EX-99.3 3 exhibit993-proforma8xka.htm EXHIBIT 99.3 Exhibit 99.3 - Pro Forma 8-K/A

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:
•
the accompanying notes to the unaudited pro forma consolidated financial information;
•
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
•
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
(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

Fixed maturities, at fair value - Trading ("Trading") or Fair Value Option ("FVO")
1,171

 
7,511,000

 
(7,511,000
)
 
(a)
 
1,171

Equity securities, at fair value - AFS
868,292

 
—

 
158,000

 
(c)
 
1,026,292

Short-term investments, at fair value - AFS
256,727

 
—

 
203,000

 
(d)  
 
459,727

Short-term investments, at fair value - FVO
—

 
203,000

 
(203,000
)
 
(d)
 
—

Other investments
2,886,059

 
604,000

 
(109,300
)
 
(e)
 
3,380,759

Total investments
$
33,371,283

 
$
8,318,000

 
$
51,700

 
 
 
$
41,740,983

Cash and cash equivalents
$
2,521,814

 
$
772,000

 
$
(1,306,939
)
 
(f)(g)
 
$
1,986,875

Restricted cash and cash equivalents
—

 
185,000

 
—

 
 
 
185,000

Accrued investment income
315,964

 
40,000

 
—

 
 
 
355,964

Deferred acquisition costs and value of business in-force
354,533

 
526,000

 
163,327

 
(h) (l)
 
1,043,860

Ceded unearned premiums
952,525

 
749,000

 
(11,710
)
 
(i)
 
1,689,815

Premiums receivable
2,473,736

 
2,004,000

 
(3,330
)
 
(i)
 
4,474,406

Reinsurance balances receivable
131,519

 
254,000

 
(618
)
 
(i)
 
384,901

Unpaid losses and loss expenses recoverable
3,429,368

 
1,451,000

 
(76,774
)
 
(i) (j)
 
4,803,594

Receivable from investments sold
92,762

 
13,000

 
—

 
 
 
105,762

Goodwill and other intangible assets
447,952

 
720,000

 
746,942

 
(k)
 
1,914,894

Deferred tax asset
204,491

 
—

 
—

 
 
 
204,491

Other assets
750,872

 
315,000

 
(15,000
)
 
(m) (n)
 
1,050,872

Total assets
$
45,046,819

 
$
15,347,000

 
$
(452,402
)
 
 
 
$
59,941,417

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unpaid losses and loss expenses
$
19,353,243

 
$
6,705,000

 
$
106,855

 
(i) (o)
 
$
26,165,098

Deposit liabilities
1,245,367

 
—

 
—

 
 
 
1,245,367

Future policy benefit reserves
4,707,199

 
—

 
—

 
 
 
4,707,199

Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable)
1,155,016

 
—

 
—

 
 
 
1,155,016

Unearned premiums
3,973,132

 
3,062,000

 
(11,710
)
 
(i)
 
7,023,422

Notes payable and debt
1,662,580

 
90,000

 
974,666

 
(g) (p)
 
2,727,246

Reinsurance balances payable
493,230

 
1,069,000

 
(3,947
)
 
(i)
 
1,558,283

Payable for investments purchased
42,291

 
37,000

 
—

 
 
 
79,291

Deferred tax liability
66,246

 
59,000

 
25,133

 
(q)
 
150,379

Other liabilities
912,748

 
313,000

 
93,846

 
(r)
 
1,319,594

Income taxes payable
—

 
20,000

 
—

 
 
 
20,000

Total liabilities
$
33,611,052

 
$
11,355,000

 
$
1,184,843

 
 
 
$
46,150,895

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Shareholders equity:
 
 
 
 
 
 
 
 
 
Ordinary shares
$
2,552

 
$
4,000

 
$
(3,501
)
 
(s) (t)
 
$
3,051

Additional paid-in capital
7,359,102

 
1,998,000

 
(146,898
)
 
(u) (v)
 
9,210,204

Accumulated other comprehensive income (loss)
1,484,458

 
(243,000
)
 
243,000

 
(w)
 
1,484,458

Retained earnings
1,187,640

 
1,682,000

 
(1,775,846
)
 
(x) (r)
 
1,093,794

Treasury Stock
—

 
(39,000
)
 
39,000

 
(y)
 
—

Shareholders’ equity attributable to XL Group plc/Catlin
$
10,033,752

 
$
3,402,000

 
$
(1,644,245
)
 
 
 
$
11,791,507

Non-controlling interest in equity of consolidated subsidiaries
1,402,015

 
590,000

 
7,000

 
(z)
 
1,999,015

Total shareholders’ equity
$
11,435,767

 
$
3,992,000

 
$
(1,637,245
)
 
 
 
$
13,790,522

Total liabilities and shareholders’ equity
$
45,046,819

 
$
15,347,000

 
$
(452,402
)
 
 
 
$
59,941,417

See accompanying notes to the unaudited pro forma consolidated financial information.


UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(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

Net investment income:
 
 
 
 
 
 
 
 
 
Net investment income - excluding Life Funds Withheld Assets
789,050

 
226,000

 
(112,823
)
 
(aa)
 
902,227

Net investment income - Life Funds Withheld Assets
129,575

 
—

 
—

 
 
 
129,575

Total net investment income
$
918,625

 
$
226,000

 
$
(112,823
)
 
 
 
$
1,031,802

Realized investment gains (losses):
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets
$
158,733

 
$
—

 
$
98,619

 
(bb)
 
$
257,352

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

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

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

Fee income and other
43,630

 
14,000

 
—

 
 
 
57,630

Total revenues
$
6,602,267

 
$
4,400,000

 
$
(64,051
)
 
 
 
$
10,938,216

Expenses:
 
 
 
 
 
 
 
 
 
Net losses and loss expenses incurred
$
3,258,393

 
$
2,183,000

 
$
(101,000
)
 
(ee)
 
$
5,340,393

Claims and policy benefits
242,963

 
—

 
—

 
 
 
242,963

Acquisition costs
738,118

 
986,000

 
101,000

 
(ff)
 
1,825,118

Operating expenses
1,341,315

 
717,000

 
18,600

 
(gg)
 
2,076,915

Foreign exchange (gains) losses
(37,568
)
 
9,000

 
—

 
 
 
(28,568
)
Loss on sale of life reinsurance subsidiary
666,423

 
—

 
—

 
 
 
666,423

Interest expense
134,106

 
17,000

 
50,647

 
(hh) (ii) (jj)
 
201,753

Total expenses
$
6,343,750

 
$
3,912,000

 
$
69,247

 
 
 
$
10,324,997

Income (loss) before income tax and income (loss) from operating affiliates
258,517

 
488,000

 
(133,298
)
 
 
 
613,219

Income (loss) from operating affiliates
107,218

 
—

 
1,435

 
(kk)
 
108,653

Provision (benefit) for income tax
96,897

 
26,000

 
(1,437
)
 
(ll)
 
121,460

Net income (loss)
$
268,838

 
$
462,000

 
$
(130,426
)
 
 
 
$
600,412

Non-controlling interests
80,498

 
44,000

 
—

 
 
 
124,498

Net income (loss) attributable to ordinary shareholders
$
188,340

 
$
418,000

 
$
(130,426
)
 
 
 
$
475,914

Weighted average ordinary shares and ordinary shares equivalents outstanding, in thousands - basic
267,103

 
358,488

 
 N/M

 
 
 
317,038

Weighted average ordinary shares and ordinary shares equivalents outstanding, in thousands - diluted
271,527

 
376,141

 
 N/M

 
 
 
321,462

Earnings (loss) per ordinary share and ordinary share equivalent – basic
$
0.71

 
$
1.17

 
 N/M

 
 
 
$
1.50

Earnings (loss) per ordinary share and ordinary share equivalent – diluted
$
0.69

 
$
1.11

 
 N/M

 
 
 
$
1.48

___________
*
N/M - Not Meaningful

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:
(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

Exchange ratio per the merger agreement
0.13

XL share issuance to Catlin shareholders
49,935

Multiplied by XL’s closing price per share on April 30, 2015
$
37.08

XL share issuance consideration
$
1,851,601

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

Multiplied by XL’s cash price component, per share in GBP
£
3.88

Cash consideration, in GBP
£
1,490,377

Foreign exchange rate: GBP/USD at April 30, 2015
$
1.5349

Cash consideration, in USD
$
2,287,579

Total acquisition consideration
$
4,139,180

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:
(U.S. dollars in thousands)
December 31, 2014

Acquisition Consideration
$
4,139,180

ASSETS
Fixed maturities, at fair value
$
7,511,000

Short-term investments, at fair value
203,000

Other invested assets
654,700

Total Investments
$
8,368,700

Cash and cash equivalents
$
772,000

Restricted cash and cash equivalents
185,000

Accrued investment income
40,000

Premiums and other receivables
2,004,000

Reinsurance recoverable on unpaid losses (net of bad debts)
1,393,628

Reinsurance recoverable on paid losses (net of bad debts)
254,000

Reinsurers’ share of unearned premiums
749,000

Intangible assets
997,000

Value of business in-force
689,327

Receivable from investments sold
13,000

Other assets
301,000

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