Share Capital

(a) Authorized and Issued

As a result of the Redomestication discussed in Note 1(a), "Significant Accounting Policies - Basis of Preparation and Consolidation," prior to July 25, 2016, share information relates to the ordinary shares of XL-Ireland and its consolidated subsidiaries. On and subsequent to July 25, 2016, share information relates to the common shares of XL-Bermuda and its consolidated subsidiaries.

The authorized share capital of XL-Bermuda is $9,999,900, divided into: (i) 500,000,000 common shares, par value $0.01 each and (ii) 499,990,000 shares, par value $0.01. Holders of common shares are entitled to one vote for each share.

In connection with the Catlin Acquisition described in Note 2(e), "Acquisitions and Disposals - Catlin Acquisition," the Company issued 49.9 million ordinary shares of XL-Ireland to Catlin shareholders, which had an aggregate value as of the Acquisition Date of $1.85 billion.

Common Shares

The following table is a summary of common shares issued and outstanding:



(in thousands)	2016		2015
Balance – beginning of year	294,745		255,183
Exercise of options	802		480
Net issuance of restricted shares	1,598		1,581
Share buybacks (1)	(30,256	)	(12,434	)
Issue of shares	—		49,935
Balance – end of year	266,889		294,745

____________


(1)	Includes share buybacks associated with authorized share buyback programs as well as purchases related to satisfying tax withholding obligations of employees in connection with the vesting of restricted shares granted under the Company’s equity compensation programs.

Buyback of Ordinary and Common Shares

On August 6, 2015, XL-Ireland announced that its Board of Directors approved a new share buyback program, authorizing the purchase of up to $1.0 billion of shares (the "August 2015 Program"). During the year ended December 31, 2016, the Company purchased and canceled 14.2 million common shares under the August 2015 Program for $499.3 million.

On May 13, 2016, XL-Ireland announced that its Board of Directors approved a new share buyback program, authorizing the purchase of up to $1.0 billion of XL-Ireland shares (the "May 2016 Program"). This authorization also canceled approximately $204.1 million remaining under the August 2015 Program. As a result of the Redomestication, XL-Bermuda assumed the May 2016 Program. Buybacks made prior to July 25, 2016 were of XL-Ireland shares, and on and after July 25, 2016 were of XL-Bermuda shares. During the year ended December 31, 2016, the Company purchased and canceled 16.0 million shares under the May 2016 Program for $550.7 million.

Other share buybacks, primarily for purposes of settling employee withholding taxes incurred in connection with the vesting of share-based compensation awards, amounted to $1.1 million for the year ended December 31, 2016. In total, the Company purchased and canceled 30.3 million XL-Ireland shares and XL-Bermuda shares, for approximately $1.051 billion during the year ended December 31, 2016. As of December 31, 2016, $449.3 million remained available for purchase under the May 2016 Program.

All share buybacks were carried out in accordance with applicable law, including prior to July 25, 2016 by way of redemption in accordance with Irish law. All shares so redeemed were canceled upon redemption.

(b) Non-controlling Interest in Equity of Consolidated Subsidiaries

The Series D Preference Ordinary Shares and Series E Preference Ordinary Shares discussed in this section were issued by XL-Cayman and do not represent share capital of XL-Bermuda. XL-Bermuda has no preferred shares outstanding and has never issued any preferred shares.

Series D Preference Ordinary Shares

On October 15, 2011, XL-Cayman issued $350 million Series D Preference Ordinary Shares. Dividends on the Series D Preference Ordinary Shares are declared and paid quarterly at a floating rate of three-month LIBOR plus 3.120% on the liquidation preference.

Series E Preference Ordinary Shares

On March 15, 2007, XL-Cayman issued 1.0 million Fixed/Floating Series E Perpetual Non-Cumulative preference ordinary shares, par value $0.01 each, with liquidation preference value of $1,000 per share (the "Series E preference ordinary shares"). The Series E preference ordinary shares are perpetual securities with no fixed maturity date. Dividends on the Series E preference ordinary shares are declared and paid semi-annually at a rate of $32.50 per share.

Until April 15, 2017 (the "Series E Fixed Rate Period"), dividends on the series E preference ordinary shares will be payable semi-annually on a non-cumulative basis, when, as and if declared by our board of directors on April 15 and October 15 of each year at a fixed rate equal to 6.500% per annum on the liquidation preference (the "Series E Fixed Rate"). From and after April 15, 2017 (the "Series E Floating Rate Period"), dividends on the Series E preference ordinary shares will be payable quarterly on a non-cumulative basis, when, as and if declared by our board of directors, on January 15, April 15, July 15 and October 15 of each year at a floating rate equal to three-month LIBOR plus 2.4575% (the "Series E Floating Rate").

Acquisition of Non-controlling Preferred Shares

In connection with the Catlin Acquisition described in Note 2(e), "Acquisitions and Disposals - Catlin Acquisition," the Company acquired 0.6 million non-cumulative perpetual preferred shares issued by Catlin-Bermuda, par value of $0.01 per share, with liquidation preference of $1,000 per share, plus declared and unpaid dividends ("CICL Prefs"). Dividends at a rate of 7.249 percent on the liquidation preference are payable semi-annually on January 19 and July 19 in arrears as and when declared up to but not including January 2017. Thereafter, if the CICL-Prefs have not yet been redeemed, dividends will be payable quarterly at a rate equal to 2.975 percent plus the three-month LIBOR rate of the liquidation preference. The fair value of the outstanding CICL-Prefs on the date of the Catlin Acquisition was $562.3 million, which was based on the last trading price of such securities prior to the Catlin Acquisition.

The Company’s performance incentive programs provide for grants of stock options, restricted stock, restricted stock units, performance units and stock appreciation rights. Share-based compensation granted by the Company generally contains a vesting period of three or four years, and certain awards also contain performance conditions. The Company records compensation expense related to each award over its vesting period, incorporating the best estimate of the expected outcome of performance conditions where applicable. Compensation expense is generally recorded on a straight line basis over the vesting period of an award.

The Company currently maintains the following performance incentive programs: the NAC Re Corp. 1989 Stock Option Plan (the "1989 Plan"), the XL Group Ltd Amended and Restated 1991 Performance Incentive Program (the "1991 Program"), the XL Group Ltd Amended and Restated 1999 Performance Incentive Program for Employees (the "1999 Program"), the XL Group plc Directors Stock & Option Plan (the "Directors Plan"), the XL Group Ltd 2009 Cash Long-Term Incentive Program (the "2009 Program"), the XL Group Ltd Supplemental Deferred Compensation Plan (the "DC Plan," and together with the 1989 Plan, the 1991 Program, the 1999 Program, the Directors Plan and the 2009 Program, the "Programs"). The programs provide that the securities to be issued pursuant to each Program are of XL-Bermuda.

(d) Options

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:



	2016		2015		2014
Dividend yield	2.00	%	2.00	%	2.00	%
Risk free interest rate	1.37	%	1.70	%	1.81	%
Volatility	21.7	%	21.6	%	34.0	%
Expected lives	6.0 years		6.0 years		6.0 years

The risk free interest rate is based on U.S. Treasury rates. The expected lives are estimated using the historical exercise behavior of grant recipients. The expected volatility is determined based upon a combination of the historical volatility of the Company’s stock and the implied volatility derived from publicly traded options.

The following is a summary of the activity in the stock option plans for the indicated years ended December 31:



(In thousands except for weighted average grant date fair value)	2016		2015		2014
Options granted to purchase common shares under the Programs - in thousands	2,200		1,974		1,025
Weighted average grant date fair value	$	5.99	$	6.51	$	8.60
Total intrinsic value of stock options exercised	$	19,471	$	8,546	$	7,499
Options exercised during the year - in thousands	810		480		424
Compensation expense related to stock option plans	$	11,065	$	8,961	$	9,961
Estimated tax benefit (charge) related to stock option plans	$	355	$	—	$	(2	)

The following is a summary of the stock options outstanding at December 31, 2016, and related activity for the year then ended:



	Number of Shares (in thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Outstanding – beginning of year	10,749		$	28.59	5.4 years	$	121,085
Granted	2,200		34.64
Exercised	(810	)	12.35
Canceled/Expired	(278	)	60.83
Outstanding – end of year	11,861		$	30.07	5.5 years	$	86,558
Options exercisable	8,002		$	27.75	4.0 years	$	77,366
Available for grant (1)	8,355

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(1)	Available for grant includes shares that may be granted as either stock options, restricted stock, restricted stock units or performance units.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the 2016 fiscal year and the exercise price, multiplied by the number of in-the-money-options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. Total unrecognized stock-based compensation expense related to non-vested stock options was approximately $15.3 million at December 31, 2016, which related to approximately 3.9 million options and is expected to be recognized over a weighted-average period of 1.3 years.

(e) Restricted Stock, Restricted Stock Units and Performance Units

Restricted Stock

Restricted stock awards issued under the 1991 Performance Incentive Program and the Directors Stock and Option Plan vest as set forth in the applicable award agreements. Each restricted stock award represents the Company’s obligation to deliver to the holder one ordinary share. The employees and directors who are granted a restricted stock award have all the rights of a shareholder, including the right to vote and receive dividends, but the shares are subject to certain restrictions prior to vesting relating to, among other things, forfeiture in the event of termination of employment and transferability.

A summary of the restricted stock awards issued under the 1991 Performance Incentive Program and the Directors Stock and Option Plan for the indicated years ended December 31 is as follows:



(In thousands except for weighted average grant date fair value)	2016		2015		2014
Restricted ordinary shares granted	48		44		46
Weighted average grant date fair value	$	34.05	$	37.11	$	31.86
Aggregate grant date fair value	$	1,650	$	1,613	$	1,463
Compensation expense related to restricted stock awards	$	2,078	$	3,889	$	5,239
Estimated tax benefit related to restricted stock awards	$	129	$	709	$	1,233

Total unrecognized stock based compensation expense related to non-vested restricted stock awards was nil at December 31, 2016, which is related to approximately 0.2 million restricted stock awards.

Non-vested restricted stock awards at December 31, 2016 and for the year then ended were as follows:



(In thousands except for weighted average grant date fair value)	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015	275		$	41.90
Granted	48		$	34.05
Vested	(132	)	$	36.35
Unvested at December 31, 2016	191		$	43.72

Restricted Stock Units

Each restricted stock unit represents the Company’s obligation to deliver to the holder one common share upon satisfaction of the three-year vesting term. Restricted stock units are granted at the closing market price on the day of grant and entitle the holder to receive dividends declared and paid in the form of additional common shares contingent upon vesting.

A summary of the restricted stock units issued to officers of the Company and its subsidiaries for the indicated years ended December 31 is as follows:



(In thousands)	2016		2015		2014
Restricted stock units granted	1,117		1,534		1,867
Aggregate grant date fair value	$	38,681	$	55,540	$	57,134
Compensation expense related to restricted stock units	$	46,209	$	48,937	$	41,879
Estimated tax benefit related to restricted stock units	$	12,701	$	13,271	$	11,607

Total unrecognized stock-based compensation expense related to non-vested restricted stock units was $49.9 million at December 31, 2016, which is related to approximately 2.5 million restricted stock units and is expected to be recognized over 1.4 years.

Non-vested restricted stock units at December 31, 2016 and for the year then ended were as follows:



(In thousands except for weighted average grant date fair value)	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015	3,070		$	32.99
Granted	1,117		$	34.64
Vested	(1,559	)	$	31.83
Forfeited	(137	)	$	36.37
Unvested at December 31, 2016	2,491		$	34.30

Performance Units

The performance units issued in 2016 vest after approximately three years, subject to the achievement of stated market metrics, and entitle the holder to shares of the Company’s common shares. Each grant of performance units has a target number of shares, with final payouts ranging from 0% to 200% of the grant amount depending upon the achievement of stated market metrics along with each employee’s continued service through the vesting date. Performance units issued prior to 2016 have a similar vesting schedule and a similar target of shares, but vesting and payout are dependent upon the achievement of stated relative and absolute financial performance metrics along with each employee's continued service through the vesting date. Furthermore, performance units granted in 2016 were granted at the closing market price on the day of grant and entitle the holder to receive dividends declared and paid in the form of additional common shares contingent upon vesting. A summary of the performance units issued to certain employees of the Company for the indicated years ended December 31 is as follows:



(In thousands)	2016		2015		2014
Performance units granted	738		781		572
Potential maximum share payout	1,477		1,563		1,144
Aggregate grant date fair value	$	25,578	$	28,082	$	16,345
Compensation expense related to performance units	$	21,647	$	12,942	$	24,089
Estimated tax benefit (charge) related to performance units	$	3,152	$	1,459	$	4,250

Total unrecognized stock-based compensation expense related to non-vested performance units was approximately $29.8 million at December 31, 2016, which is related to approximately 1.4 million performance units and is expected to be recognized over 1.8 years. Non-vested restricted performance units as of December 31, 2016 were as follows:



(In thousands except for weighted average grant date fair value)	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015	1,881		$	31.02
Granted	738		$	34.64
Vested	(746	)	$	27.00
Forfeited	(28	)	$	34.12
Performance driven addition (reduction)	(477	)	$	34.60
Unvested at December 31, 2016	1,368		$	32.83

(f) Restricted Cash Units

During the year ended December 31, 2016, the Company granted approximately 1.8 million liability-classed stock units to certain employees with an aggregate grant date fair value of approximately $63.2 million. Each liability-classed restricted stock unit represents the Company's obligation to deliver to the holder a cash payment equivalent to the value of one common share. The grants may vest either in three equal installments upon the first, second and third anniversaries of the date of grant; or in two equal installments upon the first and second anniversaries of the date of grant. Liability-classed stock units are granted at the closing market price on the day of grant and entitle the holder to receive dividends declared and are paid in cash contingent upon vesting.



(In thousands)	2016		2015		2014
Restricted cash units granted	1,826		2,559		—
Aggregate grant date fair value	$	63,261	$	94,525	$	—
Compensation expense related to restricted cash units	$	39,433	$	19,834	$	—
Estimated tax benefit related to restricted cash units	$	8,543	$	4,374	$	—

Total unrecognized stock-based compensation expense related to non-vested restricted cash units was approximately $74.1 million at December 31, 2016, which is related to approximately 2.6 million restricted cash units and is expected to be recognized over 1.5 years. Non-vested restricted cash units as of December 31, 2016 were as follows:



(In thousands except for weighted average grant date fair value)	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015	2,006		$	36.95
Granted	1,826		$	34.64
Vested	(892	)	$	36.93
Forfeited	(367	)	$	36.27
Unvested at December 31, 2016	2,573		$	35.41

(g) Voting

XL-Bermuda’s Bye-laws restrict the voting power of any person to less than approximately 10% of the total voting power.