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Selected balance sheet data:
(U.S. dollars in thousands, except per share amounts)
(Unaudited) | | At
September 30,
2012 | | At
December 31,
2011 (Note 1) | |
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Total investments available for sale | | $ | 28,315,925 | | $ | 27,017,285 | |
Total fixed maturities, held to maturity | | | 2,805,796 | | | 2,668,978 | |
Cash and cash equivalents | | | 3,197,305 | | | 3,825,125 | |
Investments in affiliates | | | 1,027,122 | | | 1,052,729 | |
Unpaid losses and loss expenses recoverable | | | 3,319,266 | | | 3,654,948 | |
Goodwill and other intangible assets | | | 407,221 | | | 407,321 | |
Total assets (Note 2) | | | 45,980,328 | | | 44,665,265 | |
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Unpaid losses and loss expenses | | | 20,074,668 | | | 20,613,901 | |
Deposit liabilities | | | 1,561,076 | | | 1,608,108 | |
Future policy benefit reserves | | | 4,848,734 | | | 4,845,394 | |
Unearned premiums | | | 4,081,557 | | | 3,555,310 | |
Notes payable and debt | | | 1,673,350 | | | 2,275,327 | |
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Total shareholders’ equity (Note 2) | | | 11,757,419 | | | 10,756,130 | |
Ordinary shareholders’ equity (Note 2) | | | 10,411,037 | | | 9,411,658 | |
Ordinary shares outstanding (Note 3) | | | 300,631,593 | | | 315,710,253 | |
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Basic book value per ordinary share (Notes 2 and 4) | | $ | 34.63 | | $ | 29.81 | |
Fully diluted book value per ordinary share (Notes 2 and 4) | | $ | 34.16 | | $ | 29.59 | |
Fully diluted tangible book value per ordinary share (Notes 2 and 4) | | $ | 32.82 | | $ | 28.31 | |
Note 1: Certain items have been reclassified to conform to the current period presentation.
Note 2: On January 1, 2012, for all fiscal years and interim periods presented, the Company adopted a FASB accounting standards update to address disparities in practice regarding the interpretation of which costs relating to the acquisition of new and renewal insurance contracts qualify for deferral. This guidance was adopted on a retrospective basis. The impact of adoption of this guidance was a reduction in deferred acquisition costs of approximately $21 million, a reduction in deferred tax liabilities of approximately $7 million, and a corresponding reduction in opening retained earnings of approximately $14 million from the amounts presented in the Company’s December 31, 2011 balance sheet. The adoption of this guidance did not have an impact on the Company’s consolidated statements of income or comprehensive income.
Note 3: 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.
Note 4: Book value per share, fully diluted book value per ordinary share and fully diluted tangible book value per ordinary share are non-GAAP financial measures. Fully diluted book value per share represents book value per ordinary share (total shareholders’ equity less non-controlling interest in equity of consolidated subsidiaries, divided by the number of outstanding ordinary shares at any period end) combined with the dilutive impact of potential future share issues at any period end. Fully diluted tangible book value per ordinary share is calculated in the same manner as fully diluted book value per ordinary share except that goodwill and intangible assets are removed from ordinary shareholders’ equity.
XL Group plc
RECONCILIATION
The following is a reconciliation of the Company’s net income (loss) attributable to ordinary shareholders to operating net income (loss) (Note 2) and also includes the calculation of annualized return on ordinary shareholders’ equity (based on operating net income (loss)) for the three and nine months ended September 30, 2012 and 2011.
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(U.S. dollars in thousands except per share amounts)
(Unaudited) | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
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| | 2012 | | 2011 (Note 1) | | 2012 | | 2011 (Note 1) | |
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Net income (loss) attributable to ordinary shareholders | | $ | 171,902 | | $ | 42,398 | | $ | 569,686 | | $ | 40,777 | |
Net realized losses (gains) on investments, net of tax | | | 5,733 | | | 59,642 | | | (3,309 | ) | | 132,355 | |
Net realized and unrealized losses (gains) on derivatives, net of tax | | | (6,253 | ) | | 23,095 | | | (2,651 | ) | | 30,478 | |
Net realized and unrealized losses (gains) on investments and derivatives related to the Company’s insurance company affiliates | | | (6 | ) | | (107 | ) | | (42 | ) | | (43 | ) |
Foreign exchange (gains) losses, net of tax | | | 16,662 | | | (36,217 | ) | | 11,530 | | | (34,478 | ) |
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Operating net income (loss): (Note 2) | | $ | 188,038 | | $ | 88,811 | | $ | 575,214 | | $ | 169,089 | |
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Per ordinary share results: (Note 3) | | | | | | | | | | | | | |
Net income (loss) attributable to ordinary shareholders | | $ | 0.56 | | $ | 0.14 | | $ | 1.82 | | $ | 0.13 | |
Operating net income (loss) (Note 2) | | $ | 0.61 | | $ | 0.28 | | $ | 1.84 | | $ | 0.54 | |
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Weighted average ordinary shares outstanding: | | | | | | | | | | | | | |
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Basic | | | 304,198,602 | | | 311,714,446 | | | 309,674,698 | | | 310,793,263 | |
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Diluted - Net income | | | 307,764,352 | | | 313,847,749 | | | 312,601,640 | | | 314,842,063 | |
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Diluted - Operating net income | | | 307,764,352 | | | 313,847,749 | | | 312,601,640 | | | 314,842,063 | |
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Return on ordinary shareholders’ equity: | | | | | | | | | | | | | |
Closing ordinary shareholders’ equity (Notes 4 and 5) | | $ | 10,411,037 | | $ | 9,926,922 | | $ | 10,411,037 | | $ | 9,926,922 | |
Average ordinary shareholders’ equity (Notes 4 and 5) | | $ | 10,139,423 | | $ | 9,769,796 | | $ | 9,911,348 | | $ | 9,762,197 | |
Operating net income (loss) (Note 2) | | $ | 188,038 | | $ | 88,811 | | $ | 575,214 | | $ | 169,089 | |
Annualized operating net income (Note 2) | | $ | 752,152 | | $ | 355,244 | | $ | 766,952 | | $ | 225,452 | |
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Annualized return on ordinary shareholders’ equity - operating net income (loss) (Notes 2, 4 and 5) | | | 7.4 | % | | 3.6 | % | | 7.7 | % | | 2.3 | % |
Note 1: Certain amounts have been reclassified to conform to the current period presentation.
Note 2: Defined as net income (loss) attributable to ordinary shareholders excluding (1) net realized gains and losses on investments, net of tax, for XL, (2) net realized and unrealized gains and losses on derivatives, net of tax, for XL, (3) its share of items (1) and (2) for the Company’s insurance company affiliates for the periods presented, (4) goodwill impairment charges, net of tax, (5) the gains recognized on the repurchase of XLIT Ltd.’s preference ordinary shares and (6) foreign exchange gains or losses, net of tax. “Operating net income” and “return on ordinary shareholders’ equity” based on operating net income are “non-GAAP financial measures.”
Note 3: 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 4: Ordinary shareholders’ equity is defined as total shareholders’ equity less non-controlling interest in equity of consolidated subsidiaries.
Note 5: On January 1, 2012, for all fiscal years and interim periods presented, the Company adopted a FASB accounting standards update to address disparities in practice regarding the interpretation of which costs relating to the acquisition of new and renewal insurance contracts qualify for deferral. This guidance was adopted on a retrospective basis. The impact of adoption of this guidance was a reduction in deferred acquisition costs of approximately $21 million, a reduction in deferred tax liabilities of approximately $7 million, and a corresponding reduction in opening retained earnings of approximately $14 million from the amounts presented in the Company’s December 31, 2011 balance sheet. The adoption of this guidance did not have an impact on the Company’s consolidated statements of income or comprehensive income.
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: (1) net realized gains and losses on investments, net of tax, for XL, (2) net realized and unrealized gains and losses on derivatives, net of tax, for XL, (3) its share of items (1) and (2) for the Company’s insurance company affiliates for the periods presented, (4) goodwill impairment charges, net of tax, (5) the gains recognized on the repurchase of XLIT Ltd.’s preference ordinary shares and (6) 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), fully diluted book value per ordinary share (book value per share combined with the dilutive impact of potential future share issues at any period end), and fully diluted tangible book value per ordinary share (calculated in the same manner as fully diluted book value per ordinary share except that goodwill and intangible assets are removed from ordinary shareholders’ equity). 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, 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 and from goodwill impairment charges 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 these two variables. Furthermore, these users believe that, for many companies, the timing of the realization of capital gains and the recognition of goodwill impairment charges are largely a function of economic and interest rate conditions.
Net realized and unrealized (gains) losses on derivatives, net of tax include all derivatives entered into by XL other than certain 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 XLIT Ltd.’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.
