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XL > SEC Filings for XL > Form 10-Q on 6-May-2014All Recent SEC Filings

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Form 10-Q for XL GROUP PLC


6-May-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ITEM 2. RESULTS OF OPERATIONS

GENERAL
The following is a discussion of our financial condition and liquidity and results of operations. Certain aspects of our business have loss experience characterized as low frequency and high severity. This may result in volatility from period to period in both the Company's and an individual segment's results of operations and financial condition. Unless the context otherwise indicates, references herein to "the Company," "we," "us," or "our" are to XL Group plc, an Irish public limited company ("XL-Ireland"), and its consolidated subsidiaries. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our 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, as well as Item 1A, "Risk Factors," included in our Annual Report on Form 10-K for the year ended December 31, 2013. This discussion and analysis should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited Consolidated Financial Statements and Notes thereto, presented under Item 7 and Item 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2013.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. Any prospectus, prospectus supplement, Annual Report to ordinary shareholders, proxy statement, Form 10-K, Form 10-Q or Form 8-K or any other written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us 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," "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. We believe that these factors include, but are not limited to, the following:
? changes in the size of our 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;

? trends in rates for property and casualty insurance and reinsurance;

? the timely and full recoverability of reinsurance placed by us with third parties, or other amounts due to us;

? changes in ratings or rating agency policies or practices;

? changes in the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers;

? the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than we anticipated;

? our ability to successfully implement our business strategy;

? increased competition on the basis of pricing, capacity, coverage terms or other factors, which could harm our ability to maintain or increase our business volumes or profitability;

? greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

? changes in general economic conditions, including the effects of inflation on our business, including on pricing and reserving, and changes in interest rates, credit spreads, foreign currency exchange rates and future volatility in the world's credit, financial and capital markets that adversely affect the performance and valuation of our investments or access to such markets;

? developments, including uncertainties related to the future of the Euro-zone, 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;

? the potential impact on us from government-mandated insurance coverage for acts of terrorism;

? the potential for changes to methodologies, estimations and assumptions that underlie the valuation of our financial instruments that could result in changes to investment valuations;


? changes to our assessment as to whether it is more likely than not that we will be required to sell, or have the intent to sell, available for sale debt securities before their anticipated recovery;

? the availability of borrowings and letters of credit under our credit facilities;

? the ability of our subsidiaries to pay dividends to XL-Ireland and XLIT Ltd., an exempted company organized under the laws of the Cayman Islands ("XL-Cayman");

? the potential effect of regulatory developments in the jurisdictions in which we operate, including those which could impact the financial markets or increase our business costs and required capital levels;

? changes in regulations or laws applicable to us or our subsidiaries, brokers or customers;

? acceptance of our products and services, including new products and services;

? changes in the availability, cost or quality of reinsurance;

? changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;

? loss of key personnel;

? changes in accounting standards, policies or practices or the application thereof;

? legislative or regulatory developments including, but not limited to, changes in regulatory capital balances that must be maintained by our operating subsidiaries and governmental actions for the purpose of stabilizing the financial markets;

? the effects of mergers, acquisitions and divestitures;

? developments related to bankruptcies of companies insofar as they affect property and casualty insurance and reinsurance coverages or claims that we may have as a counterparty;

? changes in applicable tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof;

? the effects of business disruption or economic contraction due to war, terrorism or other hostilities; and

? the other factors set forth in Item 1A, "Risk Factors," included in our Annual Report on Form 10-K for the year ended December 31, 2013 and our 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. We undertake 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.
EXECUTIVE OVERVIEW
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview," included in our Annual Report on Form 10-K for the year ended December 31, 2013. That discussion is updated with the disclosures set forth below.

RESULTS OF OPERATIONS AND KEY FINANCIAL MEASURES
Results of Operations
The following table presents an analysis of our net income (loss) attributable
to ordinary shareholders and other financial measures (described below) for the
three months ended March 31, 2014 and 2013:
                                                                  Three Months Ended
                                                                      March 31,
(U.S. dollars in thousands, except per share amounts)             2014          2013
Net income (loss) attributable to ordinary shareholders       $  255,717     $ 350,790
Earnings (loss) per ordinary share - basic                    $     0.93     $    1.19
Earnings (loss) per ordinary share - diluted                  $     0.91     $    1.17
Weighted average number of ordinary shares and ordinary share
equivalents, in thousands - basic                                276,337       295,000
Weighted average number of ordinary shares and ordinary share
equivalents, in thousands - diluted                              280,458       299,469


Key Financial Measures
The following are some of the financial measures management considers important
in evaluating our operating performance:
                                                                  Three Months Ended
                                                            March 31,                    Change
(U.S. dollars in thousands, except ratios and
per share amounts)                                     2014             2013          2014 to 2013
Underwriting profit (loss) - P&C operations      $      144,874     $   180,588              (19.8 )%
Combined ratio - P&C operations                            89.7 %          87.7 %           2.0pts
Net investment income - P&C operations           $      162,297     $   174,780               (7.1 )%
Operating net income (1)                         $      238,649     $   279,868              (14.7 )%
Operating net income per share (1)               $         0.85     $      0.93     $        (0.08 )
Annualized return on average ordinary
shareholders' equity (1)                                   10.1 %          13.4 %         (3.3)pts
Annualized operating return on average ordinary
shareholders' equity (1)                                    9.4 %          10.7 %         (1.3)pts
Annualized operating return on average ordinary
shareholders' equity excluding unrealized gains
and losses on investments (1)                              10.4 %          12.3 %         (1.9)pts

                                                                    December 31,         Change
(U.S. dollars)                                    March 31, 2014        2013         (Three Months)
Book value per ordinary share (1)                $        37.45     $     35.92     $         1.53
Fully diluted tangible book value per ordinary
share (1)                                        $        35.30     $     33.86     $         1.44


____________


(1) Represents a non-GAAP financial measure as discussed further below.

The following are descriptions of these key financial measures and a brief discussion of the factors influencing them:
Underwriting profit - property and casualty ("P&C") operations One way that we evaluate the performance of our insurance and reinsurance operations is by underwriting profit or loss. We do 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.
In the following discussion as well as in the "Income Statement Analysis" section, the following ratios are used to explain the underwriting profit (loss) from our P&C operations:
? The combined ratio related to the P&C 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. In the P&C industry, the combined ratio is a widely used measure of underwriting profitability.

? The loss and loss expense ratio related to the P&C operations is calculated by dividing the losses and loss expenses incurred by the net premiums earned for the Insurance and Reinsurance segments.

? The underwriting expense ratio related to the P&C operations is the sum of acquisition costs and operating expenses for the Insurance and Reinsurance segments divided by net premiums earned for the Insurance and Reinsurance segments.

? The acquisition expense ratio related to the P&C operations is calculated by dividing the acquisition costs incurred by the net premiums earned for the Insurance and Reinsurance segments.

? The operating expense ratio related to the P&C operations is calculated by dividing the operating expenses incurred by the net premiums earned for the Insurance and Reinsurance segments.

Our underwriting profit (loss) in the three months ended March 31, 2014 and 2013 was consistent with the combined ratio, discussed below.


Combined ratio - P&C operations
The following table presents the ratios for our P&C operations for the three months ending March 31:

                                               Percentage Point
                                                    Change
                             2014     2013       2014 to 2013
Loss and loss expense ratio 58.9 %   57.6 %             1.3
Acquisition expense ratio   13.6 %   14.8 %            (1.2 )
Operating expense ratio     17.2 %   15.3 %             1.9
Underwriting expense ratio  30.8 %   30.1 %             0.7
Combined ratio              89.7 %   87.7 %             2.0

Three months ended March 31, 2014 vs. 2013: The loss and loss expense ratio increase was primarily as a result of higher levels of natural catastrophe losses in 2014, changes in the mix of business and the impact of competitive market conditions, partially offset by higher favorable prior year reserve development in 2014 compared to 2013. The underwriting expense ratio increase was mainly driven by the Insurance segment due to higher operating expenses as a result of increased compensation costs from business expansion, partially offset by a decrease in acquisition expenses due to a change in the reinsurance structure in the Professional business group during 2014 as compared to 2013. For further information on our combined ratio, see "Income Statement Analysis" below.
Net investment income - P&C operations
Net investment income related to P&C operations, which includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments, net of related investment expenses, is an important measure that affects our overall profitability. Our largest liability relates to our unpaid loss reserves, and our 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, foreign exchange rates and changes in overall asset allocation. See the segment results under "Investment Activities" below for a discussion of our net investment income for the three months ended March 31, 2014.
Operating net income and Operating net income per share Operating net income is a non-GAAP financial measure defined as net income
(loss) attributable to ordinary shareholders excluding: (1) our net realized gains and losses on investments, net of tax, (2) our net realized and unrealized gains and losses on derivatives, net of tax, (3) our share of items (1) and (2) for our operating affiliates for the periods presented, (4) goodwill impairment charges, net of tax, (5) the gains recognized on our purchase of XL-Cayman's preference ordinary shares and (6) foreign exchange gains or losses, net of tax. We evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income (loss), we believe that showing operating net income (loss) enables investors and other users of our financial information to analyze our performance in a manner similar to how we analyze our performance. In this regard, we believe that providing only a GAAP presentation of net income (loss) would make it more difficult for users of our financial information to evaluate our underlying business. We also believe that equity analysts and certain rating agencies that follow us (and the insurance industry as a whole) exclude these items from their analyses for the same reasons and they request that we provide this non-GAAP financial information on a regular basis. A reconciliation of our net income (loss) attributable to ordinary shareholders to operating net income (loss) is provided at "Reconciliation of Non-GAAP Measures" below. Operating net income per share is calculated by dividing non-GAAP operating net income by the weighted average number of ordinary shares and ordinary share equivalents outstanding for each period combined with the impact from dilution of share-based compensation and certain conversion features where dilutive. Annualized return on average ordinary shareholders' equity ("ROE") ROE is another non-GAAP financial measure that we consider important in evaluating our operating performance and view as a key measure of return generated for ordinary shareholders. ROE is calculated by dividing the net income (loss) attributable to ordinary shareholders for any period by the average of the opening and closing Shareholders' equity attributable to XL-Ireland. We establish minimum target ROEs for our total operations, segments and lines of business. If our minimum


ROE targets over the longer term are not met with respect to any line of business, we seek to modify and/or exit this line. In addition, among other factors, compensation of our senior officers is dependent on the achievement of our performance goals to enhance ordinary shareholder value as measured by ROE (adjusted for certain items considered to be "non-operating" in nature). The following table presents our ROE for the three months ending March 31:

                         Change
     2014     2013    2014 to 2013
ROE 10.1 %   13.4 %       (3.3)pts

Three months ended March 31, 2014 vs. 2013: The decrease in our ROE was primarily due to lower underwriting results and lower net investment income, partially offset by higher affiliate earnings in 2014 than in 2013 as further discussed below under "Significant Items Affecting the Results of Operations" and "Income Statement Analysis."
Annualized operating return on average ordinary shareholders' equity ("Operating ROE")
Operating ROE is another non-GAAP financial measure that we consider important in evaluating our operating performance. Operating ROE is derived by dividing non-GAAP operating net income for any period by the average of the opening and closing ordinary shareholders' equity.
The following table presents our Operating ROE for the three months ending March 31:

                                  Change
              2014     2013    2014 to 2013
Operating ROE 9.4 %   10.7 %       (1.3)pts

Three months ended March 31, 2014 vs. 2013: The decrease in our Operating ROE was the result of the lower operating net income in 2014 due to the factors discussed above as part of ROE.
A reconciliation of Net income (loss) attributable to ordinary shareholders to operating net income (loss) is provided at "Reconciliation of Non-GAAP Measures" included below.
Annualized operating return on average ordinary shareholders' equity excluding unrealized gains and losses on investments ("Operating ROE ex-UGL") Operating ROE ex-UGL is an additional measure of our profitability that eliminates the impacts of mark to market fluctuations on our investment portfolio that have not been realized through sales, which we believe provides a consistent measure of our performance. Operating ROE ex-UGL is derived from the non-GAAP operating net income measure by dividing non-GAAP operating net income for any period by the average of the opening and closing ordinary shareholders' equity excluding unrealized gains and losses on investments. A reconciliation of the opening and closing ordinary shareholders' equity to the opening and closing ordinary shareholders' equity excluding unrealized gains and losses on investments is provided under "Reconciliation of Non-GAAP Measures" below. The following table presents our Operating ROE ex-UGL for the three months ending March 31:

                                          Change
                      2014     2013    2014 to 2013
Operating ROE ex-UGL 10.4 %   12.3 %       (1.9)pts

Three months ended March 31, 2014 vs. 2013: The decrease in our Operating ROE ex-UGL was the result of the lower operating net income in 2014 due to the factors discussed above as part of ROE.
Book value per ordinary share
We view the change in our book value per ordinary share as an additional measure of our performance, representing the value generated for our ordinary shareholders each period, and we believe that this measure (along with the diluted measures described below) is a key driver of our share price over time. Book value per ordinary share, a non-GAAP financial measure, is calculated by dividing ordinary shareholders' equity (total shareholders' equity less non-controlling interest in equity of consolidated subsidiaries) by the number of outstanding ordinary shares at the applicable period end. Book value per ordinary share is affected primarily by net income (loss), by any changes in the net unrealized gains and losses on our


investment portfolio, by currency translation adjustments and by the impact of any share buyback or issuance activity. Ordinary shareholders' equity was $10.2 billion and $10.0 billion and the number of ordinary shares outstanding was 273.6 million and 278.3 million at March 31, 2014 and December 31, 2013, 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.
The following table presents our book value per ordinary share at March 31, 2014 and December 31, 2013:
Change
(U.S. dollars) March 31, 2014 December 31, 2013 (Three Months)
Book value per ordinary share $ 37.45 $ 35.92 $ 1.53

Three months ended March 31, 2014: The increase in our book value per ordinary share was primarily due to our net income attributable to ordinary shareholders, an increase in net unrealized gains on investments combined with the benefit of share buyback activity, partially offset by the payment of dividends. Fully diluted tangible book value per ordinary share Fully diluted tangible book value per ordinary share is a non-GAAP financial measure and is calculated by dividing ordinary shareholders' equity excluding intangible assets (as disclosed on the face of the balance sheet) by the number of outstanding ordinary shares at any period end combined with the impact from dilution of share-based compensation and certain conversion features where dilutive.
The following table presents our fully diluted tangible book value per ordinary share at March 31, 2014 and December 31, 2013:
December 31, Change
(U.S. dollars) March 31, 2014 2013 (Three Months)
Fully diluted tangible book value per ordinary share $ 35.30 $ 33.86 $ 1.44

Three months ended March 31, 2014: The increase in our fully diluted tangible book value per ordinary share was a result of the factors noted above as part of book value per ordinary share.


RECONCILIATION OF NON-GAAP MEASURES
The following is a reconciliation of net income (loss) attributable to ordinary
shareholders to operating net income (loss) and also includes the calculation of
Operating ROE and Operating ROE ex-UGL for the three months ended March 31, 2014
and 2013:
                                                                 Three Months Ended
(U.S. dollars in thousands, except ratios and per share               March 31,
amounts)                                                        2014             2013
Net income (loss) attributable to ordinary shareholders    $    255,717     $    350,790
Net realized (gains) losses on investments, net of tax          (18,889 )        (36,238 )
Net realized and unrealized (gains) losses on derivatives,
net of tax                                                       (1,810 )         (7,885 )
Net realized and unrealized (gains) losses on investments
and derivatives related to the Company's insurance company
affiliates                                                       (3,958 )           (180 )
Foreign exchange (gains) losses, net of tax                       7,589          (26,619 )
Operating net income (loss)                                $    238,649     $    279,868
Per ordinary share results:
Net income (loss) attributable to ordinary shareholders -
diluted                                                    $       0.91     $       1.17
Operating net income (loss) - diluted                      $       0.85     $       0.93
Weighted average ordinary shares outstanding, in
thousands:
Basic                                                           276,337          295,000
Diluted                                                         280,458          299,469
Return on ordinary shareholders' equity:
Closing ordinary shareholders' equity (at period end)      $ 10,244,962     $ 10,487,354
Unrealized (gain) loss on investments, net of tax (at
period end)                                                $ (1,025,711 )   $ (1,364,979 )
Average ordinary shareholders' equity for the period
excluding unrealized gains and losses on investments       $  9,217,939     $  9,078,000
Average ordinary shareholders' equity for the period       $ 10,121,298     $ 10,498,716
Operating net income (loss)                                $    238,649     $    279,868
Annualized operating net income (loss)                     $    954,596     $  1,119,472
Annualized operating ROE                                            9.4 %           10.7 %
Annualized operating ROE ex-UGL                                    10.4 %           12.3 %

SIGNIFICANT ITEMS AFFECTING THE RESULTS OF OPERATIONS
The Company's net income and other financial measures as shown above for the three months ended March 31, 2014 have been affected by, among other things, the following significant items:
1) The current underwriting environment; and
2) Market movement impacts on our investment portfolio.
1) The Current Underwriting Environment There can be no assurance that the following (re)insurance rate conditions or . . .

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