UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): | May 1, 2015 |
XL GROUP
Public Limited Company
(Exact name of registrant as specified in its charter)
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Ireland | | 1-10804 | | 98-0665416 |
(State or other jurisdiction of incorporation) | | (Commission File Number) | | (IRS Employer Identification No.) |
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XL House, 8 St. Stephen's Green, Dublin, Ireland | | 2 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: +353 (1) 400-5500
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Not Applicable |
(Former name or former address, if changed since last report) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
This Current Report on Form 8-K/A amends and supplements Item 9.01 of the Current Report on Form 8-K filed by XL Group plc ("the Company") on May 4, 2015 to include pro forma financial information required by Part (b) of Item 9.01 relating to the Company's May 1, 2015 acquisition of 100% of the issued and outstanding common stock of Catlin Group Limited ("Catlin"), pursuant to the Implementation and Merger Agreements between the Company, Catlin and Green Holdings Limited, an indirect wholly owned subsidiary of the Company, dated January 9, 2015. The Company's Current Report on Form 8-K filed on March 19, 2015 included the historical audited financial statements of Catlin required by Item 9.01(a) of Form 8-K, included herewith as Exhibit 99.2.
Item 9.01. Financial Statements and Exhibits.
(b) Pro forma financial information
By amendment to the Current Report on Form 8-K filed by the Company on May 4, 2015, the Company's unaudited pro forma consolidated balance sheet as of December 31, 2014 and the Company's unaudited pro forma consolidated statements of income for the year ended December 31, 2014, and the notes related thereto, are filed herewith as Exhibit 99.3 and incorporated into this Item 9.01(b) by reference.
(d) Exhibits. The following exhibits are filed herewith:
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Exhibit No. | Description |
23.1 | Consent of PricewaterhouseCoopers Ltd., dated June 26, 2015. |
99.2 | Catlin Group Limited Audited Financial Statements as of and for the years ended December 31, 2014 and 2013, incorporated by reference to Exhibit 99.1 to the Company's Form 8-K (No. 1-10804) filed on March 19, 2015. |
99.3 | XL Group plc Unaudited Pro Forma Consolidated Financial Information as of and for the year ended December 31, 2014. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: June 26, 2015
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| XL Group plc (Registrant) |
| By: | /s/ Kirstin Gould |
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Name: Kirstin Gould Title: General Counsel and Secretary |
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S‑3 (No. 333-199842) and Form S-8 (No. 333-161124, 333-161122, 333-89568, 333-81451, 333-46250, 333-62137, 333-174138) of XL Group plc of our report dated February 10, 2015 (except for restricted cash, Note 7 and Note 16 as described in Note 2 to the consolidated financial statements, as to which the date is March 6, 2015) relating to the financial statements of Catlin Group Limited, which appears in the Current Report on Form 8‑K/A of XL Group plc dated June 26, 2015.
/s/ PricewaterhouseCoopers Ltd.
Bermuda
June 26, 2015
Exhibit 99.3
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information is based on the separate historical financial statements of XL Group plc ("XL" or the "Company") and Catlin Group Limited ("Catlin") after giving effect to the Acquisition of Catlin by XL (the "Acquisition"), the issuance of XL ordinary shares and additional debt in connection therewith (collectively, with the Acquisition, the "Transactions"), and based upon the assumptions and adjustments described in the accompanying notes to the unaudited pro forma consolidated financial information. The unaudited pro forma consolidated balance sheet as of December 31, 2014 is presented as if the Transactions had occurred on December 31, 2014. The unaudited pro forma consolidated income statement for the year ended December 31, 2014 is presented as if the Transactions had occurred on January 1, 2014. The historical consolidated financial statements have been adjusted to reflect factually supportable items that are directly attributable to the Transactions and, with respect to the income statements only, expected to have a continuing impact on consolidated results of operations.
The preparation of the unaudited pro forma consolidated financial information and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma consolidated financial information should be read together with:
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• | the accompanying notes to the unaudited pro forma consolidated financial information; |
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• | XL’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2014, included in XL’s Annual Report on Form 10-K for the year ended December 31, 2014; and |
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• | Catlin’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2014, attached as Exhibit 99.2. |
The unaudited pro forma consolidated financial information has been prepared for illustrative purposes only. The pro forma adjustments are based on estimates using information available at this time. The unaudited pro forma consolidated financial information is not necessarily indicative of what the financial position or results of operations actually would have been had the Acquisition been completed at the dates indicated, and include pro forma adjustments which are preliminary and may be revised. There can be no assurance that such revisions will not result in material changes. The unaudited pro forma consolidated financial information shown therein are not necessarily indicative of what the past financial position and results of operations of the combined company would have been nor indicative of the financial position and results of operations of the post-Acquisition periods. The unaudited pro forma consolidated financial information does not give consideration to the impact of possible revenue enhancements, expense efficiencies, strategy modifications, asset dispositions or other management actions that may be taken as a result of the Acquisition.
The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States of America (“GAAP”). XL is the acquirer for accounting purposes. Accordingly, the assets, liabilities and commitments of Catlin, the accounting acquiree, are adjusted to their estimated December 31, 2014 fair values. The estimates of fair value are preliminary and are dependent upon certain valuations that have not progressed to a stage where there is sufficient information to make a definitive valuation. The unaudited pro forma adjustments, including the allocations of the acquisition consideration, have been made solely for the purpose of providing unaudited pro forma consolidated financial information.
The acquisition consideration and fair values of Catlin’s assets and liabilities, has been based on the actual net tangible and intangible assets of Catlin existing on the Acquisition date. Consequently, amounts preliminarily allocated to goodwill and intangible assets could change significantly from those allocations used in the unaudited pro forma consolidated financial information presented below and could result in a material change in amortization of acquired intangible assets.
On January 9, 2015, the Company entered into deal contingent deliverable foreign exchange forwards ("FX Forwards") with Morgan Stanley Capital Services LLC and Goldman Sachs International. The purpose of the FX Forwards was to mitigate risk of foreign currency exposure related to the Acquisition. Following the close of the Acquisition, the FX Forwards were settled.
In connection with the post-Acquisition integration of the operations of XL and Catlin, XL anticipates that nonrecurring integration charges will be incurred. XL is not able to determine the timing, nature, and amount of these charges as of June 26, 2015. However, these charges will impact the results of operations of the combined company following the completion of the Acquisition, in the period in which they are incurred.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
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(U.S. dollars in thousands) | December 31, 2014 |
| XL | | Catlin | | Adjustments | | | | Total |
ASSETS |
Fixed maturities, at fair value - Available for sale ("AFS") | $ | 29,359,034 |
| | $ | — |
| | $ | 7,514,000 |
| | (a) (b) | | $ | 36,873,034 |
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Fixed maturities, at fair value - Trading ("Trading") or Fair Value Option ("FVO") | 1,171 |
| | 7,511,000 |
| | (7,511,000 | ) | | (a) | | 1,171 |
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Equity securities, at fair value - AFS | 868,292 |
| | — |
| | 158,000 |
| | (c) | | 1,026,292 |
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Short-term investments, at fair value - AFS | 256,727 |
| | — |
| | 203,000 |
| | (d) | | 459,727 |
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Short-term investments, at fair value - FVO | — |
| | 203,000 |
| | (203,000 | ) | | (d) | | — |
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Other investments | 2,886,059 |
| | 604,000 |
| | (109,300 | ) | | (e) | | 3,380,759 |
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Total investments | $ | 33,371,283 |
| | $ | 8,318,000 |
| | $ | 51,700 |
| | | | $ | 41,740,983 |
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Cash and cash equivalents | $ | 2,521,814 |
| | $ | 772,000 |
| | $ | (1,306,939 | ) | | (f)(g) | | $ | 1,986,875 |
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Restricted cash and cash equivalents | — |
| | 185,000 |
| | — |
| | | | 185,000 |
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Accrued investment income | 315,964 |
| | 40,000 |
| | — |
| | | | 355,964 |
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Deferred acquisition costs and value of business in-force | 354,533 |
| | 526,000 |
| | 163,327 |
| | (h) (l) | | 1,043,860 |
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Ceded unearned premiums | 952,525 |
| | 749,000 |
| | (11,710 | ) | | (i) | | 1,689,815 |
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Premiums receivable | 2,473,736 |
| | 2,004,000 |
| | (3,330 | ) | | (i) | | 4,474,406 |
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Reinsurance balances receivable | 131,519 |
| | 254,000 |
| | (618 | ) | | (i) | | 384,901 |
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Unpaid losses and loss expenses recoverable | 3,429,368 |
| | 1,451,000 |
| | (76,774 | ) | | (i) (j) | | 4,803,594 |
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Receivable from investments sold | 92,762 |
| | 13,000 |
| | — |
| | | | 105,762 |
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Goodwill and other intangible assets | 447,952 |
| | 720,000 |
| | 746,942 |
| | (k) | | 1,914,894 |
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Deferred tax asset | 204,491 |
| | — |
| | — |
| | | | 204,491 |
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Other assets | 750,872 |
| | 315,000 |
| | (15,000 | ) | | (m) (n) | | 1,050,872 |
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Total assets | $ | 45,046,819 |
| | $ | 15,347,000 |
| | $ | (452,402 | ) | | | | $ | 59,941,417 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
Unpaid losses and loss expenses | $ | 19,353,243 |
| | $ | 6,705,000 |
| | $ | 106,855 |
| | (i) (o) | | $ | 26,165,098 |
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Deposit liabilities | 1,245,367 |
| | — |
| | — |
| | | | 1,245,367 |
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Future policy benefit reserves | 4,707,199 |
| | — |
| | — |
| | | | 4,707,199 |
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Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable) | 1,155,016 |
| | — |
| | — |
| | | | 1,155,016 |
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Unearned premiums | 3,973,132 |
| | 3,062,000 |
| | (11,710 | ) | | (i) | | 7,023,422 |
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Notes payable and debt | 1,662,580 |
| | 90,000 |
| | 974,666 |
| | (g) (p) | | 2,727,246 |
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Reinsurance balances payable | 493,230 |
| | 1,069,000 |
| | (3,947 | ) | | (i) | | 1,558,283 |
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Payable for investments purchased | 42,291 |
| | 37,000 |
| | — |
| | | | 79,291 |
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Deferred tax liability | 66,246 |
| | 59,000 |
| | 25,133 |
| | (q) | | 150,379 |
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Other liabilities | 912,748 |
| | 313,000 |
| | 93,846 |
| | (r) | | 1,319,594 |
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Income taxes payable | — |
| | 20,000 |
| | — |
| | | | 20,000 |
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Total liabilities | $ | 33,611,052 |
| | $ | 11,355,000 |
| | $ | 1,184,843 |
| | | | $ | 46,150,895 |
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Commitments and contingencies | | | | | | | | | |
Shareholders equity: | | | | | | | | | |
Ordinary shares | $ | 2,552 |
| | $ | 4,000 |
| | $ | (3,501 | ) | | (s) (t) | | $ | 3,051 |
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Additional paid-in capital | 7,359,102 |
| | 1,998,000 |
| | (146,898 | ) | | (u) (v) | | 9,210,204 |
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Accumulated other comprehensive income (loss) | 1,484,458 |
| | (243,000 | ) | | 243,000 |
| | (w) | | 1,484,458 |
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Retained earnings | 1,187,640 |
| | 1,682,000 |
| | (1,775,846 | ) | | (x) (r) | | 1,093,794 |
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Treasury Stock | — |
| | (39,000 | ) | | 39,000 |
| | (y) | | — |
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Shareholders’ equity attributable to XL Group plc/Catlin | $ | 10,033,752 |
| | $ | 3,402,000 |
| | $ | (1,644,245 | ) | | | | $ | 11,791,507 |
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Non-controlling interest in equity of consolidated subsidiaries | 1,402,015 |
| | 590,000 |
| | 7,000 |
| | (z) | | 1,999,015 |
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Total shareholders’ equity | $ | 11,435,767 |
| | $ | 3,992,000 |
| | $ | (1,637,245 | ) | | | | $ | 13,790,522 |
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Total liabilities and shareholders’ equity | $ | 45,046,819 |
| | $ | 15,347,000 |
| | $ | (452,402 | ) | | | | $ | 59,941,417 |
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See accompanying notes to the unaudited pro forma consolidated financial information.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
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(U.S. dollars in thousands, except per share amounts) | Year Ended December 31, 2014 |
| XL | | Catlin | | Adjustments | | | | Total |
Revenues: | | | | | | | | | |
Net premiums earned | $ | 5,895,070 |
| | $ | 4,160,000 |
| | $ | — |
| | | | $ | 10,055,070 |
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Net investment income: | | | | | | | | | |
Net investment income - excluding Life Funds Withheld Assets | 789,050 |
| | 226,000 |
| | (112,823 | ) | | (aa) | | 902,227 |
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Net investment income - Life Funds Withheld Assets | 129,575 |
| | — |
| | — |
| | | | 129,575 |
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Total net investment income | $ | 918,625 |
| | $ | 226,000 |
| | $ | (112,823 | ) | | | | $ | 1,031,802 |
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Realized investment gains (losses): | | | | | | | | | |
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets | $ | 158,733 |
| | $ | — |
| | $ | 98,619 |
| | (bb) | | $ | 257,352 |
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Other-than-temporary impairments ("OTTI") on investments - excluding Life Funds Withheld Assets | (33,508 | ) | | — |
| | — |
| | | | (33,508 | ) |
OTTI on investments transferred to (from) other comprehensive income - excluding Life Funds Withheld Assets | (2,234 | ) | | — |
| | — |
| | | | (2,234 | ) |
Net realized gains (losses) on investments sold - Life Funds Withheld Assets | 5,067 |
| | — |
| | — |
| | | | 5,067 |
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OTTI on investments - Life Funds Withheld Assets | (20,587 | ) | | — |
| | — |
| | | | (20,587 | ) |
Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets | (9 | ) | | — |
| | — |
| | | | (9 | ) |
Total net realized gains (losses) on investments, and net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets | $ | 107,462 |
| | $ | — |
| | $ | 98,619 |
| | | | $ | 206,081 |
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Net realized and unrealized gains (losses) on derivative instruments | 29,886 |
| | — |
| | (48,674 | ) | | (cc) | | (18,788 | ) |
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets | (488,222 | ) | | — |
| | — |
| | | | (488,222 | ) |
Income (loss) from investment fund affiliates | 95,816 |
| | — |
| | (1,173 | ) | | (dd) | | 94,643 |
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Fee income and other | 43,630 |
| | 14,000 |
| | — |
| | | | 57,630 |
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Total revenues | $ | 6,602,267 |
| | $ | 4,400,000 |
| | $ | (64,051 | ) | | | | $ | 10,938,216 |
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Expenses: | | | | | | | | | |
Net losses and loss expenses incurred | $ | 3,258,393 |
| | $ | 2,183,000 |
| | $ | (101,000 | ) | | (ee) | | $ | 5,340,393 |
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Claims and policy benefits | 242,963 |
| | — |
| | — |
| | | | 242,963 |
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Acquisition costs | 738,118 |
| | 986,000 |
| | 101,000 |
| | (ff) | | 1,825,118 |
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Operating expenses | 1,341,315 |
| | 717,000 |
| | 18,600 |
| | (gg) | | 2,076,915 |
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Foreign exchange (gains) losses | (37,568 | ) | | 9,000 |
| | — |
| | | | (28,568 | ) |
Loss on sale of life reinsurance subsidiary | 666,423 |
| | — |
| | — |
| | | | 666,423 |
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Interest expense | 134,106 |
| | 17,000 |
| | 50,647 |
| | (hh) (ii) (jj) | | 201,753 |
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Total expenses | $ | 6,343,750 |
| | $ | 3,912,000 |
| | $ | 69,247 |
| | | | $ | 10,324,997 |
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Income (loss) before income tax and income (loss) from operating affiliates | 258,517 |
| | 488,000 |
| | (133,298 | ) | | | | 613,219 |
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Income (loss) from operating affiliates | 107,218 |
| | — |
| | 1,435 |
| | (kk) | | 108,653 |
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Provision (benefit) for income tax | 96,897 |
| | 26,000 |
| | (1,437 | ) | | (ll) | | 121,460 |
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Net income (loss) | $ | 268,838 |
| | $ | 462,000 |
| | $ | (130,426 | ) | | | | $ | 600,412 |
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Non-controlling interests | 80,498 |
| | 44,000 |
| | — |
| | | | 124,498 |
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Net income (loss) attributable to ordinary shareholders | $ | 188,340 |
| | $ | 418,000 |
| | $ | (130,426 | ) | | | | $ | 475,914 |
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Weighted average ordinary shares and ordinary shares equivalents outstanding, in thousands - basic | 267,103 |
| | 358,488 |
| | N/M |
| | | | 317,038 |
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Weighted average ordinary shares and ordinary shares equivalents outstanding, in thousands - diluted | 271,527 |
| | 376,141 |
| | N/M |
| | | | 321,462 |
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Earnings (loss) per ordinary share and ordinary share equivalent – basic | $ | 0.71 |
| | $ | 1.17 |
| | N/M |
| | | | $ | 1.50 |
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Earnings (loss) per ordinary share and ordinary share equivalent – diluted | $ | 0.69 |
| | $ | 1.11 |
| | N/M |
| | | | $ | 1.48 |
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See accompanying notes to the unaudited pro forma consolidated financial information
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. Basis of Pro Forma Presentation
The unaudited pro forma consolidated balance sheet as of December 31, 2014 and the unaudited pro forma consolidated income statements for the year ended December 31, 2014 are based on the historical financial statements of XL and Catlin after giving effect to the Transactions and the assumptions and adjustments described in the accompanying notes. It does not reflect cost savings or operating synergies expected to result from the Acquisition, the costs to achieve these cost savings or operating synergies, or any disposition of assets that may result from the integration of the operations of the two companies.
The Acquisition will be accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”) with XL as the acquiring entity. In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.
Under ASC 805, all of the Catlin assets acquired and liabilities assumed in this business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred, with the exception of certain costs associated with the issuance of subordinated notes, which were deferred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Changes in deferred tax asset valuation allowances and income tax uncertainties, if any, after the acquisition date will generally affect income tax expense. Subsequent to the Acquisition, the integration plan may affect how the assets acquired, including intangible assets, will be utilized by the combined company.
The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the consolidated results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.
2. Accounting Policies
XL continues to perform a comprehensive review of accounting policies of Catlin, in an effort to determine if differences exist between XL's and Catlin's accounting policies and the related financial statement presentation. As a result of that review, XL may identify additional differences that, when conformed, could have a material impact on this unaudited pro forma consolidated financial information.
3. Acquisition Consideration
On May 1, 2015 (the "Acquisition Date"), the Company completed the Acquisition of the entire issued share capital of Catlin Group Limited ("Catlin") as contemplated by that certain Implementation Agreement, dated January 9, 2015 (the “Implementation Agreement”), by and among XL-Ireland, Green Holdings Limited, a wholly-owned subsidiary of the Company (“Green Holdings”), and Catlin.
Pursuant to the terms of the Implementation Agreement, the Acquisition was implemented by way of a scheme of arrangement (the “Scheme”) under Section 99 of the Companies Act 1981 of Bermuda, as amended (the “Companies Act”), and sanctioned by the Supreme Court of Bermuda (the “Court”), immediately after which Catlin was merged with and into Green Holdings under Section 104H of the Companies Act, with Green Holdings as the surviving company, pursuant to the terms of that certain Merger Agreement, dated January 9, 2015 (the “Merger Agreement”), among XL-Ireland, Green Holdings and Catlin. The XL Shares issued in connection with the Acquisition were issued in reliance upon an exemption from registration under U.S. federal securities laws provided by Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”).
Pursuant to the terms of the Implementation Agreement, XL-Ireland acquired each ordinary share of Catlin, par value $0.01 per share (“Catlin Shares”), for consideration per Catlin Share (the “Acquisition Consideration”) equal to 388 pence in cash and 0.130 of an XL-Ireland ordinary share, par value $0.01 per share (“XL Shares”), subject to the mix and match facility set forth in the Implementation Agreement. The newly-issued XL Shares are listed on the New York Stock Exchange.
XL-Ireland issued approximately 49.9 million XL Shares and paid approximately £1.49 billion in cash to the holders of Catlin Shares as Acquisition Consideration pursuant to the terms of the Scheme.
The foregoing description of the Implementation Agreement and the Merger Agreement is qualified in its entirety by reference to the full text of the Implementation Agreement and Merger Agreement, copies of which were filed on Form 8-K on January 9, 2015.
Calculation of Acquisition Consideration
The acquisition consideration excludes the impact of fractional shares and is calculated as follows:
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(In thousands, except per share data) | |
Estimated shares of Catlin common stock outstanding as of April 30, 2015, in thousands (including the dilutive effect of warrants) | 384,118 |
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Exchange ratio per the merger agreement | 0.13 |
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XL share issuance to Catlin shareholders | 49,935 |
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Multiplied by XL’s closing price per share on April 30, 2015 | $ | 37.08 |
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XL share issuance consideration | $ | 1,851,601 |
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Estimated shares of Catlin common stock outstanding as of April 30, 2015, in thousands, that will receive cash consideration (including the dilutive effect of warrants) | 384,118 |
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Multiplied by XL’s cash price component, per share in GBP | £ | 3.88 |
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Cash consideration, in GBP | £ | 1,490,377 |
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Foreign exchange rate: GBP/USD at April 30, 2015 | $ | 1.5349 |
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Cash consideration, in USD | $ | 2,287,579 |
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Total acquisition consideration | $ | 4,139,180 |
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4. Acquisition Consideration Allocation
Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and identifiable intangible assets and assumed liabilities of Catlin based on their estimated fair values as of the closing of the Acquisition. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
The allocation of the acquisition consideration is preliminary and is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation reflected in the unaudited pro forma adjustments will remain preliminary until XL management determines the final fair values of assets acquired and liabilities assumed. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma consolidated financial information.
The total acquisition consideration is allocated to Catlin’s tangible and identifiable intangible assets and liabilities as of December 31, 2014 based on their preliminary fair values as follows:
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(U.S. dollars in thousands) | December 31, 2014 |
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Acquisition Consideration | $ | 4,139,180 |
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ASSETS |
Fixed maturities, at fair value | $ | 7,511,000 |
|
Short-term investments, at fair value | 203,000 |
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Other invested assets | 654,700 |
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Total Investments | $ | 8,368,700 |
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Cash and cash equivalents | $ | 772,000 |
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Restricted cash and cash equivalents | 185,000 |
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Accrued investment income | 40,000 |
|
Premiums and other receivables | 2,004,000 |
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Reinsurance recoverable on unpaid losses (net of bad debts) | 1,393,628 |
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Reinsurance recoverable on paid losses (net of bad debts) | 254,000 |
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Reinsurers’ share of unearned premiums | 749,000 |
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Intangible assets | 997,000 |
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Value of business in-force | 689,327 |
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Receivable from investments sold | 13,000 |
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Other assets | 301,000 |
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Total Assets | $ | 15,766,655 |
|
LIABILITIES |
Reserves for losses and loss expenses | $ | 6,831,257 |
|
Unearned premiums | 3,062,000 |
|
Reinsurance payable | 1,069,000 |
|
Accounts payable and other liabilities | 313,000 |
|
Subordinated debt | 84,027 |
|
Payable for investments purchased | 37,000 |
|
Deferred tax liability (net) | 84,133 |
|
Income taxes payable | 20,000 |
|
Total Liabilities | $ | 11,500,417 |
|
Net assets acquired before non-controlling interest | $ | 4,266,238 |
|
Non-controlling interest in equity of consolidated subsidiaries | 597,000 |
|
Net assets acquired | $ | 3,669,238 |
|
| |
Goodwill | $ | 469,942 |
|
Identifiable intangible assets. The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is as follows:
|
| | | | | |
(U.S. dollars in thousands) | December 31, 2014 | | Estimated Useful Life (Years) |
Syndicate Capacity | $ | 660,000 |
| | Indefinite |
Insurance Licenses | 22,000 |
| | Indefinite |
Total identified indefinite life intangible assets | $ | 682,000 |
| | |
Lloyds – Managing Agent Contracts | $ | 15,000 |
| | 13-17 |
Distribution network | 290,000 |
| | 18-25 |
Trademarks / Trade Names | 10,000 |
| | 2-3 |
Total identified definite life intangible assets | $ | 315,000 |
| |
|
Total Identified Intangible Assets | $ | 997,000 |
| | |
Approximately $315 million has been preliminarily allocated to acquired amortizable intangible assets with definite lives. The amortization related to the preliminary fair value of amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma consolidated statement of income.
Goodwill. Goodwill represents the excess of the acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the identifiable net tangible and intangible assets are the skill sets, operations and synergies that can be leveraged to enable the combined company to build a stronger enterprise. In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur a charge to earnings for the amount of the impairment during the period in which the determination is made.
5. Unaudited Pro Forma and Acquisition Accounting Adjustments
The unaudited pro forma financial information is not necessarily indicative of what the financial position and results from operations actually would have been had the Transactions been completed at the date indicated and includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-acquisition periods. The unaudited pro forma financial information does not give consideration to the impact of expense efficiencies, synergies, integration costs, asset dispositions, or other actions that may result from the Acquisition.
The following unaudited pro forma adjustments result from accounting for the Transactions, including the determination of fair value of the assets, liabilities, and commitments which XL, as the acquirer for accounting purposes, has acquired and assumed from Catlin. The descriptions related to these adjustments are as follows:
Balance Sheet
|
| | | | | |
(U.S. dollars in thousands) | Increase
(decrease) as of
December 31, 2014 |
(a) | Adjustment to reclassify fixed maturity securities on which fair value option was elected by Catlin to AFS to conform with XL's accounting policies | | 7,511,000 |
|
(b) | Adjustment to reclassify certain Catlin's derivative contracts to conform with XL's presentation | | 3,000 |
|
(c) | Adjustment to reclassify equities carried at fair value to AFS | | 158,000 |
|
(d) | Adjustment to reclassify short-term investments on which fair value option was elected by Catlin to AFS to conform with XL's accounting policies | | 203,000 |
|
(e) | Adjustments to other investments | | (109,300 | ) |
| To reclassify equities carried at fair value to AFS | (158,000 | ) |
|
|
| To reflect certain investment at fair value | 50,700 |
|
|
|
| To reclassify certain derivative contracts to conform presentation | (2,000 | ) |
|
|
(f) | Adjustment to reflect cash paid by XL to Catlin’s shareholders | | (2,287,579 | ) |
(g) | Adjustment to reflect the issuance of subordinated notes by XL, net of issuance costs | | 980,640 |
|
(h) | Adjustment to reflect elimination of Catlin's deferred acquisition cost asset | | (526,000 | ) |
(i) | Adjustments to eliminate intercompany balances between XL and Catlin | | |
| To eliminate intercompany ceded unearned premiums | | (11,710 | ) |
| To eliminate premiums receivable | | (3,330 | ) |
| To eliminate reinsurance balances receivables | | (618 | ) |
| To eliminate unpaid loss and loss expense recoverable | | (19,402 | ) |
| To eliminate unpaid losses and loss expense | | (19,402 | ) |
| To eliminate unearned premium | | (11,710 | ) |
| To eliminate reinsurance balances payable | | (3,947 | ) |
(j) | Adjustment to reflect the difference between the estimated fair value and the historical carrying value of Catlin’s reinsurance recoverable on unpaid losses (net of bad debts). The estimated fair value consists of the present value of reinsurance recoverable on unpaid losses (net of bad debts) | | (57,372 | ) |
(k) | Adjustment to reflect goodwill and intangible assets at fair value | | 746,942 |
|
| To eliminate Catlin’s carried goodwill and intangible assets | (720,000 | ) |
|
|
| To establish goodwill arising from the Acquisition | 469,942 |
| |
| To establish the separately identifiable intangible assets at fair value | 997,000 |
|
|
|
(l) | Adjustment to establish intangible asset resulting from the adjustment of unearned premiums to the estimated fair value of profit within Catlin’s unearned premiums, adjusted for a risk premium | | 689,327 |
|
(m) | Adjustments to reclassify certain Catlin's derivative contracts to conform with XL's presentation | | (1,000 | ) |
(n) | Adjustment to reflect the fair value of certain other assets | | (14,000 | ) |
(o) | Adjustment to reflect the difference between the estimated fair value and the historical carrying value of Catlin’s reserve for losses and loss expenses. The estimated fair value consists of the present value of the loss reserves plus a risk premium | | 126,257 |
|
(p) | Adjustment to reflect Catlin’s subordinated debt at fair value | | (5,974 | ) |
(q) | Adjustment to reflect the income tax effect for unaudited pro forma consolidated balance sheet adjustments related to the Acquisition using the statutory tax rates of the jurisdictions, where the respective tax effects apply | | 25,133 |
|
(r) | Adjustment to reflect the transaction costs incurred by XL and Catlin that are directly related to the acquisition as a reduction of retained earnings | | (93,846 | ) |
(s) | Adjustment to reflect the elimination of Catlin’s common stock | | (4,000 | ) |
(t) | Adjustment to reflect the issuance of XL ordinary shares - par value | | 499 |
|
(u) | Adjustment to reflect the issuance of XL ordinary shares - additional paid-in capital | | 1,851,102 |
|
(v) | Adjustment to reflect the elimination of Catlin’s additional paid-in capital | | (1,998,000 | ) |
(w) | Adjustment to reflect the elimination of Catlin’s accumulated other comprehensive income | | 243,000 |
|
(x) | Adjustment to reflect the elimination of Catlin’s retained earnings | | (1,682,000 | ) |
(y) | Adjustment to reflect the elimination of Catlin’s treasury stock | | 39,000 |
|
(z) | Adjustment to reflect Catlin's non-controlling interest at fair value | | 7,000 |
|
Income Statements
|
| | | | | |
(U.S. dollars in thousands) | Increase (decrease) for Year Ended December 31, 2014 |
(aa) | Adjustments to conform presentation of net investment income | | (112,823 | ) |
| To reclassify Catlin's realized and unrealized gains in conjunction with the reclassification of fixed maturities and equities at fair value to fixed maturities, AFS, to conform with XL's presentation | (126,204 | ) |
|
|
| To reclassify Catlin's derivative losses to conform with XL's presentation | 48,674 |
|
|
|
| To reclassify gains related to equity funds and certain loans | (22,945 | ) |
|
|
| To amortize the fair value adjustment of fixed maturity securities, AFS and certain loans | (10,353 | ) |
|
|
| To reclassify income from operating affiliates to conform with XL's presentation | (1,995 | ) |
|
|
(bb) | Adjustment to conform presentation of net realized gains (losses) on investments sold | | 98,619 |
|
(cc) | Adjustment to reclassify derivative losses from net investment income to conform presentation | | (48,674 | ) |
(dd) | Adjustment to conform presentation of income (loss) from investment fund affiliates | | (1,173 | ) |
(ee) | Amortization of the adjustment resulting from the difference between estimated fair value and the historical carrying value of Catlin's net loss and LAE reserves | | (101,000 | ) |
(ff) | Adjustment to acquisition costs | | 101,000 |
|
| Adjustment to eliminate amortization of Catlin’s DAC | (526,000 | ) |
|
|
| Amortization of intangible asset resulting from the adjustment of unearned premiums to the estimated fair value of profit within Catlin’s unearned premiums | 627,000 |
|
|
|
(gg) | Adjustment to amortize the fair value adjustment of intangible and certain other assets | | 18,600 |
|
(hh) | Adjustment to amortize the fair value adjustment of Catlin’s subordinated debt | | (268 | ) |
(ii) | Adjustment to amortize the deferred issuance costs for the subordinated notes | | 834 |
|
(jj) | Adjustment to record interest expense related to the subordinated notes issued to finance the acquisition | | 50,081 |
|
(kk) | Adjustment to conform presentation of income (loss) from operating affiliates | | 1,435 |
|
(ll) | Adjustment to reflect income tax effect for unaudited pro forma consolidated statement of income adjustments related to the Acquisition using the statutory tax rates of the jurisdictions, where the respective tax effects apply | | (1,437 | ) |
The total costs and expenses relating to the Acquisition are estimated to amount to approximately $106.9 million. Of these estimated transaction costs, $13.1 million relates to the subordinated notes' issuance costs associated with financing the Acquisition and will be deferred per guidance in ASC 805. The remaining estimated transaction costs relate to bridge loan financing, professional fees and other costs associated with the Acquisition, including legal, accounting, tax and printing fees to be paid to third parties based on actual expenses incurred to date and best estimates provided by third party service providers to XL and Catlin. The adjustment does involve a degree of judgment and estimation, which XL management believes to be reasonable as at the date of this Form 8-K/A. There can be no assurance that these estimates will not change, even materially, as the transaction progresses to its conclusion. These transaction and related costs are one-time in nature and are not expected to have a continuing impact on the combined XL entity and as such are not included in the unaudited pro forma consolidated income statement for the year ended December 31, 2014.
6. Net Income Per Share
Preliminary pro forma net income per share for the year ended December 31, 2014 have been calculated using XL’s historic weighted average ordinary shares outstanding plus the ordinary shares assumed to be issued to Catlin stockholders per the Acquisition agreement.
The following table sets forth the calculation of basic and diluted preliminary pro forma net income per share for the year ended December 31, 2014:
|
| | | | | | | |
| Year Ended December 31, 2014 |
(In thousands, except per share amounts) | Basic | | Diluted |
Preliminary pro forma net income | $ | 475,914 |
| | $ | 475,914 |
|
Weighted average ordinary shares outstanding: | | | |
Historic XL | 267,103 |
| | 267,103 |
|
Historic XL dilutive potential ordinary shares | — |
| | 4,424 |
|
Adjusted weighted average ordinary shares outstanding | 267,103 |
| | 271,527 |
|
XL share issuance to Catlin shareholders | 49,935 |
| | 49,935 |
|
Preliminary pro forma adjusted weighted average common shares outstanding | 317,038 |
| | 321,462 |
|
Preliminary pro forma net income per share | $ | 1.50 |
| | $ | 1.48 |
|
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