Acquisition and Disposals

(a) Catlin Acquisition

On May 1, 2015 (the "Acquisition Date"), the Company completed its acquisition (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 direct, 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.

In connection with the Acquisition, on January 9, 2015, the Company announced that it was able to rely on £1.6 billion of debt to be provided under a bridge facility entered into by XLIT Ltd., a wholly-owned subsidiary of the Company ("XL-Cayman"), and arranged by Morgan Stanley Senior Funding, Inc. and Goldman Sachs Bank USA (the "Bridge Facility") for the purposes of discharging the cash component of the Acquisition consideration.

In addition, 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.

The calculation of the consideration transferred to acquire Catlin Shares is as follows:



(In thousands, except per share data)
Catlin Shares outstanding as of April 30, 2015 that will receive share consideration (including the dilutive effect of warrants)	384,118
Exchange ratio per the merger agreement	0.130
Share issuance to Catlin shareholders	49,935
Closing price per share on April 30, 2015 (1)	$	37.08
Share issuance consideration	$	1,851,601
Shares of Catlin common stock outstanding as of April 30, 2015 that will receive cash consideration (including the dilutive effect of warrants)	384,118
Cash price component, per share in GBP	£	3.88
Cash consideration, in GBP	£	1,490,377
Foreign exchange rate: GBP/USD on April 30, 2015	$	1.5349
Cash consideration	$	2,287,579
Total acquisition consideration	$	4,139,180

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(1)	The closing market price of XL's common stock on the acquisition date represents the fair value of shares issued as part of the consideration transferred.

The Company financed the $2.29 billion cash consideration portion of the Acquisition by issuing $1.0 billion of subordinated debt, net proceeds of which were $980.6 million, and the remaining $1.31 billion by using cash and cash equivalents on hand. See Note 10, "Notes Payable and Debt and Financing Arrangements," for further information on the debt issuance. The Company terminated the commitments under the Bridge Facility as of April 8, 2015, due to a sufficient amount in escrow to discharge the cash consideration payable to Catlin shareholders in respect of the Acquisition.

Due to the limited time subsequent to the Acquisition Date, the accounting for the Acquisition is not yet complete. The Company will file an amendment to its current report on Form 8-K filed on May 4, 2015 to provide pro forma financial statements and intends to include amounts recognized as of the Acquisition Date for the major classes of assets and liabilities assumed, pre-acquisition contingencies and goodwill in the Company's Quarterly Report on Form 10-Q for the second quarter of 2015.

The Company incurred certain acquisition, integration and financing costs associated with the transaction prior to the Acquisition Date. The Company has recorded $25.5 million of these costs for the three months ended March 31, 2015, of which $10.5 million has been included in Operating expenses and $15.0 million has been included in Interest expense. However, the assets acquired and the liabilities assumed from Catlin, the consideration paid to acquire Catlin, as well as the results of Catlin's operations are not reflected in the Unaudited Consolidated Financial Statements as of and for the three months ended March 31, 2015.

(b) Sale of Strategic Operating Affiliate

On April 1, 2015, XL Re Ltd ("XL Re"), an indirect wholly-owned subsidiary of the Company, completed the previously announced sale of all of its shares in ARX Holding Corp. ("ARX") to The Progressive Corporation ("Progressive") pursuant to the terms of the Stock Purchase Agreement with Progressive. XL Re's shares in ARX represented approximately 40.6% of ARX's outstanding capital stock on a fully diluted basis at the time of the announcement. As of March 31, 2015, the Company recorded XL Re's shares in ARX as $222.6 million, included within Investments in Affiliates.

XL Re received approximately $560 million in proceeds from the transaction, which was based upon the consolidated tangible net book value of ARX and its subsidiaries as of December 31, 2014, and certain other factors. The Company will record a gain of approximately $337 million in the second quarter as a result of this transaction.

On May 1, 2014, a wholly owned subsidiary of the Company, XL Insurance (Bermuda) Ltd (“XLIB”), entered into a sale and purchase agreement with GreyCastle Holdings Ltd. (“GreyCastle”) providing for the sale of 100% of the common shares of XLIB's wholly-owned subsidiary, XL Life Reinsurance (SAC) Ltd (“XLLR”), to GreyCastle for $570 million in cash (subsequent to the transaction, XLLR changed its name to GreyCastle Life Reinsurance (SAC) Ltd ("GCLR")). This transaction closed on May 30, 2014. As a result of the transaction, the Company ceded the majority of its life reinsurance business to GCLR via 100% quota share reinsurance (the "Life Retro Arrangements"). This transaction covered a substantial portion of our life reinsurance reserves. The Company ceased writing new life reinsurance contracts in 2009 and since that time has been managing the run-off of its life reinsurance operations ("Run-Off Life Operations"). The designated investments that support the Life Retro Arrangements on a funds withheld basis ("Life Funds Withheld Assets") are managed pursuant to agreed investment guidelines that meet the contractual commitments of the Company's ceding subsidiaries and applicable laws and regulations. All of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GCLR.

The Run-Off Life Operations business, including the business subject to the transaction with GreyCastle, was previously reported within the Company’s Life operations segment. Subsequent to the transaction, the Company no longer considers the Life operations to be a separate operating segment and the results of the Run-Off Life Operations are reported within “Corporate and Other.” See Note 5, "Segment Information," for further information. In addition, certain securities within fixed maturities were reclassified from held to maturity to available for sale in conjunction with this transaction. See Note 6, "Investments," for further information.

All of the reclassified securities are included within Life Funds Withheld Assets, along with certain other available for sale securities as defined in the sale and purchase agreement. The Life Funds Withheld Assets are managed pursuant to agreed investment guidelines that meet the contractual commitments of the XL ceding companies and applicable laws and regulations. All of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GCLR. Because the Company no longer shares in the risks and rewards of the underlying performance of the supporting invested assets, disclosures within the financial statement notes included herein separate the Life Funds Withheld Assets from the rest of the Company's investments.

As of May 30, 2014, gross future policy benefit reserves relating to the Life operations were approximately $5.2 billion. Subsequent to the completion of the GreyCastle transaction, the Company retained approximately $0.4 billion of these reserves, and recorded a reinsurance recoverable from GCLR of $4.8 billion. Under the terms of the transaction, the Company continues to own, on a funds withheld basis, assets supporting the Life Retro Arrangements consisting of cash, fixed maturity securities and accrued interest. Based upon the right of offset, the funds withheld liability owing to GCLR is recorded net of future policy benefit reserves recoverable, and is included within “Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable)" on the unaudited consolidated balance sheets. The transaction resulted in an overall after-tax U.S. GAAP net loss of $621.3 million.

As of March 31, 2015, gross future policy benefit reserves relating to the Run-Off Life Operations were approximately $4.4 billion, of which the Company retained approximately $0.4 billion, after consideration of its future policy benefit reserves recoverable from GCLR of approximately $3.9 billion. The net funds withheld liability included within “Funds withheld on life retrocession arrangements, net of future policy benefit reserves recoverable" was $1.1 billion. The Company continued to own $5.1 billion of assets supporting the Life Retro Arrangements.

The impact of the Life Retro Arrangements on the Company's results was as follows:



Impact of Life Retro Arrangements	Three months ended March 31,
(U.S. dollars in thousands)	2015
Underwriting profit (loss) (1)	$	603
Net investment income - Life Funds Withheld Assets	50,419
Net realized gains (losses) on investments sold - Life Funds Withheld Assets	52,738
Net unrealized gains (losses) on investments, Trading - Life Funds Withheld Assets	760
OTTI on investments - Life Funds Withheld Assets	(5,209		)
Exchange (gains) losses	3,684
Other income and expenses	(1,298		)
Net realized and unrealized gains (losses) on life retrocession embedded derivative and derivative instruments - Life Funds Withheld Assets	(229,367		)
Net income (loss)	$	(127,670	)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax	37,115
Change in adjustments related to future policy benefit reserves, net of tax	60,356
Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax	30,802
Total changes to other comprehensive income as a result of Life Retro Arrangements	$	128,273
Comprehensive income (loss)	$	603

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(1)	The underwriting profit of $0.6 million relates to a premium adjustment during the three months ended March 31, 2015 relating to the Life Retro Arrangements transaction which was completed on May 30, 2014. Excluding this transaction, the impact to comprehensive income relating to the Life Retro Arrangements was nil for the three months ended March 31, 2015.

As shown in the table above, although the Company's net income (loss) is subject to variability related to the Life Retro Arrangements, there is minimal net impact on the Company's comprehensive income in any period. The life retrocession embedded derivative value includes the interest income, unrealized gains and losses, and realized gains and losses from sales on the Life Funds Withheld Assets subsequent to May 30, 2014.