The following is a reconciliation of the Company’s (i) net income (loss) attributable to ordinary shareholders to operating net income (loss) (Note 1) and (ii) annualized return on ordinary shareholders’ equity (based on operating net income (loss)) to average ordinary shareholders’ equity for the three months ended March 31, 2011 and 2010.
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| | Three months ended
March 31
(Unaudited) | |
(U.S. dollars in thousands) | | 2011 | | 2010 | |
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Net income (loss) attributable to ordinary shareholders | | $ | (227,284 | ) | $ | 127,996 | |
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Net realized losses on investments, net of tax | | | 63,315 | | | 36,242 | |
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Net realized and unrealized losses (gains) on derivatives, net of tax | | | (5,209 | ) | | 20,217 | |
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Net realized and unrealized (gains) losses on investments and derivatives related to the Company’s insurance company affiliates | | | (874 | ) | | (1,121 | ) |
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Foreign exchange (gains) losses, net of tax | | | 7,197 | | | (17,106 | ) |
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Gain on repurchase of preference ordinary shares | | | (134 | ) | | (16,616 | ) |
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Operating net income (loss) (Note 1) | | $ | (162,989 | ) | $ | 149,612 | |
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Per ordinary share results: (Note 2) | | | | | | | |
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Net income (loss) attributable to ordinary shareholders | | $ | (0.73 | ) | $ | 0.37 | |
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Operating net income (loss) (Note 1) | | $ | (0.52 | ) | $ | 0.44 | |
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Weighted average ordinary shares outstanding: | | | | | | | |
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Basic | | | 311,478,402 | | | 342,148,365 | |
Diluted - Net income | | | 311,478,402 | | | 342,759,685 | |
Diluted - Operating net income | | | 311,478,402 | | | 342,759,685 | |
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Return on ordinary shareholders’ equity: | | | | | | | |
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Average ordinary shareholders’ equity | | $ | 9,438,975 | | $ | 8,734,685 | |
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Operating net income (loss) (Note 1) | | $ | (162,989 | ) | $ | 149,612 | |
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Annualized operating net income (loss) (Note 1) | | | N/A | | $ | 598,448 | |
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Annualized return on ordinary shareholders’ equity - operating net income (loss)
(Notes 1 and 3) | | | N/A | | | 6.9 | % |
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Note 1: Defined as net income (loss) attributable to ordinary shareholders excluding net realized gains and losses on investments, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax, for the Company and its share of these items for the Company’s insurance company affiliates for the periods presented, the gains recognized on the repurchase of the Company’s preference ordinary shares, as well as foreign exchange gains or losses, net of tax. Operating net income and annualized return on ordinary shareholders’ equity based on operating net income are “ non-GAAP financial measures.” The results from prior periods have been reclassified to conform to the current period’s press release.
Note 2: Diluted weighted average number of ordinary shares outstanding is used to calculate per share data except where it is anti-dilutive to earnings per share or where there is a net loss. When it is anti-dilutive or when a net loss occurs, basic weighted average ordinary shares outstanding is utilized in the calculation of net loss per share and net operating loss per share.
Note 3: Ordinary shareholders’ equity is defined as total shareholders’ equity less preference ordinary shares and less non-controlling interest in equity of consolidated subsidiaries.
Note 4: Certain amounts have been reclassified to conform to the current period presentation.
Comment on Regulation G
XL presents its operations in the way it believes will be most meaningful and useful to investors, analysts, rating agencies and others who use XL’s financial information in evaluating XL’s performance. This press release contains the presentation of (i) operating net income (loss) (“Operating Net Income”), which is defined as net income (loss) attributable to ordinary shareholders excluding net realized gains and losses on investments, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax, for the Company and its share of these items for the Company’s insurance company affiliates for the periods presented, the gains recognized on the repurchase of the Company’s preference ordinary shares, as well as foreign exchange gains or losses, net of tax (ii) annualized return on ordinary shareholders’ equity (“ROE”) based on operating net income (loss) (“Operating ROE”) and (iii) book value per ordinary share (ordinary shareholders’ equity divided by the number of shares outstanding at the period end date) and fully diluted book value per ordinary share (book value per share adjusted for the impact of share based compensation and certain conversion features where dilutive). These items are “non-GAAP financial measures” as defined in Regulation G. The reconciliation of such measures to the most directly comparable GAAP financial measures in accordance with Regulation G is included in this press release.
Although the investment of premiums to generate income (or loss) and realized capital gains (or losses) is an integral part of XL’s operations and the Company’s insurance company operating affiliates, the determination to realize capital gains (or losses) is independent of the underwriting process. In addition, under applicable GAAP accounting requirements, losses can be created as the result of other than temporary declines in value without actual realization. In this regard, certain users of XL’s financial information, including certain rating agencies, evaluate earnings before tax and capital gains to understand the profitability of the recurring sources of income without the effects of this variable. Furthermore, these users believe that, for many companies, the timing of the realization of capital gains is largely a function of economic and interest rate conditions.
Investment derivatives include all derivatives entered into by XL other than credit derivatives. With respect to credit derivatives, because XL and its insurance company operating affiliates generally hold financial guaranty contracts written in credit default derivative form to maturity, the net effects of the changes in fair value of these credit derivatives are excluded (similar with other companies’ treatment of such contracts) as the changes in fair value each quarter are not indicative of underlying business performance.
The gains recognized on the repurchase of the Company’s preference ordinary shares, are excluded as these transactions were capital in nature and outside the scope of the Company’s underlying business.
Foreign exchange gains and losses in the income statement are only one element of the overall impact of foreign exchange fluctuations on the Company’s financial position and are not representative of any economic gain or loss made by the Company. Accordingly, it is not a relevant indicator of financial performance and it is excluded.
In summary, XL evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income (loss), XL believes that showing operating net income (loss) enables investors and other users of XL’s financial information to analyze XL’s performance in a manner similar to how management of XL analyzes performance. In this regard, XL believes that providing only a GAAP presentation of net income (loss) makes it much more difficult for users of XL’s financial information to evaluate XL’s underlying business. Also, as stated above, XL believes that the equity analysts and certain rating agencies that follow XL (and the insurance industry as a whole) exclude these items from their analyses for the same reasons and they request that XL provide this non-GAAP financial information on a regular basis.
Operating ROE is a widely used measure of any company’s profitability that is calculated by dividing annualized Operating Net Income for any period by the average of the opening and closing ordinary shareholders’ equity. The Company establishes target Operating ROEs for its total operations, segments and lines of business. If the Company’s Operating ROE targets are not met with respect to any line of business over time, the Company seeks to re-evaluate these lines.
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