|
77,554
|
|
|
104,254
|
|
|
53,301
|
|
Accumulated underfunded
pension liability
|
|
|
(17,521
|
)
|
|
(14,899
|
)
|
|
(8,566
|
)
|
Accumulated cash flow
hedge
|
|
|
1,235
|
|
|
796
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
583,064
|
|
$
|
100,795
|
|
$
|
(1,142,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
202
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
21. Dividends
In
2011, four quarterly dividends of $0.11 per share were paid to all ordinary
shareholders of record as of March 15, June 15, September 15 and December 15.
In 2010, four quarterly dividends of $0.10 per share were paid to all ordinary
shareholders of record as of March 15, June 15, September 15 and December 15.
In 2009, four quarterly dividends of $0.10 per share were paid to all ordinary
shareholders of record as of March 13, June 15, September 15 and December 15.
The
Company paid dividends to Series C and Series E preference shareholders, and
declared dividends to Series D preference shareholders, for the three years
ended December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in millions)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Series C preference
ordinary shares
|
|
$
|
5.3
|
|
$
|
7.9
|
|
$
|
23.2
|
|
Series D preference
ordinary shares (1)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Series E preference
ordinary shares
|
|
$
|
66.2
|
|
$
|
69.9
|
|
$
|
65.0
|
|
|
|
|
|
|
(1)
|
On December 16, 2011, the
Company announced that the Board of Directors of XL-Cayman resolved to pay a
dividend of $9.1084 per share on XL-Caymans Series D Preference Ordinary
Shares. The dividend was paid on January 17, 2012 to all shareholders of
record as of January 3, 2012.
|
22. Taxation
Following
completion of the redomestication of the Company, with effect from July
1, 2010, the Company is subject to income and capital gains tax in Ireland
under applicable Irish law. Prior to July 1, 2010, the Company was resident for tax purposes in
the Cayman Islands and in accordance with Cayman law, was not subject to any
taxes in the Cayman Islands on either income or capital gains.
The
Companys Bermuda subsidiaries are not subject to any income, withholding or
capital gains taxes under current Bermuda law. In the event that there is a
change such that these taxes are imposed, the Bermuda subsidiaries would be
exempted from any such tax until March 2035 pursuant to the Bermuda Exempted
Undertakings Tax Protection Act of 1966, and the Exempted Undertakings Tax
Protection Amendment Act of 2011.
The
Companys U.S. subsidiaries are subject to federal, state and local corporate
income taxes and other taxes applicable to U.S. corporations. The provision for
federal income taxes has been determined under the principles of the
consolidated tax provisions of the IRS Code and Regulations thereunder.
The
Company has operations in subsidiary and branch form in various other
jurisdictions around the world, including but not limited to the U.K.,
Switzerland, Ireland, Germany, France, Canada, Brazil and various other
countries in Latin America and Asia that are subject to relevant taxes in those
jurisdictions.
Deferred
income taxes have not been accrued with respect to certain undistributed
earnings of foreign subsidiaries. If the earnings were to be distributed, as
dividends or otherwise, such amounts may be subject to withholding taxation in
the state of the paying entity. During 2010, the Company revised its
capital strategy such that it is no longer able to positively assert that all
earnings arising in the U.S. will be permanently reinvested in that
jurisdiction and accordingly, a provision for withholding taxes arising in
respect of U.S. earnings has been made. No withholding taxes are accrued with respect to the earnings of
the Companys subsidiaries arising outside the U.S., as it is the intention that all such earnings will remain reinvested
indefinitely.
The
Company adopted the provisions of the final authoritative guidance on
accounting for uncertainty in income taxes, on January 1, 2007. The Company did
not recognize any liabilities for unrecognized tax benefits as a result of its
implementation and has not recognized any liabilities in subsequent
accounting periods. The
Companys policy is to recognize any interest accrued related to unrecognized
tax benefits as a component of interest expense and penalties in the tax
charge. At December 31, 2011 and 2010, the Company has no accrued liabilities
relating to interest and penalties.
The
Company has open examinations by tax authorities in Ireland (2006 to 2009), the
U.K. (2007 to 2010), the U.S. (2006 to 2009), France (2008 and 2009), Germany
(2006 to 2009), India (2008 to 2010), Canada (2007 to 2010) and Singapore (2008
and 2009). The Company believes that these examinations will be
concluded within the next 24 months; however, it is not currently possible to
estimate the outcome of these examinations.
203
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
22. Taxation (Continued)
The
Company has open tax years that are potentially subject to examinations by
local tax authorities, in the following major tax jurisdictions: the U.S., 2010
and 2011; the U.K., 2009 to 2011; Switzerland, 2007 to 2011; Ireland, 2005 to
2011; Germany, 2010 and 2011; and France, 2007 to 2011.
The
income tax provisions for the years ended December 31, 2011, 2010 and 2009 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Current
expense:
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
9,138
|
|
$
|
40,413
|
|
$
|
29,112
|
|
Non U.S
|
|
|
87,220
|
|
|
35,113
|
|
|
90,079
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current expense
|
|
$
|
96,358
|
|
$
|
75,526
|
|
$
|
119,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
(5,550
|
)
|
$
|
18,225
|
|
$
|
(4,604
|
)
|
Non U.S
|
|
|
(31,101
|
)
|
|
68,986
|
|
|
5,720
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred expense (benefit)
|
|
$
|
(36,651
|
)
|
$
|
87,211
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tax Expense
|
|
$
|
59,707
|
|
$
|
162,737
|
|
$
|
120,307
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average expected tax provision has been calculated using the pre-tax
accounting income (loss) in each jurisdiction multiplied by that jurisdictions
applicable statutory tax rate. The applicable statutory tax rates of the most
significant jurisdictions contributing to the overall taxation of the Company
are: Ireland 12.5% and 25%, Bermuda 0%, the U.S. 35%, the U.K. 26.5%, Switzerland
7.83% and 21.2%, Germany 15%, and France 34.43%. Reconciliation of the
difference between the provision for income taxes and the expected tax
provision at the weighted average tax rate for the years ended December 31,
2011, 2010 and 2009 is provided below:
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Expected tax provision at weighted average rate
|
|
$
|
(66,493
|
)
|
$
|
80,225
|
|
$
|
129,136
|
|
Permanent differences:
|
|
|
|
|
|
|
|
|
|
|
Non-taxable investment income (loss)
|
|
|
(14,246
|
)
|
|
(10,176
|
)
|
|
(5,715
|
)
|
Non-taxable income (loss)
|
|
|
(3,265
|
)
|
|
3,838
|
|
|
(91,968
|
)
|
Prior year adjustments
|
|
|
(9,206
|
)
|
|
16,594
|
|
|
(15,360
|
)
|
State, local and foreign taxes
|
|
|
42,581
|
|
|
44,122
|
|
|
59,835
|
|
Valuation allowance
|
|
|
24,990
|
|
|
1,346
|
|
|
11,439
|
|
Allocated investment income
|
|
|
21,483
|
|
|
12,386
|
|
|
20,045
|
|
Stock options
|
|
|
5,840
|
|
|
3,323
|
|
|
6,222
|
|
Non-deductible expenses
|
|
|
12,901
|
|
|
11,079
|
|
|
6,673
|
|
Non-deductible goodwill impairment
|
|
|
57,069
|
|
|
|
|
|
|
|
Non-taxable reserve release
|
|
|
(11,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
59,707
|
|
$
|
162,737
|
|
$
|
120,307
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
during 2011 varied significantly relative to the weighted average effective tax
rate due to a combination of three key items; i) the impairment of goodwill
which represented a loss to the company but was not deductible in certain
relevant jurisdictions, ii) the distribution of fourth quarter 2011 catastrophe
losses between jurisdictions with the majority ultimately impacting low tax
jurisdictions, and iii) the valuation allowances recorded against the tax
impact of certain realized investment losses.
204
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
22. Taxation (Continued)
Significant
components of the Companys deferred tax assets and liabilities at December 31,
2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Deferred
Tax Asset:
|
|
|
|
|
|
|
|
Net unpaid loss reserve discount
|
|
$
|
108,981
|
|
$
|
105,313
|
|
Net unearned premiums
|
|
|
62,162
|
|
|
57,289
|
|
Compensation liabilities
|
|
|
35,830
|
|
|
42,347
|
|
Net operating losses
|
|
|
263,600
|
|
|
282,202
|
|
Investment adjustments
|
|
|
12,861
|
|
|
8,941
|
|
Pension
|
|
|
9,753
|
|
|
6,290
|
|
Bad debt reserve
|
|
|
10,829
|
|
|
10,502
|
|
Amortizable goodwill
|
|
|
10,732
|
|
|
|
|
Net unrealized depreciation on investments
|
|
|
320
|
|
|
6,004
|
|
Stock options
|
|
|
13,842
|
|
|
15,052
|
|
Depreciation
|
|
|
4,072
|
|
|
7,131
|
|
Net realized capital losses
|
|
|
119,307
|
|
|
117,358
|
|
Deferred intercompany capital losses
|
|
|
117,892
|
|
|
142,300
|
|
Other
|
|
|
7,573
|
|
|
9,527
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, gross of valuation allowance
|
|
$
|
777,754
|
|
$
|
810,256
|
|
Valuation allowance
|
|
|
497,236
|
|
|
514,467
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
280,518
|
|
$
|
295,789
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liability:
|
|
|
|
|
|
|
|
Net unrealized appreciation on investments
|
|
$
|
96,797
|
|
$
|
52,972
|
|
Deferred acquisition costs
|
|
|
20,103
|
|
|
19,601
|
|
Currency translation adjustments
|
|
|
8,062
|
|
|
11,115
|
|
Regulatory reserves
|
|
|
125,249
|
|
|
149,650
|
|
Untaxed Lloyds result
|
|
|
8,340
|
|
|
16,028
|
|
Other
|
|
|
4,786
|
|
|
8,565
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
$
|
263,337
|
|
$
|
257,931
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Asset
|
|
$
|
17,181
|
|
$
|
37,858
|
|
|
|
|
|
|
|
|
|
The
deferred tax asset and liability balances presented above represent the gross
deferred tax asset and liability balances across each tax jurisdiction. The
deferred tax asset balances of $115.6 million and $143.5 million at December
31, 2011 and 2010, respectively, and deferred tax liability balances of $98.4
million and $105.7 million at December 31, 2011 and 2010, respectively, as
disclosed on the consolidated balance sheets include netting of certain
deferred tax assets and liabilities within a tax jurisdiction to the extent
such netting is consistent with the regulations of the tax authorities in those
jurisdictions.
The
valuation allowance at December 31, 2011 and December 31, 2010 of $497.2
million and $514.5 million, respectively, related primarily to net operating
loss carry forwards in Switzerland, net operating loss and capital loss carry
forwards in Ireland, and net unrealized capital losses and realized capital
loss carry forwards in the U.S. that may not be realized within a reasonable
period. At December 31, 2011, the Company had realized capital loss carry
forwards of approximately $340.8 million in the U.S. ($119.3 million tax
effected). The 5 year limitation for the utilization of realized capital losses
applies to this balance. Losses of $35.2 million will expire at the end of 2012
with another $305.6 million of realized capital losses expiring in future years
through 2016. A valuation allowance ($119.3 million) has been established in
respect of all of these realized capital losses. At December 31, 2011, the
Company also had $336.8 million of losses arising from the sale of investments
to a group company ($117.9 million tax effected), against which a valuation
allowance of $117.9 million has been established. These losses cannot be
utilized to offset any future U.S. realized capital gains, and will not begin
to expire, until the underlying assets have been sold to unrelated parties.
205
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
22. Taxation (Continued)
At
December 31, 2011, net operating loss carry forwards in the U.K. were
approximately $96.5 million and have no expiration. A valuation allowance ($2.1
million) has been established in respect of $8.1 million of these U.K. losses
given managements expectation that losses in specific U.K. entities will not
be utilized in the future. At December 31, 2011, net operating loss carry
forwards in Switzerland were approximately $881.2 million, of which $803.3
million will expire at the end of 2012 with the balance expiring in future
years through 2018. A valuation allowance ($183.8 million) has been established
in respect of all of the net operating losses which will expire in 2012 and in
respect of a further $74.3 million of other Swiss losses. At December 31, 2011,
net operating loss carry forwards in Ireland were approximately $189.5 million,
with a further $158.0 million of capital losses carried forward. Although these
Irish losses may be carried forward indefinitely, a valuation allowance ($53.1
million) has been established in respect of these Irish losses due to the
uncertainty surrounding any future loss utilization.
Management
has reviewed historical taxable income and future taxable income projections
for its U.K. group and has determined that in its judgment substantially all of
the U.K. net operating losses ($88.4 million) will more likely than not be
realized as reductions of future taxable income within a reasonable period.
Management will continue to evaluate income generated in future periods by the
U.K. group in determining the reasonableness of its position. If management
determines that future income generated by the U.K. group is insufficient to
cause the realization of the net operating losses within a reasonable period, a
valuation allowance would be required for the U.K. portion of the net deferred
tax asset balance related to net operating losses in the amount of $22.2
million.
Management
believes it is more likely than not that the tax benefit of the remaining net
deferred tax assets will be realized.
Shareholders
equity at December 31, 2011 and 2010 reflected tax benefits of nil and nil,
respectively, related to compensation expense deductions for stock options
exercised by the Companys U.S. subsidiaries.
23. Statutory Financial Data
The
Companys ability to pay dividends is subject to certain regulatory
restrictions on the payment of dividends by its subsidiaries. The payment of
such dividends is limited by applicable laws and statutory requirements of the
various countries in which the Company operates, including Bermuda, the U.S.,
Ireland and the U.K., among others. Statutory capital and surplus for the
principal operating subsidiaries of the Company for the years ended December
31, 2011 and 2010 are summarized below. 2011 information is preliminary as many
regulatory returns are due later in 2012 for many jurisdictions in which the
Company does business, and accordingly, 2011 information summarized below is
subject to revision.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bermuda (1)
|
|
U.S. (2)
|
|
U.K., Europe and Other
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required statutory capital and surplus
|
|
$
|
4,923,801
|
|
$
|
4,687,988
|
|
$
|
637,799
|
|
$
|
640,834
|
|
$
|
1,132,821
|
|
$
|
1,141,884
|
|
Actual statutory capital and surplus (3)
|
|
$
|
9,140,393
|
|
$
|
9,159,021
|
|
$
|
2,093,694
|
|
$
|
2,273,711
|
|
$
|
3,197,220
|
|
$
|
3,211,204
|
|
|
|
|
|
|
(1)
|
Required statutory capital
and surplus represents 100% BSCR level for principal Bermuda operating
subsidiaries.
|
(2)
|
Required statutory capital
and surplus represents 100% RBC level for principal U.S. operating
subsidiaries.
|
(3)
|
Statutory assets in Bermuda
include investments in other U.S. and international subsidiaries reported
separately herein.
|
The
difference between statutory financial statements and statements prepared in
accordance with GAAP varies by jurisdiction, however, the primary difference
is that statutory financial statements do not reflect deferred policy acquisition
costs, deferred income tax net assets, intangible assets, unrealized
appreciation on investments and any unauthorized/authorized reinsurance
charges.
Certain
statutory restrictions on the payment of dividends from retained earnings by
the Companys subsidiaries are further detailed below.
Management
has evaluated the principal operating subsidiaries ability to maintain
adequate levels of statutory capital, liquidity and rating agency capital and
believes they will be able to do so. In performing this analysis, management
has considered the current statutory capital position of each of the principal
operating subsidiaries as well as the ability of the holding company to
allocate capital and liquidity around the group as and when needed.
206
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
23. Statutory Financial Data (Continued)
Bermuda Operations
In
early July 2008, the Insurance Amendment Act of 2008 was passed, which
introduced a number of changes to the Bermuda Insurance Act 1978, such as
allowing the Bermuda Monetary Authority (BMA) to prescribe standards for an
enhanced capital requirement and a capital and solvency return that insurers
and reinsurers must comply with. The Bermuda Solvency Capital Requirement
(BSCR) employs a standard mathematical model that can relate more accurately
the risks taken on by (re)insurers to the capital that is dedicated to their
business. Insurers and reinsurers may adopt the BSCR model or, where an insurer
or reinsurer believes that its own internal model better reflects the inherent risk
of its business, an in-house model approved by the BMA. Class 4 (re)insurers,
such as the Company, were required to implement the new capital requirements
under the BSCR model beginning with fiscal years ending on or after December
31, 2009. The Companys capital requirements under the BSCR are highlighted in
the table above. In addition to the BSCR based requirements, the BMA also
prescribes minimum liquidity standards which must be met.
Under
the Insurance Act 1978, amendments thereto and related regulations of Bermuda,
the Companys Bermuda subsidiaries, XL Re Ltd and XL Insurance (Bermuda)
Ltd, are prohibited from declaring or paying dividends of more than 25% of each
of their prior years statutory capital and surplus, or of more than 15%
of its statutory capital, unless the Company filed with the Bermuda Monetary
Authority a signed affidavit by at least two members of the Companys Board
of Directors and the Companys
Principal Representative attesting that a dividend in excess of this amount would
not cause the company to fail to meet its relevant margins. At December 31, 2011
and 2010, the maximum dividend that the Bermuda operating entities could pay,
without a signed affidavit, having met minimum levels of statutory capital and
surplus and liquidity requirements, was approximately $1.3 billion and $1.3
billion, respectively.
U.S. Property and Casualty Operations
Unless
permitted by the New York Superintendent of Insurance, the Companys lead
property and casualty subsidiary in the United States (XLRA) may
not pay dividends to shareholders in an aggregate amount in any twelve month
period that exceeds the lesser of 10 percent of XLRAs statutory policyholders
surplus or 100 percent of its adjusted net investment income, as
defined. The New York State insurance law also provides that any distribution
that is a dividend may only be paid out of statutory earned surplus. At December
31, 2011, and 2010, XLRA had statutory earned surplus of $59.7 million and $184.3
million, respectively. At December 31, 2011, XLRAs statutory policyholders
surplus was $2.1 billion, and accordingly, the maximum amount of dividends
XLRA can declare and pay in 2012, without prior regulatory approval, is $59.7
million. At December 31, 2011 and 2010, none of the seven property and casualty
subsidiaries of XLRA had a statutory earned deficit.
International Operations
The
Companys international subsidiaries prepare statutory financial statements
based on local laws and regulations. Some jurisdictions impose complex regulatory
requirements on insurance companies while other jurisdictions impose fewer
requirements. In some countries, the Company must obtain licenses issued by
governmental authorities to conduct local insurance business. These licenses
may be subject to reserves and minimum capital and solvency tests.
Jurisdictions may impose fines, censure, and/or impose criminal sanctions for
violation of regulatory requirements. The majority of the actual statutory
capital outside of the U.S. and Bermuda is held in Ireland ($1.5 billion at
December 31, 2011) and the U.K. ($1.1 billion at December 31, 2011).
Dividends from the U.K. and Ireland are limited to the equivalent of retained
earnings. As a part of the restructuring that established XL Re (Europe), the
Company is required to notify the regulator in order to reduce capital levels
below $1.5 billion in Ireland.
207
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
24. Computation of Earnings Per Ordinary
Share and Ordinary Share Equivalent
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands, except per share
amounts)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Basic earnings per ordinary share and ordinary share
equivalents:
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to XL Group plc.
|
|
$
|
(474,760
|
)
|
$
|
603,550
|
|
$
|
74,991
|
|
Less: preference share dividends (1)
|
|
|
|
|
|
(34,694
|
)
|
|
(80,200
|
)
|
Add: gain on redemption of the Redeemable Series C preference
ordinary shares
|
|
|
|
|
|
16,616
|
|
|
211,816
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shareholders
|
|
$
|
(474,760
|
)
|
$
|
585,472
|
|
$
|
206,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
|
|
|
312,896
|
|
|
336,283
|
|
|
340,612
|
|
Basic earnings per ordinary share & ordinary share equivalents
outstanding
|
|
$
|
(1.52
|
)
|
$
|
1.74
|
|
$
|
0.61
|
|
Diluted earnings per ordinary share and ordinary
share equivalents:
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding basic
|
|
$
|
312,896
|
|
$
|
336,283
|
|
$
|
340,612
|
|
Impact of share based compensation and certain conversion features
|
|
|
|
|
|
1,426
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding diluted
|
|
$
|
312,896
|
|
$
|
337,709
|
|
$
|
340,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per ordinary share & ordinary share equivalents
outstanding
|
|
$
|
(1.52
|
)
|
$
|
1.73
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per ordinary share
|
|
$
|
0.44
|
|
$
|
0.40
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the first quarter of
2011, the Redeemable Series C preference ordinary shares were reclassified as
Non-controlling interest Redeemable Series C preference ordinary shares and
Series E preference ordinary shares were reclassified as Non-controlling
interest in equity of consolidated subsidiaries on the Companys consolidated
balance sheet as a result of changes in ownership structure arising as part
of the Companys redomestication of the ultimate parent holding company to
Ireland as of July 1, 2010. Accordingly, preference share dividends declared
are recorded as Non-controlling interests rather than as Preference share
dividends within the consolidated statements of income from July 1, 2010
onwards. See Note 1, Basis of Preparation and Consolidation for additional
details. During the third quarter of 2011, all outstanding Redeemable Series
C preference ordinary shares were repurchased and canceled.
|
For
the years ended December 31, 2011 and 2010, ordinary shares available for
issuance under share based compensation plans of 16.9 million and 12.8 million,
respectively, were not included in the calculation of diluted earnings per
share because the assumed exercise or issuance of such shares would be
anti-dilutive.
208
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
25. Related Party Transactions
At
December 31, 2011 and 2010, the Company owned minority stakes in three and
four, respectively, independent investment management companies (Investment
Manager Affiliates) that are actively managing client capital and
seeking growth opportunities. The
Company sold its stake in Finisterre in the third quarter of 2011. For further information regarding this sale
see Note 6(b), Investment Affiliates Operating Affiliates. 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 Companys 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 years ended December 31, 2011,
2010 and 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
(U.S. dollars
in thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
Reported net premiums
written
|
|
$
|
65,347
|
|
$
|
71,077
|
|
$
|
44,097
|
|
Net losses incurred
|
|
$
|
34,597
|
|
$
|
33,098
|
|
$
|
20,056
|
|
Reported acquisition costs
|
|
$
|
25,268
|
|
$
|
32,790
|
|
$
|
19,079
|
|
In
addition, the Company had entered into a reinsurance contract with another
strategic affiliate, ITAU, which as outlined in Note 6, Investments in
Affiliates, was sold during the second quarter of 2010. During the year ended
December 31, 2009, the reinsurance contract resulted in reported net premiums
of approximately $3.1 million, loss reserves of $1.2 million, and reported
acquisition costs of $1.4 million.
209
XL GROUP PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
26. Unaudited Quarterly Financial Data
The
following is a summary of the unaudited quarterly financial data for 2011 and
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned property and casualty operations
|
|
$
|
1,271,696
|
|
$
|
1,306,125
|
|
$
|
1,362,532
|
|
$
|
1,386,759
|
|
Net premiums earned life operations
|
|
|
89,687
|
|
|
92,214
|
|
|
90,794
|
|
|
90,323
|
|
Underwriting profit (loss) property and casualty operations
|
|
|
(328,064
|
)
|
|
67,049
|
|
|
(22,200
|
)
|
|
(114,138
|
)
|
Net income (loss) attributable to ordinary shareholders
|
|
|
(227,284
|
)
|
|
225,663
|
|
|
42,398
|
|
|
(515,537
|
)
|
Net income (loss) per ordinary share and ordinary share equivalent
basic
|
|
$
|
(0.73
|
)
|
$
|
0.73
|
|
$
|
0.14
|
|
$
|
(1.62
|
)
|
Net income (loss) per ordinary share and ordinary share equivalent
diluted
|
|
$
|
(0.73
|
)
|
$
|
0.69
|
|
$
|
0.14
|
|
$
|
(1.62
|
)
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned property and casualty operations
|
|
$
|
1,263,601
|
|
$
|
1,216,313
|
|
$
|
1,268,741
|
|
$
|
1,282,482
|
|
Net premiums earned life operations
|
|
|
104,884
|
|
|
86,448
|
|
|
96,586
|
|
|
95,006
|
|
Underwriting profit property and casualty operations
|
|
|
(6,610
|
)
|
|
94,673
|
|
|
64,666
|
|
|
109,765
|
|
Net income (loss) attributable to ordinary shareholders
|
|
|
127,996
|
|
|
191,811
|
|
|
77,543
|
|
|
188,122
|
|
Net income (loss) per ordinary share and ordinary share equivalent
basic
|
|
$
|
0.37
|
|
$
|
0.56
|
|
$
|
0.23
|
|
$
|
0.58
|
|
Net income (loss) per ordinary share and ordinary share equivalent
diluted
|
|
$
|
0.37
|
|
$
|
0.56
|
|
$
|
0.23
|
|
$
|
0.57
|
|
210
|
|
|
|
I
TEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
|
There
have been no changes in accountants within the twenty-four months ending
December 31, 2011.
|
|
|
|
I
TEM 9A.
|
CONTROLS AND
PROCEDURES
|
|
|
Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures
The
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of its disclosure
controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under
the Securities Exchange Act of 1934, as amended, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls
and procedures, as of the end of the period covered by this report, were
effective to provide reasonable assurance that all material information
relating to the Company required to be filed in this report has been made known
to them in a timely fashion.
Managements Report on Internal Control Over
Financial Reporting
The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended.
The
Companys internal control system was designed to provide reasonable assurance
to the Companys management and board of directors regarding the preparation
and fair presentation of published financial statements.
The
Companys management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2011. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework (the Framework). Based on its assessment, management
concluded that, as of December 31, 2011, the Companys internal control over
financial reporting is effective based on the Framework criteria.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The
effectiveness of the Companys internal control over financial reporting as of
December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears in Item 15, Exhibits, Financial Statement Schedules.
Changes in Internal Control Over Financial
Reporting
There
have been no changes in internal control over financial reporting identified in
connection with the Companys evaluation required pursuant to Rules 13a-15 and
15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that
occurred during the most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
|
|
|
|
I
TEM 9B.
|
OTHER INFORMATION
|
|
|
None.
211
P
ART III
|
|
|
|
I
TEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
|
|
Certain
of the information required by this item relating to the executive officers of
the Company may be found at the end of Part I under the heading Executive
Officers of the Company. The balance of the information required by this item
is omitted because a definitive proxy statement that involves the election of
directors will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A, and the information required by
this item is incorporated by reference from that proxy statement.
|
|
|
|
I
TEM 11.
|
EXECUTIVE COMPENSATION
|
|
|
This
item is omitted because the information required by this item is incorporated
by reference from a definitive proxy statement that involves the election of
directors that will be filed with the SEC not later than 120 days after the
close of the fiscal year pursuant to Regulation 14A.
|
|
|
|
I
TEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
|
|
This
item is omitted because the information required by this item is incorporated
by reference from a definitive proxy statement that involves the election of
directors that will be filed with the SEC not later than 120 days after the
close of the fiscal year pursuant to Regulation 14A.
|
|
|
|
I
TEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
|
|
|
This
item is omitted because the information required by this item is incorporated
by reference from a definitive proxy statement that involves the election of
directors that will be filed with the SEC not later than 120 days after the
close of the fiscal year pursuant to Regulation 14A.
|
|
|
|
I
TEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
|
|
This
item is omitted because the information required by this item is incorporated
by reference from a definitive proxy statement that involves the election of
directors that will be filed with the SEC not later than 120 days after the
close of the fiscal year pursuant to Regulation 14A.
212
P
ART
IV
|
|
|
|
I
TEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
Financial Statements,
Financial Statement Schedules and Exhibits.
1. Financial Statements
Included in Part II, Item 8
of this report.
2. Financial Statement Schedules
Included in Part IV of this
report:
|
|
|
|
|
|
|
Schedule Number
|
|
Page
|
|
|
|
|
|
Consolidated Summary of Investments Other
than Investments in Related Parties, at December 31, 2011 and 2010
|
|
I
|
|
223
|
Condensed Financial Information of
Registrant, at December 31, 2011 and for the years ended December 31, 2011,
2010 and 2009
|
|
II
|
|
225
|
Reinsurance, for the years ended December
31, 2011, 2010 and 2009
|
|
IV
|
|
228
|
Supplementary Information Concerning
Property/Casualty (Re)Insurance Operations for the years ended December 31,
2011, 2010 and 2009
|
|
VI
|
|
229
|
Other Schedules have been omitted as they
are not applicable to the Company.
|
|
|
|
|
213
3. Exhibits
In
reviewing the agreements included as exhibits to this Annual Report on Form
10-K, please remember they are included to provide you with information
regarding their terms and are not intended to provide any other factual or
disclosure information about the Company or the other parties to the
agreements. The agreements contain representations and warranties by each of
the parties to the applicable agreement. These representations and warranties
have been made solely for the benefit of the other parties to the applicable
agreement and:
|
|
|
|
|
should not in all
instances be treated as categorical statements of fact, but rather as a way of
allocating the risk to one of the parties if those statements prove to be
inaccurate;
|
|
|
|
|
|
have been qualified by
disclosures that were made to the other party in connection with the
negotiation of the applicable agreement, which disclosures are not necessarily
reflected in the agreement;
|
|
|
|
|
|
may apply standards of
materiality in a way that is different from what may be viewed as material to
you or other investors; and
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were made only as of the
date of the applicable agreement or such other date or dates as may be
specified in the agreement and are subject to more recent developments.
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Accordingly, these
representations and warranties may not describe the actual state of affairs as
of the date they were made or at any other time.
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Exhibit
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Description
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3.1
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Memorandum and Articles of Association of XL Group
plc, incorporated by reference to Exhibit 3.1 to the Companys Current Report
on Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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3.2
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Certification of Incorporation of XL Group plc,
incorporated by reference to Exhibit 3.2 to the Companys Current Report on
Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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3.3
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Memorandum of Association of XLIT Ltd., incorporated
by reference to Exhibit 14.19 of the Companys Registration Statement on Form
S-3 (No. 333-177869), filed on November 9, 2011.
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3.4
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Articles of Association of XLIT Ltd., incorporated
by reference to Exhibit 14.20 of the Companys Registration Statement on Form
S-3 (No. 333-177869), filed on November 9, 2011.
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4.1
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Excerpts from the Minutes of a Meeting of a
Committee of the Board of Directors pursuant to Article 75 of XL Capital
Ltds Articles of Association held on March 15, 2007, incorporated by
reference to Exhibit 4.2 to the Companys Current Report on Form 8-K (No.
1-10804) filed on March 15, 2007.
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4.2
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Indenture, dated as of January 23, 2003, between XL
Capital Ltd and U.S. Bank National Association, as Trustee, incorporated by
reference to Exhibit 4.1 to the Companys Amendment No. 1 to Registration
Statement on Form S-3 (No. 333-101288) filed on January 23, 2003.
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4.3
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Indenture, dated as of June 2, 2004, between XL
Capital Ltd and The Bank of New York, as Trustee, incorporated by reference
to Exhibit 4.1 to the Companys Registration Statement on Form S-3 (No.
333-116245) filed on June 7, 2004.
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4.4
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First Supplemental Indenture, dated as of August 23,
2004, to the Indenture, dated as of June 2, 2004, between XL Capital Ltd and
The Bank of New York, as Trustee, incorporated by reference to Exhibit 4.1 to
the Companys Current Report on Form 8-K (No. 1-10804) filed on August 23,
2004.
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4.5
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Form of 5.25% Senior Note due 2014 (included in
Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on August 23, 2004.
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4.6
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Second Supplemental Indenture, dated as of November
12, 2004, to the Indenture, dated as of June 2, 2004, between XL Capital Ltd
and The Bank of New York, as Trustee, incorporated by reference to Exhibit
4.1 to the Companys Current Report on Form 8-K (No. 1-10804) filed on
November 15, 2004.
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4.7
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Form of 6.375% Senior Note due 2024 (included in
Exhibit 4.6 hereto), incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on November 15,
2004.
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214
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4.8
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Third Supplemental Indenture, dated as of December
9, 2005, to the Indenture, dated as of June 2, 2004, between XL Capital Ltd
and The Bank of New York, as trustee, incorporated by reference to Exhibit
4.2 to the Companys Current Report on Form 8-K (No. 1-10804) filed on
December 12, 2005.
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4.9
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Fourth Supplemental Indenture, dated May 7, 2007, to
the Indenture, dated as of June 2, 2004, between XL Capital Ltd, and The Bank
of New York, as trustee, incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on May 7, 2007.
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4.10
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Form of 6.25% Senior Note due 2027 (included in
Exhibit 4.9 hereto), incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on May 7, 2007.
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4.11
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Form of XL Group plc Ordinary Share Certificate,
incorporated by reference to Exhibit 4.5 to the Companys Current Report on
Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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4.12*
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Excerpts from the Authorizing Resolutions of the
Board of Directors of XL Capital Ltd, dated October 27, 2006.
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4.13
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Indenture, dated as of January 10, 2002, among XL
Capital Finance (Europe) plc, XL Capital Ltd and State Street Bank and Trust
Company, incorporated by reference to Exhibit 4.16(a) to the Companys
Current Report on Form 8-K (No. 1-10804) filed on January 14, 2002.
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4.14
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Form of XL Capital Financial (Europe) plc Debt
Security, incorporated by reference to Exhibit 4.14 to the Companys Current
Report on Form 8-K (No. 1-10804) filed on January 14, 2002.
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4.15
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Excerpts from the Authorizing Resolutions of the
Board of Directors of XL Capital Finance (Europe) plc, dated January 7, 2002,
incorporated by reference to Exhibit 4.16(b) to the Companys Current Report
on Form 8-K (No. 1-10804) filed on January 14, 2002.
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4.16
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Excerpts from the Authorizing Resolutions of the
Special Finance Committee of XL Capital Ltd, dated July 3, 2003, incorporated
by reference to Exhibit 99.11 to the Companys Quarterly Report on Form 10-Q
(No. 1-10804) filed on August 14, 2003.
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4.17
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Form of 5.25% Senior Note due 2011 (included in
Exhibit 4.8 hereto), incorporated by reference to Exhibit 4.8 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on December 12,
2005.
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4.18
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Fifth Supplemental Indenture, dated August 5, 2008,
to the Indenture, dated as of June 2, 2004, between XL Capital Ltd and The
Bank of New York Mellon, as trustee, incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form 8-K (No. 1-10804) filed on August 6,
2008.
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4.19
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Purchase Contract Agreement, dated August 5, 2008,
between Xl Capital Ltd and The Bank of New York Mellon, as Purchase Contract
Agent, incorporated by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K (No. 1-10804) filed on August 6, 2008.
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4.20
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Pledge Agreement, dated August 5, 2008, by and among
XL Capital Ltd and the Bank of New York Mellon, as Collateral Agent, Custodial
Agent, Securities Intermediary and Purchase Contract Agent, incorporated by
reference to Exhibit 4.3 to the Companys Current Report on Form 8-K (No.
1-10804) filed on August 6, 2008.
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4.21
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Form of Normal Units Certificate (included in
Exhibit 4.19 hereto), incorporated by reference to Exhibit 4.5 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on August 6, 2008.
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4.22
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Form of Stripped Units Certificate (included in
Exhibit 4.19 hereto), incorporated by reference to Exhibit 4.6 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on August 6, 2008.
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4.23
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Form of 8.25% Senior Note due 2021 (included in
Exhibit 4.18 hereto), incorporated by reference to Exhibit 4.7 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on August 6, 2008.
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4.24
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Sixth Supplemental Indenture, dated as of June 30,
2010, to the Indenture, dated as of June 2, 2004, and the Fifth Supplemental
Indenture, date as of August 5, 2008, between XL Capital Ltd, XL Group plc,
as guarantor and the Bank of New York Mellon, as trustee, incorporated by
reference to Exhibit 4.3 to the Companys Current Report on Form 8-K12B (No.
1-10804) filed on July 1, 2010.
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215
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4.25
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First Amendment, dated as of June 30, 2010, to the
Pledge Agreement, dated August 5, 2008, by and among XL Capital Ltd, XL
Company Switzerland GmbH and The Bank of New York Mellon, as Collateral
Agent, Custodial Agent and Securities Intermediary and Purchase Contract
Agent, incorporated by reference to Exhibit 4.2 to the Companys Current
Report on Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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4.26
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First Amendment, dated as of June 30, 2010, to the
Purchase Contract Agreement, dated August 5, 2008, between the Registrant, XL
Capital Ltd, XL Company Switzerland GmbH and The Bank of New York Mellon, as
Purchase Contract Agent, incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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4.27
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Supplemental Indenture, dated as of June 30, 2010,
to the Indenture, dated as of January 10, 2002, among XL Capital Finance
(Europe) plc, XL Capital Ltd, XL Company Switzerland GmbH and State Street
Bank and Trust Company, incorporated by reference to Exhibit 4.4 to the
Companys Current Report on Form 8-K12B (No. 1-10804) filed on July 1, 2010.
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4.28
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Form of XL Capital Ltd Global Series E Preference Share
Certificate, incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form
8-K (No. 1-10804) filed on March 15, 2007.
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4.29*
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Form of XLIT Ltd. Global Series D Preference Ordinary Share Certificate.
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10.1+
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1991 Performance Incentive Plan (as amended and
restated effective March 7, 2003), incorporated by reference to Appendix B to
the Companys Definitive Proxy Statement on Schedule 14A (No. 1-10804) filed
on April 4, 2003.
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10.2+
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1991 Performance Incentive Program (as amended and
restated effective April 29, 2005), incorporated by reference to Appendix C
to the Companys Definitive Proxy Statement on Schedule 14A (No. 1-10804)
filed on March 24, 2005.
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10.3+
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1991 Performance Incentive Program (as amended and
restated effective February 27, 2009), incorporated by reference to Appendix
B to the Companys Definitive Proxy Statement on Schedule 14A (No. 1-10804)
filed on March 9, 2009.
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10.4+
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1991 Performance Incentive Program (as amended and
restated effective April 30, 2010), incorporated by reference to Exhibit 10.1
to the Companys Quarterly Report on Form 10-Q (No. 1-10804) for the period
ended June 30, 2010.
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10.5+
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Amended and Restated Directors Stock & Option
Plan, incorporated by reference to Appendix C to the Companys Definitive
Proxy Statement on Schedule 14A (No. 1-10804) filed on April 4, 2003.
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10.6+
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Amended and Restated Directors Stock & Option
Plan, effective as of January 1, 2009, incorporated by reference to Appendix
C to the Companys Definitive Proxy Statement on Schedule 14A (No. 1-10804)
filed on March 9, 2009.
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10.7+
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Amended and Restated Directors Stock & Option
Plan, effective as of April 30, 2010, incorporated by reference to Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q (No. 1-10804) for the
period ended June 30, 2010.
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10.8+
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Employment Agreement, dated as of September 29,
2006, between XL Capital Ltd and Sarah E. Street, incorporated by reference
to Exhibit 10.1 to the Companys quarterly report on Form 10-Q for the period
ended September 30, 2006 (No. 1-10804).
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10.9+
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Form of Non-Statutory Stock Option Agreement
(One-Time Vesting), incorporated by reference to Exhibit 10.45 to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2004
(No. 1-10804).
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10.10+
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Form of Non-Statutory Stock Option Agreement
(Incremental Vesting), incorporated by reference to Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2010
(No. 1-10804)
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10.11+
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|
Form of Non-Statutory Stock Option Agreement
(Incremental Vesting), incorporated by reference to Exhibit 10.5 to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2004
(No. 1-10804).
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10.12+
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|
Form of Incentive Stock Option Agreement,
incorporated by reference to Exhibit 10.6 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
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10.13+
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|
Form of Restricted Stock Agreement, incorporated by
reference to Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2004 (No. 1-10804).
|
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10.14+
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|
Form of Non-Statutory Stock Option Agreement
(Renewal Form), incorporated by reference to Exhibit 10.8 to the Companys
Quarterly Report on Form 10-Q for the period ended June 30, 2004 (No.
1-10804).
|
|
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10.15+
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|
Form of Non-Statutory Stock Option Agreement
(Non-Employee Director Renewal Form), incorporated by reference to Exhibit
10.9 to the Companys Quarterly Report on Form 10-Q for the period ended June
30, 2004 (No. 1-10804).
|
216
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10.16+
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|
Form of Directors Restricted Stock Agreement,
incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
|
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10.17+
|
|
Form of Performance Restricted Stock Agreement,
incorporated by reference to Exhibit 10.11 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
|
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|
10.18+
|
|
Form of Performance Restricted Stock Unit Agreement,
incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
|
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|
10.19+
|
|
Form of Performance Unit Agreement, incorporated by
reference to Exhibit 10.8 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2010 (No. 1-10804).
|
|
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|
10.20+
|
|
Form of Performance Unit Agreement, incorporated by
reference to Exhibit 10.9 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2010 (No. 1-10804).
|
|
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|
10.21+
|
|
Form of Restricted Stock Unit Agreement,
incorporated by reference to Exhibit 10.13 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
|
|
|
|
10.22+
|
|
Form of Restricted Stock Unit Agreement,
incorporated by reference to Exhibit 10.6 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2010 (No. 1-10804).
|
|
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|
10.23+
|
|
Form of Restricted Stock Unit Agreement (for U.S.
taxpayers based in Bermuda), incorporated by reference to Exhibit 10.7 to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2010
(No. 1-10804).
|
|
|
|
10.24+
|
|
Form of Director Stock Option Agreement,
incorporated by reference to Exhibit 10.14 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2004 (No. 1-10804).
|
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|
10.25
|
|
Insurance Letters of Credit Master Agreement
between XL Mid Ocean Reinsurance Ltd and Citibank, N.A., dated May 19, 1993,
incorporated by reference to Exhibit 10.33 to Amendment No. 2 to the
Registration Statement on Form S-1 of Mid Ocean Limited (No. 333-63298) filed
on June 25, 1993.
|
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|
10.26
|
|
Second Amended and Restated Agreement for the Sale
and Purchase of Winterthur International, dated as of February 15, 2001,
between Winterthur Swiss Insurance Company and XL Insurance (Bermuda) Ltd
(formerly XL Insurance Ltd), incorporated by reference to Exhibit 99(a) to
the Companys Current Report on Form 8-K (No. 1-10804) filed August 9, 2001.
|
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10.27
|
|
Amendment Agreement, dated July 19, 2002, between
Winterthur Swiss Insurance Company and XL Insurance (Bermuda) Ltd,
incorporated by reference to Exhibit 10.58 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2002 (No. 1-10804).
|
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10.28
|
|
Pledge Agreement, dated as of December 18, 2001,
made by XL Investments Ltd, XL Re Ltd, XL Insurance (Bermuda) Ltd and XL
Europe Ltd, as Grantors, in favor of Citibank, N.A., as Bank, incorporated by
reference to Exhibit 10.54 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2001 (No. 1-10804).
|
|
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10.29
|
|
Amendment No. 1, dated as of June 24, 2002, to the
Pledge Agreement, dated December 18, 2001, made by XL Investments Ltd, XL Re
Ltd, XL Insurance (Bermuda) Ltd, and XL Europe Ltd, as Grantors, in favor of
Citibank, N.A., as Bank, incorporated by reference to Exhibit 10.67 to the
Companys Quarterly Report on Form 10-Q for the period ended September 30,
2003 (No. 1-10804).
|
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|
10.30
|
|
Replacement Capital Covenant, dated March 15, 2007,
incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K (No. 1-10804) filed on March 15, 2007.
|
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|
10.31
|
|
Service Agreement Relative to Sureties, Letters of
Guarantees and International Stand-By Letters of Credit, dated April 25,
2003, between Société Le Mans Re and Credit Lyonnais, incorporated by
reference to Exhibit 10.62 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2003 (No. 1-10804).
|
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10.32
|
|
First Renewal, dated November 27, 2000, between Le
Mans Re and BNP Paribas, to the Reinsurance Stand-By Letter of Credit
Agreement, dated October 7, 1999, incorporated by reference to Exhibit 10.63
to the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2003 (No. 1-10804).
|
217
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|
10.33
|
|
Master Commutation, Release and Restructuring
Agreement by and among XL Capital Ltd, XL Insurance (Bermuda) Ltd, XL
Reinsurance America Inc., X.L. Global Services, Inc., XL Services (Bermuda)
Ltd and X.L. America, Inc., Security Capital Assurance Ltd (SCA), certain
of SCAs subsidiaries and certain financial institutions who have entered
into various credit default swaps with affiliates of SCA, dated as of July
28, 2008, as amended, incorporated by reference to Exhibit 10.10 to the
Companys Quarterly Report on Form 10-Q for the period ended June 30, 2009
(No. 1-10804).
|
|
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|
10.34+
|
|
Employment Agreement, dated as of March 14, 2008 by
and between XL Capital Ltd and Michael S. McGavick, incorporated by reference
to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period
ended March 30, 2008 (No. 1-10804).
|
|
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|
10.35+
|
|
Agreement and Release, dated November 29, 2011,
between XL Group plc and David B. Duclos, incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 1,
2011 (No. 1-10804).
|
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|
10.36+
|
|
Consulting Agreement, dated November 29, 2011,
between XL Group plc, XL Specialty Insurance Company, Inc. and David B.
Duclos, incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on December 1, 2011 (No. 1-10804).
|
|
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|
10.37
|
|
Consulting Agreement, dated as of April 24, 2009,
between XL Capital Ltd and Brian OHara, incorporated by reference to Exhibit
10.3 to the Companys Quarterly Report on Form 10-Q for the period ended June
30, 2009 (No. 1-10804).
|
|
|
|
10.38+
|
|
2008 Form of Employment Agreement between XL Capital
Ltd and certain Executive Officers, incorporated by reference to Exhibit 10.4
to the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2009 (No. 1-10804).
|
|
|
|
10.39+
|
|
2008 Form of Amendment to Employment Agreement
between XL Capital Ltd and certain Executive Officers (amended in response to
Internal Revenue Code Section 457A), incorporated by reference to Exhibit
10.5 to the Companys Quarterly Report on Form 10-Q for the period ended June
30, 2009 (No. 1- 10804).
|
|
|
|
10.40+
|
|
2009 Form of Employment Agreement between XL Capital
Ltd and certain Executive Officers, incorporated by reference to Exhibit 10.6
to the Companys Quarterly Report on Form 10-Q for the period ended June 30,
2009 (No. 1-10804).
|
|
|
|
10.41+
|
|
Amended Employment Agreement, dated as of April 25,
2008, by and between XL Capital Ltd, X.L. Global Services, Inc. and James H.
Veghte (amended in response to Internal Revenue Code Section 409A),
incorporated by reference to Exhibit 10.7 to the Companys Quarterly Report
on Form 10-Q for the period ended June 30, 2009 (No. 1-10804).
|
|
|
|
10.42+
|
|
Amendment to Employment Agreement, dated as of
December 2008, between XL Capital Ltd and Michael S. McGavick (amended in
response to Internal Revenue Code Section 457A), incorporated by reference to
Exhibit 10.9 to the Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2009 (No. 1-10804).
|
|
|
|
10.43+
|
|
Agreement and Release between XL Capital Ltd and
Brian W. Nocco, dated as of November 3, 2009, incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period
ended September 30, 2009 (No. 1-10804).
|
|
|
|
10.44+
|
|
Amendment to Employment Agreement, dated as of
December 16, 2009, by and between XL Capital Ltd and Sarah E. Street,
incorporated by reference to Exhibit 10.52 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2009 (No. 1-10804).
|
|
|
|
10.45+
|
|
Form of Letter Agreement, dated December 15, 2009,
relating to Employment Agreements between XL Capital Ltd and certain
Executive Officers, incorporated by reference to Exhibit 10.52 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2009
(No. 1-10804).
|
|
|
|
10.46
|
|
Insurance Letters of CreditMaster Agreement, dated
November 11, 2009, between XL Insurance (Bermuda) Ltd and Citibank Europe
plc, incorporated by reference to Exhibit 10.52 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2009 (No. 1-10804).
|
|
|
|
10.47
|
|
Pledge Agreement, dated November 11, 2009, between
XL Re Ltd and XL Insurance (Bermuda) Ltd, as Pledgors, and Citibank Europe
plc, as Pledgee, incorporated by reference to Exhibit 10.52 to the Companys
Annual Report on Form
|
218
|
|
|
|
|
10-K for the year ended December 31, 2009 (No.
1-10804).
|
|
|
|
10.48
|
|
Amendment No. 1, dated November 23, 2009, to Pledge
Agreement dated November 11, 2009 between XL Re Ltd and XL Insurance
(Bermuda) Ltd, as Pledgors, and Citibank Europe plc, as Pledgee, incorporated
by reference to Exhibit 10.52 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2009 (No. 1-10804).
|
|
|
|
10.49
|
|
Amendment No. 2, dated December 23, 2009, to Pledge
Agreement dated November 11, 2009 between XL Re Ltd and XL Insurance
(Bermuda) Ltd, as Pledgors, and Citibank Europe plc, as Pledgee, incorporated
by reference to Exhibit 10.57 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2009 (No. 1-10804).
|
|
|
|
10.50+
|
|
Form of Indemnification Agreement, dated July 1,
2010, by and between XL Capital Ltd and certain directors and executive
officers of the Company, incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K12B filed on July 1, 201 (No. 1-10804).
|
|
|
|
10.51+
|
|
Deed Poll Indemnity, dated July 1, 2010, by XL
Capital Ltd, incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K12B filed on July 1, 2010 (No. 1-10804).
|
|
|
|
10.52+
|
|
Employment Agreement, dated as of May 6, 2010,
between XL Capital Ltd and Irene M. Esteves, incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 6, 2010
(No. 1-10804).
|
|
|
|
10.53+
|
|
Supplemental Deferred Compensation Plan, amended and
restated effective as of January 1, 2007, incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the period
ended June 30, 2010 (No. 1-10804).
|
|
|
|
10.54+
|
|
2009 Cash Long Term Program, amended and restated as
of April 30, 2010, incorporated by reference to Exhibit 10.4 to the Companys
Quarterly Report on Form 10-Q for the period ended June 30, 2010 (No.
1-10804).
|
|
|
|
10.55
|
|
Aircraft Time Sharing Agreement, dated February 22,
2011, between Michael S. McGavick and X.L. America, Inc, incorporated by
reference to Exhibit 10.63 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2010.
|
|
|
|
10.56
|
|
Credit Agreement, dated as of March 25, 2011,
between XL Group plc, XL Group Ltd., X.L. America, Inc., XL Insurance
(Bermuda) Ltd, XL Re Ltd, XL Re Europe Limited, XL Insurance Company Limited,
XL Insurance Switzerland Ltd and XL Life Ltd, as Account Parties, XL Group
plc, XL Group Ltd., X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Re Ltd
and XL Life Ltd, as Guarantors, the Lenders party thereto, JPMorgan Chase
Bank, N.A., as Administrative Agent and The Bank of New York Mellon, as
Collateral Agent, incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed on March 28, 2011 (No. 1-10804).
|
|
|
|
10.57
|
|
Pledge Agreement, dated as of March 25, 2011,
between XL Group plc, XL Group Ltd., X.L. America, Inc., Insurance (Bermuda)
Ltd, XL Re Ltd, XL Re Europe Limited, XL Insurance Company Limited, XL
Insurance Switzerland Ltd and XL Life Ltd, as Pledgors, JPMorgan Chase Bank,
N.A., as Administrative Agent, and The Bank of New York Mellon, as Collateral
Agent, incorporated by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed on March 28, 2011 (No. 1-10804).
|
|
|
|
10.58+
|
|
XL Services UK Limited Profit Sharing Scheme,
incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-8 filed on May 11, 2011 (No. 333-174138).
|
|
|
|
10.59+
|
|
Employment Agreement, dated as of June 18, 2011, by
and between XL Group plc, X.L. Global Services, Inc. and Peter R. Porrino,
incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on June 21, 2011.
|
|
|
|
10.60
|
|
Indenture, dated September 30, 2011, among XL Group
plc, XL Group Ltd. (n/k/a XLIT Ltd.) and Wells Fargo Bank, National Association, as
Trustee, incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K filed on September 30, 2011 (No. 1-10804).
|
|
|
|
10.61
|
|
First Supplemental Indenture, dated September 30,
2011 to the Indenture dated September 30, 2011 among XL Group plc, XL Group
Ltd. (n/k/a XLIT Ltd.) and Wells Fargo Bank, National Association, as
Trustee, incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
filed on September 30, 2011 (No. 1-10804).
|
|
|
|
10.62
|
|
Form of 5.75% Senior Note due 2021, incorporated by
reference to Exhibit 4.2 to the Companys Current Report on
|
219
|
|
|
|
|
Form 8-K filed on September 30, 2011 (No. 1-10804).
|
|
|
|
10.63
|
|
Secured Credit Agreement, dated as of December 9,
2011, between XL Group plc, XLIT Ltd., X.L. America, Inc., XL Insurance
(Bermuda) Ltd, XL Re Ltd, XL Re Europe Limited, XL Insurance Company Limited,
XL Insurance Switzerland Ltd and XL Life Ltd, as Account Parties, XL Group
plc, XLIT Ltd., X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Re Ltd and
XL Life Ltd, as Guarantors, the Lenders party thereto, JPMorgan Chase Bank,
N.A., as Administrative Agent and The Bank of New York Mellon, as Collateral
Agent, incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on December 12, 2011.
|
|
|
|
10.64
|
|
Unsecured Credit Agreement, dated as of December 9,
2011, between XL Group plc, XLIT Ltd., X.L. America, Inc., XL Insurance
(Bermuda) Ltd, XL Re Ltd, XL Re Europe Limited, XL Insurance Company Limited,
XL Insurance Switzerland Ltd and XL Life Ltd, as Account Parties, XL Group
plc, XLIT Ltd., X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Re Ltd and
XL Life Ltd, as Guarantors, the Lenders party thereto, and JPMorgan Chase
Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on December 12, 2011.
|
|
|
|
10.65
|
|
Amendment, dated as of December 9, 2011, to the
Credit Agreement, dated as of March 25, 2011, between XL Group plc, XLIT Ltd.
(formerly XL Group Ltd.), X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL
Re Ltd, XL Re Europe Limited, XL Insurance Company Limited, XL Insurance
Switzerland Ltd and XL Life Ltd, as Account Parties, XL Group plc, XLIT Ltd.
(formerly XL Group Ltd.), X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL
Re Ltd and XL Life Ltd, as Guarantors, the Lenders party thereto, JPMorgan
Chase Bank, N.A., as Administrative Agent and The Bank of New York Mellon, as
Collateral Agent, incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed on December 12, 2011.
|
|
|
|
10.66
|
|
Pledge Agreement, dated as of December 9, 2011,
between XL Group plc, XLIT Ltd., X.L. America, Inc., Insurance (Bermuda) Ltd,
XL Re Ltd, XL Re Europe Limited, XL Insurance Company Limited, XL Insurance
Switzerland Ltd and XL Life Ltd, as Pledgors, JPMorgan Chase Bank, N.A., as
Administrative Agent, and The Bank of New York Mellon, as Collateral Agent,
incorporated by reference to Exhibit 10.4 to the Companys Current Report on
Form 8-K filed on December 12, 2011.
|
|
|
|
10.67+*
|
|
Form of Letter Agreement between
XL Global Services, Inc. and/or XL Group plc and certain executive officers.
|
|
|
|
10.68
|
|
Subscription Agreement, dated as
of December 5, 2006, among XL Capital Ltd, Stoneheath Re and Goldman Sachs
International, incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K (No. 1-10804) filed on December 11, 2006.
|
|
|
|
10.69
|
|
Excess of Loss Reinsurance Agreement, dated as of
December 12, 2006, by and among XL Insurance (Bermuda) Ltd, XL Insurance
Switzerland, XL Europe Limited, XL Insurance Company Limited, XL Re Latin
America Ltd, XL Insurance Argentina S.A. Compania de Seguros, XL Insurance
Company Ltd, XL Re Ltd, XL Re Europe Limited, Vitodurum Reinsurance Company,
Underwriting Members of Lloyds Syndicate #1209 and Stoneheath Re,
incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K (No. 1-10804) filed on December 12, 2006.
|
|
|
|
10.70
|
|
Securities Issuance Agreement, dated
as of December 12, 2006, between XL Capital Ltd and Stoneheath Re, incorporated
by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K (No. 1-10804) filed on December 12, 2006.
|
|
|
|
10.71
|
|
Trust Agreement, dated as of December 12, 2006 among
the Asset Swap Counterparty, The Ceding Insurers and XL Capital Ltd as
Beneficiaries and Stoneheath Re, as Guarantor and Beneficiary and The Bank of
New York, as Trustee, incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K (No. 1-10804) filed on December 12,
2006.
|
|
|
|
31*
|
|
Rule 13a-14(a)/15d-14(a) Certifications.
|
|
|
|
32*
|
|
Section 1350 Certifications.
|
|
|
101.INS**
|
XBRL Instance Document
|
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase
Document
|
220
|
|
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase
Document
|
|
|
101.DEF**
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
*
|
Filed herewith
|
**
|
These interactive data
files are furnished herewith and deemed not filed or part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities Act of 1933, as amended, and otherwise are not subject to
liability under those sections.
|
+
|
Management contract or
compensatory plan or arrangement
|
221
R
EPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
XL Group plc:
In
our opinion, the consolidated financial statements listed in the index
appearing under Item 15 (1), present fairly, in all material respects, the
financial position of XL Group plc and its subsidiaries at December 31, 2011
and 2010 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2011 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the index appearing
under Item 15 (2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in
Internal Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements and
financial statement schedules, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Managements Report on Internal
Control over Financial Reporting, Item 9A. Our responsibility is to express opinions
on these financial statements, on the financial statement schedules, and on the
Companys internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As
discussed in Note 2(g) to the consolidated financial statements, the Company
adopted new accounting guidance that changed the manner in which it accounts
for other-than-temporary impairments of available for sale securities in 2009.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
New York, New York
February 27, 2012
222
XL GROUP PLC
S
CHEDULE
I
CONSOLIDATED SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
At December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Type of
Investment
(U.S.
dollars in thousands)
|
|
Cost or
Amortized
Cost (1)
|
|
Fair
Value
|
|
Amount
Presented
in the
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported
|
|
$
|
1,864,354
|
|
$
|
1,990,983
|
|
$
|
1,990,983
|
|
Corporate
|
|
|
10,212,083
|
|
|
10,462,515
|
|
|
10,462,515
|
|
Residential mortgage-backed securities
Agency
|
|
|
5,189,473
|
|
|
5,379,406
|
|
|
5,379,406
|
|
Residential mortgage-backed securities
Non-Agency
|
|
|
851,557
|
|
|
641,815
|
|
|
641,815
|
|
Commercial mortgage-backed securities
|
|
|
927,684
|
|
|
974,835
|
|
|
974,835
|
|
Collateralized debt obligations
|
|
|
843,553
|
|
|
658,602
|
|
|
658,602
|
|
Other asset-backed securities Government
|
|
|
995,903
|
|
|
986,356
|
|
|
986,356
|
|
U.S. States and political subdivisions of
the States
|
|
|
1,698,573
|
|
|
1,797,378
|
|
|
1,797,378
|
|
Non-U.S. Sovereign Government,
Supranational and Government-Related
|
|
|
3,188,535
|
|
|
3,298,135
|
|
|
3,298,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1)
|
|
$
|
25,771,715
|
|
$
|
26,190,025
|
|
$
|
26,190,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
480,685
|
|
$
|
468,197
|
|
$
|
468,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
$
|
359,378
|
|
$
|
359,063
|
|
$
|
359,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, held to maturity (1)
|
|
$
|
2,668,978
|
|
$
|
2,895,688
|
|
$
|
2,668,978
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
849,511
|
|
$
|
958,681
|
|
$
|
985,262
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments other than investments in
related parties
|
|
$
|
30,130,267
|
|
$
|
30,871,654
|
|
$
|
30,671,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investments in fixed
maturities, short-term investments and held to maturity are shown at
amortized cost.
|
223
XL GROUP PLC
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES (CONTINUED)
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Type of
Investment
(U.S.
dollars in thousands)
|
|
Cost or
Amortized
Cost (1)
|
|
Fair
Value
|
|
Amount
Presented
in the
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
Bonds and notes:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
Government-Related/Supported
|
|
$
|
2,499,079
|
|
$
|
2,565,444
|
|
$
|
2,565,444
|
|
Corporate
|
|
|
10,962,804
|
|
|
10,968,971
|
|
|
10,968,971
|
|
Residential mortgage-backed securities
Agency
|
|
|
5,059,249
|
|
|
5,203,711
|
|
|
5,203,711
|
|
Residential mortgage-backed securities
Non-Agency
|
|
|
1,257,474
|
|
|
1,021,823
|
|
|
1,021,823
|
|
Commercial mortgage-backed securities
|
|
|
1,135,075
|
|
|
1,172,507
|
|
|
1,172,507
|
|
Collateralized debt obligations
|
|
|
920,501
|
|
|
734,138
|
|
|
734,138
|
|
Other asset-backed securities Government
|
|
|
979,539
|
|
|
960,532
|
|
|
960,532
|
|
U.S. States and political subdivisions of
the States
|
|
|
1,379,150
|
|
|
1,360,456
|
|
|
1,360,456
|
|
Non-U.S. Sovereign Government,
Supranational and Government-Related
|
|
|
3,129,971
|
|
|
3,154,523
|
|
|
3,154,523
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities (1)
|
|
$
|
27,322,842
|
|
$
|
27,142,105
|
|
$
|
27,142,105
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
56,737
|
|
$
|
84,767
|
|
$
|
84,767
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (1)
|
|
$
|
450,491
|
|
$
|
450,681
|
|
$
|
450,681
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, held to maturity (1)
|
|
$
|
2,728,335
|
|
$
|
2,742,626
|
|
$
|
2,728,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
789,917
|
|
$
|
883,409
|
|
$
|
893,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments other than investments in
related parties
|
|
$
|
31,348,322
|
|
$
|
31,303,588
|
|
$
|
31,299,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investments in fixed
maturities, short-term investments and held to maturity are shown at
amortized cost.
|
224
XL
GROUP PLC
S
CHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS PARENT COMPANY ONLY
As at December 31, 2011 and 2010
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,644
|
|
$
|
2,816
|
|
Amounts due from subsidiaries
|
|
|
80,841
|
|
|
|
|
Investments in subsidiaries on an equity
basis
|
|
|
9,374,825
|
|
|
9,750,149
|
|
Other assets
|
|
|
3,797
|
|
|
901
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,461,107
|
|
$
|
9,753,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Amounts due to subsidiaries (1)
|
|
$
|
|
|
$
|
125,052
|
|
Accounts payable and accrued liabilities
|
|
|
19,145
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
19,145
|
|
$
|
126,909
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
Ordinary shares, 999,990,000 authorized,
par value $0.01 Issued and outstanding: (2011, 315,645,796; 2010,
316,396,289)
|
|
$
|
3,157
|
|
$
|
3,165
|
|
Additional paid in capital
|
|
|
8,955,702
|
|
|
9,009,220
|
|
Accumulated other comprehensive Income
(loss)
|
|
|
583,064
|
|
|
100,795
|
|
Retained earnings (deficit)
|
|
|
(99,961
|
)
|
|
513,777
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
9,441,962
|
|
$
|
9,626,957
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,461,107
|
|
$
|
9,753,866
|
|
|
|
|
|
|
|
|
|
225
XL GROUP PLC
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF INCOME AND COMPREHENSIVE INCOME PARENT COMPANY ONLY
For the Years Ended December 31, 2011, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XL Group plc
|
|
XLIT Ltd. (1
)
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Year Ended
December 31,
2011
|
|
July 1 to
December 31,
2010
|
|
January 1 to
June 30,
2010
|
|
Year Ended
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
2
|
|
$
|
|
|
$
|
44,636
|
|
$
|
20,245
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments sold
|
|
|
|
|
|
|
|
|
25,177
|
|
|
(5,453
|
)
|
Other-than-temporary impairments on investments
|
|
|
|
|
|
|
|
|
(11,670
|
)
|
|
(8,468
|
)
|
Other-than-temporary impairments on investments transferred to other
comprehensive income
|
|
|
|
|
|
|
|
|
4
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains (losses) on investments
|
|
|
|
|
|
|
|
|
13,511
|
|
|
(12,602
|
)
|
Net realized and unrealized gains (losses) on derivative instruments
|
|
|
|
|
|
|
|
|
(4,087
|
)
|
|
(8,830
|
)
|
Equity in net
earnings (losses) of subsidiaries (Dividends were $183,029 in 2011 $197,326
and $448,400 in 2010 and $2,091,474 in 2009)
|
|
|
(400,612
|
)
|
|
275,629
|
|
|
384,311
|
|
|
310,490
|
|
Equity in net earnings of affiliates
|
|
|
|
|
|
|
|
|
2
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
(400,610
|
)
|
$
|
275,629
|
|
$
|
438,373
|
|
$
|
310,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
74,422
|
|
|
9,930
|
|
|
48,256
|
|
|
107,211
|
|
Foreign exchange (gains) losses
|
|
|
(275
|
)
|
|
34
|
|
|
1,003
|
|
|
(122
|
)
|
Interest expense
|
|
|
3
|
|
|
|
|
|
51,431
|
|
|
122,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
74,150
|
|
$
|
9,964
|
|
$
|
100,690
|
|
$
|
229,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
|
(474,760
|
)
|
|
265,665
|
|
|
337,683
|
|
|
80,773
|
|
Provision for income tax
|
|
|
|
|
|
|
|
|
(202
|
)
|
|
5,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(474,760
|
)
|
$
|
265,665
|
|
$
|
337,885
|
|
$
|
74,991
|
|
Preference share dividends
|
|
|
|
|
|
|
|
|
(34,694
|
)
|
|
(80,200
|
)
|
Gain on redemption of Redeemable Series C preference ordinary shares
|
|
|
|
|
|
|
|
|
16,616
|
|
|
211,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shareholders
|
|
$
|
(474,760
|
)
|
$
|
265,665
|
|
$
|
319,807
|
|
$
|
206,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(474,760
|
)
|
$
|
265,665
|
|
$
|
337,885
|
|
$
|
74,991
|
|
Impact of adoption of new authoritative OTTI guidance, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
(229,670
|
)
|
Impact of adoption of new authoritative embedded derivative guidance,
net of taxes
|
|
|
|
|
|
31,917
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investment portfolio, net
of tax
|
|
|
471,696
|
|
|
161,048
|
|
|
880,332
|
|
|
2,391,020
|
|
Change in OTTI losses recognized in other comprehensive income, net
of tax
|
|
|
39,456
|
|
|
93,269
|
|
|
31,637
|
|
|
(123,343
|
)
|
Change in underfunded pension liability
|
|
|
(2,622
|
)
|
|
(6,186
|
)
|
|
3,567
|
|
|
(3,427
|
)
|
Change in value of cash flow hedge
|
|
|
439
|
|
|
219
|
|
|
220
|
|
|
438
|
|
Change in net unrealized gains (losses) on future policy benefit
reserves
|
|
|
|
|
|
|
|
|
(3,714
|
)
|
|
6,554
|
|
Foreign currency translation adjustments
|
|
|
(26,700
|
)
|
|
159,261
|
|
|
(108,308
|
)
|
|
180,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
7,509
|
|
$
|
705,193
|
|
$
|
1,141,619
|
|
$
|
2,297,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As part of the
Redomestication on July 1, 2010, XL-Cayman became a wholly-owned subsidiary
of XL-Ireland, and as such, certain of the above financial data with respect
to periods prior to the Redomestication are not comparable for periods
subsequent to the Redomestication.
|
226
XL GROUP PLC
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS PARENT COMPANY ONLY
For the Years Ended December 31, 2011, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XL Group plc
|
|
XLIT Ltd. (1
)
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Year Ended
December 31,
2011
|
|
July 1 to
December 31,
2010
|
|
January 1 to
June 30,
2010
|
|
Year Ended
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(474,760
|
)
|
$
|
265,665
|
|
$
|
337,885
|
|
$
|
74,991
|
|
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (gains) losses on investments and derivative instruments
|
|
|
|
|
|
|
|
|
(9,423
|
)
|
|
21,432
|
|
Equity in (earnings) loss of subsidiaries
|
|
|
400,612
|
|
|
(275,629
|
)
|
|
(384,311
|
)
|
|
(310,490
|
)
|
Equity in net (income) of affiliates
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
(1,221
|
)
|
Share based compensation
|
|
|
29,377
|
|
|
15,705
|
|
|
15,586
|
|
|
32,231
|
|
Amortization of premiums (discounts) on fixed maturities
|
|
|
|
|
|
|
|
|
(9,791
|
)
|
|
221
|
|
Accretion of notes payable and debt
|
|
|
|
|
|
|
|
|
341
|
|
|
681
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
(24,973
|
)
|
|
(57,806
|
)
|
Amounts due to (from) subsidiaries
|
|
|
(205,893
|
)
|
|
125,052
|
|
|
(183,273
|
)
|
|
(3,259,462
|
)
|
Dividends received from subsidiaries
|
|
|
183,029
|
|
|
448,400
|
|
|
197,326
|
|
|
2,091,474
|
|
Other
|
|
|
22,804
|
|
|
7,914
|
|
|
30,936
|
|
|
17,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
429,929
|
|
|
321,442
|
|
|
(367,584
|
)
|
|
(1,465,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(44,831
|
)
|
$
|
587,107
|
|
$
|
(29,699
|
)
|
$
|
(1,390,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of fixed maturities and short-term investments
|
|
$
|
|
|
$
|
|
|
$
|
369,752
|
|
$
|
245,629
|
|
Proceeds from redemption of fixed maturities and short-term
investments
|
|
|
|
|
|
|
|
|
575,326
|
|
|
2,860,755
|
|
Proceeds from sale of equity securities
|
|
|
|
|
|
|
|
|
238
|
|
|
|
|
Purchases of fixed maturities and short term investments
|
|
|
|
|
|
|
|
|
(919,840
|
)
|
|
(4,475,472
|
)
|
Investment in subsidiaries
|
|
|
272,398
|
|
|
|
|
|
298,119
|
|
|
1,955,045
|
|
Investment in affiliates
|
|
|
|
|
|
|
|
|
5
|
|
|
1,743
|
|
Investment in limited partnerships
|
|
|
|
|
|
|
|
|
95
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
272,398
|
|
$
|
|
|
$
|
323,695
|
|
$
|
588,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of ordinary shares and exercise of stock
options
|
|
$
|
576,333
|
|
$
|
1,182
|
|
$
|
|
|
$
|
745,000
|
|
Repurchase of Series E preference ordinary shares
|
|
|
|
|
|
|
|
|
(94,157
|
)
|
|
(104,718
|
)
|
Dividends paid
|
|
|
(138,050
|
)
|
|
(65,350
|
)
|
|
(106,471
|
)
|
|
(225,008
|
)
|
Buybacks of ordinary shares
|
|
|
(667,022
|
)
|
|
(520,184
|
)
|
|
(1,840
|
)
|
|
(626
|
)
|
Repayment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(745,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
(228,739
|
)
|
$
|
(584,352
|
)
|
$
|
(202,468
|
)
|
$
|
(330,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,172
|
)
|
|
2,755
|
|
|
91,528
|
|
|
(1,132,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
2,816
|
|
|
61
|
|
|
600,993
|
|
|
1,733,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
1,644
|
|
$
|
2,816
|
|
$
|
692,521
|
|
$
|
600,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As part of the
Redomestication on July 1, 2010, XL-Cayman became a wholly-owned subsidiary
of XL-Ireland, and as such, certain of the above financial data with respect
to periods prior to the Redomestication are not comparable for periods
subsequent to the Redomestication.
|
227
XL GROUP PLC
S
CHEDULE IV
REINSURANCE
For the Years Ended December 31, 2011, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(U.S.
dollars in thousands)
|
|
Gross
Amount
|
|
Ceded
to Other
Companies
|
|
Assumed
from Other
Companies
|
|
Net
Amount
|
|
Percentage
of Amount
Assumed
to Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life reinsurance in force(1)
|
|
$
|
|
|
$
|
559,676
|
|
$
|
88,646,215
|
|
$
|
88,086,538
|
|
|
100.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty operations
|
|
$
|
4,624,557
|
|
$
|
1,477,000
|
|
$
|
2,179,555
|
|
$
|
5,327,112
|
|
|
40.9
|
%
|
Life operations
|
|
|
|
|
|
32,308
|
|
|
395,326
|
|
|
363,018
|
|
|
108.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned:
|
|
$
|
4,624,557
|
|
$
|
1,509,308
|
|
$
|
2,574,881
|
|
$
|
5,690,130
|
|
|
45.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life reinsurance in force(1)
|
|
$
|
|
|
$
|
559,674
|
|
$
|
100,908,397
|
|
$
|
100,348,723
|
|
|
100.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty operations
|
|
$
|
4,535,626
|
|
$
|
1,342,017
|
|
$
|
1,837,528
|
|
$
|
5,031,137
|
|
|
36.5
|
%
|
Life operations
|
|
|
|
|
|
32,226
|
|
|
415,150
|
|
|
382,924
|
|
|
108.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned:
|
|
$
|
4,535,626
|
|
$
|
1,374,243
|
|
$
|
2,252,678
|
|
$
|
5,414,061
|
|
|
41.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life reinsurance in force(1)
|
|
$
|
|
|
$
|
565,048
|
|
$
|
129,797,640
|
|
$
|
129,232,592
|
|
|
100.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty operations
|
|
$
|
4,861,073
|
|
$
|
1,586,968
|
|
$
|
1,877,634
|
|
$
|
5,151,739
|
|
|
36.4
|
%
|
Life operations
|
|
|
|
|
|
41,275
|
|
|
596,376
|
|
|
555,101
|
|
|
107.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned:
|
|
$
|
4,861,073
|
|
$
|
1,628,243
|
|
$
|
2,474,010
|
|
$
|
5,706,840
|
|
|
43.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the sum face
value outstanding of in force life reinsurance policies.
|
228
XL
GROUP PLC
SCHEDULE VI
SUPPLEMENTARY INFORMATION
C
ONCERNING PROPERTY/CASUALTY (RE)INSURANCE
OPERATIONS
For
the Years Ended December 31, 2011, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and Loss
Expenses
incurred related to
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
For
Losses
and Loss
Expenses
|
|
|
|
|
|
|
|
|
Net
Paid
Losses
and
Loss
Expenses
|
|
|
|
|
|
(U.S.
dollars
in
thousands)
|
|
Deferred
Acquisition
Costs
|
|
|
Reserves
for
Unearned
Premiums
|
|
|
|
|
|
|
|
Amortization
of Deferred
Acquisition
Costs
|
|
|
|
|
|
|
|
Net
Earned
Premiums
|
|
Net
Investment
Income
|
|
|
|
|
|
Net
Premiums
Written
|
|
|
|
|
|
|
|
Current
Year
|
|
Prior
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011(1)
|
|
$
|
531,282
|
|
$
|
20,613,901
|
|
$
|
3,555,310
|
|
$
|
5,327,112
|
|
$
|
745,138
|
|
$
|
4,363,258
|
|
$
|
(284,867
|
)
|
$
|
3,846,202
|
|
$
|
786,093
|
|
$
|
5,433,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010(1)
|
|
$
|
498,385
|
|
$
|
20,531,607
|
|
$
|
3,469,934
|
|
$
|
5,031,137
|
|
$
|
803,358
|
|
$
|
3,584,662
|
|
$
|
(372,862
|
)
|
$
|
3,470,509
|
|
$
|
739,154
|
|
$
|
4,999,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)
|
|
$
|
486,180
|
|
$
|
20,823,524
|
|
$
|
3,646,815
|
|
$
|
5,151,739
|
|
$
|
882,748
|
|
$
|
3,453,577
|
|
$
|
(284,740
|
)
|
$
|
3,875,935
|
|
$
|
775,869
|
|
$
|
4,743,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The information presented above includes P&C
Operations balances only.
|
229
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
Date:
February 27, 2012
|
|
|
|
|
XL Group plc
|
|
(Registrant)
|
|
|
|
/s/ M
ICHAEL
S. M
C
G
AVICK
|
|
|
|
Name: Michael S. McGavick
|
|
Title: Chief Executive
Officer and Director
|
|
XL Group plc
|
|
|
Date:
February 27, 2012
|
|
|
|
|
/s/ P
ETER
R. P
ORRINO
|
|
|
|
Name: Peter R. Porrino
|
|
Title: Chief Financial
Officer
|
|
XL Group plc
|
230
POWER OF ATTORNEY
We,
the undersigned directors and executive officers of XL Group plc, hereby
severally constitute Michael S. McGavick, Peter R. Porrino and Kirstin Gould,
and each of them singly, our true and lawful attorneys with full power to them
and each of them to sign for us, and in our names in the capacities indicated
below, any and all amendments to the Annual Report on Form 10-K filed with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys to any and all
amendments to said Annual Report on Form 10-K.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ M
ICHAEL
S. M
C
G
AVICK
|
|
Chief Executive Officer
(Principal Executive
|
|
February
27, 2012
|
|
|
Officer) and Director
|
|
|
Michael
S. McGavick
|
|
|
|
|
|
|
|
|
|
/s/ P
ETER
R. P
ORRINO
|
|
Chief Financial Officer
(Principal Financial Officer
|
|
February
27, 2012
|
|
|
and Principal Accounting
Officer)
|
|
|
Peter
R. Porrino
|
|
|
|
|
|
|
|
|
|
/s/ R
AMANI
A
YER
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Ramani
Ayer
|
|
|
|
|
|
|
|
|
|
/s/
D
ALE
R. C
OMEY
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Dale
R. Comey
|
|
|
|
|
|
|
|
|
|
/s/
R
OBERT
R. G
LAUBER
|
|
Director and Chairman of
the Board of Directors
|
|
February
27, 2012
|
|
|
|
|
|
Robert
R. Glauber
|
|
|
|
|
|
|
|
|
|
/s/
H
ERBERT
N. H
AAG
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Herbert
N. Haag
|
|
|
|
|
|
|
|
|
|
/s/
S
UZANNE
B. L
ABARGE
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Suzanne
B. Labarge
|
|
|
|
|
|
|
|
|
|
/s/
J
OSEPH
M
AURIELLO
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Joseph
Mauriello
|
|
|
|
|
|
|
|
|
|
/s/
E
UGENE
M. M
CQUADE
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Eugene
M. McQuade
|
|
|
|
|
|
|
|
|
|
/s/
C
LAYTON
S. R
OSE
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Clayton
S. Rose
|
|
|
|
|
|
|
|
|
|
/s/
S
IR
J
OHN
V
EREKER
|
|
Director
|
|
February
27, 2012
|
|
|
|
|
|
Sir John Vereker
|
|
|
|
|
231
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