UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2014
 
 
 
 
 
OR
 
 
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to ______
Commission file number 1-10804
XL GROUP
Public Limited Company
(Exact name of registrant as specified in its charter)

Ireland
 
98-0665416
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
XL House, 8 St. Stephen's Green, Dublin 2, Ireland
(Address of principal executive offices and zip code)
+353 (1) 400-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 4, 2014, there were 265,499,119 outstanding Ordinary Shares, $0.01 par value per share, of the registrant.


XL GROUP PLC
INDEX TO FORM 10-Q
 
 
Page No.
 
 
 
 
 
 
 
Unaudited Consolidated Balance Sheets at June 30, 2014 and December 31, 2013
 
Unaudited Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013
 
Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013
 
Unaudited Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2014 and 2013
 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

ITEM 1.
 
FINANCIAL STATEMENTS
XL GROUP PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
June 30, 2014
 
December 31, 2013
ASSETS
Investments:
 

 
 

Fixed maturities, at fair value (amortized cost: 2014, $29,065,531; 2013, $27,111,874)
$
30,442,921

 
$
27,500,136

Equity securities, at fair value (cost: 2014, $839,716; 2013, $903,201)
988,710

 
1,040,237

Short-term investments, at fair value (amortized cost: 2014, $347,473; 2013, $455,470)
347,674

 
456,288

Total investments available for sale
$
31,779,305

 
$
28,996,661

Fixed maturities, held to maturity at amortized cost (fair value: 2014, $0; 2013, $3,131,235)
—

 
2,858,695

Investments in affiliates
1,500,548

 
1,370,943

Other investments
1,204,564

 
1,164,630

Total investments
$
34,484,417

 
$
34,390,929

Cash and cash equivalents
3,071,139

 
1,800,832

Accrued investment income
322,100

 
346,809

Deferred acquisition costs
459,081

 
670,659

Ceded unearned premiums
1,129,091

 
788,871

Premiums receivable
3,409,296

 
2,612,602

Reinsurance balances receivable
149,995

 
118,885

Unpaid losses and loss expenses recoverable
3,354,273

 
3,435,230

Receivable from investments sold
59,469

 
144,765

Goodwill and other intangible assets
455,057

 
411,611

Deferred tax asset
216,312

 
237,884

Other assets
738,685

 
693,810

Total assets
$
47,848,915

 
$
45,652,887

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
 

 
 

Unpaid losses and loss expenses
$
20,281,934

 
$
20,481,065

Deposit liabilities
1,288,376

 
1,509,243

Future policy benefit reserves
5,273,549

 
4,803,816

Funds withheld on life retrocession arrangements (net of future policy benefit reserves recoverable: 2014, $4,823,680; 2013, nil)
842,753

 
—

Unearned premiums
4,704,993

 
3,846,526

Notes payable and debt
2,262,452

 
2,263,203

Reinsurance balances payable
779,914

 
302,399

Payable for investments purchased
169,222

 
60,162

Deferred tax liability
72,527

 
86,330

Other liabilities
764,618

 
950,845

Total liabilities
$
36,440,338

 
$
34,303,589

Commitments and Contingencies


 


Shareholders’ Equity:
 

 
 

Ordinary shares, 999,990,000 authorized, par value $0.01; issued and outstanding (2014, 268,307,061; 2013, 278,253,308)
$
2,683

 
$
2,783

Additional paid in capital
7,700,377

 
7,994,100

Accumulated other comprehensive income
1,207,034

 
736,657

Retained earnings
1,124,195

 
1,264,093

Shareholders’ equity attributable to XL Group plc
$
10,034,289

 
$
9,997,633

Non-controlling interest in equity of consolidated subsidiaries
1,374,288

 
1,351,665

Total shareholders’ equity
$
11,408,577

 
$
11,349,298

Total liabilities and shareholders’ equity
$
47,848,915

 
$
45,652,887

See accompanying Notes to Unaudited Consolidated Financial Statements

1

XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(U.S. dollars in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Revenues:
 

 
 

 
 

 
 

Net premiums earned
$
1,496,594

 
$
1,562,393

 
$
2,985,433

 
$
3,092,084

Net investment income:
 
 
 
 
 
 
 
Net investment income - excluding Life Funds Withheld Assets
213,608

 
232,546

 
446,797

 
479,014

Net investment income - Life Funds Withheld Assets
19,165

 
—

 
19,165

 
—

Total net investment income
$
232,773

 
$
232,546

 
$
465,962

 
$
479,014

Realized investment gains (losses):
 
 
 
 
 
 
 
Net realized gains (losses) on investments sold - excluding Life Funds Withheld Assets
105,460

 
43,357

 
128,416

 
84,504

Other-than-temporary impairments ("OTTI") on investments - excluding Life Funds Withheld Assets
(24,362
)
 
(1,561
)
 
(26,638
)
 
(5,288
)
OTTI on investments transferred to (from) other comprehensive income - excluding Life Funds Withheld Assets
(254
)
 
(828
)
 
(1,705
)
 
(1,739
)
 Net realized gains (losses) on investments sold - Life Funds Withheld Assets
624

 
—

 
624

 
—

OTTI on investments - Life Funds Withheld Assets
(8,771
)
 
—

 
(8,771
)
 
—

Total net realized gains (losses) on investments
$
72,697

 
$
40,968

 
$
91,926

 
$
77,477

Net realized and unrealized gains (losses) on derivative instruments
11,599

 
(5,105
)
 
13,409

 
2,780

Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
 
—

 
(17,546
)
 
—

Income (loss) from investment fund affiliates
17,683

 
46,543

 
50,986

 
78,764

Fee income and other
9,706

 
10,871

 
21,160

 
20,503

Total revenues
$
1,823,506

 
$
1,888,216

 
$
3,611,330

 
$
3,750,622

Expenses:
 
 
 
 
 
 
 
Net losses and loss expenses incurred
$
827,880

 
$
937,606

 
$
1,659,385

 
$
1,780,690

Claims and policy benefits
85,299

 
116,767

 
198,886

 
227,720

Acquisition costs
184,619

 
231,886

 
384,033

 
452,145

Operating expenses
333,030

 
303,159

 
643,454

 
586,991

Exchange (gains) losses
21,141

 
(11,331
)
 
31,582

 
(44,766
)
Loss on sale of life reinsurance subsidiary
666,423

 
—

 
666,423

 
—

Interest expense
14,085

 
38,204

 
57,026

 
76,904

Total expenses
$
2,132,477

 
$
1,616,291

 
$
3,640,789

 
$
3,079,684

Income (loss) before income tax and income (loss) from operating affiliates
$
(308,971
)
 
$
271,925

 
$
(29,459
)
 
$
670,938

Income (loss) from operating affiliates
27,738

 
32,825

 
74,023

 
63,823

Provision (benefit) for income tax
(5,654
)
 
28,872

 
28,667

 
72,351

Net income (loss)
$
(275,579
)
 
$
275,878

 
$
15,897

 
$
662,410

Non-controlling interests
3,682

 
3,180

 
39,441

 
38,922

Net income (loss) attributable to ordinary shareholders
$
(279,261
)
 
$
272,698

 
$
(23,544
)
 
$
623,488

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – basic
270,924

 
289,513

 
273,616

 
292,277

Weighted average ordinary shares and ordinary share equivalents outstanding, in thousands – diluted
270,924

 
294,333

 
273,616

 
297,044

Earnings (loss) per ordinary share and ordinary share equivalent – basic
$
(1.03
)
 
$
0.94

 
$
(0.09
)
 
$
2.13

Earnings (loss) per ordinary share and ordinary share equivalent – diluted
$
(1.03
)
 
$
0.93

 
$
(0.09
)
 
$
2.10

See accompanying Notes to Unaudited Consolidated Financial Statements

2

XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to ordinary shareholders
$
(279,261
)
 
$
272,698

 
$
(23,544
)
 
$
623,488

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
260,690

 
(682,278
)
 
502,076

 
(794,501
)
Unrealized gains on held to maturity investment portfolio at time of transfer to available for sale, net of tax
424,861

 
—

 
424,861

 
—

Change in adjustments related to future policy benefit reserves, net of tax
(440,461
)
 
(32,900
)
 
(474,461
)
 
(32,900
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
12,297

 
—

 
12,297

 
—

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
10,850

 
30,076

 
13,973

 
25,642

Change in OTTI losses recognized in other comprehensive income, net of tax
1,636

 
14,438

 
4,932

 
19,620

Change in underfunded pension liability, net of tax
(8
)
 
(91
)
 
(39
)
 
295

Change in value of cash flow hedge
110

 
110

 
220

 
220

Foreign currency translation adjustments, net of tax
(9,602
)
 
(23,718
)
 
(13,482
)
 
(27,637
)
Comprehensive income (loss)
$
(18,888
)
 
$
(421,665
)
 
$
446,833

 
$
(185,773
)
See accompanying Notes to Unaudited Consolidated Financial Statements


3

XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
Six Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Ordinary Shares:
 

 
 

Balance - beginning of year
$
2,783

 
$
2,987

Issuance of ordinary shares
11

 
11

Buybacks of ordinary shares
(113
)
 
(129
)
Exercise of stock options
2

 
5

Balance - end of period
$
2,683

 
$
2,874

Additional Paid in Capital:
 

 
 

Balance - beginning of year
$
7,994,100

 
$
8,584,752

Issuance of ordinary shares
14

 
13

Buybacks of ordinary shares
(323,455
)
 
(360,201
)
Exercise of stock options
3,055

 
8,380

Share-based compensation expense
26,663

 
17,620

Balance - end of period
$
7,700,377

 
$
8,250,564

Accumulated Other Comprehensive Income (Loss):
 

 
 

Balance - beginning of year
$
736,657

 
$
1,520,020

Change in net unrealized gains (losses) on investments - excluding Life Funds Withheld Assets, net of tax
502,076

 
(794,501
)
Unrealized gains on held to maturity investment portfolio at time of transfer to available for sale, net of tax
424,861

 
—

Change in adjustments related to future policy benefit reserves, net of tax
(474,461
)
 
(32,900
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
12,297

 
—

Change in net unrealized gains (losses) on affiliate and other investments, net of tax
13,973

 
25,642

Change in OTTI losses recognized in other comprehensive income, net of tax
4,932

 
19,620

Change in underfunded pension liability, net of tax
(39
)
 
295

Change in value of cash flow hedge
220

 
220

Foreign currency translation adjustments, net of tax
(13,482
)
 
(27,637
)
Balance - end of period
$
1,207,034

 
$
710,759

Retained Earnings (Deficit):
 

 
 

Balance - beginning of year
$
1,264,093

 
$
402,318

Net income (loss) attributable to ordinary shareholders
(23,544
)
 
623,488

Dividends on ordinary shares
(88,269
)
 
(82,336
)
Buybacks of ordinary shares
(28,085
)
 
(15,092
)
Balance - end of period
$
1,124,195

 
$
928,378

Non-controlling Interest in Equity of Consolidated Subsidiaries:
 

 
 

Balance - beginning of year
$
1,351,665

 
$
1,346,325

Non-controlling interests - contributions
21,494

 
—

Non-controlling interests - distributions
—

 
(37
)
Non-controlling interests
1,129

 
82

Non-controlling interest share in change in accumulated other comprehensive income (loss)
—

 
(29
)
Non-controlling interests - deconsolidation
—

 
(1,841
)
Balance - end of period
$
1,374,288

 
$
1,344,500

Total Shareholders’ Equity
$
11,408,577

 
$
11,237,075

See accompanying Notes to Unaudited Consolidated Financial Statements


4

XL GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Cash flows provided by (used in) operating activities:
 
 
 
Net income (loss)
$
15,897

 
$
662,410

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Net realized (gains) losses on investments
(91,926
)
 
(77,477
)
Net realized and unrealized (gains) losses on derivative instruments
(13,409
)
 
(2,780
)
Net realized and unrealized (gains) losses on life retrocession embedded derivative
17,546

 
—

Amortization of premiums (discounts) on fixed maturities
76,846

 
84,095

(Income) loss from investment and operating affiliates
(68,292
)
 
(142,587
)
Loss on sale of life reinsurance subsidiary
666,423

 
—

Share-based compensation
40,563

 
28,400

Depreciation
29,107

 
23,693

Accretion of deposit liabilities
(7,762
)
 
25,467

Changes in:
 
 
 
Unpaid losses and loss expenses
(264,804
)
 
(293,927
)
Future policy benefit reserves
(93,202
)
 
(90,147
)
Funds withheld on life retrocession agreements, net
(52,104
)
 
—

Unearned premiums
848,937

 
751,455

Premiums receivable
(792,588
)
 
(779,737
)
Unpaid losses and loss expenses recoverable
136,758

 
95,046

Ceded unearned premiums
(338,855
)
 
(222,467
)
Reinsurance balances receivable
(28,270
)
 
(48,420
)
Deferred acquisition costs
216,453

 
(74,886
)
Reinsurance balances payable
420,902

 
478,012

Deferred tax asset - net
(51,571
)
 
(9,476
)
Derivatives
(45,306
)
 
68,445

Other assets
(15,478
)
 
(58,729
)
Other liabilities
(286,737
)
 
(60,531
)
Other
34,501

 
3,794

Total adjustments
$
337,732

 
$
(302,757
)
Net cash provided by (used in) operating activities
$
353,629

 
$
359,653

Cash flows provided by (used in) investing activities:
 
 
 
Proceeds from sale of fixed maturities and short-term investments
$
3,043,659

 
$
2,110,114

Proceeds from redemption of fixed maturities and short-term investments
1,837,319

 
2,266,692

Proceeds from sale of equity securities
295,448

 
74,310

Purchases of fixed maturities and short-term investments
(3,801,109
)
 
(4,108,180
)
Purchases of equity securities
(239,680
)
 
(331,865
)
Proceeds from sale of affiliates
156,481

 
95,988

Purchases of affiliates
(196,487
)
 
(259,630
)
Proceeds from sale of life reinsurance subsidiary
570,000

 
—

Other, net
(96,222
)
 
110,133

Net cash provided by (used in) investing activities
$
1,569,409

 
$
(42,438
)
Cash flows provided by (used in) financing activities:
 
 
 
Proceeds from issuance of ordinary shares and exercise of stock options
$
3,057

 
$
8,385

Buybacks of ordinary shares
(351,654
)
 
(375,423
)
Dividends paid on ordinary shares
(87,056
)
 
(41,975
)
Distributions to non-controlling interests
(38,502
)
 
(39,020
)
Contributions from non-controlling interests
21,494

 
—

Deposit liabilities
(213,869
)
 
(44,117
)
Net cash provided by (used in) financing activities
$
(666,530
)
 
$
(492,150
)
Effects of exchange rate changes on foreign currency cash
13,799

 
(23,361
)
Increase (decrease) in cash and cash equivalents
$
1,270,307

 
$
(198,296
)
Cash and cash equivalents - beginning of period
1,800,832

 
2,618,378

Cash and cash equivalents - end of period
$
3,071,139

 
$
2,420,082

See accompanying Notes to Unaudited Consolidated Financial Statements

5

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation and Consolidation
Unless the context otherwise indicates, references herein to the “Company” include XL Group plc, an Irish public limited company ("XL-Ireland"), and its consolidated subsidiaries.
These unaudited consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In addition, the year-end balance sheet data was derived from audited financial statements but do not include all disclosures required by GAAP. In the opinion of management, these unaudited financial statements reflect all adjustments considered necessary for a fair statement of financial position and results of operations at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. For further information, see Item 8, Note 2(a), “Significant Accounting Policies – Basis of Preparation and Consolidation,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.
2. Significant Accounting Policies
(a) Investments Related to Life Retrocession Agreements written on a Funds Withheld Basis
The designated investments that support certain life retrocession agreements written on a funds withheld basis ("Life Funds Withheld Assets") are included within "Total investments available for sale". Investment results for these assets - including interest income, unrealized gains and losses, and gains and losses from sales - are passed directly to the reinsurer pursuant to a contractual arrangement which is accounted for as a derivative. See Note 3, "Sale of Life Reinsurance Subsidiary", for information regarding the reinsurance arrangement.
Changes in the fair value of the embedded derivative associated with these life retrocession agreements are recorded in “Net realized and unrealized gains (losses) on life retrocession embedded derivative” on the consolidated statements of income. The fair value of the embedded derivative is included within “Funds withheld on life retrocession arrangements, net of future policy benefit reserves recoverable” on the consolidated balance sheets.
(b) Reinsurance
The Company enters into reinsurance agreements with other companies in the normal course of business. All balances related to reinsurance agreements are reported on a gross basis on our consolidated balance sheets as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of the life retrocession agreements written on a funds withheld basis. The future policy benefit reserves recoverable related to these retrocession agreements are netted against the funds withheld liability owing to the counterparty on the consolidated balance sheets due to the right of offset.
(c) Recent Accounting Pronouncements
In July 2013, the FASB issued an accounting standards update concerning the presentation of unrecognized tax benefits. The objective of the guidance is to improve the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance seeks to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The guidance was effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. This guidance did not have a significant impact on the Company's financial condition, results of operations or cash flows.
In April 2014, the FASB issued an accounting standards update intended to improve financial reporting by changing key criteria used to evaluate whether disposal transactions meet the definition of discontinued operations. Under the guidance

6

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

only those disposals of components of an entity - either by sale or otherwise - which represent strategic shifts that have, or will have, a major effect on an entity’s operations and financial results would qualify for reporting as discontinued operations. Disposals that are considered to be routine in nature can no longer be reported as discontinued operations. However, a disposal may now qualify for discontinued operations reporting even if the disposed component's operations and cash flows are not eliminated from on-going operations of the disposing entity, or if post-disposal, the disposing entity still has significant continuing involvement in the component’s operations. The standard also establishes both additional disclosure requirements and expanded disclosures regarding on-going involvement an entity may have with a discontinued operation after its disposal. The guidance is effective prospectively for all public company disposals (or component reclassifications to held-for-sale) that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals (or component reclassifications to held-for-sale) that have not been reported in financial statements issued or available for issuance prior to the effective date. This guidance is not expected to have a significant impact on the Company's financial condition, results of operations or cash flows.
3. Sale of Life Reinsurance Subsidiary
On May 1, 2014, 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 XL Life Reinsurance (SAC) Ltd (“XLLR”) (subsequent to the transaction XLLR changed its name to GreyCastle Life Reinsurance (SAC) Ltd), a wholly-owned subsidiary of XLIB, to GreyCastle for $570 million in cash. This transaction was completed on May 30, 2014. As a result of the transaction, XLLR reinsures the majority of the Company's life reinsurance business via 100% quota share reinsurance (the "Life Retro Arrangements"). This transaction covers a substantial portion of the Company’s life reinsurance reserves. The Company announced the run-off of its life reinsurance business in 2009.
The run-off life reinsurance business, including the business subject to the transaction, 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 life run-off business 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 GreyCastle. 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.
At May 30, 2014, gross future policy benefit reserves relating to the Life operations were approximately $5.2 billion. Subsequent to the completion of this transaction the Company has retained approximately $0.4 billion of these reserves, and has recorded a reinsurance recoverable from XLLR of $4.8 billion. Under the terms of the transaction, the Company continues to own, on a funds withheld basis, $5.7 billion of 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 GreyCastle 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. The changes in this amount from the previous estimate provided by the Company were primarily the result of movements in the mark-to-market value of the Life Funds Withheld Assets, additional underwriting profits earned on the business subject to the Life Retro Arrangements and foreign exchange rate movements from March 31, 2014 through completion of the transaction.
The impact of the Life Retro Arrangements on the Company's results from the completion of the transaction on May 30, 2014 through June 30, 2014 were as follows:

7

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Impact of Life Retro Arrangements
May 30 to June 30
(U.S. dollars in thousands)
2014
Underwriting profit (loss)
$
—

Net investment income - Life Funds Withheld Assets
19,165

Net realized gains (losses) on investments sold - Life Funds Withheld Assets
624

OTTI on investments - Life Funds Withheld Assets
(8,771
)
Other income and expenses
(19
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
Net income (loss)
$
(6,547
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
12,297

Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax
(5,750
)
Comprehensive income (loss)
$
—

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 no 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.

4. Fair Value Measurements
Fair value is defined as the amount that would be received for the sale of an asset or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The fair values for available for sale investments are generally sourced from third parties. The fair value of fixed income securities is based upon quoted market values where available, “evaluated bid” prices provided by third party pricing services (“pricing services”) where quoted market values are not available, or by reference to broker quotes where pricing services do not provide coverage for a particular security. While the Company receives values for the majority of the investment securities it holds from pricing services, it is ultimately management’s responsibility to determine whether the values received and recorded in the financial statements are representative of appropriate fair value measurements.
The Company performs regular reviews of the prices received from its third party valuation sources to assess if the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for obtaining the valuations. The approaches taken by the Company include, but are not limited to, annual reviews of the controls of the external parties responsible for sourcing valuations, which are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, and monthly reconciliations between the valuations provided by our external parties and valuations provided by our third party investment managers at a portfolio level.
Where broker quotes are the primary source of the valuations, sufficient information regarding the specific inputs utilized by the brokers is generally not available to support a Level 2 classification. The Company obtains the majority of broker quoted values from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value.
As discussed in Note 2(a), “Significant Accounting Policies - Investments Related to Life Retrocession Agreements written on a Funds Withheld Basis,” under the Life Retro Arrangements, all of the investment results associated with the Life Funds Withheld Assets ultimately accrue to GreyCastle. Because the Company no longer shares in the risks and rewards of the underlying performance of the Life Funds Withheld Assets, the financial statements and accompanying notes included herein separate the Life Funds Withheld Assets from the rest of the Company's investments.

8

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For further information, see Item 8, Note 2(b), “Significant Accounting Policies - Fair Value Measurements,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
(a) Fair Value Summary
The following tables set forth the Company’s assets and liabilities that were accounted for at fair value at June 30, 2014 and December 31, 2013 by level within the fair value hierarchy:
June 30, 2014
(U.S. dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Collateral
and
Counterparty
Netting
 
Balance at
June 30, 2014
Assets
 

 
 

 
 

 
 

 
 

Fixed maturities - Available for Sale ("AFS") - Excluding Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$
—

 
$
2,084,294

 
$
—

 
$
—

 
$
2,084,294

Corporate (1)
—

 
9,723,691

 
3,933

 
—

 
9,727,624

Residential mortgage-backed securities – Agency (“RMBS - Agency”)
—

 
3,296,150

 
6,896

 
—

 
3,303,046

Residential mortgage-backed securities – Non-Agency (“RMBS - Non-Agency”)
—

 
415,492

 
11

 
—

 
415,503

Commercial mortgage-backed securities (“CMBS”)
—

 
1,122,342

 
1,945

 
—

 
1,124,287

Collateralized debt obligations (“CDO”)
—

 
5,249

 
732,824

 
—

 
738,073

Other asset-backed securities (2)
—

 
1,298,568

 
11,704

 
—

 
1,310,272

U.S. States and political subdivisions of the States
—

 
1,939,590

 
—

 
—

 
1,939,590

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
—

 
4,355,861

 
—

 
—

 
4,355,861

Total fixed maturities - AFS - Excluding Funds Withheld Assets, at fair value
$
—

 
$
24,241,237

 
$
757,313

 
$
—

 
$
24,998,550

Equity securities, at fair value (3)
603,993

 
384,717

 
—

 
—

 
988,710

Short-term investments, at fair value (1)(4)
—

 
347,674

 
—

 
—

 
347,674

Total investments AFS - Excluding Funds Withheld Assets
$
603,993

 
$
24,973,628

 
$
757,313

 
$
—

 
$
26,334,934

Fixed maturities - Life Funds Withheld Assets
 
 
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported
$
—

 
$
18,225

 
$
—

 
$
—

 
$
18,225

Corporate
—

 
3,017,446

 
—

 
—

 
3,017,446

RMBS – Agency
—

 
4,023

 
—

 
—

 
4,023

RMBS – Non-Agency
—

 
88,104

 
—

 
—

 
88,104

CMBS
—

 
216,844

 
—

 
—

 
216,844

CDO
—

 
—

 
—

 
—

 
—

Other asset-backed securities
—

 
293,617

 
—

 
—

 
293,617

U.S. States and political subdivisions of the States
—

 
—

 
—

 
—

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
—

 
1,806,112

 
—

 
—

 
1,806,112

Total fixed maturities - AFS - Life Funds Withheld Assets, at fair value
$
—

 
$
5,444,371

 
$
—

 
$
—

 
$
5,444,371

Total investments - AFS, at fair value
$
603,993

 
$
30,417,999

 
$
757,313

 
$
—

 
$
31,779,305

Cash equivalents (5)
1,792,096

 
464,544

 
—

 
—

 
2,256,640

Cash equivalents - Life Funds Withheld Assets
646

 
122,393

 
—

 
—

 
123,039

Other investments (6)
—

 
804,268

 
124,475

 
—

 
928,743

Other assets (7)
—

 
48,117

 
12,453

 
(1,240
)
 
59,330

Total assets accounted for at fair value
$
2,396,735

 
$
31,857,321

 
$
894,241

 
$
(1,240
)
 
$
35,147,057

Liabilities
 
 
 
 
 
 
 
 
 
Financial instruments sold, but not yet purchased (8)
$
1,854

 
$
29,296

 
$
—

 
$
—

 
$
31,150

Other liabilities (7)
—

 
38,277

 
31,363

 
(1,240
)
 
68,400

Total liabilities accounted for at fair value
$
1,854

 
$
67,573

 
$
31,363

 
$
(1,240
)
 
$
99,550


9

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013
(U.S. dollars in thousands)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Other
Unobservable
Inputs
(Level 3)
 
Collateral
and
Counterparty
Netting
 
Balance at
December 31,
2013
Assets
 

 
 

 
 

 
 

 
 

U.S. Government and Government - Related/Supported
$
—

 
$
2,501,851

 
$
—

 
$
—

 
$
2,501,851

Corporate (1)
—

 
11,094,257

 
31,573

 
—

 
11,125,830

RMBS – Agency
—

 
3,535,649

 
10,473

 
—

 
3,546,122

RMBS – Non-Agency
—

 
398,759

 
9

 
—

 
398,768

CMBS
—

 
1,234,262

 
12,533

 
—

 
1,246,795

CDO
—

 
7,060

 
710,253

 
—

 
717,313

Other asset-backed securities (2)
—

 
1,230,227

 
11,877

 
—

 
1,242,104

U.S. States and political subdivisions of the States
—

 
1,845,812

 
—

 
—

 
1,845,812

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
—

 
4,875,541

 
—

 
—

 
4,875,541

Total fixed maturities, at fair value
$
—

 
$
26,723,418

 
$
776,718

 
$
—

 
$
27,500,136

Equity securities, at fair value (3)
540,331

 
499,906

 
—

 
—

 
1,040,237

Short-term investments, at fair value (1)(4)
—

 
454,273

 
2,015

 
—

 
456,288

Total investments available for sale
$
540,331

 
$
27,677,597

 
$
778,733

 
$
—

 
$
28,996,661

Cash equivalents (5)
834,514

 
226,636

 
—

 
—

 
1,061,150

Other investments (6)
—

 
757,110

 
113,472

 
—

 
870,582

Other assets (7)
—

 
27,487

 
—

 
(1,342
)
 
26,145

Total assets accounted for at fair value
$
1,374,845

 
$
28,688,830

 
$
892,205

 
$
(1,342
)
 
$
30,954,538

Liabilities
 
 
 
 
 
 
 
 
 
Financial instruments sold, but not yet purchased (8)
$
—

 
$
28,861

 
$
—

 
$
—

 
$
28,861

Other liabilities (7)
—

 
76,375

 
29,110

 
(1,342
)
 
104,143

Total liabilities accounted for at fair value
$
—

 
$
105,236

 
$
29,110

 
$
(1,342
)
 
$
133,004

____________
(1)
Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes had a fair value of $155.9 million and $154.6 million and an amortized cost of $143.6 million and $147.7 million at June 30, 2014 and December 31, 2013, respectively. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.
(2)
The Company invests in covered bonds (“Covered Bonds”). Covered Bonds are senior secured debt instruments issued by financial institutions and backed by over-collateralized pools of public sector or mortgage loans. At June 30, 2014 and December 31, 2013, Covered Bonds with a fair value of $763.6 million and $553.1 million, respectively, are included within Other asset-backed securities.
(3)
Included within Equity securities are investments in fixed income funds with a fair value of $92.1 million and $87.4 million at June 30, 2014 and December 31, 2013, respectively.
(4)
Short-term investments consist primarily of Corporate securities and U.S. and Non-U.S. Government and Government-Related/Supported securities.
(5)
Cash equivalents balances subject to fair value measurement include certificates of deposit and money market funds. Operating cash balances are not subject to recurring fair value measurement guidance.
(6)
The Other investments balance excludes certain structured transactions including certain investments in project finance transactions, a payment obligation and liquidity financing provided to a structured credit vehicle as a part of a third party medium term note facility. These investments, which totaled $275.8 million at June 30, 2014 and $294.0 million at December 31, 2013, are carried at amortized cost. For further information, see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
(7)
Other assets and other liabilities include derivative instruments. The derivative balances included in each category are reported on a gross basis by level with a netting adjustment presented separately in the Collateral and Counterparty Netting column. The fair values of the individual derivative contracts are reported gross in their respective levels based on the fair value hierarchy. For further details regarding derivative fair values and associated collateral received or paid see Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements.
(8)
Financial instruments sold, but not yet purchased, represent “short sales” and are included within “Payable for investments purchased” on the balance sheets.
(b) Level 3 Assets and Liabilities
The tables below present additional information about assets and liabilities measured at fair value on a recurring basis and for which Level 3 inputs were utilized to determine fair value. The tables present a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2014 and 2013 for all financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3) at June 30, 2014 and 2013, respectively. The tables do not include gains or losses that were reported in Level 3 in prior periods for assets that were transferred out of Level 3 prior to June 30, 2014 and 2013. Gains and losses for assets and liabilities classified within Level 3 in the table below may include changes in

10

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, it should be noted that the following tables do not take into consideration the effect of offsetting Level 1 and 2 financial instruments entered into by the Company that are either economically hedged by certain exposures to the Level 3 positions or that hedge the exposures in Level 3 positions.
In general, Level 3 assets include securities for which values were obtained from brokers where either significant inputs were utilized in determining the values that were difficult to corroborate with observable market data, or sufficient information regarding the specific inputs utilized by the broker was not available to support a Level 2 classification. Transfers into or out of Level 3 primarily arise as a result of the valuations utilized by the Company changing between either those provided by independent pricing services that do not contain significant unobservable inputs and other valuations sourced from brokers that are considered Level 3.
There were no significant transfers between Level 1 and Level 2 during the three and six months ended June 30, 2014 and 2013.
 
Level 3 Assets and Liabilities -Three Months Ended June 30, 2014
(U.S. dollars in thousands)
Corporate
 
RMBS - Agency
 
RMBS - Non
Agency
 
CMBS
 
CDO
Balance, beginning of period
$
4,382

 
$
8,928

 
$
11

 
$
5,926

 
$
718,827

Realized gains (losses)
35

 
6

 
—

 
2

 
875

Movement in unrealized gains (losses)
(93
)
 
(13
)
 
—

 
(1
)
 
8,331

Purchases and issuances
8

 
—

 
—

 
1,376

 
75,201

Sales
—

 
—

 
—

 
—

 
(30,892
)
Settlements
(399
)
 
(2,025
)
 
—

 
(5,358
)
 
(39,518
)
Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
3,933

 
$
6,896

 
$
11

 
$
1,945

 
$
732,824

Movement in total gains (losses) above relating to instruments still held at the reporting date
$
(58
)
 
$
(6
)
 
$
—

 
$
—

 
$
8,247

 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities -Three Months Ended June 30, 2014
(U.S. dollars in thousands)
Other asset-
backed
securities
 
Non-US Sovereign
Government,
Provincial,
Supranational and
Government
Related/Supported
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$
10,673

 
$
—

 
$
—

 
$
116,418

 
$
(32,496
)
Realized gains (losses)
(5
)
 
—

 
—

 
5,127

 
—

Movement in unrealized gains (losses)
144

 
—

 
—

 
(1,779
)
 
13,586

Purchases and issuances
3,000

 
—

 
—

 
9,997

 
—

Sales
—

 
—

 
—

 
—

 
—

Settlements
(2,108
)
 
—

 
—

 
(5,288
)
 
—

Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
11,704

 
$
—

 
$
—

 
$
124,475

 
$
(18,910
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$
140

 
$
—

 
$
—

 
$
3,348

 
$
13,586


11

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities -Three Months Ended June 30, 2013
(U.S. dollars in thousands)
Corporate
 
RMBS - Agency
 
RMBS - Non
Agency
 
CMBS
 
CDO
Balance, beginning of period
$
40,815

 
$
19,107

 
$
103

 
$
25,012

 
$
702,904

Realized gains (losses)
(69
)
 
(2
)
 
—

 
—

 
(55
)
Movement in unrealized gains (losses)
426

 
(19
)
 
—

 
(19
)
 
14,491

Purchases and issuances
—

 
—

 
3,326

 
—

 
5,362

Sales
—

 
—

 
—

 
—

 
—

Settlements
(7,139
)
 
(872
)
 
(18
)
 
(570
)
 
(16,689
)
Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
(1,860
)
 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
32,173

 
$
18,214

 
$
3,411

 
$
24,423

 
$
706,013

Movement in total gains (losses) above relating to instruments still held at the reporting date
$
424

 
$
(22
)
 
$
(1
)
 
$
(19
)
 
$
13,804

 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities -Three Months Ended June 30, 2013
(U.S. dollars in thousands)
Other asset-
backed
securities
 
Non-US Sovereign
Government,
Provincial,
Supranational and
Government
Related/Supported
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$
35,887

 
$
—

 
$
2,017

 
$
113,322

 
$
(32,550
)
Realized gains (losses)
(13
)
 
—

 
(10
)
 
2,872

 
—

Movement in unrealized gains (losses)
(512
)
 
—

 
(8
)
 
932

 
3,176

Purchases and issuances
—

 
—

 
—

 
1,002

 
—

Sales
—

 
—

 
—

 
—

 
—

Settlements
(1,317
)
 
—

 
—

 
(14,284
)
 
—

Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
(6,506
)
 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
27,539

 
$
—

 
$
1,999

 
$
103,844

 
$
(29,374
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$
(525
)
 
$
—

 
$
(18
)
 
$
3,812

 
$
3,176




12

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
Level 3 Assets and Liabilities - Six Months Ended June 30, 2014
(U.S. dollars in thousands)
Corporate
 
RMBS - Agency
 
RMBS - Non
Agency
 
CMBS
 
CDO
Balance, beginning of period
$
31,573

 
$
10,473

 
$
9

 
$
12,533

 
$
710,253

Realized gains (losses)
155

 
6

 
—

 
3

 
2,456

Movement in unrealized gains (losses)
(96
)
 
(13
)
 
2

 
(3
)
 
12,013

Purchases and issuances
1,443

 
—

 
—

 
1,376

 
103,015

Sales
—

 
—

 
—

 
—

 
(40,824
)
Settlements
(5,513
)
 
(2,598
)
 
—

 
(11,964
)
 
(54,089
)
Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
(23,629
)
 
(972
)
 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
3,933

 
$
6,896

 
$
11

 
$
1,945

 
$
732,824

Movement in total gains (losses) above relating to instruments still held at the reporting date
$
90

 
$
(6
)
 
$
2

 
$
—

 
$
13,216

 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities - Six Months Ended June 30, 2014
(U.S. dollars in thousands)
Other asset-
backed
securities
 
Non-US Sovereign
Government,
Provincial,
Supranational and
Government
Related/Supported
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$
11,877

 
$
—

 
$
2,015

 
$
113,472

 
$
(29,110
)
Realized gains (losses)
(20
)
 
—

 
—

 
8,691

 
—

Movement in unrealized gains (losses)
206

 
—

 
(15
)
 
(282
)
 
10,200

Purchases and issuances
3,000

 
—

 
—

 
21,086

 
—

Sales
—

 
—

 
—

 
—

 
—

Settlements
(3,359
)
 
—

 
(2,000
)
 
(18,492
)
 
—

Transfers into Level 3
—

 
—

 


 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
11,704

 
$
—

 
$
—

 
$
124,475

 
$
(18,910
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$
186

 
$
—

 
$
—

 
$
8,409

 
$
10,200


13

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
Level 3 Assets and Liabilities - Six Months Ended June 30, 2013
(U.S. dollars in thousands)
Corporate
 
RMBS - Agency
 
RMBS - Non
Agency
 
CMBS
 
CDO
Balance, beginning of period
$
30,098

 
$
32,005

 
$
116

 
$
25,347

 
$
701,736

Realized gains (losses)
(71
)
 
11

 
—

 
—

 
301

Movement in unrealized gains (losses)
630

 
(37
)
 
—

 
(18
)
 
35,746

Purchases and issuances
10,621

 
—

 
3,326

 
—

 
5,362

Sales
—

 
(535
)
 
—

 
—

 
—

Settlements
(7,245
)
 
(1,765
)
 
(31
)
 
(906
)
 
(37,132
)
Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
(1,860
)
 
(11,465
)
 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
32,173

 
$
18,214

 
$
3,411

 
$
24,423

 
$
706,013

Movement in total gains (losses) above relating to instruments still held at the reporting date
$
627

 
$
(40
)
 
$
(1
)
 
$
(18
)
 
$
34,278

 
 
 
 
 
 
 
 
 
 
 
Level 3 Assets and Liabilities - Six Months Ended June 30, 2013
(U.S. dollars in thousands)
Other asset-
backed
securities
 
Non-US Sovereign
Government,
Provincial,
Supranational and
Government
Related/Supported
 
Short-term
investments
 
Other investments
 
Derivative Contracts
- Net
Balance, beginning of period
$
18,128

 
$
—

 
$
—

 
$
115,272

 
$
(36,247
)
Realized gains (losses)
38

 
—

 
(10
)
 
5,787

 
—

Movement in unrealized gains (losses)
963

 
—

 
(8
)
 
(970
)
 
6,873

Purchases and issuances
21,686

 
—

 
2,017

 
2,907

 
—

Sales
—

 
—

 
—

 
—

 
—

Settlements
(6,770
)
 
—

 
—

 
(19,152
)
 
—

Transfers into Level 3
—

 
—

 
—

 
—

 
—

Transfers out of Level 3
(6,506
)
 
—

 
—

 
—

 
—

Fixed maturities to short-term investments classification change
—

 
—

 
—

 
—

 
—

Balance, end of period
$
27,539

 
$
—

 
$
1,999

 
$
103,844

 
$
(29,374
)
Movement in total gains (losses) above relating to instruments still held at the reporting date
$
(516
)
 
$
—

 
$
(18
)
 
$
4,808

 
$
6,873

(c) Fixed maturities and short-term investments
The Company’s Level 3 assets consist primarily of CDOs, for which non-binding broker quotes are the primary source of the valuations. Sufficient information regarding the specific inputs utilized by the brokers was not available to support a Level 2 classification. The Company obtains the majority of broker quotes for these CDOs from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, the Company compares the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent a reasonable estimate of the fair value. Although the Company does not have access to the specific unobservable inputs that may have been used in the fair value measurements of the CDO securities provided by brokers, we would expect that the significant inputs considered are prepayment rates, probability of default, loss severity in the event of default, recovery rates, liquidity premium and reinvestment rates. Significant increases (decreases) in any of those inputs in isolation could result in a significantly different fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
The remainder of the Level 3 assets relate primarily to private investment funds and certain derivative positions as described below.

14

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(d) Other investments
Included within the Other investments component of the Company’s Level 3 valuations are private investments and alternative fund investments where the Company is not deemed to have significant influence over the investee. The fair value of these investments is based upon net asset values received from the investment manager or general partner of the respective entity. The nature of the underlying investments held by the investee that form the basis of the net asset value include assets such as private business ventures and are such that significant Level 3 inputs are utilized in the determination of the individual underlying holding values and, accordingly, the fair value of the Company’s investment in each entity is classified within Level 3. The Company has not adjusted the net asset values received; however, management incorporates factors such as the most recent financial information received, annual audited financial statements and the values at which capital transactions with the investee take place when applying judgment regarding whether any adjustments should be made to the net asset value in recording the fair value of each position. Investments in alternative funds included in Other investments utilize strategies including arbitrage, directional, event driven and multi-style. These funds potentially have lockup and gate provisions which may limit redemption liquidity. For further details regarding the nature of Other investments and related features see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
(e) Derivative instruments
Derivative instruments recorded within Other liabilities and classified within Level 3 include credit derivatives sold providing protection on senior tranches of structured finance transactions where the value is obtained directly from the investment bank counterparty and sufficient information regarding the inputs utilized in such valuation was not obtained to support a Level 2 classification and guaranteed minimum income benefits embedded within one reinsurance contract. The majority of inputs utilized in the valuations of these types of derivative contracts are considered Level 1 or Level 2; however, each valuation includes at least one Level 3 input that was significant to the valuation and, accordingly, the values are disclosed within Level 3.
The calculation of the change in fair value of the embedded derivative associated with the Life Retro Arrangements includes the interest income, realized and unrealized gains and losses on Life Funds Withheld Assets and certain related expenses related to the Life Funds Withheld Assets. The fair value of the embedded derivative is included in the “Funds withheld on life retrocession arrangements, net of future policy benefit reserves recoverable” on the consolidated balance sheets. The fair value of the embedded derivative is considered a Level 2 valuation.
(f) Financial Instruments Not Carried at Fair Value
Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure of fair value information for financial instruments not carried at fair value in both interim and annual reporting periods. Certain financial instruments, particularly insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents, accrued investment income, net receivable from investments sold, other assets, net payable for investments purchased, other liabilities and other financial instruments not included below approximated their fair values. The following table includes financial instruments for which the carrying value differs from the estimated fair values at June 30, 2014 and December 31, 2013. All of these fair value estimates are considered Level 2 fair value measurements. The fair values for fixed maturities held to maturity are provided by third party pricing vendors and significant valuation inputs for all other items included were based upon market data obtained from sources independent of the Company, and are subject to the same control environment previously described.
 
June 30, 2014
 
December 31, 2013
(U.S. dollars in thousands)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Fixed maturities, held to maturity
$
—

 
$
—

 
$
2,858,695

 
$
3,131,235

Other investments - structured transactions
275,821

 
299,661

 
294,048

 
296,799

Financial Assets
$
275,821

 
$
299,661

 
$
3,152,743

 
$
3,428,034

Deposit liabilities
$
1,288,376

 
$
1,520,108

 
$
1,509,243

 
$
1,718,394

Notes payable and debt
2,262,452

 
2,511,270

 
2,263,203

 
2,429,412

Financial Liabilities
$
3,550,828

 
$
4,031,378

 
$
3,772,446

 
$
4,147,806

As described in Note 3, "Sale of Life Reinsurance Subsidiary," certain fixed maturities were reclassified from held to maturity to available for sale. See also Note 6, "Investments" for further information.

15

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company historically participated in structured transactions. Remaining structured transactions include cash loans supporting project finance transactions, liquidity facility financing provided to structured project deals and an investment in a payment obligation with an insurance company. These transactions are carried at amortized cost. The fair value of these investments held by the Company is determined through use of internal models utilizing reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.
Deposit liabilities include obligations under structured insurance and reinsurance transactions. For purposes of fair value disclosures, the Company determined the estimated fair value of the deposit liabilities by assuming a discount rate equal to the appropriate U.S. Treasury rate plus 45.5 basis points and 56.7 basis points at June 30, 2014 and December 31, 2013, respectively. The discount rate incorporates the Company’s own credit risk into the determination of estimated fair value.
The fair values of the Company’s notes payable and debt outstanding were determined based on quoted market prices.
There are no significant concentrations of credit risk within the Company’s financial instruments as defined in the authoritative guidance over disclosures of fair value of financial instruments not carried at fair value, which excludes certain financial instruments, particularly insurance contracts.
5. Segment Information
The Company is organized into two operating segments: Insurance and Reinsurance. Subsequent to the transaction as described in Note 3, "Sale of Life Reinsurance Subsidiary", XLLR reinsures the majority of the Company's life reinsurance business through the Life Retro Arrangements. The Company no longer considers the Life Operations to be a separate operating segment and the results of the life run-off business are reported within “Corporate and Other.” The Company’s general investment and financing operations are also reflected in Corporate and Other. The run-off business subject to the Life Retro Arrangements was previously reported within the Company’s Life operations segment. Prior period information has been re-presented to reflect the current presentation.
The Company evaluates the performance of both the Insurance and Reinsurance segments based on underwriting profit. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, the Company does not allocate investment assets used to support its Property and Casualty (“P&C”) operations to the individual segments, except as noted below. Investment assets related to the Company’s run-off life operations and certain structured products included in the Insurance and Reinsurance segments are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from the applicable segment. The following tables summarize the segment results for the three and six months ended June 30, 2014 and 2013:


16

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, 2014
(U.S. dollars in thousands, except ratios)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
1,618,405

 
$
493,124

 
$
2,111,529

 
$
86,710

 
$
2,198,239

Net premiums written
996,880

 
436,446

 
1,433,326

 
58,518

 
1,491,844

Net premiums earned
1,003,990

 
434,086

 
1,438,076

 
58,518

 
1,496,594

Net losses and loss expenses
627,627

 
200,253

 
827,880

 
85,299

 
913,179

Acquisition costs
99,863

 
80,874

 
180,737

 
3,882

 
184,619

Operating expenses (2)
213,931

 
47,582

 
261,513

 
2,209

 
263,722

Underwriting profit (loss)
$
62,569

 
$
105,377

 
$
167,946

 
$
(32,872
)
 
$
135,074

Net investment income - excluding Life Funds Withheld Assets
 
 
 
 
144,555

 
52,118

 
196,673

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
19,165

 
19,165

Net results from structured products (3)
31,645

 
3,240

 
34,885

 
—

 
34,885

Net fee income and other (4)
(3,567
)
 
664

 
(2,903
)
 
45

 
(2,858
)
Loss on sale of life reinsurance subsidiary
 
 
 
 
—

 
666,423

 
666,423

Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
78,505

 
2,339

 
80,844

Net realized gains (losses) on investments - Life Funds Withheld Assets
 
 
 
 
—

 
(8,147
)
 
(8,147
)
Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 
—

 
11,599

 
11,599

Net realized and unrealized gains (losses) on life retrocession embedded derivative
 
 
 
 
—

 
(17,546
)
 
(17,546
)
Net income (loss) from investment fund affiliates and operating affiliates (5)
 

 
 

 
—

 
45,421

 
45,421

Exchange (gains) losses
 

 
 

 
—

 
21,141

 
21,141

Corporate operating expenses
 

 
 

 
—

 
56,495

 
56,495

Contribution from P&C and Corporate and Other
 

 
 

 
422,988

 
(671,937
)
 
(248,949
)
Interest expense (6)
 

 
 

 
 

 
32,284

 
32,284

Non-controlling interests
 

 
 

 
 

 
3,682

 
3,682

Income tax expense
 

 
 

 
 

 
(5,654
)
 
(5,654
)
Net income (loss) attributable to ordinary shareholders
 

 
 

 
 

 
 

 
$
(279,261
)
Ratios – P&C operations: (7)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
62.5
%
 
46.1
%
 
57.6
%
 
 

 
 

Underwriting expense ratio
31.3
%
 
29.6
%
 
30.7
%
 
 

 
 

Combined ratio
93.8
%
 
75.7
%
 
88.3
%
 
 

 
 

____________
(1)
Corporate and Other includes the Company's run-off life operations.
(2)
Operating expenses exclude Corporate operating expenses, shown separately.
(3)
The net results from structured products include net investment income and interest expense (credit) of $16.9 million and $(18.2) million, respectively. Net results from structured products includes a benefit of $28.7 million from a negotiated termination of one of the Company's larger structured indemnity contracts during the second quarter of 2014, producing a net interest expense credit.
(4)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(5)
The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.
(6)
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.
(7)
Ratios are based on net premiums earned from P&C operations.

17

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, 2013
(U.S. dollars in thousands, except ratios)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
1,472,388

 
$
471,782

 
$
1,944,170

 
$
81,302

 
$
2,025,472

Net premiums written
1,049,163

 
410,809

 
1,459,972

 
73,896

 
1,533,868

Net premiums earned
1,058,542

 
429,955

 
1,488,497

 
73,896

 
1,562,393

Net losses and loss expenses
721,323

 
216,283

 
937,606

 
116,767

 
1,054,373

Acquisition costs
138,032

 
86,599

 
224,631

 
7,255

 
231,886

Operating expenses (2)
194,514

 
39,622

 
234,136

 
2,206

 
236,342

Underwriting profit (loss)
$
4,673

 
$
87,451

 
$
92,124

 
$
(52,332
)
 
$
39,792

Net investment income - excluding Life Funds Withheld Assets
 
 
 
 
143,818

 
70,592

 
214,410

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
—

 
—

Net results from structured products (3)
3,532

 
2,521

 
6,053

 
—

 
6,053

Net fee income and other (4)
(1,355
)
 
520

 
(835
)
 
44

 
(791
)
Loss on sale of life reinsurance subsidiary
 
 
 
 
—

 
—

 
—

Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
29,369

 
11,599

 
40,968

Net realized gains (losses) on investments - Life Funds Withheld Assets
 
 
 
 
—

 
—

 
—

Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 
—

 
(5,105
)
 
(5,105
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative
 
 
 
 
—

 
—

 
—

Net income (loss) from investment fund affiliates and operating affiliates (5)
 

 
 

 
—

 
79,368

 
79,368

Exchange (gains) losses
 

 
 

 
—

 
(11,331
)
 
(11,331
)
Corporate operating expenses
 

 
 

 
—

 
55,155

 
55,155

Contribution from P&C and Corporate and Other
 

 
 

 
270,529

 
60,342

 
330,871

Interest expense (6)
 

 
 

 
 

 
26,121

 
26,121

Non-controlling interests
 

 
 

 
 

 
3,180

 
3,180

Income tax expense
 

 
 

 
 

 
28,872

 
28,872

Net income (loss) attributable to ordinary shareholders
 

 
 

 
 

 
 
 
$
272,698

Ratios – P&C operations: (7)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
68.1
%
 
50.3
%
 
63.0
%
 
 

 


Underwriting expense ratio
31.5
%
 
29.4
%
 
30.8
%
 
 

 
 

Combined ratio
99.6
%
 
79.7
%
 
93.8
%
 
 

 
 

____________
(1)
Corporate and Other includes the Company's run-off life operations.
(2)
Operating expenses exclude Corporate operating expenses, shown separately.
(3)
The net results from structured products include net investment income and interest expense of $18.1 million and $12.1 million, respectively.
(4)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(5)
The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.
(6)
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.
(7)
Ratios are based on net premiums earned from P&C operations.

18

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Six Months Ended June 30, 2014
(U.S. dollars in thousands, except ratios)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
3,189,331

 
$
1,350,837

 
$
4,540,168

 
$
171,007

 
$
4,711,175

Net premiums written
2,124,247

 
1,228,619

 
3,352,866

 
134,829

 
3,487,695

Net premiums earned
1,996,430

 
854,174

 
2,850,604

 
134,829

 
2,985,433

Net losses and loss expenses
1,266,820

 
392,565

 
1,659,385

 
198,886

 
1,858,271

Acquisition costs
204,863

 
168,109

 
372,972

 
11,061

 
384,033

Operating expenses (2)
416,984

 
88,443

 
505,427

 
5,397

 
510,824

Underwriting profit (loss)
$
107,763

 
$
205,057

 
$
312,820

 
$
(80,515
)
 
$
232,305

Net investment income - excluding Life Funds Withheld Assets
 
 
 
 
288,082

 
123,010

 
411,092

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
19,165

 
19,165

Net results from structured products (3)
36,535

 
6,303

 
42,838

 
—

 
42,838

Net fee income and other (4)
(4,779
)
 
1,337

 
(3,442
)
 
90

 
(3,352
)
Loss on sale of life reinsurance subsidiary
 
 
 
 
—

 
666,423

 
666,423

Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
96,171

 
3,902

 
100,073

Net realized gains (losses) on investments - Life Funds Withheld Assets
 
 
 
 
—

 
(8,147
)
 
(8,147
)
Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 
—

 
13,409

 
13,409

Net realized and unrealized gains (losses) on life retrocession embedded derivative
 
 
 
 
—

 
(17,546
)
 
(17,546
)
Net income (loss) from investment fund affiliates and operating affiliates (5)
 

 
 

 
—

 
125,009

 
125,009

Exchange (gains) losses
 

 
 

 
—

 
31,582

 
31,582

Corporate operating expenses
 

 
 

 
—

 
107,833

 
107,833

Contribution from P&C and Corporate and Other
 

 
 

 
$
736,469

 
$
(627,461
)
 
$
109,008

Interest expense (6)
 

 
 

 
 

 
64,444

 
64,444

Non-controlling interests
 

 
 

 
 

 
39,441

 
39,441

Income tax expense
 

 
 

 
 

 
28,667

 
28,667

Net income (loss) attributable to ordinary shareholders
 

 
 

 
 

 
 
 
$
(23,544
)
Ratios – P&C operations: (7)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
63.5
%
 
46.0
%
 
58.2
%
 
 

 
 

Underwriting expense ratio
31.1
%
 
30.0
%
 
30.8
%
 
 

 
 

Combined ratio
94.6
%
 
76.0
%
 
89.0
%
 
 

 
 

____________
(1)
Corporate and Other includes the Company's run-off life operations.
(2)
Operating expenses exclude Corporate operating expenses, shown separately.
(3)
The net results from structured products include net investment income and net interest expense (credit) of $35.7 million and $(7.4) million, respectively. Net results from structured products includes a benefit of $28.7 million from a negotiated termination of one of the Company's larger structured indemnity contracts during the second quarter of 2014, producing a net interest expense credit.
(4)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(5)
The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.
(6)
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.
(7)
Ratios are based on net premiums earned from P&C operations.

19

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2013
(U.S. dollars in thousands, except ratios)
Insurance
 
Reinsurance
 
Total P&C
 
Corporate
and Other (1)
 
Total
Gross premiums written
$
2,970,175

 
$
1,378,911

 
$
4,349,086

 
$
154,272

 
$
4,503,358

Net premiums written
2,238,351

 
1,263,830

 
3,502,181

 
139,341

 
3,641,522

Net premiums earned
2,097,634

 
855,109

 
2,952,743

 
139,341

 
3,092,084

Net losses and loss expenses
1,371,840

 
408,850

 
1,780,690

 
227,720

 
2,008,410

Acquisition costs
268,654

 
172,133

 
440,787

 
11,358

 
452,145

Operating expenses (2)
378,511

 
80,043

 
458,554

 
4,801

 
463,355

Underwriting profit (loss)
$
78,629

 
$
194,083

 
$
272,712

 
$
(104,538
)
 
$
168,174

Net investment income - excluding Life Funds Withheld Assets
 
 
 
 
300,857

 
142,280

 
443,137

Net investment income - Life Funds Withheld Assets
 
 
 
 
 
 
—

 
—

Net results from structured products (3)
7,717

 
3,512

 
11,229

 
—

 
11,229

Net fee income and other (4)
(3,294
)
 
1,152

 
(2,142
)
 
1,087

 
(1,055
)
Loss on sale of life reinsurance subsidiary
 
 
 
 
—

 
—

 
—

Net realized gains (losses) on investments - excluding Life Funds Withheld Assets
 

 
 

 
74,947

 
2,530

 
77,477

Net realized gains (losses) on investments - Life Funds Withheld Assets
 
 
 
 
—

 
—

 
—

Net realized and unrealized gains (losses) on derivative instruments
 

 
 

 
—

 
2,780

 
2,780

Net realized and unrealized gains (losses) on life retrocession embedded derivative
 
 
 
 
—

 
—

 
—

Net income (loss) from investment fund affiliates and operating affiliates (5)
 

 
 

 
—

 
142,587

 
142,587

Exchange (gains) losses
 

 
 

 
—

 
(44,766
)
 
(44,766
)
Corporate operating expenses
 

 
 

 
—

 
102,077

 
102,077

Contribution from P&C and Corporate and Other
 

 
 

 
$
657,603

 
$
129,415

 
$
787,018

Interest expense (6)
 

 
 

 
 

 
52,257

 
52,257

Non-controlling interests
 

 
 

 
 

 
38,922

 
38,922

Income tax expense
 

 
 

 
 

 
72,351

 
72,351

Net income (loss) attributable to ordinary shareholders
 

 
 

 
 

 
 
 
$
623,488

Ratios – P&C operations: (7)
 

 
 

 
 

 
 

 
 

Loss and loss expense ratio
65.4
%
 
47.8
%
 
60.3
%
 
 

 
 

Underwriting expense ratio
30.9
%
 
29.5
%
 
30.5
%
 
 

 
 

Combined ratio
96.3
%
 
77.3
%
 
90.8
%
 
 

 
 

____________
(1)
Corporate and Other includes the Company's run-off life operations.
(2)
Operating expenses exclude Corporate operating expenses, shown separately.
(3)
The net results from structured products include net investment income and interest expense of $35.9 million and $24.6 million, respectively.
(4)
Net fee income and other includes operating expenses from the Company's loss prevention consulting services business.
(5)
The Company records the income related to the alternative funds and to the private investment and operating fund affiliates on a one-month and three-month lag, respectively.
(6)
Interest expense excludes interest expense related to deposit liabilities recorded in the Insurance and Reinsurance segments.
(7)
Ratios are based on net premiums earned from P&C operations.


20

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize the Company’s net premiums earned by line of business for the three months ended June 30, 2014 and 2013:
Three Months Ended June 30, 2014
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
267,509

 
$
44,239

 
$
—

 
$
311,748

Casualty
358,990

 
82,929

 
—

 
441,919

Property catastrophe
—

 
112,562

 
—

 
112,562

Property
142,874

 
142,337

 
—

 
285,211

Marine, energy, aviation and satellite
—

 
21,065

 
—

 
21,065

Specialty
179,948

 
—

 
—

 
179,948

Other (1)
54,669

 
30,954

 
—

 
85,623

Total P&C Operations
$
1,003,990

 
$
434,086

 
$
—

 
$
1,438,076

Corporate and Other:
 
 
 
 
 

 
 

Run-off Life operations - Annuity
$
—

 
$
—

 
$
21,565

 
$
21,565

Run-off Life operations - Other Life
—

 
—

 
36,953

 
36,953

Total Corporate and Other
$
—

 
$
—

 
$
58,518

 
$
58,518

Total
$
1,003,990

 
$
434,086

 
$
58,518

 
$
1,496,594

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2013
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
349,812

 
$
50,978

 
$
—

 
$
400,790

Casualty
338,437

 
76,544

 
—

 
414,981

Property catastrophe
—

 
129,361

 
—

 
129,361

Property
135,089

 
132,501

 
—

 
267,590

Marine, energy, aviation and satellite
—

 
24,588

 
—

 
24,588

Specialty
181,131

 
—

 
—

 
181,131

Other (1)
54,073

 
15,983

 
—

 
70,056

Total P&C Operations
$
1,058,542

 
$
429,955

 
$
—

 
$
1,488,497

Corporate and Other:
 
 
 
 
 

 
 

Run-off Life operations - Annuity
$
—

 
$
—

 
$
30,087

 
$
30,087

Run-off Life operations - Other Life
—

 
—

 
43,809

 
43,809

Total Corporate and Other
$
—

 
$
—

 
$
73,896

 
$
73,896

Total
$
1,058,542

 
$
429,955

 
$
73,896

 
$
1,562,393

____________
(1)
Other within the Insurance segment includes: excess and surplus, programs, surety, structured indemnity and certain other discontinued lines. Other within the Reinsurance segment includes: whole account contracts, accident and health and other lines.

21

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize the Company’s net premiums earned by line of business for the six months ended June 30, 2014:
Six Months Ended June 30, 2014
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
542,936

 
$
94,343

 
$
—

 
$
637,279

Casualty
702,994

 
159,650

 
—

 
862,644

Property catastrophe
—

 
220,999

 
—

 
220,999

Property
282,607

 
277,576

 
—

 
560,183

Marine, energy, aviation and satellite
—

 
44,579

 
—

 
44,579

Specialty
356,857

 
—

 
—

 
356,857

Other (1)
111,036

 
57,027

 
—

 
168,063

Total P&C Operations
$
1,996,430

 
$
854,174

 
$
—

 
$
2,850,604

Corporate and Other:
 

 
 

 
 

 
 

Run-off Life operations - Annuity
$
—

 
$
—

 
$
53,362

 
$
53,362

Run-off Life operations - Other Life
—

 
—

 
81,467

 
81,467

Total Corporate and Other
$
—

 
$
—

 
$
134,829

 
$
134,829

Total
$
1,996,430

 
$
854,174

 
$
134,829

 
$
2,985,433

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
(U.S. dollars in thousands)
Insurance
 
Reinsurance
 
Corporate
and Other
 
Total
P&C Operations:
 

 
 

 
 

 
 

Professional
$
700,650

 
$
96,414

 
$
—

 
$
797,064

Casualty
665,855

 
153,525

 
—

 
819,380

Property catastrophe
—

 
243,003

 
—

 
243,003

Property
259,539

 
273,770

 
—

 
533,309

Marine, energy, aviation and satellite
—

 
52,428

 
—

 
52,428

Specialty
364,096

 
—

 
—

 
364,096

Other (1)
107,494

 
35,969

 
—

 
143,463

Total P&C Operations
$
2,097,634

 
$
855,109

 
$
—

 
$
2,952,743

Corporate and Other:
 

 
 

 
 

 
 

Run-off Life operations - Annuity
$
—

 
$
—

 
$
59,771

 
$
59,771

Run-off Life operations - Other Life
—

 
—

 
79,570

 
79,570

Total Corporate and Other
$
—

 
$
—

 
$
139,341

 
$
139,341

Total
$
2,097,634

 
$
855,109

 
$
139,341

 
$
3,092,084

____________
(1)
Other within the Insurance segment includes: excess and surplus, programs, surety, structured indemnity and certain other discontinued lines. Other within the Reinsurance segment includes: whole account contracts, accident and health and other lines.


22

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. Investments
(a) Fixed Maturities, Short-Term Investments and Equity Securities
Classification of Fixed Income Securities
During the three months ended June 30, 2014 fixed maturities with a carrying value of $2.8 billion were reclassified from held to maturity to available for sale in conjunction with the sale of XLLR as discussed in Note 3, “Sale of Life Reinsurance Subsidiary.” Gross unrealized gains and gross unrealized losses, net of tax, of $424.9 million and nil, respectively, related to these securities were recognized in other comprehensive income on the date of transfer. For certain annuity contracts that are subject to the Life Retro Arrangements, policy benefit reserves were historically increased for the impact of changes in unrealized gains on investments supporting such contracts as if the gains had been realized, with a corresponding entry to other comprehensive income ("Shadow Adjustments"). In conjunction with the sale of XLLR and the related reclassification of securities from HTM to AFS, the Company recorded an additional gross charge of $440.5 million , net of tax, as a reduction of comprehensive income for such Shadow Adjustments on the date of the transfer. See Note 15, "Accumulated Other Comprehensive Income" for further information.
All of the reclassified securities are included within the 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 GreyCastle. Because the Company no longer shares in the risks and rewards of the underlying performance of the Life Funds Withheld Assets, disclosures within the financial statements and accompanying notes included herein separate the Life Funds Withheld Assets from the rest of the Company's investments.
Amortized Cost and Fair Value Summary
The cost (amortized cost for fixed maturities and short-term investments), fair value, gross unrealized gains and gross unrealized (losses), including other-than-temporary impairments (“OTTI”) recorded in accumulated other comprehensive income (“AOCI”) of the Company’s AFS investments, the Life Funds Withheld Assets designated as AFS, and HTM investments at June 30, 2014 and December 31, 2013, were as follows:


23

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014
(U.S. dollars in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Value
 
Non-credit Related OTTI (1)
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 

 
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported (2)
$
2,033,152

 
$
60,408

 
$
(9,266
)
 
$
2,084,294

 
$
—

Corporate (3) (4)
9,345,654

 
425,093

 
(43,123
)
 
9,727,624

 
(4,758
)
RMBS – Agency
3,218,551

 
104,874

 
(20,379
)
 
3,303,046

 
—

RMBS – Non-Agency
395,629

 
41,054

 
(21,180
)
 
415,503

 
(70,645
)
CMBS
1,098,149

 
33,562

 
(7,424
)
 
1,124,287

 
(2,561
)
CDO
763,146

 
3,656

 
(28,729
)
 
738,073

 
(1,812
)
Other asset-backed securities (5)
1,271,201

 
42,158

 
(3,087
)
 
1,310,272

 
(2,058
)
U.S. States and political subdivisions of the States
1,836,889

 
109,258

 
(6,557
)
 
1,939,590

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
4,264,089

 
117,877

 
(26,105
)
 
4,355,861

 
—

Total fixed maturities - AFS - Excluding Life Funds Withheld Assets
$
24,226,460

 
$
937,940

 
$
(165,850
)
 
$
24,998,550

 
$
(81,834
)
Total short-term investments (2)
$
347,473

 
$
972

 
$
(771
)
 
$
347,674

 
$
—

Total equity securities (6)
$
839,716

 
$
151,618

 
$
(2,624
)
 
$
988,710

 
$
—

Total investments - AFS - Excluding Life Funds Withheld Assets
$
25,413,649

 
$
1,090,530

 
$
(169,245
)
 
$
26,334,934

 
$
(81,834
)
Fixed maturities - AFS - Life Funds Withheld Assets
 

 
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported
$
16,356

 
$
1,869

 
$
—

 
$
18,225

 
$
—

Corporate
2,722,907

 
294,539

 
—

 
3,017,446

 
—

RMBS – Agency
3,990

 
33

 
—

 
4,023

 
—

RMBS – Non-Agency
78,804

 
9,300

 
—

 
88,104

 
—

CMBS
198,576

 
18,268

 
—

 
216,844

 
—

CDO
—

 
—

 
—

 
—

 
—

Other asset-backed securities
271,691

 
21,926

 
—

 
293,617

 
—

U.S. States and political subdivisions of the States
—

 
—

 
—

 
—

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
1,546,747

 
259,365

 
—

 
1,806,112

 
—

Total fixed maturities - AFS - Life Funds Withheld Assets
$
4,839,071

 
$
605,300

 
$
—

 
$
5,444,371

 
$
—

Total investments - AFS
$
30,252,720

 
$
1,695,830

 
$
(169,245
)
 
$
31,779,305

 
$
(81,834
)
Total fixed maturities - HTM
$
—

 
$
—

 
$
—

 
$
—

 
$
—

___________
(1)
Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the date an impairment was recorded.
(2)
U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments includes government-related securities with an amortized cost of $1,679.1 million and fair value of $1,721.8 million and U.S. Agencies with an amortized cost of $230.2 million and fair value of $256.8 million.
(3)
Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $155.9 million and an amortized cost of $143.6 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.
(4)
Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $28.1 million and an amortized cost of $32.6 million.
(5)
Covered Bonds with an amortized cost of $737.0 million and a fair value of $763.6 million are included within Other asset-backed securities to align the Company's classification to market indices.
(6)
Included within Total equity securities are investments in fixed income funds with a fair value of $92.1 million and an amortized cost of $92.1 million.

24

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013
(U.S. dollars in thousands)
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair Value
 
Non-credit Related OTTI (1)
Fixed maturities - AFS
 

 
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported (2)
$
2,484,193

 
$
51,701

 
$
(34,043
)
 
$
2,501,851

 
$
—

Corporate (3) (4)
10,802,332

 
433,097

 
(109,599
)
 
11,125,830

 
(4,758
)
RMBS – Agency
3,540,101

 
68,098

 
(62,077
)
 
3,546,122

 
—

RMBS – Non-Agency
396,798

 
33,096

 
(31,126
)
 
398,768

 
(74,528
)
CMBS
1,223,313

 
39,255

 
(15,773
)
 
1,246,795

 
(2,753
)
CDO
754,414

 
5,833

 
(42,934
)
 
717,313

 
(2,036
)
Other asset-backed securities (5)
1,210,384

 
40,560

 
(8,840
)
 
1,242,104

 
(2,807
)
U.S. States and political subdivisions of the States
1,821,499

 
55,083

 
(30,770
)
 
1,845,812

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
4,878,840

 
80,961

 
(84,260
)
 
4,875,541

 
—

Total fixed maturities - AFS
$
27,111,874

 
$
807,684

 
$
(419,422
)
 
$
27,500,136

 
$
(86,882
)
Total short-term investments (2)
$
455,470

 
$
962

 
$
(144
)
 
$
456,288

 
$
—

Total equity securities (6)
$
903,201

 
$
154,506

 
$
(17,470
)
 
$
1,040,237

 
$
—

Total investments - AFS
$
28,470,545

 
$
963,152

 
$
(437,036
)
 
$
28,996,661

 
$
(86,882
)
Fixed maturities - HTM
 

 
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported (2)
$
10,993

 
$
629

 
$
—

 
$
11,622

 
$
—

Corporate
1,386,863

 
113,179

 
(968
)
 
1,499,074

 
—

RMBS – Non-Agency
66,987

 
4,985

 
—

 
71,972

 
—

CMBS
144,924

 
11,864

 
—

 
156,788

 
—

Other asset-backed securities (5)
106,540

 
6,908

 
—

 
113,448

 
—

Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
1,142,388

 
136,585

 
(642
)
 
1,278,331

 
—

Total fixed maturities - HTM
$
2,858,695

 
$
274,150

 
$
(1,610
)
 
$
3,131,235

 
$
—

____________
(1)
Represents the non-credit component of OTTI losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the date an impairment was recorded.
(2)
U.S. Government and Government-Related/Supported, Non-U.S. Sovereign Government, Provincials, Supranationals and Government-Related/Supported and Total short-term investments includes government-related securities with an amortized cost of $2,241.5 million and fair value of $2,275.6 million and U.S. Agencies with an amortized cost of $267.0 million and fair value of $284.3 million.
(3)
Included within Corporate are certain medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a fair value of $154.6 million and an amortized cost of $147.7 million. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.
(4)
Included within Corporate are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions. These securities have a fair value of $282.2 million and an amortized cost of $286.2 million.
(5)
Covered Bonds within Fixed maturities - AFS with an amortized cost of $526.4 million and a fair value of $553.1 million and Covered Bonds within Fixed maturities - HTM with an amortized cost of $8.6 million and a fair value of $8.7 million are included within Other asset-backed securities to align the Company's classification to market indices.
(6)
Included within Total equity securities are investments in fixed income funds with a fair value of $87.4 million and an amortized cost of $100.0 million.
At June 30, 2014 and December 31, 2013, approximately 2.8% and 2.6%, respectively, of the Company's fixed income investment portfolio at fair value, excluding Life Funds Withheld Assets, was invested in securities that were below investment grade or not rated. Approximately 22.0% and 12.4% of the gross unrealized losses in the Company's fixed income securities portfolio, excluding Life Funds Withheld Assets, at June 30, 2014 and December 31, 2013, respectively, related to securities that were below investment grade or not rated. There were no unrealized losses within the Life Funds Withheld Assets at June 30, 2014.

25

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contractual Maturities Summary
The contractual maturities of AFS and HTM fixed income securities at June 30, 2014 and December 31, 2013 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2014 (1)

December 31, 2013 (1)
(U.S. dollars in thousands)
Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value
Fixed maturities - AFS - Excluding Life Funds Withheld Assets
 


 


 


 

Due less than one year
$
2,069,219

 
$
2,088,394

 
$
2,052,251

 
$
2,060,365

Due after 1 through 5 years
9,384,790

 
9,657,635

 
10,075,087

 
10,305,986

Due after 5 through 10 years
4,518,798

 
4,693,075

 
5,474,120

 
5,507,450

Due after 10 years
1,506,977

 
1,668,265

 
2,385,406

 
2,475,233

 
$
17,479,784

 
$
18,107,369

 
$
19,986,864

 
$
20,349,034

RMBS – Agency
3,218,551

 
3,303,046

 
3,540,101

 
3,546,122

RMBS – Non-Agency
395,629

 
415,503

 
396,798

 
398,768

CMBS
1,098,149

 
1,124,287

 
1,223,313

 
1,246,795

CDO
763,146

 
738,073

 
754,414

 
717,313

Other asset-backed securities
1,271,201

 
1,310,272

 
1,210,384

 
1,242,104

Total mortgage and asset-backed securities
$
6,746,676

 
$
6,891,181

 
$
7,125,010

 
$
7,151,102

Total fixed maturities - AFS - Excluding Life Funds Withheld Assets
$
24,226,460

 
$
24,998,550

 
$
27,111,874

 
$
27,500,136

Fixed maturities - AFS - Life Funds Withheld Assets
 

 
 

 
 

 
 

Due less than one year
$
138,250

 
$
144,169

 
$
—

 
$
—

Due after 1 through 5 years
680,192

 
725,237

 
—

 
—

Due after 5 through 10 years
1,159,277

 
1,297,027

 
—

 
—

Due after 10 years
2,308,291

 
2,675,350

 
—

 
—

 
$
4,286,010

 
$
4,841,783

 
$
—

 
$
—

RMBS – Agency
3,990

 
4,023

 
—

 
—

RMBS – Non-Agency
78,804

 
88,104

 
—

 
—

CMBS
198,576

 
216,844

 
—

 
—

CDO
—

 
—

 
—

 
—

Other asset-backed securities
271,691

 
293,617

 
—

 
—

Total mortgage and asset-backed securities
$
553,061

 
$
602,588

 
$
—

 
$
—

Total fixed maturities - AFS - Life Funds Withheld Assets
$
4,839,071

 
$
5,444,371

 
$
—

 
$
—

Total fixed maturities - AFS
$
29,065,531

 
$
30,442,921

 
$
27,111,874

 
$
27,500,136

Fixed maturities - HTM
 

 
 

 
 

 
 

Due less than one year
$
—

 
$
—

 
$
65,651

 
$
66,766

Due after 1 through 5 years
—

 
—

 
240,802

 
255,322

Due after 5 through 10 years
—

 
—

 
455,633

 
492,095

Due after 10 years
—

 
—

 
1,778,158

 
1,974,844

 
$
—

 
$
—

 
$
2,540,244

 
$
2,789,027

RMBS – Non-Agency
—

 
—

 
66,987

 
71,972

CMBS
—

 
—

 
144,924

 
156,788

Other asset-backed securities
—

 
—

 
106,540

 
113,448

Total mortgage and asset-backed securities
$
—

 
$
—

 
$
318,451

 
$
342,208

Total fixed maturities - HTM
$
—

 
$
—

 
$
2,858,695

 
$
3,131,235

____________
(1)
Included in the table above within Fixed Maturities - AFS - Excluding Life Funds Withheld Assets, are Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments, which are senior to the common and preferred equities of the financial institutions, at their fair values of $28.1 million and $282.2 million at June 30, 2014 and December 31, 2013, respectively. These securities are reflected in the table based on their call date and have net unrealized losses of $4.5 million and $4.0 million at June 30, 2014 and December 31, 2013, respectively.

26

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

OTTI Considerations
Under final authoritative accounting guidance, a debt security for which amortized cost exceeds fair value is deemed to be other-than-temporarily impaired if it meets either of the following conditions: (a) the Company intends to sell, or it is more likely than not that the Company will be required to sell, the security before a recovery in value, or (b) the Company does not expect to recover the entire amortized cost basis of the security. Other than in a situation in which the Company has the intent to sell a debt security or more likely than not will be required to sell a debt security, the amount of the OTTI related to a credit loss on the security is recognized in earnings, and the amount of the OTTI related to other factors (e.g., interest rates, market conditions, etc.) is recorded as a component of OCI. The net amount recognized in earnings (“credit loss impairment”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment (“NPV”). The remaining difference between the security's NPV and its fair value is recognized in OCI. Subsequent changes in the fair value of these securities are included in OCI unless a further impairment is deemed to have occurred.
In the scenario where the Company has the intent to sell a security in which its amortized cost exceeds its fair value, or it is more likely than not that it will be required to sell such a security, the entire difference between the security's amortized cost and its fair value is recognized in earnings.
The determination of credit loss impairment is based on detailed analyses of underlying cash flows and other considerations. Such analyses require the use of certain assumptions to develop the estimated performance of underlying collateral. Key assumptions used include, but are not limited to, items such as RMBS default rates based on collateral duration in arrears, severity of losses on default by collateral class, collateral reinvestment rates and expected future general corporate default rates.
Factors considered for all securities on a quarterly basis in determining that a gross unrealized loss is not other-than-temporarily impaired include management's consideration of current and near term liquidity needs and other available sources of funds, an evaluation of the factors and time necessary for recovery and an assessment of whether the Company has the intention to sell or considers it more likely than not that it will be forced to sell a security.
Pledged Assets
Certain of the Company's invested assets are held in trust and pledged in support of insurance and reinsurance liabilities as well as credit facilities. Such pledges are largely required by the Company's operating subsidiaries that are “non-admitted” under U.S. state insurance regulations, in order for the U.S. cedant to receive statutory credit for reinsurance. Also, certain deposit liabilities and annuity contracts require the use of pledged assets. At June 30, 2014 and December 31, 2013, the Company had $16.1 billion and $15.5 billion in pledged assets, respectively.

27

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(b) Gross Unrealized Losses
The following is an analysis of how long the AFS and HTM securities at June 30, 2014 and December 31, 2013 had been in a continual unrealized loss position:
 
Less than 12 months
 
Equal to or greater
than 12 months
June 30, 2014
(U.S. dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fixed maturities and short-term investments - AFS - Excluding Life Funds Withheld Assets
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported
$
155,192

 
$
(1,345
)
 
$
455,830

 
$
(7,926
)
Corporate
510,313

 
(4,910
)
 
820,499

 
(38,302
)
RMBS – Agency
28,954

 
(123
)
 
652,745

 
(20,256
)
RMBS – Non-Agency
26,501

 
(374
)
 
216,406

 
(20,806
)
CMBS
65,205

 
(197
)
 
202,685

 
(7,227
)
CDO
69,479

 
(268
)
 
492,272

 
(28,461
)
Other asset-backed securities
60,338

 
(130
)
 
79,464

 
(2,957
)
U.S. States and political subdivisions of the States
32,636

 
(260
)
 
222,479

 
(6,297
)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
548,628

 
(6,517
)
 
515,159

 
(20,265
)
Total fixed maturities and short-term investments - AFS - Excluding Life Funds Withheld Assets
$
1,497,246

 
$
(14,124
)
 
$
3,657,539

 
$
(152,497
)
Total fixed maturities and short-term investments - AFS - Life Funds Withheld Assets
$
—

 
$
—

 
$
—

 
$
—

Total fixed maturities and short-term investments - AFS
$
1,497,246

 
$
(14,124
)
 
$
3,657,539

 
$
(152,497
)
Total equity securities
$
46,158

 
$
(2,624
)
 
$
—

 
$
—

Total fixed maturities - HTM
$
—

 
$
—

 
$
—

 
$
—


 
Less than 12 months
 
Equal to or greater
than 12 months
December 31, 2013
(U.S. dollars in thousands)
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fixed maturities and short-term investments - AFS
 

 
 

 
 

 
 

U.S. Government and Government-Related/Supported
$
1,333,704

 
$
(30,474
)
 
$
44,158

 
$
(3,614
)
Corporate
2,756,235

 
(59,497
)
 
513,106

 
(50,160
)
RMBS – Agency
1,485,261

 
(50,362
)
 
169,704

 
(11,715
)
RMBS – Non-Agency
14,204

 
(604
)
 
240,946

 
(30,522
)
CMBS
432,820

 
(6,816
)
 
107,192

 
(8,957
)
CDO
58,239

 
(217
)
 
574,613

 
(42,717
)
Other asset-backed securities
196,639

 
(2,149
)
 
96,528

 
(6,691
)
U.S. States and political subdivisions of the States
463,974

 
(23,124
)
 
64,324

 
(7,646
)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
2,130,792

 
(56,866
)
 
306,873

 
(27,435
)
Total fixed maturities and short-term investments - AFS
$
8,871,868

 
$
(230,109
)
 
$
2,117,444

 
$
(189,457
)
Total equity securities
$
155,453

 
$
(17,470
)
 
$
—

 
$
—

Fixed maturities - HTM
 

 
 

 
 

 
 

Corporate
$
46,034

 
$
(941
)
 
$
642

 
$
(27
)
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported
—

 
—

 
11,894

 
(642
)
Total fixed maturities - HTM
$
46,034

 
$
(941
)
 
$
12,536

 
$
(669
)

28

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company had gross unrealized losses totaling $169.2 million on 1,385 securities out of a total of 7,668 held at June 30, 2014 in its AFS - Excluding Life Funds Withheld Assets portfolio, which it considers to be temporarily impaired or with respect to which it reflects non-credit losses on other-than-temporarily impaired assets. Individual security positions comprising this balance have been evaluated by management to determine the severity of these impairments and whether they should be considered other-than-temporary. Management believes it is more likely than not that the issuer will be able to fund sufficient principal and interest payments to support the current amortized cost.
Management, in its assessment of whether securities in a gross unrealized loss position are temporarily impaired, as described above, considers the significance of the impairments. At June 30, 2014, the AFS - Excluding Life Funds Withheld Assets portfolio included structured credit securities with gross unrealized losses of $10.6 million, which had a fair value of $4.6 million, and a cumulative fair value decline of greater than 50% of amortized cost. All of these securities are mortgage and asset-backed securities. These greater than 50% impaired securities include gross unrealized losses of $10.4 million on CDOs and $0.2 million on non-Agency RMBS.
(c) Net Realized Gains (Losses)
The following represents an analysis of net realized gains (losses) on investments:
Net Realized Gains (Losses) on Investments
Three months ended June 30,
 
Six months ended June 30,
(U.S. dollars in thousands)
2014
 
2013
 
2014
 
2013
Net realized gains (losses) on investments - excluding Life Funds Withheld Assets:
 
 
 
 
 
 
 
Gross realized gains
$
118,947

 
$
64,865

 
$
170,160

 
$
138,038

Gross realized losses on investments sold
(13,487
)
 
(21,508
)
 
(41,744
)
 
(53,534
)
OTTI on investments, net of amounts transferred to other comprehensive income
(24,616
)
 
(2,389
)
 
(28,343
)
 
(7,027
)
 
$
80,844

 
$
40,968

 
$
100,073

 
$
77,477

Net realized gains (losses) on investments - Life Funds Withheld Assets:
 
 
 
 
 
 
 
Gross realized gains
$
624

 
$
—

 
$
624

 
$
—

Gross realized losses on investments sold
—

 
—

 
—

 
—

OTTI on investments, net of amounts transferred to other comprehensive income
(8,771
)
 
—

 
(8,771
)
 
—

 
$
(8,147
)
 
$
—

 
$
(8,147
)
 
$
—

Total net realized gains (losses) on investments
$
72,697

 
$
40,968

 
$
91,926

 
$
77,477

The main components of the net impairment charges of $24.6 million for investments excluding Life Funds Withheld Assets for the three months ended June 30, 2014 were:
▪
$10.3 million related to certain equities as the holdings were in a loss position for more than 11 months.
▪
$12.5 million related to Other Investments.
The following table sets forth the amount of credit loss impairments on fixed income securities held by the Company as of the dates or the periods indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts.
Credit Loss Impairments
Three months ended June 30,
 
Six months ended June 30,
(U.S. dollars in thousands)
2014
 
2013
 
2014
 
2013
Opening balance at beginning of indicated period
$
171,382

 
$
260,066

 
$
174,805

 
$
268,707

Credit loss impairment recognized in the current period on securities not previously impaired
30

 
27

 
41

 
527

Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period
(3,322
)
 
(55,144
)
 
(7,571
)
 
(61,619
)
Credit loss impairments previously recognized on securities impaired to fair value during the period
—

 
—

 
—

 
—

Additional credit loss impairments recognized in the current period on securities previously impaired
892

 
1,996

 
3,153

 
4,300

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
(3,105
)
 
(4,083
)
 
(4,551
)
 
(9,053
)
Balance at June 30,
$
165,877

 
$
202,862

 
$
165,877

 
$
202,862


29

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended June 30, 2014 and 2013, the $3.3 million and $55.1 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $2.5 million and $54.4 million, respectively, of non-Agency RMBS.
During the six months ended June 30, 2014 and 2013, the $7.6 million and $61.6 million, respectively, of credit loss impairments previously recognized on securities that matured, or were paid down, prepaid or sold, includes $5.2 million and $60.2 million, respectively, of non-Agency RMBS.

7. Derivative Instruments
The Company enters into derivative instruments for both risk management and investment purposes. The Company is exposed to potential loss from various market risks, and manages its market risks based on guidelines established by management and the Risk and Finance Committee of the Company's Board of Directors. The Company recognizes all derivatives as either assets or liabilities in the balance sheets and measures those instruments at fair value, with the changes in fair value of derivatives shown in the consolidated statement of income as “Net realized and unrealized gains (losses) on derivative instruments” unless the derivatives are designated as hedging instruments. The accounting for derivatives that are designated as hedging instruments is described in Item 8, Note 2(h), “Significant Accounting Policies - Derivative Instruments,” to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
The following table summarizes information on the location and gross amounts of derivative fair values contained in the consolidated balance sheets at June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
December 31, 2013
(U.S. dollars in thousands)
Asset
Derivative
Notional
Amount
 
Asset
Derivative
Fair Value
(1)
 
Liability
Derivative
Notional
Amount
 
Liability
Derivative
Fair Value
(1)
 
Asset
Derivative
Notional
Amount
 
Asset
Derivative
Fair Value
(1)
 
Liability
Derivative
Notional
Amount
 
Liability
Derivative
Fair Value
(1)
Derivatives designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
$
891,217

 
$
45,597

 
$
1,315,385

 
$
35,265

 
$
1,005,610

 
$
26,098

 
$
2,572,227

 
$
70,462

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investment Related Derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate exposure
$
1,295,267

 
$
259

 
$
28,090

 
$
—

 
$
30,702

 
$
266

 
$
10,259

 
$
8

Foreign exchange exposure
190,870

 
1,914

 
105,797

 
3,004

 
17,497

 
12

 
50,614

 
680

Credit exposure
4,566

 
3

 
14,270

 
9,988

 
—

 
—

 
340,020

 
15,128

Financial market exposure
46,645

 
344

 
43,468

 
—

 
58,232

 
1,111

 
14,821

 
77

Financial Operations Derivatives: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit exposure
—

 
—

 
41,346

 
8,930

 
—

 
—

 
44,234

 
4,190

Other Non-Investment Derivatives:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Guaranteed minimum income benefit contract
50,802

 
12,453

 
50,802

 
12,453

 
—

 
—

 
53,564

 
14,940

Modified coinsurance funds withheld contracts (3)
65,721

 
—

 
5,659,644

 
—

 
66,369

 
—

 
—

 
—

Total derivatives not designated as hedging instruments
$
1,653,871

 
$
14,973

 
$
5,943,417

 
$
34,375

 
$
172,800

 
$
1,389

 
$
513,512

 
$
35,023

____________
(1)
Derivative instruments in an asset or liability position are included within Other assets or Other liabilities, respectively, in the balance sheets on a net basis where the Company has both a legal right of offset and the intentions to settle the contracts on a net basis.
(2)
Financial operations derivatives represent interests in variable interest entities as described in Note 12, “Variable Interest Entities".
(3)
The fair value movements in derivative assets and liabilities relating to modified coinsurance funds withheld contracts are included within the the associated asset or liability at each period end on the face of the balance sheets. Notional amounts associated with reinsurance agreements under which the Company assumes reinsurance risk are recorded as asset derivative notional amounts. Notional amounts associated with the Life Retro Arrangements under which the Company cedes reinsurance risk are recorded as liability derivative notional amounts. Included in the liability derivative notional amount at June 30, 2014 is the current period net realized and unrealized loss on life retrocession embedded derivative of $17.5 million.


30

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information on the gross and net amounts of derivative fair values and associated collateral received related to derivative assets or paid relating to derivative liabilities contained in the consolidated balance sheets at June 30, 2014 and December 31, 2013:
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheets
 
 
June 30, 2014
(U.S. dollars in thousands)
Gross Amounts Recognized in the Balance Sheets
 
Gross Amounts Offset in the Balance Sheets
 
Net Amounts in the Balance Sheets
 
Financial Instruments
 
Cash Collateral
 
Net Amounts
Derivative Assets
$
60,570

 
$
1,240

 
$
59,330

 
$
—

 
$
3,160

 
$
56,170

Derivative Liabilities
$
69,640

 
$
1,240

 
$
68,400

 
$
—

 
$
—

 
$
68,400

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
(U.S. dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
$
27,487

 
$
1,342

 
$
26,145

 
$
—

 
$
—

 
$
26,145

Derivative Liabilities
$
105,485

 
$
1,342

 
$
104,143

 
$
—

 
$
19,847

 
$
84,296

Derivative instruments in an asset or liability position are included within Other assets or Other liabilities, respectively, in the balance sheets on a net basis where the Company has both a legal right of offset and the intention to settle the contracts on a net basis. The Company often enters into different types of derivative contracts with a single counterparty and these contracts are covered under netting agreements. At June 30, 2014 the Company held cash collateral related to foreign currency derivative positions and certain other derivative positions of $3.2 million and at December 31, 2013, the Company paid cash collateral related to foreign currency derivative positions and certain other derivative positions of $19.8 million. The assets related to the net collateral paid were recorded as Other assets within the balance sheets as the collateral and derivative positions are not intended to be settled on a net basis.
(a) Derivative Instruments Designated as Fair Value Hedges
The Company designates certain of its derivative instruments as fair value hedges or cash flow hedges and formally and contemporaneously documents all relationships between the hedging instruments and hedged items and links the hedging derivative to specific assets and liabilities. The Company assesses the effectiveness of the hedge both at inception and on an on-going basis, and determines whether the hedge is highly effective in offsetting changes in fair value or cash flows of the linked hedged item.
The Company may hedge portions of its liabilities against changes in the applicable designated benchmark interest rate. Interest rate swaps may also be used to hedge the changes in fair value of certain fixed rate liabilities and fixed income securities due to changes in the designated benchmark interest rate. In addition, the Company utilizes foreign exchange contracts to hedge the fair value of certain fixed income securities as well as to hedge certain net investments in foreign operations.

31

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the total impact on earnings relating to derivative instruments formally designated as fair value hedges along with the impacts of the related hedged items for the three and six months ended June 30, 2014 and 2013:
 
 
Hedged Items - Amount of Gain/(Loss) Recognized in Income Attributable to Risk
 
Derivatives Designated as Fair Value Hedges:
Three Months Ended June 30, 2014
(U.S. dollars in thousands)
Gain/(Loss)
Recognized
in Income on
Derivative
 
Fixed Maturity
Investments
 
Ineffective
Portion of
Hedging
Relationship -
Gain/(Loss)
Interest rate exposure
$
—

 
 

 
 

Foreign exchange exposure
(9,132
)
 
 

 
 

Total
$
(9,132
)
 
$
7,082

 
$
(2,050
)
 
 

 
 

 
 

Three Months Ended June 30, 2013
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

Interest rate exposure
$
—

 
 

 
 

Foreign exchange exposure
(5,002
)
 
 

 
 

Total
$
(5,002
)
 
$
4,496

 
$
(506
)
 
 
 
 
 
 
Six Months Ended June 30, 2014
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

Interest rate exposure
$
—

 
 

 
 

Foreign exchange exposure
(15,663
)
 
 

 
 

Total
$
(15,663
)
 
$
15,407

 
$
(256
)
 
 
 
 
 
 
Six Months Ended June 30, 2013
 

 
 

 
 

(U.S. dollars in thousands)
 

 
 

 
 

Interest rate exposure
$
—

 
 

 
 

Foreign exchange exposure
25,243

 
 

 
 

Total
$
25,243

 
$
(24,274
)
 
$
969

The gains (losses) recorded on both the derivative instruments and specific items designated as being hedged as part of the fair value hedging relationships outlined above along with any associated ineffectiveness in the relationships are recorded through Net realized and unrealized gains (losses) on derivative instruments in the income statement. In addition, the periodic coupon settlements relating to the interest rate swaps are recorded as adjustments to net investment income for the hedges of fixed maturity investments.
Settlement of Fair Value Hedges
A summary of the fair value hedges that have been settled and their impact on results during the three and six months ended June 30, 2014 and 2013, as well as the remaining balance of fair value hedges and average years remaining to maturity are shown below:
Settlement of Fair Value Hedges - Summary
Fair Value Hedges - Notes
Payable and Debt
June 30,
 
Fair Value Hedges - Deposit
Liabilities
June 30,
(U.S. dollars in thousands, except years)
2014
 
2013
 
2014
 
2013
Cumulative reduction to interest expense
$
20,810

 
$
16,903

 
$
90,615

 
$
29,257

Remaining balance
$
814

 
$
4,721

 
$
142,580

 
$
203,938

Weighted average years remaining to maturity
0.2

 
1.2

 
24.0

 
24.2


During the second quarter of 2014, the Company negotiated the termination of one of its larger structured indemnity contracts. This contract had previously been designated as a fair value hedge that was settled as noted above. The remaining fair value adjustment of $47.0 million that was being amortized as a reduction of interest expense over the remaining term of the contract was recorded as an adjustment to interest expense at the termination date. As a result of the termination, a net decrease of $28.7 million was recorded to interest expense reflecting the realization of the remaining balance of the fair value hedge adjustment, partially offset by an accretion rate adjustment due to changes in cash flows.

32

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(b) Derivative Instruments Designated as Hedges of the Net Investment in a Foreign Operation
The Company utilizes foreign exchange contracts to hedge the fair value of certain net investments in foreign operations. During the three and six months ended June 30, 2014 and 2013, the Company entered into foreign exchange contracts that were formally designated as hedges of investments in foreign subsidiaries, the majority of which have functional currencies of either U.K. sterling or the Euro. There was no ineffectiveness in these transactions.
The following table provides the weighted average U.S. dollar equivalent of foreign denominated net assets that were hedged and the resulting derivative gain (loss) that was recorded in the Foreign currency translation adjustment, net of tax, account within AOCI for the three and six months ended June 30, 2014 and 2013:
Derivative Instruments Designated as Hedges of the
Net Investment in a Foreign Operation - Summary
Three months ended June 30,
 
Six months ended June 30,
(U.S. dollars in thousands)
2014
 
2013
 
2014
 
2013
Weighted average of U.S. dollar equivalent of foreign denominated net assets
$
2,270,090

 
$
2,588,385

 
$
2,478,772

 
$
2,556,103

Derivative gains (losses)
$
(2,170
)
 
$
(6,135
)
 
$
(1,210
)
 
$
54,479

(c) Derivative Instruments Not Formally Designated As Hedging Instruments
The following table provides the total impact on earnings relating to derivative instruments not formally designated as hedging instruments under authoritative accounting guidance and from the ineffective portion of fair value hedges. The impacts are all recorded through Net realized and unrealized gains (losses) on derivatives in the income statement for the three and six months ended June 30, 2014 and 2013:
Net Realized and Unrealized Gains (Losses) on Derivative Instruments
Three months ended June 30,
 
Six months ended June 30,
(U.S. dollars in thousands)
2014
 
2013
 
2014
 
2013
Investment Related Derivatives:
 

 
 

 
 

 
 

Interest rate exposure
$
8,978

 
$
288

 
$
9,326

 
$
489

Foreign exchange exposure
(1,490
)
 
(2,690
)
 
1,798

 
(4,288
)
Credit exposure
411

 
(1,178
)
 
7

 
(1,994
)
Financial market exposure
2,508

 
(2,736
)
 
3,378

 
2,616

Financial Operations Derivatives:
 

 
 
 
 

 
 
Credit exposure
447

 
1,087

 
(4,353
)
 
1,329

Other Non-Investment Derivatives:
 

 
 
 
 

 
 
Guaranteed minimum income benefit contract
633

 
2,306

 
2,257

 
6,002

Modified coinsurance funds withheld contract
2,162

 
(1,676
)
 
1,252

 
(2,343
)
Total gain (loss) recognized in income from derivatives not designated as hedging instruments
$
13,649

 
$
(4,599
)
 
$
13,665

 
$
1,811

Amount of gain (loss) recognized in income from ineffective
portion of fair value hedges
(2,050
)
 
(506
)
 
(256
)
 
969

Net realized and unrealized gains (losses) on derivative instruments
$
11,599

 
$
(5,105
)
 
$
13,409

 
$
2,780

 
 
 
 
 
 
 
 
Net realized and unrealized gains (losses) on life retrocession embedded derivative
$
(17,546
)
 
$
—

 
$
(17,546
)
 
$
—

The Company’s objectives in using these derivatives are explained below.
(d)(i) Investment Related Derivatives
The Company, either directly or through its investment managers, may use derivative instruments within its investment portfolio, including interest rate swaps, inflation swaps, commodity contracts, credit derivatives (single name and index credit default swaps), options, forward contracts and financial futures (foreign exchange, bond and stock index futures), primarily as a means of economically hedging exposures to interest rate, credit spread, equity price changes and foreign currency risk or, in limited instances, for investment purposes. When using cleared (exchange-traded) derivatives, the Company is exposed to the credit risk of the applicable clearing house and of the Company's future commissions merchant. When using uncleared (over-the-counter) derivatives, the Company is exposed to credit risk in the event of non-performance by the counterparties under any derivative contracts, although the Company generally seeks to use credit support arrangements with counterparties to help manage this risk.

33

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Investment Related Derivatives – Interest Rate Exposure
The Company utilizes risk management and overlay strategies that incorporate the use of derivative financial instruments, primarily to manage its fixed income portfolio duration and net economic exposure to interest rate risks. The Company may also use interest rate swaps to convert certain liabilities from a fixed rate to a variable rate of interest or use them to convert a variable rate of interest from one basis to another.
Investment Related Derivatives – Foreign Exchange Exposure
The Company has exposure to foreign currency exchange rate fluctuations through its operations and in its investment portfolio. The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities. These contracts are not designated as specific hedges for financial reporting purposes and, therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of twelve months or less.
In addition, certain of the Company's investment managers may, subject to investment guidelines, enter into forward contracts.
Investment Related Derivatives – Credit Exposure
Credit derivatives may be purchased within the Company's investment portfolio in the form of single name and basket credit default swaps, which are used to mitigate credit exposure through a reduction in credit spread duration (i.e., macro credit strategies rather than single-name credit hedging) or exposure to selected issuers, including issuers that are not held in the underlying fixed income portfolio.
Investment Related Derivatives - Financial Market Exposure
Stock index futures may be purchased within the Company's investment portfolio in order to create synthetic equity exposure and to add value to the portfolio with overlay strategies where market inefficiencies are believed to exist. From time to time, the Company may enter into other financial market exposure derivative contracts on various indices including, but not limited to, inflation and commodity contracts.
(d)(ii) Financial Operations Derivatives - Credit Exposure
At June 30, 2014 and December 31, 2013, the Company held one credit derivative exposure, which was written as part of the Company's previous financial lines business and is outside of the Company's investment portfolio. This is a European project finance loan participation that benefits from a deficiency guarantee from the German state and federal governments, in the current amount of 68% of the outstanding exposure at June 30, 2014, following the scheduled expiry of a portion of this guarantee. An aggregate summary of the credit derivative exposure at June 30, 2014 and December 31, 2013 is as follows:
Financial Operations Derivatives - Credit Exposure Summary:
(U.S. dollars in thousands)
June 30, 2014
 
December 31, 2013
Principal outstanding
$
39,748

 
$
42,080

Interest outstanding
1,598

 
2,154

Aggregate outstanding exposure
$
41,346

 
$
44,234

Total liability recorded
$
8,930

 
$
4,190

Weighted average contractual term to maturity
3.3 years

 
3.7 years

Underlying obligations credit rating
CC

 
CC

At June 30, 2014 and December 31, 2013, there was no reported event of default on this obligation. However, the liability shown in the above table has been recorded due to the combination of the reduction in the deficiency guarantee percentage and a deterioration of the credit quality of the underlying obligations. Credit derivatives are recorded at fair value based upon prices received from the investment bank counterparty, or by using models developed by the Company. Although the Company does not have access to the specific unobservable inputs that may be used in the determination of fair value, it expects that the significant inputs considered would include changes in interest rates, future default rates, credit spreads, changes in credit quality, future expected recovery rates and other market factors. The change resulting from movements in credit and credit quality spreads is unrealized as the credit derivative is not traded to realize this resultant value.

34

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(d)(iii) Other Non-Investment Derivatives
The Company also has derivatives embedded in certain reinsurance contracts. For a certain life reinsurance contract, the Company pays the ceding company a fixed amount equal to the estimated present value of the excess of the guaranteed benefit over the account balance upon the policyholder's election to take the income benefit. The fair value of this derivative is determined based on the present value of expected cash flows. In addition, the Company has modified coinsurance and funds withheld reinsurance agreements that provide for a return to be paid to the Company based on a portfolio of fixed income securities. As such, the agreements contain an embedded derivative. The embedded derivative is bifurcated from the funds withheld balance and recorded at fair value with changes in fair value recognized in earnings through Net realized and unrealized gains (losses) on derivative instruments.
In addition, the Company has entered into Life Retro Arrangements as described in Notes 2, "Significant Accounting Policies - (a) Investments Related to Life Retrocession Agreements written on a Funds Withheld Basis" and " - (b) Reinsurance" and Note 3, "Sale of Life Reinsurance Subsidiary." The embedded derivative related to the Life Retro Arrangements is recorded at fair value with changes in fair value recognized in earnings through net realized and unrealized gains (losses) on life retrocession embedded derivative.
The value of the life retrocession embedded derivative includes the interest income, realized and unrealized gains and losses on Life Funds Withheld Assets and certain related expenses subsequent to May 30, 2014 as follows:
Components of Life Retrocession Embedded Derivative:
May 30 to June 30
(U.S. dollars in thousands)
2014
Interest income
$
(19,944
)
Realized and unrealized gains (losses) on Life Funds Withheld Assets
1,893

Other
505

Net realized and unrealized gains (losses) on life retrocession embedded derivative
$
(17,546
)
(e) Contingent Credit Features
Certain derivative agreements entered into by the Company or its subsidiaries contain rating downgrade provisions that permit early termination of the agreement by the counterparty if collateral is not posted following failure to maintain certain credit ratings from one or more of the principal credit rating agencies. If the Company were required to early terminate such agreements due to a rating downgrade, it could potentially be in a net liability position at the time of settlement of such agreements. The aggregate fair value of all derivative agreements containing such rating downgrade provisions that were in a liability position and any collateral posted under these agreements as of June 30, 2014 and December 31, 2013 were as follows:
Contingent Credit Features - Summary:
(U.S. dollars in thousands)
June 30, 2014
 
December 31, 2013
Aggregate fair value of derivative agreements with downgrade provisions in a net liability position
$
6,728

 
$
47,703

Collateral posted to counterparty
$
—

 
$
13,260

8. Goodwill and Other Intangible Assets
During the first quarter of 2014, goodwill and intangible assets increased as a result of the completion of an acquisition and the impact of foreign currency translation. The transaction was accounted for using the acquisition method under which the Company recorded the identifiable assets and liabilities at their acquisition date fair values, and recorded the excess of consideration transferred over the net assets acquired as goodwill and intangible assets. The fair value of identifiable assets and liabilities acquired, as well as amounts recorded in the Company’s consolidated results since the acquisition date, are not material. The Company’s goodwill and intangible assets of $455.1 million at June 30, 2014 related to the Reinsurance segment.

35

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. Share Capital
(a) Authorized and Issued
Buybacks of Ordinary Shares
On February 22, 2013, XL-Ireland announced that its Board of Directors approved a new share buyback program, authorizing the purchase of up to $850 million of its ordinary shares (the “Share Buyback Program”). At December 31, 2013, $275 million remained available for purchase under the Share Buyback Program. On February 21, 2014, XL-Ireland announced that its Board of Directors approved an increase to the Share Buyback Program, authorizing the purchase of up to $1.0 billion of our ordinary shares. This authorization includes the approximately $200.0 million that remained under the Share Buyback Program prior to the increase. During the three and six months ended June 30, 2014, the Company purchased and canceled 5.5 million and 11.3 million ordinary shares under the Share Buyback Program for $175.0 million and $350.0 million, respectively. At June 30, 2014, $717.6 million remained available for purchase under the Share Buyback Program.
All share buybacks were carried out by way of redemption in accordance with Irish law and the Company's constitutional documents. All shares so redeemed were canceled upon redemption.
(b) Stock Plans
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. See Item 8, Note 18, “Share Capital,” to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for further information on the Company's performance incentive programs and associated accounting.
During the six months ended June 30, 2014, the Company granted approximately 1.0 million stock options with a weighted-average grant date fair value of $8.60 per option. The fair value of the options issued was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
Dividend yield
1.99
%
Risk free interest rate
1.80
%
Volatility
33.8
%
Expected lives
6.0 years

During the six months ended June 30, 2014, the Company granted 42,444 restricted stock awards to certain employees and directors of the Company and its subsidiaries with an aggregate grant date fair value of approximately $1.4 million. The award recipients generally have the rights and privileges of a shareholder as to the restricted stock, including the right to receive dividends contingent upon the vesting of the restricted stock and the right to vote such restricted stock. The recipients are not entitled to receive delivery of a stock certificate prior to vesting nor may any restricted stock be sold, transferred, pledged, or otherwise disposed of prior to the satisfaction of all vesting requirements.
During the six months ended June 30, 2014, the Company granted approximately 1.8 million restricted stock units to certain employees of the Company and its subsidiaries with an aggregate grant date fair value of approximately $54.3 million. Each restricted stock unit represents the Company's obligation to deliver to the holder one ordinary share, and grants vest in three equal installments upon the first, second and third anniversary of the date of grant. 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 ordinary shares contingent upon vesting.
During the six months ended June 30, 2014, the Company granted approximately 0.6 million performance units (representing a potential maximum share payout of approximately 1.1 million ordinary shares) to certain employees with an aggregate grant date fair value of approximately $16.3 million. The performance units vest after three years, subject to the achievement of stated performance metrics, and entitle the holder to ordinary shares of the Company. There are no dividend rights associated with the performance units. 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 a combination of corporate and business segment performance along with each employee's continued service through the vesting date. Performance targets are based on relative and absolute financial performance metrics.

36

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. Notes Payable and Debt and Financing Arrangements
(a) Notes Payable and Debt
All outstanding debt of the Company at June 30, 2014 and December 31, 2013 was issued by XLIT Ltd. (“XL-Cayman”), a 100% owned subsidiary of XL-Ireland and the only direct subsidiary thereof. XL-Ireland does not have significant assets or operations independent of XL-Cayman. XL-Cayman's outstanding debt is fully and unconditionally guaranteed by XL-Ireland. The ability of XL-Cayman, like that of the Company, to obtain funds from its subsidiaries to satisfy any of its obligations under guarantees is subject to certain contractual restrictions, applicable laws and statutory requirements of the various countries in which the subsidiaries operate, including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom. For details of the required statutory capital and surplus for the principal operating subsidiaries of the Company, see Item 8, Note 23, “Statutory Financial Data,” to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
The Company was in compliance with all covenants by significant margins at June 30, 2014, and the Company currently remains in compliance with all covenants.
(b) Letter of Credit Facilities and Other Sources of Collateral
The Company has several letter of credit facilities provided on both syndicated and bilateral bases from commercial banks. These facilities are utilized primarily to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd’s. The Company’s letter of credit facilities and revolving credit facilities at June 30, 2014 and December 31, 2013 were as follows:
Letter of Credit Summary:
(U.S. dollars in thousands except percentages)
June 30, 2014 (1)
 
December 31, 2013 (1)
Revolving credit facility (2)
$
1,000,000

 
$
1,000,000

Available letter of credit facilities - commitments (3)
$
3,575,000

 
$
3,575,000

Available letter of credit facilities - in use
$
1,870,818

 
$
1,895,425

Collateralized by certain assets of the Company’s investment portfolio
67.2
%
 
67.6
%
____________
(1)
At June 30, 2014 and December 31, 2013, there were seven available letter of credit facilities.
(2)
At June 30, 2014 and December 31, 2013,the revolving credit available under the November 2013 unsecured credit agreement, which provides for issuance of letters of credit and revolving credit loans up to $1 billion, was unutilized. The credit agreements entered into with Citicorp USA, Inc. in May through November 2013 (the "Citi Agreements") provide for issuance of letters of credit and revolving credit loans up to an aggregate amount of $575.0 million. At June 30, 2014, $575.0 million of letters of credit were issued under these agreements and therefore such amount is not included in the table.
(3)
The Company has the option to increase the size of the facilities under the Syndicated Credit Agreements by an additional $500 million across such facilities. The Company also has the option to increase the maximum amount of the letters of credit and revolving credit loans available under the 2013 Citi Agreements with the lender's and issuing lender's consent.
For details regarding these facilities see Item 8, Note 13(b), “Notes Payable and Debt and Financing Arrangements - Letter of Credit Facilities and Other Sources of Collateral,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

37

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11. Related Party Transactions
At each of June 30, 2014 and 2013, the Company owned minority stakes in five independent investment management companies (“Investment Manager Affiliates”) that are actively managing client capital and seeking growth opportunities. The Company seeks to develop relationships with specialty investment management organizations, generally acquiring an equity interest in the business. The Company also invests in certain of the funds and limited partnerships and other legal entities managed by these affiliates, and through these funds and partnerships, pays management and performance fees to the Company's Investment Manager Affiliates. See Item 8, Note 6, “Investments in Affiliates,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
In the normal course of business, the Company enters into assumed reinsurance contracts with certain of its other strategic affiliates, or their subsidiaries. Management believes that these transactions are conducted at market rates consistent with negotiated arm's-length contracts. During the three and six months ended June 30, 2014 and 2013, these contracts resulted in reported net premiums written, net reported claims and reported acquisition costs as summarized below.
(U.S. dollars in thousands)
Three months ended June 30,
 
Six months ended June 30,
2014
 
2013
 
2014
 
2013
Reported net premiums written
$
18,025

 
$
11,415

 
$
36,191

 
$
24,155

Net losses and loss expenses incurred
$
7,692

 
$
6,117

 
$
14,301

 
$
11,766

Reported acquisition costs
$
6,994

 
$
5,355

 
$
15,553

 
$
10,707

Several of the Company’s wholly-owned subsidiaries retrocede assumed reinsurance business to special purpose reinsurers that receive capital from funds managed by New Ocean Capital Management Limited (“New Ocean”), as discussed in Note 12, “Variable Interest Entities”. Underwriting administration services are provided to the special purpose reinsurers by other subsidiaries of the Company under service fee agreements negotiated at arm's-length, while investment advisory services are provided by New Ocean.
During the three and six months ended June 30, 2014, ceded premiums earned, ceded losses and loss expenses incurred, ceding commission income, and other fee income related to these retrocessional contracts were not material to the Company. Management believes that these transactions are conducted at market rates consistent with negotiated arm's-length contracts.
12. Variable Interest Entities
At times, the Company has utilized variable interest entities (“VIEs”) both indirectly and directly in the ordinary course of the Company's business.
The Company invests in CDOs and other investment vehicles that are issued through VIEs as part of the Company's investment portfolio. The activities of these VIEs are generally limited to holding the underlying collateral used to service investments therein. The Company's involvement in these entities is passive in nature and we are not the arranger of these entities. In addition, the Company has not been involved in establishing these entities and is not the primary beneficiary of these VIEs as contemplated in current authoritative accounting guidance.
The Company has a limited number of remaining outstanding credit enhancement exposures, including written financial guarantee and credit default swap contracts. The obligations related to these transactions are often securitized through VIEs. The Company is not the primary beneficiary of these VIEs as contemplated in current authoritative accounting guidance on the basis that management does not believe that the Company has the power to direct the activities, such as asset selection and collateral management, which most significantly impact each entity's economic performance. For further details on the nature of the obligations and the size of the Company's maximum exposure, see Note 7, “Derivative Instruments,” and Note 14 (a), “Commitments and Contingencies - Financial Guarantee Exposures.”
During the third quarter of 2013, the Company, along with other investors, formed New Ocean, a new Bermuda-based company, to act as an investment manager focused on providing third-party investors access to insurance-linked securities and other insurance and reinsurance capital markets products. The Company holds a majority voting interest in New Ocean through its ownership of common shares and, accordingly, the financial statements of New Ocean have been included in the consolidated financial statements of the Company. None of the assets, liabilities, revenues or net income of New Ocean was material to the Company during the three and six months ended June 30, 2014. The equity interest attributable to third party investors in New Ocean recorded in the Company’s Unaudited Consolidated Balance Sheets as "Non-controlling interest in equity of consolidated subsidiaries" was $0.2 million and $0.3 million at June 30, 2014 and December 31, 2013, respectively.

38

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the fourth quarter of 2013, the Company, along with other investors, invested in a new Bermuda-based company, New Ocean Focus Cat Fund Ltd. ("New Ocean FCFL"), which is considered a VIE under GAAP. During the three months ended March 31, 2014, New Ocean FCFL invested in a special purpose reinsurer, Vector Reinsurance Ltd (“Vector Re”), formed for the purpose of underwriting collateralized excess of loss reinsurance with a focus on global property catastrophe risks. Most of Vector Re’s current underwriting activity relates to reinsurance business assumed from XL subsidiaries. Underwriting administration and claims services are provided to Vector Re by XL under service fee contracts which management believes were negotiated at arm's-length, while investment advisory services are provided by New Ocean.
The Company currently holds majority equity interests, which are considered to be the controlling financial interests, in New Ocean FCFL and Vector Re. Accordingly, included in the consolidated financial statements of the Company are New Ocean FCFL's and Vector Re's total net assets of $89.3 million and $46.5 million at June 30, 2014 and December 31, 2013, respectively. The Company’s share of revenue and net income in these VIEs was not material to the Company for three and six months ended June 30, 2014. All inter-company transactions between XL entities have been eliminated in consolidation. The equity interest attributable to third party investors in New Ocean FCFL and Vector Re recorded in the Company’s Consolidated Balance Sheets as "Non-controlling interest in equity of consolidated subsidiaries" was $29.6 million and $6.9 million at June 30, 2014 and December 31, 2013, respectively.
13. Computation of Earnings Per Ordinary Share and Ordinary Share Equivalent
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
(U.S. dollars in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Basic earnings per ordinary share & ordinary share equivalents outstanding:
Net income (loss) attributable to ordinary shareholders
$
(279,261
)
 
$
272,698

 
$
(23,544
)
 
$
623,488

Weighted average ordinary shares outstanding, in thousands - basic
270,924

 
289,513

 
273,616

 
292,277

Basic earnings per ordinary share & ordinary share equivalents outstanding
$
(1.03
)
 
$
0.94

 
$
(0.09
)
 
$
2.13

 
 
 
 
 
 
 
 
Diluted earnings per ordinary share & ordinary share equivalents outstanding:
Weighted average ordinary shares outstanding, in thousands - basic
270,924

 
289,513

 
273,616

 
292,277

Impact of share-based compensation and certain conversion features, in thousands
—

 
4,820

 
—

 
4,767

Weighted average ordinary shares outstanding, in thousands - diluted
270,924

 
294,333

 
273,616

 
297,044

Diluted earnings per ordinary share & ordinary share equivalents outstanding
$
(1.03
)
 
$
0.93

 
$
(0.09
)
 
$
2.10

Dividends per ordinary share
$
0.16

 
$
0.14

 
$
0.32

 
$
0.28

For the three months ended June 30, 2014 and 2013, and for the six months ended June 30, 2014 and 2013, ordinary shares available for issuance under share-based compensation plans of 16.8 million and 6.0 million, and 16.6 million and 6.3 million, respectively, were not included in the calculation of diluted earnings per share because the assumed exercise or issuance of such shares would be anti-dilutive.

39

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14. Commitments and Contingencies
(a) Financial Guarantee Exposures
A summary of the Company's outstanding financial guarantee exposures at June 30, 2014 and December 31, 2013 is as follows:
Financial Guarantee Exposure Summary
(U.S. dollars in thousands except number of contracts and term to maturity)
June 30, 2014
 
December 31, 2013
Opening number of financial guarantee contracts
3

 
4

Number of financial guarantee contracts matured, prepaid or commuted during the period
—

 
(1
)
Closing number of financial guarantee contracts
3

 
3

Principal outstanding
$
108,255

 
$
108,255

Interest outstanding
$
—

 
$
—

Aggregate exposure outstanding
$
108,255

 
$
108,255

Total gross claim liability recorded
$
—

 
$
—

Total unearned premiums and fees recorded
$
61

 
$
134

Weighted average contractual term to maturity in years
25.6

 
26.0

The Company's outstanding financial guarantee contracts at June 30, 2014 provide credit support for a variety of collateral types with the exposures comprised of an aggregate $108.3 million notional financial guarantee on three notes backed by zero coupon long dated bonds and bank perpetual securities, including some issued by European financials.
Surveillance procedures to track and monitor credit deteriorations in the insured financial obligations are performed by the primary obligors for each transaction on the Company's behalf. Information regarding the performance status and updated exposure values is provided to the Company on a quarterly basis and evaluated by management in recording claims reserves. At June 30, 2014, there were no reported events of default on these obligations.
(b) Litigation
The Company and its subsidiaries are subject to litigation and arbitration in the normal course of business. These lawsuits and arbitrations principally involve claims on policies of insurance and contracts of reinsurance and are typical for the Company and for the property and casualty insurance and reinsurance industry in general. Such claims proceedings are considered in connection with the Company's loss and loss expense reserves. Reserves in varying amounts may or may not be established in respect of particular claims proceedings based on many factors, including the legal merits thereof. In addition to litigation relating to insurance and reinsurance claims, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance or reinsurance policies. This category of business litigation typically involves, among other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, shareholder disputes or disputes arising from business ventures. The status of these legal actions is actively monitored by management.
Legal actions are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened legal actions. Based on available information, it is the opinion of management that the ultimate resolution of pending or threatened legal actions other than claims proceedings, both individually and in the aggregate, will not result in losses having a material adverse effect on the Company's financial position or liquidity at June 30, 2014.
If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions, the Company discloses an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or discloses that an estimate cannot be made. Based on the Company's assessment at June 30, 2014, no such disclosures were considered necessary.

40

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15. Accumulated Other Comprehensive Income (Loss)
The changes in AOCI, net of tax, by component for the three and six months ended June 30, 2014 and 2013 are as follows:
Three months ended June 30, 2014
(U.S. dollars in thousands)
Unrealized Gains (Losses) on Investments (1)
 
OTTI Losses Recognized in AOCI
 
Foreign Currency Translation Adjustments
 
Underfunded Pension Liability
 
Cash Flow Hedge
 
Total
Balance, beginning of period, net of tax
$
1,032,941

 
$
(85,894
)
 
$
10,661

 
$
(13,270
)
 
$
2,223

 
$
946,661

OCI before reclassifications
363,348

 
—

 
(3,621
)
 
(8
)
 
—

 
359,719

Amounts reclassified from AOCI
(74,337
)
 
1,640

 
—

 
—

 
110

 
(72,587
)
Tax benefit (expense)
(20,774
)
 
(4
)
 
(5,981
)
 
—

 
—

 
(26,759
)
Net current period OCI - net of tax
268,237

 
1,636

 
(9,602
)
 
(8
)
 
110

 
260,373

Balance, end of period, net of tax
$
1,301,178

 
$
(84,258
)
 
$
1,059

 
$
(13,278
)
 
$
2,333

 
$
1,207,034

 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2013
(U.S. dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period, net of tax
$
1,474,553

 
$
(116,189
)
 
$
65,480

 
$
(20,506
)
 
$
1,784

 
$
1,405,122

OCI before reclassifications
(701,365
)
 
—

 
(25,524
)
 
(91
)
 
—

 
(726,980
)
Amounts reclassified from AOCI
(55,408
)
 
14,440

 
—

 
—

 
110

 
(40,858
)
Tax benefit (expense)
71,671

 
(2
)
 
1,806

 
—

 
—

 
73,475

Net current period OCI - net of tax
(685,102
)
 
14,438

 
(23,718
)
 
(91
)
 
110

 
(694,363
)
Balance, end of period, net of tax
$
789,451

 
$
(101,751
)
 
$
41,762

 
$
(20,597
)
 
$
1,894

 
$
710,759

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
(U.S. dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period, net of tax
$
822,432

 
$
(89,190
)
 
$
14,541

 
$
(13,239
)
 
$
2,113

 
$
736,657

OCI before reclassifications
628,599

 
—

 
(9,521
)
 
(39
)
 
—

 
619,039

Amounts reclassified from AOCI
(96,975
)
 
5,049

 
—

 
—

 
220

 
(91,706
)
Tax benefit (expense)
(52,878
)
 
(117
)
 
(3,961
)
 
—

 
—

 
(56,956
)
Net current period OCI - net of tax
478,746

 
4,932

 
(13,482
)
 
(39
)
 
220

 
470,377

Balance, end of period, net of tax
$
1,301,178

 
$
(84,258
)
 
$
1,059

 
$
(13,278
)
 
$
2,333

 
$
1,207,034

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
(U.S. dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period, net of tax
$
1,591,210

 
$
(121,371
)
 
$
69,399

 
$
(20,892
)
 
$
1,674

 
$
1,520,020

OCI before reclassifications
(789,054
)
 
—

 
(30,576
)
 
295

 
—

 
(819,335
)
Amounts reclassified from AOCI
(97,102
)
 
19,625

 
—

 
—

 
220

 
(77,257
)
Tax benefit (expense)
84,397

 
(5
)
 
2,939

 
—

 
—

 
87,331

Net current period OCI - net of tax
(801,759
)
 
19,620

 
(27,637
)
 
295

 
220

 
(809,261
)
Balance, end of period, net of tax
$
789,451

 
$
(101,751
)
 
$
41,762

 
$
(20,597
)
 
$
1,894

 
$
710,759

____________
(1)
Included in these amounts are the impact of Shadow Adjustments. During the year ended December 31, 2013, the initial impact of $44.7 million was recorded. During the six months ended June 30, 2014, additional impacts of $474.5 million were recorded, resulting in a total cumulative impact of shadow adjustments on future policy benefit reserves of $519.2 million at June 30, 2014.
The reclassifications out of AOCI along with the associated income statement line items affected by component, and the total related tax (expense) benefit for the three and six months ended June 30, 2014 and 2013 are as follows:

41

XL GROUP PLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Gross Amount Reclassified From AOCI
Details About AOCI Components
(U.S. dollars in thousands)
Three months ended June 30, 2014
 
Three months ended June 30, 2013
 
Six months ended June 30, 2014
 
Six months ended June 30, 2013
 
Affected Line Item in the Statement of Income
Unrealized gains and losses on investments:
 
 
 
 
 
 
 
 
 
 
$
(107,470
)
 
$
(56,969
)
 
$
(132,384
)
 
$
(102,391
)
 
Net realized gains (losses) on investments sold
 
33,133

 
1,561

 
35,409

 
5,289

 
OTTI on investments
 
$
(74,337
)
 
$
(55,408
)
 
$
(96,975
)
 
$
(97,102
)
 
Total before tax
 
1,477

 
(3,560
)
 
1,930

 
(3,286
)
 
Provision (benefit) for income tax
 
$
(72,860
)
 
$
(58,968
)
 
$
(95,045
)
 
$
(100,388
)
 
Net of tax
OTTI losses recognized in OCI:
 
 
 
 
 
 
 
 
 
 
$
1,386

 
$
13,612

 
$
3,344

 
$
17,887

 
Net realized gains (losses) on investments sold
 
254

 
828

 
1,705

 
1,738

 
OTTI on investments transferred to (from) OCI
 
$
1,640

 
$
14,440

 
$
5,049

 
$
19,625

 
Total before tax
 
(4
)
 
(2
)
 
(117
)
 
(5
)
 
Provision (benefit) for income tax
 
$
1,636

 
$
14,438

 
$
4,932

 
$
19,620

 
Net of tax
Gains and losses on cash flow hedges:
 
 
 
 
 
 
 
 
 
     Interest rate contracts
$
110

 
$
110

 
$
220

 
$
220

 
Interest Expense
 
—

 
—

 
—

 
—

 
Provision (benefit) for income tax
 
$
110

 
$
110

 
$
220

 
$
220

 
Net of tax
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period, gross of tax
$
(72,587
)
 
$
(40,858
)
 
$
(91,706
)
 
$
(77,257
)
 
 
Tax benefit (expense)
1,473

 
(3,562
)
 
1,813

 
(3,291
)
 
 
Total reclassifications for the period, net of tax
$
(71,114
)
 
$
(44,420
)
 
$
(89,893
)
 
$
(80,548
)
 
 


42

ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
The following is a discussion of our financial condition and liquidity and results of operations. Certain aspects of our business have loss experience characterized as low frequency and high severity. This may result in volatility from period to period in both the Company's and an individual segment's results of operations and financial condition. Unless the context otherwise indicates, references herein to “the Company,” “we,” “us,” or “our” are to XL Group plc, an Irish public limited company (“XL-Ireland”), and its consolidated subsidiaries.
This “Management's Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based upon current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements and, therefore, undue reliance should not be placed on them. See “Cautionary Note Regarding Forward-Looking Statements” for a list of additional factors that could cause actual results to differ materially from those contained in any forward-looking statement, as well as Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
This discussion and analysis should be read in conjunction with the “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and Notes thereto, presented under Item 7 and Item 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2013.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, Annual Report to ordinary shareholders, proxy statement, Form 10-K, Form 10-Q or Form 8-K or any other written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us in particular, and to the insurance and reinsurance sectors in general (both as to underwriting and investment matters). Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “may” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:
▪
changes in the size of our claims relating to natural or man-made catastrophe losses due to the preliminary nature of some reports and estimates of loss and damage to date;
▪
trends in rates for property and casualty insurance and reinsurance;
▪
the timely and full recoverability of reinsurance placed by us with third parties, or other amounts due to us;
▪
changes in ratings or rating agency policies or practices;
▪
changes in the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers;
▪
the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than we anticipated;
▪
our ability to successfully implement our business strategy;
▪
our ability to realize the value or benefits expected as a result of the Life Retro Arrangements, as defined herein;
▪
increased competition on the basis of pricing, capacity, coverage terms or other factors, which could harm our ability to maintain or increase our business volumes or profitability;
▪
greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;
▪
changes in general economic conditions, including the effects of inflation on our business, including on pricing and reserving, and changes in interest rates, credit spreads, foreign currency exchange rates and future volatility in the world's credit, financial and capital markets that adversely affect the performance and valuation of our investments or access to such markets;
▪
developments, including uncertainties related to the future of the Euro-zone, the ability of Euro-zone countries to service existing debt obligations and the strength of the Euro as a currency and to the financial condition of counterparties, reinsurers and other companies that are at risk of bankruptcy;
▪
the potential impact on us from government-mandated insurance coverage for acts of terrorism;
▪
the potential for changes to methodologies, estimations and assumptions that underlie the valuation of our financial instruments that could result in changes to investment valuations;

43

▪
changes to our assessment as to whether it is more likely than not that we will be required to sell, or have the intent to sell, available for sale debt securities before their anticipated recovery;
▪
the availability of borrowings and letters of credit under our credit facilities;
▪
the ability of our subsidiaries to pay dividends to XL-Ireland and XLIT Ltd., an exempted company organized under the laws of the Cayman Islands ("XL-Cayman");
▪
the potential effect of regulatory developments in the jurisdictions in which we operate, including those which could impact the financial markets or increase our business costs and required capital levels;
▪
changes in regulations or laws applicable to us or our subsidiaries, brokers or customers;
▪
acceptance of our products and services, including new products and services;
▪
changes in the availability, cost or quality of reinsurance;
▪
changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;
▪
loss of key personnel;
▪
changes in accounting standards, policies or practices or the application thereof;
▪
legislative or regulatory developments including, but not limited to, changes in regulatory capital balances that must be maintained by our operating subsidiaries and governmental actions for the purpose of stabilizing the financial markets;
▪
the effects of mergers, acquisitions and divestitures;
▪
developments related to bankruptcies of companies insofar as they affect property and casualty insurance and reinsurance coverages or claims that we may have as a counterparty;
▪
changes in applicable tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof;
▪
the effects of business disruption or economic contraction due to war, terrorism or other hostilities; and
▪
the other factors set forth in Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2013 and our other documents on file with the SEC.
The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by the federal securities laws.
EXECUTIVE OVERVIEW
See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview,” included in our Annual Report on Form 10-K for the year ended December 31, 2013. That discussion is updated with the disclosures set forth below.
RESULTS OF OPERATIONS AND KEY FINANCIAL MEASURES
Results of Operations
The following table presents an analysis of our net income (loss) attributable to ordinary shareholders and other financial measures (described below) for the three and six months ended June 30, 2014 and 2013:
(U.S. dollars in thousands, except per share amounts)
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to ordinary shareholders
$
(279,261
)
 
$
272,698

 
$
(23,544
)
 
$
623,488

Earnings (loss) per ordinary share – basic
$
(1.03
)
 
$
0.94

 
$
(0.09
)
 
$
2.13

Earnings (loss) per ordinary share – diluted
$
(1.03
)
 
$
0.93

 
$
(0.09
)
 
$
2.10

Weighted average number of ordinary shares and ordinary share equivalents, in thousands – basic
270,924

 
289,513

 
273,616

 
292,277

Weighted average number of ordinary shares and ordinary share equivalents, in thousands – diluted
270,924

 
294,333

 
273,616

 
297,044

Sale of Life Reinsurance Subsidiary
Our net income (loss) attributable to ordinary shareholders and other financial measures as shown above for the three and six months ended June 30, 2014 have been affected primarily by the sale of our life reinsurance subsidiary that was completed during the second quarter of 2014. For further information on this transaction and its impact on our net income (loss) attributable to ordinary shareholders and other financial measures for the three and six months ended June 30, 2014 and 2013 see “Significant Items Affecting the Results of Operations" below and Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited Consolidated Financial Statements included herein.

44

Key Financial Measures
The following are some of the financial measures management considers important in evaluating our operating performance:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Change
 
June 30,
 
Change
(U.S. dollars in thousands, except ratios and per share amounts)
2014
 
2013
 
2014 to 2013
 
2014
 
2013
 
2014 to 2013
Underwriting profit (loss) - P&C operations
$
167,946

 
$
92,124

 
82.3
 %
 
$
312,820

 
$
272,712

 
14.7
 %
Combined ratio - P&C operations
88.3
 %
 
93.8
%
 
(5.5)pts

 
89.0
 %
 
90.8
%
 
(1.8)pts

Net investment income (1)
$
213,608

 
$
232,546

 
(8.1
)%
 
$
446,797

 
$
479,014

 
(6.7
)%
Operating net income (2)
$
279,576

 
$
221,591

 
26.2
 %
 
$
518,225

 
$
501,459

 
3.3
 %
Operating net income per share (2)
$
1.02

 
$
0.75

 
$
0.27

 
$
1.86

 
$
1.69

 
$
0.17

Annualized return on average ordinary shareholders’ equity (2)
(11.0
)%
 
10.7
%
 
(21.7)pts

 
(0.5
)%
 
12.2
%
 
(12.7)pts

Annualized operating return on average ordinary shareholders’ equity (2)
11.0
 %
 
8.7
%
 
2.3pts

 
10.3
 %
 
9.8
%
 
0.5pts

Annualized operating return on average ordinary shareholders’ equity excluding unrealized gains and losses on investments (2)
12.3
 %
 
9.7
%
 
2.6pts

 
11.5
 %
 
11.0
%
 
0.5pts

 
 

 
 

 
 
 
 

 
 

 
 
(U.S. dollars)
June 30, 2014
 
March 31, 2014
 
Change
(Three Months)
 
June 30, 2014
 
December 31, 2013
 
Change
(Six Months)
Book value per ordinary share (2)
$
37.39

 
$
37.45

 
$
(0.06
)
 
$
37.39

 
$
35.92

 
$
1.47

Fully diluted tangible book value per ordinary share (2)
$
35.09

 
$
35.30

 
$
(0.21
)
 
$
35.09

 
$
33.86

 
$
1.23

____________
(1)
Represents Net investment income - excluding Life Funds Withheld Assets.
(2)
Represents a non-GAAP financial measure as discussed further below.
The following are descriptions of these key financial measures and a brief discussion of the factors influencing them:
Underwriting profit – property and casualty insurance and reinsurance (“P&C”) operations
One way that we evaluate the performance of our P&C operations is by underwriting profit or loss. We do not measure performance based on the amount of gross premiums written. Underwriting profit or loss is calculated from premiums earned less net losses incurred and expenses related to underwriting activities.
In the following discussion as well as in the “Income Statement Analysis” section, the following ratios are used to explain the underwriting profit (loss) from our P&C operations:
▪
The combined ratio related to the P&C operations is the sum of the loss and loss expense ratio and the underwriting expense ratio. A combined ratio under 100% represents an underwriting profit and over 100% represents an underwriting loss. In the P&C industry, the combined ratio is a widely used measure of underwriting profitability.
▪
The loss and loss expense ratio related to the P&C operations is calculated by dividing the losses and loss expenses incurred by the net premiums earned for the Insurance and Reinsurance segments.
▪
The underwriting expense ratio related to the P&C operations is the sum of acquisition costs and operating expenses for the Insurance and Reinsurance segments divided by net premiums earned for the Insurance and Reinsurance segments.
▪
The acquisition expense ratio related to the P&C operations is calculated by dividing the acquisition costs incurred by the net premiums earned for the Insurance and Reinsurance segments.
▪
The operating expense ratio related to the P&C operations is calculated by dividing the operating expenses incurred by the net premiums earned for the Insurance and Reinsurance segments.
Our underwriting profit (loss) in the three and six months ended June 30, 2014 and 2013 was consistent with the combined ratio, discussed below.

45

Combined ratio – P&C operations
The following table presents the ratios for our P&C operations for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Change
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
57.6
%
 
63.0
%
 
(5.4
)
 
58.2
%
 
60.3
%
 
(2.1
)
Acquisition expense ratio
12.6
%
 
15.1
%
 
(2.5
)
 
13.1
%
 
14.9
%
 
(1.8
)
Operating expense ratio
18.1
%
 
15.7
%
 
2.4

 
17.7
%
 
15.6
%
 
2.1

Underwriting expense ratio
30.7
%
 
30.8
%
 
(0.1
)
 
30.8
%
 
30.5
%
 
0.3

Combined ratio
88.3
%
 
93.8
%
 
(5.5
)
 
89.0
%
 
90.8
%
 
(1.8
)

Three months ended June 30, 2014 vs. 2013: The combined ratio decrease was the result of a lower loss ratio mainly due to lower levels of natural catastrophe losses in 2014, partially offset by lower favorable prior year reserve development in 2014 compared to 2013. The underwriting expense ratio decrease was mainly driven by a decrease in acquisition expenses due to a change in the reinsurance structure in the Professional business group in our Insurance segment, partially offset by an increase in operating expenses as a result of higher compensation costs from increased headcount as a result of business expansion.
Six months ended June 30, 2014 vs. 2013: The combined ratio decrease was the result of a lower loss ratio mainly due to lower levels of natural catastrophe losses in 2014, partially offset by lower favorable prior year reserve development in 2014 compared to 2013. The underwriting expense ratio increase was driven by an increase in operating expenses primarily due to higher compensation costs from increased headcount as a result of business expansion, partially offset by a decrease in acquisition expenses due to a change in the reinsurance structure in the Professional business group in our Insurance segment and lower profit commissions within the Reinsurance segment in 2014.
For further information on our combined ratio, see “Income Statement Analysis” below.
Net investment income
Net investment income - excluding Life Funds Withheld Assets, which includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments, net of related investment expenses, is an important measure that affects our overall profitability. Our largest liability relates to our unpaid loss reserves, and our investment portfolio provides liquidity for claims settlements of these reserves as they become due. As a result, a significant part of the investment portfolio is invested in fixed income securities. Net investment income is influenced by a number of factors, including the amounts and timing of inward and outward cash flows, the level of interest rates and credit spreads, foreign exchange rates and changes in overall asset allocation. See the segment results under “Investment Activities” below for a discussion of our net investment income for the three and six months ended June 30, 2014.
Operating net income and Operating net income per share
Operating net income is a non-GAAP financial measure defined as net income (loss) attributable to ordinary shareholders excluding: (1) our net investment income attributable to the Life Retro Arrangements, (2) our net realized gains and losses on investments, net of tax, (3) our net realized and unrealized gains and losses on derivatives, net of tax, (4) our net realized and unrealized gains and losses on life retrocession embedded derivative, net of tax, (5) our share of items (2) and (3) for our insurance company affiliates for the periods presented, (6) our loss on the sale of the life reinsurance subsidiary, XLLR, net of tax, and (7) our foreign exchange gains and losses, net of tax. We evaluate the performance of and manage our business to produce an underwriting profit. In addition to presenting net income (loss), we believe that showing operating net income (loss) enables investors and other users of our financial information to analyze our performance in a manner similar to how we analyze our performance. In this regard, we believe that providing only a GAAP presentation of net income (loss) would make it more difficult for users of our financial information to evaluate our underlying business. We also believe that equity analysts and certain rating agencies that follow us (and the insurance industry as a whole) exclude these items from their analyses for the same reasons, and they request that we provide this non-GAAP financial information on a regular basis. A reconciliation of our net income (loss) attributable to ordinary shareholders to operating net income (loss) is provided at “Reconciliation of Non-GAAP Measures” below.

46

Operating net income per share is calculated by dividing non-GAAP operating net income by the weighted average number of ordinary shares and ordinary share equivalents outstanding for each period combined with the impact from dilution of share-based compensation and certain conversion features where dilutive.
Annualized return on average ordinary shareholders' equity (“ROE”)
ROE is another non-GAAP financial measure that we consider important in evaluating our operating performance and view as a key measure of return generated for ordinary shareholders. ROE is calculated by dividing the net income (loss) attributable to ordinary shareholders for any period by the average of the opening and closing Shareholders' equity attributable to XL-Ireland. We establish minimum target ROEs for our total operations, segments and lines of business. If our minimum ROE targets over the longer term are not met with respect to any line of business, we seek to modify and/or exit this line. In addition, among other factors, compensation of our senior officers is dependent on the achievement of our performance goals to enhance ordinary shareholder value as measured by ROE (adjusted for certain items considered to be “non-operating” in nature).
The following table presents our ROE for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Change
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
 
2014
 
2013
 
2014 to 2013
ROE
(11.0
)%
 
10.7
%
 
(21.7)pts

 
(0.5
)%
 
12.2
%
 
(12.7)pts

Three and six months ended June 30, 2014 vs. 2013: The decrease in our ROE for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 was primarily due to the after-tax net loss on sale of our life reinsurance subsidiary, XLLR, of $621.3 million. In addition, foreign exchange losses were recorded during the three and six months ended June 30, 2014 as compared to the foreign exchange gains recorded during the comparative periods of 2013. These items were offset by the favorable impact of the improvement in our P&C operations' combined ratio for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013.
Annualized operating return on average ordinary shareholders’ equity (“Operating ROE”)
Operating ROE is another non-GAAP financial measure that we consider important in evaluating our operating performance. Operating ROE is derived by dividing non-GAAP operating net income for any period by the average of the opening and closing ordinary shareholders' equity.
The following table presents our Operating ROE for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Change
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
 
2014
 
2013
 
2014 to 2013
Operating ROE
11.0
%
 
8.7
%
 
2.3pts
 
10.3
%
 
9.8
%
 
0.5pts
Three and six months ended June 30, 2014 vs. 2013: The increase in our Operating ROE was the result of higher operating net income in 2014 due to the favorable impact of the improvement in our P&C combined ratio for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013. A detailed discussion of our individual segment operating results is included below under "Income Statement Analysis".
A reconciliation of Net income (loss) attributable to ordinary shareholders to operating net income (loss) is provided under “Reconciliation of Non-GAAP Measures” below.
Annualized operating return on average ordinary shareholders' equity excluding unrealized gains and losses on investments (“Operating ROE ex-UGL”)
Operating ROE ex-UGL is an additional measure of our profitability that eliminates the impacts of mark to market fluctuations on our investment portfolio that have not been realized through sales, which we believe provides a consistent measure of our performance. Operating ROE ex-UGL is derived from the non-GAAP operating net income measure by dividing non-GAAP operating net income for any period by the average of the opening and closing ordinary shareholders'

47

equity excluding unrealized gains and losses on investments. A reconciliation of the opening and closing ordinary shareholders' equity to the opening and closing ordinary shareholders' equity excluding unrealized gains and losses on investments is provided under "Reconciliation of Non-GAAP Measures" below.
The following table presents our Operating ROE ex-UGL for the three months ending June 30:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Change
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
 
2014
 
2013
 
2014 to 2013
Operating ROE ex-UGL
12.3
%
 
9.7
%
 
2.6pts
 
11.5
%
 
11.0
%
 
0.5pts
Three and six months ended June 30, 2014 vs. 2013: The increase in our Operating ROE ex-UGL was the result of the higher operating net income in 2014 due to the factors discussed above as part of Operating ROE.
Book value per ordinary share
We view the change in our book value per ordinary share as an additional measure of our performance, representing the value generated for our ordinary shareholders each period, and we believe that this measure (along with the diluted measures described below) is a key driver of our share price over time. Book value per ordinary share, a non-GAAP financial measure, is calculated by dividing ordinary shareholders' equity (total shareholders' equity less non-controlling interest in equity of consolidated subsidiaries) by the number of outstanding ordinary shares at the applicable period end. Book value per ordinary share is affected primarily by net income (loss), by any changes in the net unrealized gains and losses on our investment portfolio, by currency translation adjustments and by the impact of any share buyback or issuance activity. Ordinary shareholders' equity was $10.0 billion and $10.0 billion and the number of ordinary shares outstanding was 268.4 million and 278.3 million at June 30, 2014 and December 31, 2013, respectively. Ordinary shares outstanding include all ordinary shares legally issued and outstanding (as disclosed on the face of the balance sheets) as well as all director share units outstanding.
The following table presents our book value per ordinary share at June 30, 2014, March 31, 2014 and December 31, 2013:
(U.S. dollars)
June 30, 2014
 
March 31, 2014
 
Change
(Three Months)
 
June 30, 2014
 
December 31, 2013
 
Change
(Six Months)
Book value per ordinary share
$
37.39

 
$
37.45

 
$
(0.06
)
 
$
37.39

 
$
35.92

 
$
1.47

Three months ended June 30, 2014: Book value per ordinary share at June 30, 2014 marginally decreased in the quarter. The decrease reflects the after-tax net loss on sale of our life reinsurance subsidiary of $621.3 million, partially offset by the benefit of a $268.2 million increase in net unrealized gains on investments, net of tax, and by underwriting income generated from our P&C operations. Further detail regarding the impact of the life reinsurance transaction is included at "Significant Items Affecting Results of Operations" below, and at Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited Consolidated Financial Statements included herein.
Six months ended June 30, 2014: The increase in our book value per ordinary share was primarily due to increases in net unrealized gains on investments and underwriting income generated by our P&C operations, combined with the benefit of share buyback activity, partially offset by the after-tax net loss on sale of life reinsurance subsidiary and payment of dividends.
Fully diluted tangible book value per ordinary share
Fully diluted tangible book value per ordinary share is a non-GAAP financial measure and is calculated by dividing ordinary shareholders' equity excluding intangible assets (as disclosed on the face of the balance sheets) by the number of outstanding ordinary shares at the applicable period end combined with the impact from dilution of share-based compensation and certain conversion features where dilutive.
The following table presents our fully diluted tangible book value per ordinary share at June 30, 2014, March 31, 2014 and December 31, 2013:

48

(U.S. dollars)
June 30, 2014
 
March 31, 2014
 
Change
(Three Months)
 
June 30, 2014
 
December 31, 2013
 
Change
(Six Months)
Fully diluted tangible book value per ordinary share
$
35.09

 
$
35.30

 
$
(0.21
)
 
$
35.09

 
$
33.86

 
$
1.23

Three months ended June 30, 2014: The marginal decrease in our fully diluted tangible book value per ordinary share was a result of the factors noted above as part of book value per ordinary share.
Six months ended June 30, 2014: The increase in our fully diluted tangible book value per ordinary share was a result of the factors noted above as part of book value per ordinary share.

RECONCILIATION OF NON-GAAP MEASURES
The following is a reconciliation of net income (loss) attributable to ordinary shareholders to operating net income (loss) and also includes the calculation of Operating ROE and Operating ROE ex-UGL for the three and six months ended June 30, 2014 and 2013:
(U.S. dollars in thousands, except ratios and per share amounts)
Three Months Ended
 
Six Months Ended
June 30,
 
June 30,
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to ordinary shareholders
$
(279,261
)
 
$
272,698

 
$
(23,544
)
 
$
623,488

Net investment income - Life Funds Withheld Assets
(19,165
)
 
—

 
(19,165
)
 
—

Net realized (gains) losses on investments, net of tax
(69,002
)
 
(44,530
)
 
(87,891
)
 
(80,768
)
Net realized and unrealized (gains) losses on derivatives, net of tax
(11,596
)
 
5,105

 
(13,406
)
 
(2,780
)
Net realized and unrealized (gains) losses on life retrocession embedded derivative
17,546

 
—

 
17,546

 
—

Net realized and unrealized (gains) losses on investments and derivatives related to the Company's insurance company affiliates
1,222

 
(75
)
 
(2,736
)
 
(255
)
Loss on sale of life reinsurance subsidiary, net of tax
621,323

 
—

 
621,323

 
—

Foreign exchange (gains) losses, net of tax
18,509

 
(11,607
)
 
26,098

 
(38,226
)
Operating net income (loss)
$
279,576

 
$
221,591

 
$
518,225

 
$
501,459

Per ordinary share results:
 
 
 
 
 
 
 
Net income (loss) attributable to ordinary shareholders - diluted
$
(1.03
)
 
$
0.93

 
$
(0.09
)
 
$
2.10

Operating net income (loss) - diluted
$
1.02

 
$
0.75

 
$
1.86

 
$
1.69

Weighted average ordinary shares outstanding, in thousands:
 
 
 
 
 
 
 
Basic
270,924

 
289,513

 
273,616

 
292,277

Diluted
270,924

 
294,333

 
273,616

 
297,044

Diluted - Operating net income
275,200

 
294,333

 
277,918

 
297,044

Return on ordinary shareholders' equity:
 
 
 
 
 
 
 
Closing ordinary shareholders' equity (at period end)
$
10,034,289

 
$
9,892,575

 
$
10,034,289

 
$
9,892,575

Unrealized (gain) loss on investments, net of tax (at period end)
$
(1,216,920
)
 
$
(687,700
)
 
$
(1,216,920
)
 
$
(687,700
)
Average ordinary shareholders' equity for the period excluding unrealized gains and losses on investments
$
9,057,642

 
$
9,166,933

 
$
9,040,880

 
$
9,122,556

Average ordinary shareholders' equity for the period
$
10,139,626

 
$
10,189,965

 
$
10,015,961

 
$
10,201,326

Operating net income (loss)
$
279,576

 
$
221,591

 
$
518,225

 
$
501,459

Annualized operating net income (loss)
$
1,118,304

 
$
886,364

 
$
1,036,450

 
$
1,002,918

Annualized operating ROE
11.0
%
 
8.7
%
 
10.3
%
 
9.8
%
Annualized operating ROE ex-UGL
12.3
%
 
9.7
%
 
11.5
%
 
11.0
%

49

SIGNIFICANT ITEMS AFFECTING THE RESULTS OF OPERATIONS
The Company’s net income and other financial measures as shown above for the three and six months ended June 30, 2014 have been affected by, among other things, the following significant items:
1)    The sale of our life reinsurance subsidiary;
2)    The current underwriting environment; and
3)    Market movement impacts on our investment portfolio.
1) Sale of Life Reinsurance Subsidiary
On May 1, 2014, 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 XL Life Reinsurance (SAC) Ltd (“XLLR”), a wholly-owned subsidiary of XLIB, to GreyCastle for $570 million in cash. This transaction was completed on May 30, 2014. As a result of the transaction, XLLR reinsures the majority of our life reinsurance business via 100% quota share reinsurance (the "Life Retro Arrangements"). This transaction covers a substantial portion of the our life reinsurance reserves. We announced the run-off of our life reinsurance business in 2009.
The run-off life reinsurance business, including the business subject to the transaction, was previously reported within the Company’s Life operations segment. Subsequent to the transaction, we no longer consider the Life operations to be a separate operating segment and the results of the life run-off business are reported within “Corporate and Other.” See Note 5, "Segment Information" for further information. In addition, the designated investments that support certain life retrocession agreements on a funds withheld basis ("Life Funds Withheld Assets") 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 GreyCastle. Because we no longer share 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.
At May 30, 2014, gross future policy benefit reserves relating to the Life operations were approximately $5.2 billion. Subsequent to the completion of this transaction we have retained approximately $0.4 billion of these reserves, and have recorded a reinsurance recoverable from XLLR of $4.8 billion. Under the terms of the transaction, we continue to own, on a funds withheld basis, $5.7 billion of 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 GreyCastle 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. The changes in this amount from the previous estimate we provided were primarily the result of movements in the mark-to-market value of the Life Funds Withheld Assets, additional underwriting profits earned on the business subject to the Life Retro Arrangements and foreign exchange rate movements from March 31, 2014 through completion of the transaction.
2) The Current Underwriting Environment
There can be no assurance that the following (re)insurance rate conditions or growth opportunities will be sustained or further materialize, or lead to improvements in our books of business. See “Cautionary Note Regarding Forward-Looking Statements.”
Insurance
During the three and six months ended June 30, 2014 we achieved an overall rate increase of 1.0% for the quarter and 1.5% for the year-to-date. Momentum slowed as pricing has slipped below loss trend in several lines and as markets, particularly the shorter-tail lines, continue to deteriorate. Nonetheless, half of our premium volume did achieve pricing in excess of loss trend for the second quarter, and for the year-to-date, 16 of our 23 businesses are still showing positive rate increases for the year to date. Our North America businesses delivered a 2% increase with nearly all businesses showing rate improvements in the 3-7% range, partially offset by a 4% reduction in property. Our International P&C and Global Professional businesses achieved rate increases in the 1 to 2% range, adversely impacted by property and high excess D&O

50

business, respectively. Our Specialty businesses were most severely impacted with an overall rate decrease of nearly 2%, reflecting ongoing competitive aviation markets.
Growth was strong in all of our business groups. Our construction and excess casualty businesses contributed to growth in North America. New business in primary casualty led to strong growth in International P&C. New and renewal business in our International financial lines business contributed to solid growth in Global Professional and new business in our Political Risk and Crisis Management businesses contributed to strong growth in Specialty.
The trading environment for our core lines of insurance business remains competitive and we continue to focus on those lines of business that we believe provide the best return on capital, including the writing of selective new business, and remain committed to taking the underwriting actions necessary to improve our margins.
Reinsurance
For the six months ended June 30, 2014 gross premiums written decreased by 2.0%, reflecting the highly competitive environment across the reinsurance market. Our mid-year renewals, specifically in our U.S. property catastrophe book, saw risk adjusted pricing down 15% from the mid-year renewals of 2013 as well as increased pressure on terms and conditions. There was also downward pricing pressure in our International businesses, with our Australian and U.K. businesses showing price reductions of up to 10% to 20% on the prior year renewals. In addition, we were impacted by high levels of competition on proportional placements in both short and long-term markets with intense pressure on terms and conditions, particularly ceding commissions. As a result, we have reduced or withdrawn our capacity in certain instances.
The Reinsurance segment continues its disciplined underwriting approach during these very challenging market conditions.
3) Market Movement Impacts on Our Investment Portfolio (Excluding Life Funds Withheld Assets)
During the three months ended June 30, 2014, the positive mark to market change of $793.0 million on our available for sale ("AFS") investments was primarily driven the benefit of a $424.9 million unrealized gain when our held to maturity assets were reclassified to available for sale investments, as well a decrease in interest rates and tightening credit spreads. This represents an approximately 1.8% appreciation in average assets for the three months ended June 30, 2014.
The following table provides further detail regarding the movements in relevant credit markets, as well as in government interest rates using selected market indices during the three months ended June 30, 2014:
 
Interest Rate Movement for the three months
ended June 30, 2014 (1)
(‘+’/‘-’ represents increases / decreases
in interest rates)
 
Credit Spread Movement for the three months
ended June 30, 2014 (2)
(‘+’/‘-’ represents widening / tightening
of credit spreads)
United States
-9 basis points (5 year Treasury)
 
-12 basis points (US Corporate A rated)
 
 
 
-17 basis points (US Mortgage Master Index)
 
 
 
-6 basis points (US CMBS, AAA rated)
United Kingdom
-6 basis points (10 year Gilt)
 
-9 basis points (UK Corporate, AA rated)
Euro-zone
-29 basis points (5 year Bund)
 
-12 basis points (Europe Corporate, A rated)
____________
(1)
Source: Bloomberg Finance L.P.
(2)
Source: Merrill Lynch Global Indices.
Net realized gains on investments in the three months ended June 30, 2014 totaled $80.8 million, including net realized losses of approximately $24.6 million related to other than temporary impairments ("OTTI") charges on certain of the Company’s fixed income investments. For further analysis of this, see “Income Statement Analysis - Investment Activities” below.
During the six months ended June 30, 2014, the positive mark to market change of $1.1 billion on our AFS investments was primarily driven by the benefit of a $424.9 million unrealized gain when our held to maturity assets were reclassified to available for sale investments, as well as a decrease in interest rates and tightening credit spreads. This represents an approximately 2.5% appreciation in average assets for the six months ended June 30, 2014.

51

The following table provides further detail regarding the movements in relevant credit markets, as well as in government interest rates using selected market indices during the six months ended June 30, 2014:
 
Interest Rate Movement for the six months
ended June 30, 2014 (1)
(‘+’/‘-’ represents increases / decreases
in interest rates)
 
Credit Spread Movement for the six months
ended June 30, 2014 (2)
(‘+’/‘-’ represents widening / tightening
of credit spreads)
United States
-11 basis points (5 year Treasury)
 
-24 basis points (US Corporate A rated)
 
 
 
-10 basis points (US Mortgage Master Index)
 
 
 
-21 basis points (US CMBS, AAA rated)
United Kingdom
-35 basis points (10 year Gilt)
 
-1 basis points (UK Corporate, AA rated)
Euro-zone
-58 basis points (5 year Bund)
 
-15 basis points (Europe Corporate, A rated)
____________
(1)
Source: Bloomberg Finance L.P.
(2)
Source: Merrill Lynch Global Indices.
Net realized gains on investments in the six months ended June 30, 2014 totaled $100.1 million, including net realized losses of approximately $28.3 million related to OTTI charges on certain of the Company’s fixed income investments. For further analysis of this, see “Income Statement Analysis - Investment Activities” below.

OTHER KEY FOCUSES OF MANAGEMENT
We remain focused on, among other things, managing capital, enhancing enterprise risk management capabilities and monitoring regulatory change. Details of these initiatives are outlined below.
Capital Management
Fundamental to supporting our business model is our ability to underwrite business, which is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that we are downgraded, our ability to write business, as well as our financial condition and/or results of operations, could be adversely affected.
Buybacks of Ordinary Shares
On February 22, 2013, we announced that the XL-Ireland Board of Directors approved a new share buyback program, authorizing the purchase of up to $850 million of our ordinary shares (the “Share Buyback Program”). At December 31, 2013, $275 million remained available for purchase under the Share Buyback Program. On February 21, 2014, we announced that the XL-Ireland Board of Directors approved an increase to the Share Buyback Program, authorizing the purchase of up to $1.0 billion of our ordinary shares. This authorization includes the approximately $200.0 million that remained under the Share Buyback Program prior to the increase. During the three and six months ended June 30, 2014, we purchased and canceled 5.5 million and 11.3 million ordinary shares under the Share Buyback Program for $175.0 million and $350.0 million, respectively. At June 30, 2014, $717.6 million remained available for purchase under share buyback program.
All share buybacks were carried out by way of redemption in accordance with Irish law and the Company's constitutional documents. All shares so redeemed were canceled upon redemption.
Risk Management
Our risk management and risk appetite framework is detailed in Item 1, “Business - Enterprise Risk Management,” included in our Annual Report on Form 10-K for the year ended December 31, 2013. The table below shows our estimated per event net 1% and 0.4% exceedance probability exposures for certain peak natural catastrophe peril regions. These estimates assume that amounts due from reinsurance and retrocession purchases are 100% collectible. There may be credit or other disputes associated with these potential receivables.

52

 
 
 
 
 
1-in-100 Event
 
1-in-250 Event
Geographical Zone
(U.S. dollars in millions)
Peril
 
Measurement
Date
of In-Force
Exposures
(1)
 
Probable
Maximum
Loss (2)
 
Percentage of
Adjusted Tangible
Shareholders’
Equity at
June 30, 2014 (3)
 
Probable
Maximum
Loss (2)
 
Percentage of
Adjusted Tangible
Shareholders’
Equity at
June 30, 2014 (3)
North Atlantic
Windstorm
 
April 1, 2014
 
$
1,306

 
13.3
%
 
$
1,826

 
18.6
%
North America
Earthquake
 
April 1, 2014
 
873

 
8.9
%
 
1,526

 
15.5
%
Europe
Windstorm
 
April 1, 2014
 
568

 
5.8
%
 
788

 
8.0
%
Japan
Earthquake
 
April 1, 2014
 
232

 
2.4
%
 
293

 
3.0
%
Japan
Windstorm
 
April 1, 2014
 
150

 
1.5
%
 
204

 
2.1
%
____________
(1)
Detailed analyses of aggregated in-force exposures and maximum loss levels are done periodically. The measurement dates represent the date of the last completed detailed analysis by geographical zone.
(2)
Probable maximum losses, which include secondary uncertainty that incorporates variability around the expected probable maximum loss for each event, do not represent our maximum potential exposures and are pre-tax.
(3)
Adjusted Tangible Shareholders’ Equity is defined as Total Shareholders’ Equity less (i) Goodwill and Other Intangible Assets and (ii) Accumulated Other Comprehensive Income (excluding net balances associated with Life Funds Withheld Assets).
Regulatory Change
As part of our operational efficiency, management continues to actively monitor and assess the various regulatory initiatives and legislation that impact us or in the future could impact us. For example, management has been focused on Solvency II, which was adopted by the European Parliament in April 2009. This is a European Union directive covering the capital adequacy and risk management of, and regulatory reporting for, European-based (re)insurers, as well as providing for a new supervisory regime for the insurance industry. The Omnibus II directive which was agreed to by the European Commission, the European Parliament and the Council of Ministers sets a Solvency II implementation date of January 1, 2016. The Central Bank of Ireland and Prudential Regulation Authority have issued proposed interim guidelines on applying the European Insurance and Occupational Pensions Authority (“EIOPA”) guidelines for authorized firms to ensure their eventual readiness for Solvency II. Management continues to prepare for the implementation of Solvency II. See Item 1, “Business - Regulation,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
See the discussion of our Critical Accounting Policies and Estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
VARIABLE INTEREST ENTITIES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS
See the discussion of our variable interest entities and other off-balance sheet arrangements in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Variable Interest Entities (“VIEs”) and Other Off-Balance Sheet Arrangements,” of our Annual Report on Form 10-K for the year ended December 31, 2013 and Item 1, Note 12, “Variable Interest Entities,” to the Unaudited Consolidated Financial Statements included herein.
SEGMENTS
We are organized into two operating segments: Insurance and Reinsurance. Subsequent to the transaction as described in Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements, we no longer consider our Life operations to be a separate operating segment and the results of the life run-off business are reported within “Corporate and Other.” Subsequent to the completion of the transaction, XLLR reinsures the majority of our life reinsurance business through the Life Retro Arrangements. Our general investment and financing operations are reflected in Corporate and Other. The run-off business subject to the Life Retro Arrangements was previously reported within our Life operations segment. Prior period information has been re-presented to reflect the current presentation.
We evaluate the performance of both the Insurance and Reinsurance segments based on underwriting profit. Other items of our revenue and expenditure are not evaluated at the segment level for reporting purposes. In addition, we do not allocate investment assets by segment for our P&C operations. Investment assets related to our run-off life operations and certain structured products included in the Insurance and Reinsurance segments are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from the applicable segment. See Item 1, Note 5, “Segment Information,” to the Unaudited Consolidated Financial Statements included herein for a reconciliation of segment data to our Unaudited Consolidated Financial Statements.

53

INCOME STATEMENT ANALYSIS
Segment Results for the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Insurance
Our Insurance operations provide commercial property, casualty and specialty insurance products on a global basis. Products generally provide tailored coverages for complex corporate risks and include the following lines of business: property, casualty, professional liability, environmental liability, aviation and satellite, marine and offshore energy, equine, fine art and specie, surplus lines, political risk and trade credit, crisis management, surety and other insurance coverages, including those mentioned above, through our programs, middle market and construction businesses. We focus on those lines of business within our Insurance operations that we believe provide the best return on capital over time. These lines of business are divided into the following business groups: International Property and Casualty (“IPC”), North America Property and Casualty (“NAPC”), Global Professional Lines (“Professional”) and Global Specialty Lines (“Specialty”).
The following table summarizes the underwriting profit (loss) for the Insurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Gross premiums written
$
1,618,405

 
$
1,472,388

 
9.9
 %
Net premiums written
996,880

 
1,049,163

 
(5.0
)%
Net premiums earned
1,003,990

 
1,058,542

 
(5.2
)%
Net losses and loss expenses
627,627

 
721,323

 
(13.0
)%
Acquisition costs
99,863

 
138,032

 
(27.7
)%
Operating expenses
213,931

 
194,514

 
10.0
 %
Underwriting profit (loss)
$
62,569

 
$
4,673

 
N/M

Net results – structured products
31,645

 
3,532

 
N/M

Net fee income and other (expense)
(3,567
)
 
(1,355
)
 
N/M

____________
*
N/M - Not Meaningful
Gross Premiums Written
The following table summarizes our gross premiums written by business group for the Insurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
IPC
$
378,178

 
$
330,798

 
14.3
%
NAPC
590,523

 
548,895

 
7.6
%
Professional
406,164

 
370,836

 
9.5
%
Specialty
243,540

 
221,859

 
9.8
%
Total
$
1,618,405

 
$
1,472,388

 
9.9
%
Gross premiums written increased by 9.9%. The following is a summary of the premium movements by business group:
▪
IPC - increase of 14.3% driven by new business in primary casualty and middle market business lines.
▪
NAPC - increase of 7.6% largely attributable to higher renewal premiums in excess casualty, surplus lines, programs and construction business lines, partially offset by a decrease in new business in global risk management.
▪
Professional - increase of 9.5% mainly attributable to the international financial lines business due to new business and higher renewed premiums.
▪
Specialty - increase of 9.8% due to new business in crisis management and political risk business lines, partially offset by lower renewed premiums in marine and aviation lines.
Foreign exchange rate movements also impacted our gross premiums written. When evaluated in local currency, our gross premiums written increased by 8.5%, compared to the 9.9% shown above.

54

Net Premiums Written
The decrease of 5.0% resulted from an increase in ceded premiums written partially offset by the gross premiums written increases outlined above. The increase in ceded premiums is largely attributable to a modification in our reinsurance structure within our Professional group to one that utilizes proportional reinsurance in order to take advantage of favorable market terms. In addition, an increase in cessions within NAPC contributed to the higher ceded premiums written.
Net Premiums Earned
The decrease of 5.2% is attributable to higher ceded premiums written and earned in the Professional business group due to the modification in the reinsurance structure mentioned above. Partially offsetting this was growth in net premiums from IPC property and primary casualty business lines and NAPC surplus lines and construction business lines and Specialty political risk and crisis management business.
Net Losses and Loss Expenses
Combined Ratio
The following table presents the ratios for the Insurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Point Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
62.5
%
 
68.1
%
 
(5.6
)
Acquisition expense ratio
9.9
%
 
13.0
%
 
(3.1
)
Operating expense ratio
21.4
%
 
18.5
%
 
2.9

Underwriting expense ratio
31.3
%
 
31.5
%
 
(0.2
)
Combined ratio
93.8
%
 
99.6
%
 
(5.8
)
The loss and loss expense ratio includes net losses incurred for both the reported year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes these components of the loss ratio for the Insurance segment for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Percentage
 
June 30,
 
Point Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
62.5
%
 
68.1
%
 
(5.6
)
Prior year reserve development
3.7
%
 
4.6
%
 
(0.9
)
Loss ratio excluding prior year development
66.2
%
 
72.7
%
 
(6.5
)
Loss Ratio - excluding prior year development
The 6.5 percentage point decrease in the loss ratio excluding prior year development was primarily as a result of lower levels of natural catastrophe losses in the three months ended June 30, 2014 as compared to the prior year period. Losses net of reinsurance recoveries and reinstatement premiums related to natural catastrophe events for the three months ended June 30, 2014 were $61.0 million lower than in the same period of 2013. Excluding favorable prior year development, net natural catastrophe losses and related reinstatement premiums in both quarters, the loss ratio for the three months ended June 30, 2014 compared to the same period of 2013 decreased by 0.8 percentage points to 64.7%.

55

Prior Year Development
The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Insurance segment for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Property
$
(10,288
)
 
$
(1,406
)
Casualty
37,572

 
(5,181
)
Professional
2,847

 
16,493

Specialty
(44,536
)
 
(75,471
)
Other (1)
(22,587
)
 
17,175

Total
$
(36,992
)
 
$
(48,390
)
____________
(1)    Other includes programs, excess and surplus, surety, structured indemnity and certain discontinued lines.
Net favorable prior year reserve development of $37.0 million was mainly attributable to the following:
▪
For property lines, net prior year development was $10.3 million favorable. This was driven by a reduction of $5.6 million in prior year catastrophe losses primarily in the 2011 accident year and by better than expected loss experience reported for the non-catastrophe exposures predominantly in the 2012 accident year.
▪
For casualty lines, net prior year development was $37.6 million unfavorable. This was driven by deterioration in pollution site claims principally in the 2010 and 2013 accident years that led to a strengthening of $37.8 million in environmental.
▪
For professional lines, net prior year development was $2.8 million unfavorable due mainly to a deterioration in unallocated loss adjustment expenses for the U.S. Select portfolio.
▪
For specialty lines, net prior year development was $44.5 million favorable. This was driven by better than expected loss experience reported for the non-catastrophe exposures principally in the 2008 to 2012 accident years that led to releases of $31.6 million in aerospace and $8.0 million in marine. It was also driven by a reduction of $5.3 million in prior year catastrophe losses related primarily to Hurricane Rita in marine.
▪
For other lines, net prior year development was $22.6 million favorable driven by the favorable settlement of a 2003 claim in one of our discontinued lines.
Acquisition Costs and Operating Expenses
Underwriting Expense Ratio
The decrease of 0.2 percentage points was due to a decrease in the acquisition expense ratio of 3.1 percentage points partially offset by an increase in the operating expense ratio of 2.9 percentage points, as follows:
▪
Acquisition expense ratio - decreased largely due to the favorable impact of our modified reinsurance structure mentioned above.
▪
Operating expense ratio - increased 2.9 percentage points largely due to the unfavorable impact of our modified reinsurance structure mentioned above as well as an increase in expenses associated with business expansion, including higher compensation expense and higher professional fees for the three months ended June 30, 2014 compared to the same period of 2013.
Net Results - Structured Products
Net results from structured insurance products, which increased from the prior year, includes net investment income of $7.9 million and $9.0 million and net interest (income)/expense of $(23.8) million and $5.5 million, for the three months ended June 30, 2014 and 2013, respectively. The increase in the net results from the prior year quarter was from the negotiated termination of one of our larger structured indemnity contracts. This contract had previously been designated as part of a fair value hedge with a remaining fair value adjustment of $47.0 million that was being amortized as a reduction of interest expense over the remaining term of the contract. As a result of the termination, a net decrease of $28.7 million was recorded to interest expense reflecting the accretion rate adjustment due to changes in cash flows and the realization of the full remaining balance of the fair value hedge adjustment, resulting in a net credit to interest expense.

56

For further information about our structured indemnity contracts that are accounted for as deposit contracts, see Item 8, Note 11, “Deposit Liabilities,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Net Fee Income and Other
The decrease compared to the same period of 2013 in net fee income and other was driven by the IPC Lloyd's business related to the run-off of certain Syndicates.
Reinsurance
The Reinsurance segment provides casualty, property risk, property catastrophe, marine, aviation and other specialty reinsurance on a global basis, with business being written on both a proportional and non-proportional treaty basis and also on a facultative basis. Our reinsurance operations are structured into three geographical business groups: Bermuda, North America and International. During the second quarter of 2013, the business groups were realigned to include Latin America within the International business group.
The following table summarizes the underwriting profit (loss) for the Reinsurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Gross premiums written
$
493,124

 
$
471,782

 
4.5
 %
Net premiums written
436,446

 
410,809

 
6.2
 %
Net premiums earned
434,086

 
429,955

 
1.0
 %
Net losses and loss expenses
200,253

 
216,283

 
(7.4
)%
Acquisition costs
80,874

 
86,599

 
(6.6
)%
Operating expenses
47,582

 
39,622

 
20.1
 %
Underwriting profit (loss)
$
105,377

 
$
87,451

 
20.5
 %
Net results – structured products
3,240

 
2,521

 
28.5
 %
Net fee income and other
664

 
520

 
27.7
 %

Gross Premiums Written
The following table summarizes our gross premiums written by business group for the Reinsurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Bermuda
$
268,586

 
$
270,727

 
(0.8
)%
North America
96,156

 
89,407

 
7.5
 %
International
128,382

 
111,648

 
15.0
 %
Total
$
493,124

 
$
471,782

 
4.5
 %

Gross premiums written increased by 4.5%. The following is a summary of the premium movements by business group:
▪
Bermuda - decrease of 0.8% due to favorable prior year quarter premium adjustments which did not repeat in the current quarter and timing on whole accounts, partially offset by favorable renewals on property treaty business.
▪
North America - increase of 7.5% was due to timing of casualty treaty renewals and increased agricultural premiums within our property treaty business, partially offset by the non-renewal of a property facultative deal.
▪
International - increase of 15.0%, mainly driven by increased aviation premiums and increased premium estimates on treaties written in prior years in Latin America, partially offset by higher catastrophe related reinstatement premiums in the prior year quarter.
Foreign exchange rate movements also impacted our gross premiums written. When evaluated in local currency, our gross premiums written increased by 4.2%, compared to the 4.5% shown above.

57

Net Premiums Written
The increase of 6.2% resulted from the gross written premium increases outlined above together with a 7.0% decrease in ceded written premiums, mainly related to whole account business in Bermuda.
Net Premiums Earned
The increase of 1.0% is attributable to the overall earn through of higher current quarter net premiums, and the impact of decreased ceded premiums related to whole account business in Bermuda.
Net Losses and Loss Expenses
Combined Ratio
The following table presents the ratios for the Reinsurance segment:
 
Three Months Ended
 
Percentage
 
June 30,
 
Point Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
46.1
%
 
50.3
%
 
(4.2
)
Acquisition expense ratio
18.6
%
 
20.1
%
 
(1.5
)
Operating expense ratio
11.0
%
 
9.3
%
 
1.7

Underwriting expense ratio
29.6
%
 
29.4
%
 
0.2

Combined ratio
75.7
%
 
79.7
%
 
(4.0
)
The loss and loss expense ratio includes net losses incurred for both the reported year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes these components of the loss ratio for the Reinsurance segment for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Percentage
 
June 30,
 
Point Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
46.1
%
 
50.3
%
 
(4.2
)
Prior year reserve development
11.0
%
 
16.3
%
 
(5.3
)
Loss ratio excluding prior year development
57.1
%
 
66.6
%
 
(9.5
)
Loss Ratio - excluding prior year development
The 9.5 percentage point decrease in the loss ratio excluding prior year development was primarily as a result of lower levels of natural catastrophe losses in the three months ended June 30, 2014 as compared to the prior year period. Losses net of reinsurance recoveries and reinstatement premiums related to natural catastrophe events for the three months ended June 30, 2014 were $38.5 million lower than in the same period in 2013. Excluding favorable prior year development, net natural catastrophe losses and related reinstatement premiums in both quarters, the loss ratio for the three months ended June 30, 2014 compared to the same period of 2013 marginally increased by 0.3 percentage points to 52.3%.
Prior Year Development
The following table summarizes the net (favorable) adverse prior year development by business group relating to the Reinsurance segment for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Property and other short-tail lines
$
(20,088
)
 
$
(24,739
)
Casualty and other long-tail lines
(27,368
)
 
(45,513
)
Total
$
(47,456
)
 
$
(70,252
)
Net favorable prior year reserve development of $47.5 million for the three months ended June 30, 2014 was mainly attributable to the following:
▪
Net favorable prior year development for the short-tailed lines totaled $20.1 million. Details of the significant components are as follows:

58

▪
For property catastrophe lines, net prior year development was $9.4 million unfavorable comprised of $10.9 million unfavorable development on major catastrophe losses partially offset by $1.5 million better than expected development on attritional losses. The $10.9 million unfavorable development on major catastrophe losses is comprised of $12.8 million unfavorable development on 2013 catastrophe losses and $4.1 million unfavorable development on 2010 catastrophe losses partially offset by a $6.0 million favorable development on other catastrophe losses.
▪
For property other lines, net prior year development was $12.3 million favorable comprised of $12.7 million better than expected development on attritional losses, mainly in North America, partially offset by $0.4 million unfavorable development on catastrophe and large losses and .
▪
For marine and aviation lines, net prior year development was $17.2 million favorable comprised of $5.3 million favorable development on catastrophe and large losses and $11.9 million favorable driven by better than expected development on attritional losses, mainly in Europe.
▪
Net favorable prior year development for the long-tailed lines totaled $27.4 million. Details of the significant components are as follows:
▪
For casualty lines, net prior year development was $17.4 million favorable due to better than expected development on attritional losses mainly in the Europe and North America books.
▪
For other lines, net prior year development was $9.9 million favorable due to better than expected development on attritional losses comprised of $5.0 million from the whole accounts book in Bermuda and the remainder spread across the rest of the segment portfolio.
Underwriting Expense Ratio
The increase of 0.2 percentage points was due to an increase in the operating expense ratio of 1.7 percentage points partially offset by a decrease in the acquisition expense ratio of 1.5 percentage points, as follows:
▪
Operating expense ratio - increased 1.7 percentage points due to higher compensation costs associated with the expansion of agriculture business in North America and capital markets business in Bermuda in 2014.
▪
Acquisition expense ratio - decreased due to changes to the structure of our agriculture business in North America, lower profit commissions in International, and the impact of ceded premiums related to whole account business written in Bermuda.
Net Results - Structured Products
Net results from structured reinsurance products, which increased 28.5% from the prior year quarter, includes net investment income of $9.1 million and $9.1 million, interest expense of $5.6 million and $6.6 million and operating expenses of $0.2 million and nil, for the three months ended June 30, 2014 and 2013, respectively. The increase in the net results from the prior year quarter was mainly due to a reduction in interest expense resulting from changes in the expected cash flows and payout patterns on one of the larger structured indemnity contracts.
For further information about our structured indemnity contracts that are accounted for as deposit contracts see Item 8, Note 11, “Deposit Liabilities,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

59

Corporate and Other (including run-off Life operations)
On May 1, 2014, XLIB entered into a sale and purchase agreement with GreyCastle providing for the sale of 100% of the common shares of XLLR, a wholly-owned subsidiary of XLIB, to GreyCastle for $570 million in cash. This transaction was completed on May 30, 2014. As a result, XLLR reinsures the majority of our life reinsurance business through the Life Retro Arrangements. This transaction covers a substantial portion of our life reinsurance reserves. We announced the run-off of our life reinsurance business in 2009.
The run-off business subject to the Life Retro Arrangements was previously reported within the Life operations segment. Subsequent to the transaction, we no longer consider the Life Operations to be a separate operating segment and the results of the life run-off business are reported within “Corporate and Other." For a further discussion, see Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited Consolidated Financial Statements included herein.
Impact of Life Retro Arrangements
Subsequent to the completion of the life transaction as described in Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements included herein, the net contribution from the Company's life reinsurance business subject to Life Retrocession Arrangements is nil. The underwriting results from this retroceded business from January 1, 2014 through May 30, 2014 are included within the Company's contribution from life operations. The impact of the Life Retro Arrangements (primarily relating to the Life Funds Withheld Assets) on the Company's results from the completion of the transaction on May 30, 2014 through June 30, 2014 were as follows:
Impact of Life Retro Arrangements
May 30 to June 30
(U.S. dollars in thousands)
2014
Underwriting profit (loss)
$
—

Net investment income - Life Funds Withheld Assets
19,165

Net realized gains (losses) on investments sold - Life Funds Withheld Assets
624

OTTI on investments - Life Funds Withheld Assets
(8,771
)
Other income and expenses
(19
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
Net income (loss)
$
(6,547
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
12,297

Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax
(5,750
)
Comprehensive income (loss)
$
—

As shown in the table above, although our net income (loss) is subject to variability related to the Life Retro Arrangements, there is no net impact on our 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 of the Life Funds Withheld Assets subsequent to May 30, 2014. For a further information on the life retrocession embedded derivative, see Item 1, Note 7(d)(iii), “Derivative Instruments - Other Non-Investment Derivatives,” to the Unaudited Consolidated Financial Statements included herein.

60

Investment Performance (Excluding Life Funds Withheld Assets)
We manage our fixed income portfolio in accordance with investment guidelines approved by the Risk and Finance Committee of the Board of Directors of XL-Ireland. The following is a summary of the investment portfolio returns, which are calculated by dividing the sum of gross investment income or net income from investment affiliates, realized gains (losses) and unrealized gains (losses) by the average market value of the portfolio, for each of our fixed income and non-fixed income portfolios, for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
June 30,
 
2014
 
2013
Total Return on Investments (1)
1.9
%
 
(1.6
)%
 
 
 
 
Other Portfolios (2)
 
 
 
Alternative portfolio (3)
1.5
%
 
3.9
 %
Equity portfolio
5.6
%
 
(0.6
)%
___________
(1)
The performance of investment portfolios is measured on a local currency basis and is not annualized. For aggregate performance calculation, respective local currency balances are translated to U.S. dollars using quarter end exchange rates to calculate composite portfolio results. Performance represents P&C operations and two months of Life operations.
(2)
Performance on Other Portfolios is included in the Total Return on Investments.
(3)
Performance on the alternative portfolio reflects the three months ended May 31, 2014 and 2013, respectively for both equity and non-equity alternative funds.
Investment Activities (Excluding Life Funds Withheld Assets)
The following table illustrates net investment income, net income from investment fund affiliates, net realized (losses) gains on investments, net realized and unrealized gains (losses) on derivative instruments and net realized and unrealized gains (losses) on life retrocession embedded derivative for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net investment income (1)
$
213,608

 
$
232,546

 
(8.1
)%
Net income (loss) from investment fund affiliates (2)
17,683

 
46,543

 
(62.0
)%
Net realized gains (losses) on investments
80,843

 
40,968

 
97.3
 %
Net realized and unrealized gains (losses) on derivative instruments
11,599

 
(5,105
)
 
N/M

____________
(1)
Net investment income includes: Net investment income - excluding Life Funds Withheld Assets and net investment income related to the net results from structured products.
(2)
We generally record the income related to alternative fund affiliates on a one-month lag and the private investment fund affiliates on a three-month lag based upon the availability of the information provided by the investees.
*
N/M - Not Meaningful
Net Investment Income
The decrease of 8.1% was primarily due to a reduction in investment yields as a result of lower reinvestment rates and the impact of the Life Retro Arrangements for the month of June 2014. We estimate that approximately $3.1 billion of assets with an average gross book yield of 2.9% will mature and pay down over the next 12 months compared to the average new money rate in the three months ended June 30, 2014 on our portfolio of 1.7%.
Net Income (Loss) from Investment Fund Affiliates
Net income from investment fund affiliates includes earnings from our investments in closed-end investment funds and partnerships and similar vehicles that are accounted for under the equity method.
Performance for the three months ended June 30, 2014 was significantly lower than the same period of 2013. Alternative investment fund returns were solid in the quarter but were considerably behind the prior year quarter’s very strong results, when event driven and equity long/short managers in particular posted large gains. Private investment fund returns were also solid in the quarter but also down considerably from the prior year quarter's very strong results.

61

Net Realized Gains and Losses on Investments
Net realized gains of $80.8 million in the three months ended June 30, 2014 included the following:
▪
Net realized gains of $105.5 million resulted primarily from sales of equities and other investments.
▪
Realized losses of approximately $24.6 million related to the OTTI write-down of certain of our AFS investments. The main components of the net impairment charges were:
▪
$10.3 million related to certain equities as the holdings were in a loss position for more than 11 months.
▪
$12.5 million related to Other Investments.
Net realized gains on investments of $41.0 million in the three months ended June 30, 2013 included realized losses of $2.4 million related to the write-down of certain of our fixed income and equity investments with respect to which we determined that there was an other-than-temporary decline in the value of those investments, as well as net realized gains of $43.4 million.
Net Realized and Unrealized Gains and Losses on Derivative Instruments
Net realized and unrealized gains on derivative instruments of $11.6 million in the three months ended June 30, 2014 resulted from our investment strategy to manage interest rate risk, foreign exchange risk and credit risk, and to replicate permitted investments. For a further discussion, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein.
Other Revenues and Expenses
The following table sets forth our other revenues and expenses for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net income (loss) from operating affiliates (1)
$
27,738

 
$
32,825

 
(15.5
)%
Exchange (gains) losses
21,141

 
(11,331
)
 
N/M

Corporate operating expenses
56,495

 
55,155

 
2.4
 %
Loss on sale of life reinsurance subsidiary
666,423

 
—

 
N/M

Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
 
—

 
N/M

Interest expense (2)
32,284

 
26,121

 
23.6
 %
Income tax expense (benefit)
(5,654
)
 
28,872

 
(119.6
)%
____________
(1)
The Company generally records the income related to certain operating affiliates on a three-month lag based upon the availability of the information provided by the investees.
(2)
Interest expense includes costs related to our debt and collateral facilities and does not include deposit liability accretion, which is included in Net investment results - structured products.
*
N/M - Not Meaningful
Net Income (Loss) from Operating Affiliates
The following table sets forth the net income (loss) from operating affiliates for the three months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net income (loss) from investment manager affiliates
$
13,147

 
$
27,068

 
(51.4
)%
Net income (loss) from strategic operating affiliates
14,591

 
5,757

 
153.4
 %
Net income (loss) from operating affiliates
$
27,738

 
$
32,825

 
(15.5
)%
Net Income from Investment Manager Affiliates
The decrease of 51.4% principally reflects the exceptional first quarter of 2013 investment performance for several investment manager affiliates, leading to strong incentive fees for the managers. Positive investment performance leads to strong incentive fees for the managers, which are reported on a one quarter-lag basis in our results.

62

Net Income from Strategic Operating Affiliates
The increase of 153.4% was largely due to higher current period income related to an insurance affiliate that writes direct U.S. homeowners insurance.
Exchange Gains and Losses
The foreign exchange losses of $21.1 million in the three months ended June 30, 2014 were a result of an overall weakening of the value of the U.S. dollar against most of our major currency exposures, particularly the U.K. sterling, and the Canadian dollar. In the three months ended June 30, 2013, foreign exchange gains of $11.3 million were produced as a result of an overall strengthening of the value of the U.S. dollar against our major currency exposures, principally the U.K. sterling, the Euro and the Swiss franc.
Corporate Operating Expenses
The increase of 2.4% was a result of increased compensation costs and professional fees, partially offset by decreases in office expenses and information technology costs.
Loss on Sale of Life Reinsurance Subsidiary
The loss on sale of life reinsurance subsidiary was due to the sale of 100% of the common shares of XLLR, a wholly-owned subsidiary of XLIB, to GreyCastle for $570 million in cash. For a further discussion, see Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited Consolidated Financial Statements included herein.
Net Realized and Unrealized Gains and Losses on Life Retrocession Embedded Derivative
The Company has entered into Life Retro Arrangements as described in Notes 2, "Significant Accounting Policies - (a) Investments Related to Life Retrocession Agreements written on a Funds Withheld Basis (“Life Retro Arrangements”) and (b) Reinsurance" and Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements included herein. The embedded derivative is recorded at fair value with changes in fair value recognized in earnings through "Net realized and unrealized gains (losses) on life retrocession embedded derivative." For a further discussion, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein and "Impact of Life Retro Arrangements" above.
Interest Expense
The increase of 23.6% was a result of the overall increase in our debt following the issuance of XL-Cayman's 2.30% Senior Notes due 2018 and its 5.25% Senior Notes due 2043 during the fourth quarter of 2013. For further information about our debt financing, see Item 8, Note 13, “Notes Payable and Debt and Financing Arrangements,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Income Tax Expense
A tax benefit of $5.7 million and charge of $28.9 million were incurred in the three months ended June 30, 2014 and 2013, respectively. The tax charges recognized in these periods reflect our expected full year effective tax rate applicable to each of the years, applied to our ordinary income in the respective periods.

63

Segment Results for the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Insurance
The following table summarizes the underwriting profit (loss) for the Insurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Gross premiums written
$
3,189,331

 
$
2,970,175

 
7.4
 %
Net premiums written
2,124,247

 
2,238,351

 
(5.1
)%
Net premiums earned
1,996,430

 
2,097,634

 
(4.8
)%
Net losses and loss expenses
1,266,820

 
1,371,840

 
(7.7
)%
Acquisition costs
204,863

 
268,654

 
(23.7
)%
Operating expenses
416,984

 
378,511

 
10.2
 %
Underwriting profit (loss)
$
107,763

 
$
78,629

 
37.1
 %
Net results – structured products
36,535

 
7,717

 
N/M

Net fee income and other (expense)
(4,779
)
 
(3,294
)
 
45.1
 %
____________
*
N/M - Not Meaningful
Gross Premiums Written
The following table summarizes our gross premiums written by business group for the Insurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
IPC
$
961,126

 
$
915,921

 
4.9
%
NAPC
986,563

 
907,313

 
8.7
%
Professional
739,318

 
674,278

 
9.6
%
Specialty
502,324

 
472,663

 
6.3
%
Total
$
3,189,331

 
$
2,970,175

 
7.4
%
Gross premiums written increased by 7.4%. The following is a summary of the premium movements by business group:
▪
IPC - increase of 4.9% driven mainly by new business in primary casualty and increased renewal premiums within primary casualty and middle market business lines, partially offset by lower renewed premiums in the construction business line.
▪
NAPC - increase of 8.7% largely driven by higher renewed premiums in the excess casualty, surplus lines, programs and construction business lines, partially offset by a lower level of new business in global risk management.
▪
Professional - increase of 9.6% largely attributable to the international professional line of business due to higher renewed premiums and increases in new business.
▪
Specialty - increase of 6.3% due to new business in crisis management and political risk business lines, partially offset by lower new business and unfavorable renewed premiums in marine lines and weaker pricing in aviation.
Foreign exchange rate movements also impacted our gross premiums written. When evaluated in local currency, our gross premiums written increased by 6.1%, compared to the 7.4% shown above.
Net Premiums Written
The decrease of 5.1% resulted from an increase in ceded premiums written partially offset by the gross premiums written increases outlined above. The increase in ceded premiums primarily relates to a modification in our reinsurance structure to one that utilizes proportional reinsurance in our Professional business group in order to take advantage of favorable market terms. In addition, an increase in global property and construction writings that involve cessions to co-insurers and/or the captive insurance operations of our insureds and higher cessions within NAPC contributed to the higher ceded premiums written.

64

Net Premiums Earned
The decrease of 4.8% is attributable to the increase in ceded premiums written and earned in the Professional business group due to the modification in the reinsurance structure and increased reinsurance participation in the NAPC property and construction business as mentioned above. Partially offsetting this was growth in net premiums from Professional international financial and select professional business lines, Specialty political risk and crisis management business and NAPC surplus lines and construction business lines.
Net Losses and Loss Expenses
Combined Ratio
The following table presents the ratios for the Insurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
63.5
%
 
65.4
%
 
(1.9
)
Acquisition expense ratio
10.3
%
 
12.8
%
 
(2.5
)
Operating expense ratio
20.8
%
 
18.1
%
 
2.7

Underwriting expense ratio
31.1
%
 
30.9
%
 
0.2

Combined ratio
94.6
%
 
96.3
%
 
(1.7
)
The loss and loss expense ratio includes net losses incurred for both the reported year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes these components of the loss ratio for the Insurance segment for the six months ended June 30, 2014:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
63.5
%
 
65.4
%
 
(1.9
)
Prior year reserve development
2.2
%
 
2.8
%
 
(0.6
)
Loss ratio excluding prior year development
65.7
%
 
68.2
%
 
(2.5
)
Loss Ratio - excluding prior year development
The 2.5% percentage point decrease in the loss ratio excluding prior year development was primarily as a result of lower levels of natural catastrophe losses in the six months ended June 30, 2014 as compared to the prior year period. Losses net of reinsurance recoveries and reinstatement premiums related to natural catastrophe events for the six months ended June 30, 2014 were $47.7 million lower than in the same period in 2013. Excluding favorable prior year development, net natural catastrophe losses and related reinstatement premiums in both quarters, the loss ratio for the six months ended June 30, 2014 compared to the same period of 2013 decreased by 0.3 percentage points to 64.1%.
Prior Year Development
The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Insurance segment for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Property
$
(25,967
)
 
$
(20,178
)
Casualty
39,274

 
(3,380
)
Professional
1,614

 
16,618

Specialty
(39,563
)
 
(70,706
)
Other (1)
(20,691
)
 
19,064

Total
$
(45,333
)
 
$
(58,582
)
____________
(1)    Other includes programs, excess and surplus, surety, structured indemnity and certain discontinued lines.
Net favorable prior year reserve development of $45.3 million was mainly attributable to the following:

65

▪
For property lines, net prior year development was $26.0 million favorable. This was driven by better than expected loss experience reported for the non-catastrophe exposures predominantly in the 2011 to 2013 accident years. It was also driven by a reduction of $5.6 million in prior year catastrophe losses primarily in the 2011 accident year.
▪
For casualty lines, net prior year development was $39.3 million unfavorable. This was driven by deterioration in pollution site claims principally in the 2010 and 2013 accident years that led to a strengthening of $37.8 million in environmental.
▪
For professional lines, net prior year development was $1.6 million unfavorable due mainly to a deterioration in unallocated loss adjustment expenses for the U.S. Select portfolio.
▪
For specialty lines, net prior year development was $39.6 million favorable. This was driven by better than expected loss experience reported for the non-catastrophe exposures principally in the 2008 to 2012 accident years that led to a release of $31.8 million in aerospace. It was also driven by a reduction of $5.3 million in prior year catastrophe losses related primarily to Hurricane Rita in marine.
▪
For other lines, net prior year development was $20.7 million favorable driven by the favorable settlement of a 2003 claim in one of our discontinued lines.
Acquisition Costs and Operating Expenses
Underwriting Expense Ratio
The increase of 0.2 percentage points was due to an increase in the operating expense ratio of 2.7 percentage points partially offset by a decrease in the acquisition expense ratio of 2.5 percentage points, as follows:
▪
Operating expense ratio - increased 2.7 percentage points largely due to the unfavorable impact of the modification of our reinsurance structure mentioned above as well as increased compensation expenses from business expansion and higher professional fees for the six months ended June 30, 2014 compared to the same period of 2013.
▪
Acquisition expense ratio - decreased largely due to the favorable impact of the modification of our reinsurance structure mentioned above and a change in the mix of business.
Net Results - Structured Products
Net results from structured insurance products, which increased from the prior year, includes net investment income of $18.0 million and $18.6 million and net interest (income)/expense of $(18.6) million and $10.9 million, for the six months ended June 30, 2014 and 2013, respectively. The increase in the net results from the prior year period was from the negotiated termination of one of our larger structured indemnity contracts. This contract had previously been designated as part of a fair value hedge with a remaining fair value adjustment of $47.0 million that was being amortized as a reduction of interest expense over the remaining term of the contract. As a result of the termination, a net decrease of $28.7 million was recorded to interest expense reflecting the accretion rate adjustment due to changes in cash flows and the realization of the full remaining balance of the fair value hedge adjustment, resulting in a net credit to interest expense.
For further information about our structured indemnity contracts that are accounted for as deposit contracts, see Item 8, Note 11, “Deposit Liabilities,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Net Fee Income and Other
The decrease compared to the same period of 2013 in net fee income and other expenses was driven by increased costs in our risk engineering services business.

66

Reinsurance
The following table summarizes the underwriting profit (loss) for the Reinsurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Gross premiums written
$
1,350,837

 
$
1,378,911

 
(2.0
)%
Net premiums written
1,228,619

 
1,263,830

 
(2.8
)%
Net premiums earned
854,174

 
855,109

 
(0.1
)%
Net losses and loss expenses
392,565

 
408,850

 
(4.0
)%
Acquisition costs
168,109

 
172,133

 
(2.3
)%
Operating expenses
88,443

 
80,043

 
10.5
 %
Underwriting profit (loss)
$
205,057

 
$
194,083

 
5.7
 %
Net results – structured products
6,303

 
3,512

 
79.5
 %
Net fee income and other
1,337

 
1,152

 
16.1
 %

Gross Premiums Written
The following table summarizes our gross premiums written by business group for the Reinsurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Bermuda
$
540,706

 
$
515,901

 
4.8
 %
North America
237,204

 
230,905

 
2.7
 %
International
572,927

 
632,064

 
(9.4
)%
Other (1)
—

 
41

 
(100.0
)%
Total
$
1,350,837

 
$
1,378,911

 
(2.0
)%
____________
(1)
Other relates to discontinued structured indemnity.
Gross premiums written decreased by 2.0%. The following is a summary of the premium movements by business group:
▪
Bermuda - increase of 4.8% due to new business and favorable renewals on whole account and property treaty businesses.
▪
North America - increase of 2.7% largely due to increased agricultural premiums within our property treaty business, partially offset by the non-renewal of a property facultative deal.
▪
International - decrease of 9.4%, mainly driven by lower casualty and property treaty renewals due to decreases in shares and competitive market conditions in Europe, including the non-renewal of a U.K. motor business quota share, partially offset by increased premium estimates on treaties written in prior years in Latin America and unfavorable adjustments in the prior year on a casualty treaty that did not repeat in the current year.
Foreign exchange rate movements also impacted our gross premiums written. When evaluated in local currency, our gross premiums written decreased by 1.6%, compared to the 2.0% shown above.
Net Premiums Written
The decrease of 2.8% resulted from the gross written premium decreases outlined above together with an increase in ceded written premiums, largely driven by a new agricultural program in North America.
Net Premiums Earned
The decrease of 0.1% is mainly attributable to lower casualty and property written premiums in Europe due to competitive market conditions and the overall earn through of higher whole account premiums in Bermuda.

67

Net Losses and Loss Expenses
Combined Ratio
The following table presents the ratios for the Reinsurance segment:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
46.0
%
 
47.8
%
 
(1.8
)
Acquisition expense ratio
19.7
%
 
20.1
%
 
(0.4
)
Operating expense ratio
10.3
%
 
9.4
%
 
0.9

Underwriting expense ratio
30.0
%
 
29.5
%
 
0.5

Combined ratio
76.0
%
 
77.3
%
 
(1.3
)
The loss and loss expense ratio includes net losses incurred for both the reported year and any favorable or adverse prior year development of loss and loss expense reserves held at the beginning of the year. The following table summarizes these components of the loss ratio for the Reinsurance segment for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
 
2014
 
2013
 
2014 to 2013
Loss and loss expense ratio
46.0
%
 
47.8
%
 
(1.8
)
Prior year reserve development
9.1
%
 
10.7
%
 
(1.6
)
Loss ratio excluding prior year development
55.1
%
 
58.5
%
 
(3.4
)
Loss Ratio - excluding prior year development
The 3.4 percentage point decrease in the loss ratio excluding prior year development was primarily as a result of lower levels of natural catastrophe losses in the six months ended June 30, 2014 as compared to the prior year period. Losses net of reinsurance recoveries and reinstatement premiums related to natural catastrophe events for the six months ended June 30, 2014 were $38.5 million lower than in the same period in 2013. Excluding favorable prior year development, net natural catastrophe losses and related reinstatement premiums in both quarters, the loss ratio for the six months ended June 30, 2014 compared to the same period of 2013 increased by 1.6 percentage points to 52.7% due to changes in the mix of business in Bermuda and competitive market conditions.
Prior Year Development
The following table summarizes the net (favorable) adverse prior year development by business group relating to the Reinsurance segment for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
June 30,
(U.S. dollars in thousands)
2014
 
2013
Property and other short-tail lines
$
(45,638
)
 
$
(46,517
)
Casualty and other long-tail lines
(32,314
)
 
(44,765
)
Total
$
(77,952
)
 
$
(91,282
)
Net favorable prior year reserve development of $78.0 million for the six months ended June 30, 2014 was mainly attributable to the following:
▪
Net favorable prior year development for the short-tailed lines totaled $45.6 million. Details of the significant components are as follows:
▪
For property catastrophe lines, net prior year development was $10.4 million unfavorable comprising of $16.3 million unfavorable development on major catastrophe losses and $5.9 million better than expected development on attritional losses. The $16.3 million unfavorable development on major catastrophe losses was due to $22.3 million unfavorable development on the 2013 catastrophe losses and $6.6 million unfavorable development on the 2010 catastrophe losses partially offset by $12.6 million favorable development on other catastrophe losses.

68

▪
For property other lines, net prior year development was $23.8 million favorable comprised of $2.4 million favorable development on catastrophe losses and $26.2 million better than expected development on attritional losses.
▪
For marine and aviation lines, net prior year development was $32.2 million favorable comprised of $9.1 million favorable development on catastrophe and large losses and $23.1 million favorable development driven by better than expected attritional loss development mainly in Europe.
▪
Net favorable prior year development for the long-tailed lines totaled $32.3 million. Details of the significant components are as follows:
▪
For casualty lines, net prior year development was $22.3 million favorable due to better than expected development on attritional losses mainly in Europe and North America.
▪
For other lines, net prior year development was $10.1 million favorable due to better than expected development on attritional losses comprised of $6.4 million from the whole accounts book in Bermuda and the remainder spread across the rest of the segment portfolio.
Underwriting Expense Ratio
The increase of 0.5 percentage points was due to an increase in the operating expense ratio of 0.9 percentage points, partially offset by a decrease in the acquisition expense ratio of 0.4 percentage points, as follows:
▪
Operating expense ratio - increased in the six months ended June 30, 2014 compared to the same period in 2013 due to higher compensation costs associated with the expansion of agriculture business in North America and capital markets in Bermuda in 2014 .
▪
Acquisition expense ratio - decreased due to changes to the structure of our agricultural business in North America and lower profit commissions in International, partially offset by a state assessment relating to prior year premiums received in the current year in North America.
Net Results - Structured Products
Net results from structured reinsurance products, which increased 79.5% from the prior year period, includes net investment income of $17.7 million and $17.2 million, interest expense of $11.2 million and $13.7 million and operating expenses of $0.3 million and nil, for the six months ended June 30, 2014 and 2013, respectively. The increase in the net results from the prior year period was mainly due to a reduction in interest expense resulting from changes in the expected cash flows and payout patterns on one of the larger structured indemnity contracts.
For further information about our structured indemnity contracts that are accounted for as deposit contracts see Item 8, Note 11, “Deposit Liabilities,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Corporate and Other (including run-off Life Operations)
As stated above, XLIB entered into a sale and purchase agreement with GreyCastle providing for the sale of 100% of the common shares of XLLR. As a result, XLLR reinsures the majority of our life reinsurance business through the Life Retro Arrangements. This transaction covers a substantial portion of our life reinsurance reserves. We announced the run-off of its life reinsurance business in 2009.
The run-off business subject to the Life Retro Arrangements was previously reported within the Life operations segment. Subsequent to the transaction, we no longer consider the life operations to be a separate operating segment and the results of the life run-off business are reported within "Corporate and Other". For a further discussion, see Item 1, Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements included herein.

69

Impact of Life Retro Arrangements
Subsequent to the completion of the life transaction as described in Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements included herein, the net contribution from U.K. and European life reinsurance business subject to Life Retrocession Arrangements is nil. The underwriting results from this retroceded business from January 1, 2014 through May 30, 2014 are included within the contribution from life operations. The impact of the Life Funds Withheld Assets on our results from the completion of the transaction on May 30, 2014 through June 30, 2014 were as follows:
Impact of Life Retro Arrangements
May 30 to June 30
(U.S. dollars in thousands)
2014
Underwriting profit (loss)
$
—

Net investment income - Life Funds Withheld Assets
19,165

Net realized gains (losses) on investments sold - Life Funds Withheld Assets
624

OTTI on investments - Life Funds Withheld Assets
(8,771
)
Other income and expenses
(19
)
Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
Net income (loss)
$
(6,547
)
Change in net unrealized gains (losses) on investments - Life Funds Withheld Assets, net of tax
12,297

Change in cumulative translation adjustment - Life Funds Withheld Assets, net of tax
(5,750
)
Comprehensive income (loss)
$
—

As shown in the table above, although our net income (loss) is subject to variability related to the Life Retro Arrangements, there is no net impact on our 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 of the Life Funds Withheld Assets subsequent to May 30, 2014. For a further information on the life retrocession embedded derivative, see Item 1, Note 7(d)(iii), “Derivative Instruments - Other Non-Investment Derivatives,” to the Unaudited Consolidated Financial Statements included herein.
Investment Performance (Excluding Life Funds Withheld Assets)
We manage our fixed income portfolio in accordance with investment guidelines approved by the Risk and Finance Committee of the Board of Directors of XL-Ireland. The following is a summary of the investment portfolio returns, which are calculated by dividing the sum of gross investment income or net income from investment affiliates, realized gains (losses) and unrealized gains (losses) by the average market value of the portfolio, for each of our fixed income and non-fixed income portfolios, for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
June 30,
 
2014
 
2013
Total Return on Investments (1)
3.8
%
 
(0.8
)%
 
 
 
 
Other Portfolios (2)
 
 
 
Alternative portfolio (3)
4.0
%
 
8.1
 %
Equity portfolio
7.1
%
 
5.4
 %
___________
(1)
The performance of investment portfolios is measured on a local currency basis and is not annualized. For aggregate performance calculation, respective local currency balances are translated to U.S. dollars using quarter end exchange rates to calculate composite portfolio results. Performance represents P&C operations and five months of Life operations.
(2)
Performance on Other Portfolios is included in the Total Return on Investments.
(3)
Performance on the alternative portfolio reflects the six months ended May 31, 2014 and 2013, respectively, for both equity and non-equity alternative funds.

70

Investment Activities (Excluding Life Funds Withheld Assets)
The following table illustrates net investment income, net income from investment fund affiliates, net realized (losses) gains on investments and net realized and unrealized gains (losses) on derivative instruments for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net investment income (1)
$
446,797

 
$
479,014

 
(6.7
)%
Net income (loss) from investment fund affiliates (2)
50,986

 
78,764

 
(35.3
)%
Net realized gains (losses) on investments
100,072

 
77,477

 
29.2
 %
Net realized and unrealized gains (losses) on derivative instruments
13,409

 
2,780

 
N/M

____________
(1)
Net investment income includes: Net investment income - excluding Life Funds Withheld Assets and net investment income related to the net results from structured products.
(2)
We generally record the income related to alternative fund affiliates on a one-month lag and the private investment fund affiliates on a three-month lag based upon the availability of the information provided by the investees.
*
N/M - Not Meaningful
Net Investment Income
The decrease of 6.7% was primarily due to a reduction in investment yields as a result of lower reinvestment rates and the impact of the Life Retro Arrangements for the month of June 2014. We estimate that approximately $3.1 billion of assets with an average gross book yield of 2.9% will mature and pay down over the next 12 months compared to the average new money rate in the six months ended June 30, 2014 on our portfolio of 1.8%.
Net Income (Loss) from Investment Fund Affiliates
Net income from investment fund affiliates includes earnings from our investments in closed-end investment funds and partnerships and similar vehicles that are accounted for under the equity method.
Performance for the six months ended June 30, 2014 was strong but lagging behind exceptional results from the same period of 2013. Alternative investment fund returns were strong in the first half of this year, but very strong equity returns and moderate volatility last year were highly supportive of fund returns, in particular for market-directional strategies. Private investment fund returns were also strong for the first half of the year but down from the prior year's results for the first half of the year.
Net Realized Gains and Losses on Investments
Net realized gains on investments of $100.1 million included the following:
▪
Net realized gains of $128.4 million resulted primarily from sales of equities and other investments.
▪
Realized losses of approximately $28.3 million related to the OTTI write-down of certain of our AFS investments. The main components of the net impairment charges were:
▪
$10.3 million related to certain equities as the holdings were in a loss position for more than 11 months.
▪
$12.5 million related to Other Investments.
▪
$0.9 million for structured securities, principally non-Agency RMBS, where we determined that the likely recovery on these securities was below the carrying value and, accordingly, recorded an impairment of the securities to the discounted value of the cash flows expected to be received on these securities.
▪
$2.5 million related to foreign exchange losses.
Net realized gains on investments of $77.5 million in the six months ended June 30, 2013 included realized losses of $7.0 million related to the write-down of certain of our fixed income and equity investments with respect to which we determined that there was an other-than-temporary decline in the value of those investments, as well as net realized gains of $84.5 million.

71

Net Realized and Unrealized Gains and Losses on Derivative Instruments
Net realized and unrealized gains on derivatives of $13.4 million in the six months ended June 30, 2014 resulted from our investment strategy to manage interest rate risk, foreign exchange risk and credit risk, and to replicate permitted investments. For a further discussion, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein.
Other Revenues and Expenses
The following table sets forth our other revenues and expenses for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net income (loss) from operating affiliates (1)
$
74,023

 
$
63,823

 
16.0
 %
Exchange (gains) losses
31,582

 
(44,766
)
 
N/M

Corporate operating expenses
107,833

 
102,077

 
5.6
 %
Loss on sale of life reinsurance subsidiary
666,423

 
—

 
N/M

Net realized and unrealized gains (losses) on life retrocession embedded derivative
(17,546
)
 
—

 
N/M

Interest expense (2)
64,444

 
52,257

 
23.3
 %
Income tax expense
28,667

 
72,351

 
(60.4
)%
____________
(1)
The Company generally records the income related to certain operating affiliates on a three-month lag based upon the availability of the information provided by the investees.
(2)
Interest expense includes costs related to our debt and collateral facilities and does not include deposit liability accretion, which is included in Net investment results - structured products.
*
N/M - Not Meaningful
Net Income (Loss) from Operating Affiliates
The following table sets forth the net income (loss) from operating affiliates for the six months ended June 30, 2014 and 2013:
 
Six Months Ended
 
Percentage
 
June 30,
 
Change
(U.S. dollars in thousands)
2014
 
2013
 
2014 to 2013
Net income (loss) from investment manager affiliates
$
40,130

 
$
45,524

 
(11.8
)%
Net income (loss) from strategic operating affiliates
33,893

 
18,299

 
85.2
 %
Net income (loss) from operating affiliates
$
74,023

 
$
63,823

 
16.0
 %

Net Income from Investment Manager Affiliates
The decrease of 11.8% principally reflects the strong first quarter of 2013 investment performance for several investment manager affiliates, leading to strong incentive fees for the managers. Positive investment performance leads to incentive fees for the managers, which are reported on a one quarter-lag basis in our results.
Net Income from Strategic Operating Affiliates
The increase of 85.2% was largely due to higher current period income related to an insurance affiliate that writes direct U.S. homeowners insurance, with more modest favorable variances from several other operating affiliates.
Exchange Gains and Losses
The foreign exchange losses of $31.6 million in the six months ended June 30, 2014 were a result of an overall weakening of the value of the U.S. dollar against most of our major currency exposures, particularly the U.K. sterling, the Euro, and the Swiss franc. In the six months ended June 30, 2013, foreign exchange gains of $44.8 million were a result of an overall strengthening of the value of the U.S. dollar against our major currency exposures, particularly the U.K. sterling, the Euro, the Canadian dollar and the Swiss franc.
Corporate Operating Expenses
The increase of 5.6% was a result of increased compensation costs as well as an increase in information technology costs and other expenses associated with infrastructure and organizational initiatives.

72

Loss on Sale of Life Reinsurance Subsidiary
The loss on sale of life reinsurance subsidiary was due to the sale of 100% of the common shares of XLLR, a wholly-owned subsidiary of XLIB, to GreyCastle for $570 million in cash. For a further discussion, see Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited Consolidated Financial Statements included herein.
Net Realized and Unrealized Gains and Losses on Life Retrocession Embedded Derivative
The Company has entered into Life Retro Arrangements as described in Notes 2, "Significant Accounting Policies - (a) Investments Related to Life Retrocession Agreements written on a Funds Withheld Basis and (b) Reinsurance" and Note 3, "Sale of Life Reinsurance Subsidiary," to the Unaudited Consolidated Financial Statements included herein. The embedded derivative is recorded at fair value with changes in fair value recognized in earnings through "Net realized and unrealized gains (losses) on life retrocession embedded derivative." For a further discussion, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein and "Impact of Life Retro Arrangements" above.
Interest Expense
The increase of 23.3% was a result of the overall increase in our debt following the issuance of the 2.30% Senior Notes due 2018 and the 5.25% Senior Notes due 2043 during the fourth quarter of 2013. For further information about our debt financing, see Item 8, Note 13, “Notes Payable and Debt and Financing Arrangements,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Income Tax Expense
Tax charges of $28.7 million and $72.4 million were incurred in the six months ended June 30, 2014 and 2013, respectively. The tax charges recognized in these periods reflect our expected full year effective tax rate applicable to each of the years, applied to our ordinary income in the respective periods.

BALANCE SHEET ANALYSIS
Investments (Excluding Life Funds Withheld Assets)
We seek to generate growth in book value and net investment income through our investment activities. Our investment strategy strives to balance investment returns against market and credit risk. Our overall investment portfolio is structured to take into account a number of variables including liability profile, local regulatory requirements, business needs, collateral management and risk tolerance.
As described in Item 1, Note 3, "Sale of Life Reinsurance Subsidiary" and Note 6, “Investments,” to the Unaudited Consolidated Financial Statements included herein, in connection to the Life Retro Arrangements certain fixed maturities were reclassified from held to maturity to available for sale. All of the reclassified securities are included within the 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 GreyCastle. Because we no longer share in the risks and rewards of the underlying performance of the supporting invested assets, disclosures within the financial statement notes included herein, and in the table below, separate the Life Funds Withheld Assets from the rest of our investments. The remaining disclosures in this section exclude the Life Funds Withheld Assets.

73

At June 30, 2014 and December 31, 2013, total investments, cash and cash equivalents, accrued investment income and net receivable/(payable) for investments sold/(purchased) were approximately $32.3 billion and $36.6 billion, respectively. The following table summarizes the composition of our invested assets, excluding Life Funds Withheld Assets, at June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
December 31, 2013
(U.S. dollars in thousands)
Carrying
Value (1)
 
Percent
of Total
 
Carrying
Value (1)
 
Percent
of Total
Cash and cash equivalents
$
3,071,139

 
9.5
 %
 
$
1,800,832

 
4.9
%
Net receivable/ (payable) for investments sold/ (purchased)
(109,753
)
 
(0.3
)%
 
84,603

 
0.2
%
Accrued investment income
322,100

 
1.0
 %
 
346,809

 
0.9
%
Short-term investments
347,674

 
1.1
 %
 
456,288

 
1.2
%
Fixed maturities - AFS:
 
 
 
 
 
 
 
U.S. Government and Government-Related/Supported (2)
2,084,294

 
6.4
 %
 
2,501,851

 
6.8
%
Corporate - Financials (3) (4)
3,040,610

 
9.4
 %
 
3,481,991

 
9.5
%
Corporate - Non Financials (4)
6,687,014

 
20.7
 %
 
7,643,839

 
20.9
%
RMBS – Agency
3,303,046

 
10.2
 %
 
3,546,122

 
9.7
%
RMBS – Non-Agency
415,503

 
1.3
 %
 
398,768

 
1.1
%
CMBS
1,124,287

 
3.5
 %
 
1,246,795

 
3.4
%
CDO
738,073

 
2.3
 %
 
717,313

 
2.0
%
Other asset-backed securities (5)
1,310,272

 
4.1
 %
 
1,242,104

 
3.4
%
U.S. States and political subdivisions of the States
1,939,590

 
6.0
 %
 
1,845,812

 
5.0
%
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
4,355,861

 
13.5
 %
 
4,875,541

 
13.3
%
Total fixed maturities - AFS
$
24,998,550

 
77.4
 %
 
$
27,500,136

 
75.1
%
Fixed maturities - held to maturity ("HTM"):
 

 
 

 
 

 
 
U.S. Government and Government-Related/Supported (2)
—

 
—
 %
 
10,993

 
—
%
Corporate - Financials (3) (4)
—

 
—
 %
 
269,547

 
0.7
%
Corporate - Non Financials (4)
—

 
—
 %
 
1,117,316

 
3.1
%
RMBS – Non-Agency
—

 
—
 %
 
66,987

 
0.2
%
CMBS
—

 
—
 %
 
144,924

 
0.4
%
Other asset-backed securities (5)
—

 
—
 %
 
106,540

 
0.3
%
Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported (2)
—

 
—
 %
 
1,142,388

 
3.1
%
Total fixed maturities - HTM
$
—

 
—
 %
 
$
2,858,695

 
7.8
%
Equity securities (6)
988,710

 
3.1
 %
 
1,040,237

 
2.8
%
Investments in affiliates
1,500,548

 
4.6
 %
 
1,370,943

 
3.8
%
Other investments
1,204,564

 
3.6
 %
 
1,164,630

 
3.3
%
Total investments and cash and cash equivalents - excluding Life Funds Withheld Assets
$
32,323,532

 
100.0
 %
 
$
36,623,173

 
100.0
%
 
 
 
 
 
 
 
 
Fixed Maturities - Life Funds Withheld Assets
$
5,444,371

 
100.0
 %
 
$
—

 
—
%
____________
(1)
Carrying values represents the fair value for AFS fixed maturities and amortized cost for HTM securities.
(2)
U.S. Government and Government-Related/Supported and Non-U.S. Sovereign Government, Provincial, Supranational and Government-Related/Supported include government-related securities with an amortized cost of $1,679.1 million and $2,241.5 million and carrying value of $1,721.8 million and $2,275.6 million at June 30, 2014 and December 31, 2013, respectively, and U.S. Agencies with an amortized cost of $230.2 million and $267.0 million and carrying value of $256.8 million and $284.3 million at June 30, 2014 and December 31, 2013, respectively.
(3)
Included in Corporate - Financials are gross unrealized losses of $4.9 million and $12.7 million on Tier One and Upper Tier Two securities of financial institutions with a carrying value of $21.8 million and $114.7 million at June 30, 2014 and December 31, 2013, respectively, as well as gross unrealized losses of $6.9 million and $9.3 million on subordinated debt (including lower Tier Two securities) with a carrying value of $66.0 million and $86.6 million at June 30, 2014 and December 31, 2013, respectively.
(4)
Included within Corporate are certain floating rate medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage. The notes have a carrying value of $155.9 million and $154.6 million and an amortized cost of $143.6 million and $147.7 million at June 30, 2014 and December 31, 2013, respectively. These securities have been allocated ratings of the underlying pool of securities. These notes allow the investor to participate in cash flows of the underlying bonds including certain residual values, which could serve to either decrease or increase the ultimate values of these notes.
(5)
Covered Bonds within Fixed maturities - AFS with a carrying value of $763.6 million and $553.1 million at June 30, 2014 and December 31, 2013, respectively, and Covered Bonds within Fixed maturities - HTM with a carrying value of $8.6 million at December 31, 2013, are included within Other asset-backed securities to align our classification to market indices.
(6)
Included within Equity securities are investments in fixed income funds with a carrying value of $92.1 million and $87.4 million at June 30, 2014 and December 31, 2013, respectively.

74

We review our corporate debt investments on a regular basis to consider their concentration, credit quality and compliance with established guidelines. At June 30, 2014 and December 31, 2013, the average credit quality of our total fixed income portfolio (consisting of corporate debt and U.S. Agency debt and related mortgage-backed securities having and including fixed maturities, short-term investments, cash and cash equivalents and net receivable/(payable) for investment sold/(purchased)) was “Aa2(AA)” and "Aa3/AA-", respectively. Included in the table below are the credit ratings of the fixed income portfolio excluding operating cash at June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
December 31, 2013
Investments by Credit Rating (1)
(U.S. dollars in millions)
Carrying
Value (2)
 
Percent
of Total
 
Carrying
Value
 
Percent
of Total
AAA
$
12,285

 
44.3
%
 
$
12,957

 
40.6
%
AA
5,525

 
19.9
%
 
6,738

 
21.1
%
A
6,727

 
24.3
%
 
7,761

 
24.3
%
BBB
2,408

 
8.7
%
 
3,654

 
11.4
%
BB and below
755

 
2.7
%
 
792

 
2.5
%
Not rated
33

 
0.1
%
 
18

 
0.1
%
Total
$
27,733

 
100.0
%
 
$
31,920

 
100.0
%
____________
(1)
The credit rating for each asset reflected above was principally determined based on the weighted average rating of the individual securities from Standard & Poor's, Moody's Investors Service and Fitch Ratings (when available). U.S. Agency debt and related mortgage-backed securities, whether with implicit or explicit government support, reflect the credit quality rating of the U.S. government for the purpose of these calculations.
(2)
Excludes Life Funds Withheld Assets.
Gross and Net Unrealized Gains and Losses on Investments (Excluding Life Funds Withheld Assets)
We had gross unrealized losses totaling $169.2 million on 1,385 securities out of a total of 7,668 held at June 30, 2014 in our AFS portfolio. We consider these securities to be temporarily impaired. Individual security positions comprising this balance have been evaluated by management, in conjunction with our investment managers, to determine the severity of these impairments and whether they should be considered other-than-temporary.
Gross unrealized losses can be attributed to the following significant drivers:
•
gross unrealized losses of $43.5 million related to Government and Government-Related holdings. Securities in a gross unrealized loss position had a fair value of $1.9 billion at June 30, 2014.
•
gross unrealized losses of $28.7 million related to Core CDO holdings (defined by the Company as investments in non-subprime CDOs), which consisted primarily of collateralized loan obligations (“CLOs”). Securities in a gross unrealized loss position had a fair value of $561.8 million at June 30, 2014.
•
gross unrealized losses of $21.2 million related to Non-Agency RMBS securities (which consists of our holdings of sub-prime Non-Agency RMBS, second liens, asset backed securities collateralized debt obligations ("ABS CDOs") with sub-prime collateral, Alt-A and Prime RMBS). Securities in an unrealized loss position had a fair value of $248.7 million at June 30, 2014. The Company has incurred realized losses, consisting of charges for OTTI and realized losses from sales, of approximately $1.4 billion since the beginning of 2007 through June 30, 2014 on these asset classes.
•
gross unrealized losses of $43.2 million related to the Corporate holdings. Securities in a gross unrealized loss position had a fair value of $1.3 billion at June 30, 2014. Of the gross unrealized losses, $17.5 million relate to financial institutions.

75

The following table details the security type and length of time that AFS securities were in a continual gross unrealized loss position at June 30, 2014:
(U.S. dollars in thousands)
June 30, 2014
Security Type and Length of Time in a Continual Unrealized Loss Position (1)
Amount of
Unrealized
Loss
 
Fair Value
of Securities in
an Unrealized
Loss Position
Fixed Maturities and Short-Term Investments
 

 
 

Less than 6 months
$
(5,790
)
 
$
956,486

At least 6 months but less than 12 months
(8,334
)
 
540,760

At least 12 months but less than 2 years
(68,672
)
 
2,659,740

2 years and over
(83,825
)
 
997,799

Total
$
(166,621
)
 
$
5,154,785

Equities
 

 
 

Less than 6 months
$
(1,148
)
 
$
25,515

At least 6 months but less than 12 months
(1,476
)
 
20,643

Total
$
(2,624
)
 
46,158

____________
(1)
Excludes Life Funds Withheld Assets.

The following is the maturity profile of the available for sale fixed income securities that were in a continual gross unrealized loss position at June 30, 2014:
 
June 30, 2014
(U.S. dollars in thousands)
Amount of
Unrealized
Loss
 
Fair Value
of Securities in
an Unrealized
Loss Position
Maturity profile in years of AFS fixed income securities in a gross unrealized loss position (1)
 
Less than 1 year remaining
$
(11,987
)
 
$
308,626

At least 1 year but less than 5 years remaining (2)
(33,576
)
 
1,852,910

At least 5 years but less than 10 years remaining (2)
(21,242
)
 
786,494

At least 10 years but less than 20 years remaining (2)
(11,514
)
 
162,121

At least 20 years or more remaining (2)
(7,503
)
 
150,585

RMBS - Agency
(20,379
)
 
681,699

RMBS - Non-Agency
(21,180
)
 
242,907

CMBS
(7,424
)
 
267,890

CDO
(28,729
)
 
561,751

Other asset-backed securities
(3,087
)
 
139,802

Total
$
(166,621
)
 
$
5,154,785

____________
(1)
Excludes Life Funds Withheld Assets.
(2)
Tier One and Upper Tier Two securities, representing committed term debt and hybrid instruments senior to the common and preferred equities of the financial institutions, are allocated based on the call date unless such security is not called on such date, in which case it is allocated the final or longest expected maturity. Medium term notes supported primarily by pools of European investment grade credit with varying degrees of leverage are allocated based on contractual maturity.
Factors considered in determining that additional OTTI charges were not warranted include management's consideration of current and near term liquidity needs along with other available sources of liquidity, and in certain instances an evaluation of the factors and time necessary for recovery. For further information, see Item 1, Note 6, “Investments,” to the Unaudited Consolidated Financial Statements included herein.
As noted in Item 8, Note 2, “Significant Accounting Policies,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, the determination of the amount of OTTI varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. We consider a wide range of factors about the securities and use our best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in our evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. We update our evaluations regularly and reflect additional impairments in net income as determinations are made. Our determination of the amount of the impairment taken on investments is highly subjective and could adversely impact our results

76

of operations. There can be no assurance that we have accurately assessed the level of OTTI taken and reflected in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
Levels of write down or OTTI are also impacted by our assessment of the intent to sell securities that have declined in value prior to recovery. If, due to changes in circumstances, we determine to reposition or realign portions of the portfolio and we determine not to hold certain securities in an unrealized loss position to recovery, we will incur OTTI charges, which could be significant. In addition, in our assessment of whether securities in a gross unrealized loss position are temporarily impaired, we consider the significance of the impairments.
At June 30, 2014, we had structured securities with gross unrealized losses of $21.2 million on non-Agency RMBS, $28.7 million on Core CDOs and $7.4 million on CMBS holdings. Included in these securities are mortgage and asset-backed securities that had a fair value of $4.6 million, gross unrealized losses of $10.6 million and a cumulative fair value decline of greater than 50% of amortized cost. We have evaluated each of these securities in conjunction with our investment manager service providers and believe it is more likely than not that the issuer will be able to fund sufficient principal and interest payments to support the current amortized cost.
Refer to “Significant Items Affecting the Results of Operations” above for further discussion surrounding the impact of credit market movements on our investment portfolio.
European Sovereign Debt Crisis (Excluding Life Funds Withheld Assets)
As developed markets emerged from recession globally, several key nations within the European Union (the "EU") - particularly Greece, Italy, Ireland, Portugal and Spain (the “European Periphery Nations") - have carried particularly high debt and have been slower to return to positive economic growth due to austerity measures implemented to lower such countries' debt levels, and a general lack of competitiveness. The European Central Bank has taken various measures and has asserted its willingness to take any measures deemed necessary to protect these sovereigns' ability to continue to fund their debt. As a result, we believe market risks associated with the European Sovereign Debt crisis have been greatly reduced.
Our exposure to this European sovereign debt crisis is from direct investment in fixed maturity securities issued by national and local governments of the European Periphery Nations, as well as from fixed maturity securities issued by certain financial and non-financial corporate entities operating within the European Periphery Nations which currently have a fair value of $100.6 million at June 30, 2014. We continue to monitor our financial exposure to this crisis, and continually assess the impact of a potential default by any of the European Periphery Nations on their respective debt issuances, including the associated impact on non-sovereign entities in these five nations in the event of such a default.
We currently have no unfunded investment exposures or commitments to either sovereign or non-sovereign entities within the European Periphery Nations. We do invest in various alternative and private investment funds that from time to time may invest in securities or investments related to the European Periphery Nations. In general, such funds will invest in debt and/or equity securities of individual corporate issuers, securitized debt instruments and/or fixed maturity instruments issued by national governments of the European Periphery Nations. As market volatility in the European Periphery Nations has declined, we have observed that our alternative and private fund managers have increased their exposure to these countries. We estimate that, as of June 30, 2014, our aggregate exposure to European Periphery Nations via our fund investments did not exceed $150 million on a net basis. The exposure was diversified across issuers and instruments and across the five European Periphery Nations.
In addition to the direct investment portfolio considerations discussed above, as an international (re)insurance company, European credit exposures may exist for us within unpaid losses and loss expenses recoverable and reinsurance balances receivable. For further details on these balances, including the names of our most significant reinsurance counterparties, see Item 8, Note 9, “Reinsurance,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. Other sources of potential exposure to European credit issues may exist within certain lines of insurance or reinsurance business written (including, but not limited to lines such as surety, business interruption, and political risk), or within underlying investments held in securitized financial instruments or in structured transactions in which we have an interest. We consider these potential exposures as part of our ongoing enterprise risk management processes.

77

Fair Value Measurements of Assets and Liabilities
As described in Item 1, Note 4, “Fair Value Measurements,” to the Unaudited Consolidated Financial Statements included herein, we have provided required disclosures by level within the fair value hierarchy of the Company’s assets and liabilities that are carried at fair value. As defined in the hierarchy, those assets and liabilities categorized as Level 3 have valuations determined using unobservable inputs. Unobservable inputs may include the entity’s own assumptions about market participant assumptions, applied to a modeled valuation; however, this is not the case with respect to the Company’s Level 3 assets and liabilities. The vast majority of the assets and liabilities classified as Level 3 are made up of those securities for which the values were obtained from brokers where either significant inputs were utilized in determining the values that were difficult to corroborate with observable market data or sufficient information regarding the specific inputs utilized by the broker was not obtained to support a Level 2 classification.
Controls over Valuation of Financial Instruments
We perform regular reviews of the prices received from our third party valuation sources to assess whether the prices represent a reasonable estimate of the fair value. This process is completed by investment and accounting personnel who are independent of those responsible for obtaining the valuations. The approaches we take include, but are not limited to, annual reviews of the controls of the external parties responsible for sourcing valuations that are subjected to automated tolerance checks, quarterly reviews of the valuation sources and dates, comparison of executed sales prices to prior valuations, regular deep dives on a sample of securities across our major asset classes and monthly reconciliations between the valuations provided by our external parties and valuations provided by our third party investment managers at a portfolio level.
In addition, we assess the effectiveness of valuation controls performed by external parties responsible for sourcing appropriate valuations from third parties on our behalf. The approaches taken by these external parties to gain comfort include, but are not limited to, comparing valuations between external sources, completing recurring reviews of third party pricing services' methodologies and reviewing controls of the third party service providers to support the completeness and accuracy of the prices received. Where broker quotes are the primary source of the valuations, sufficient information regarding the specific inputs utilized by the brokers is generally not available to support a Level 2 classification. We obtain the majority of broker quoted values from third party investment managers who perform independent verifications of these valuations using pricing matrices based upon information gathered by market traders. In addition, for the majority of these securities, we compare the broker quotes to independent valuations obtained from third party pricing vendors, which may also consist of broker quotes, to assess if the prices received represent reasonable estimates of the fair value.
Valuation Methodology of Level 3 Assets and Liabilities
Refer to Item 1, Note 4, “Fair Value Measurements,” of the Unaudited Consolidated Financial Statements included herein, for a description of the valuation methodology utilized to value Level 3 assets and liabilities, how the valuation methodology is validated as well as further details associated with various assets classified as Level 3. At June 30, 2014, we did not have any liabilities that were carried at fair value based on Level 3 inputs other than derivative instruments in a liability position at June 30, 2014.

78

Fair Value of Level 3 Assets and Liabilities (Excluding Life Funds Withheld Assets)
At June 30, 2014, the fair value of Level 3 assets and liabilities as a percentage of our total assets and liabilities that are carried at fair value was as follows:
(U.S. dollars in thousands)
Total Assets
and Liabilities
Carried at
Fair Value at
June 30, 2014
 
Fair Value
of Level 3
Assets and
Liabilities
 
Level 3 Assets
and Liabilities
as a Percentage
of Total Assets
and Liabilities
Carried at Fair
Value, by Class
Assets
 

 
 

 
 

Fixed maturities, at fair value
 

 
 

 
 

U.S. Government and Government Agency-Related/Supported
$
2,084,294

 
$
—

 
—
%
Corporate
9,727,624

 
3,933

 
—
%
RMBS – Agency
3,303,046

 
6,896

 
0.2
%
RMBS – Non-Agency
415,503

 
11

 
—
%
CMBS
1,124,287

 
1,945

 
0.2
%
CDO
738,073

 
732,824

 
99.3
%
Other asset-backed securities (1)
1,310,272

 
11,704

 
0.9
%
U.S. States and political subdivisions of the States
1,939,590

 
—

 
—
%
Non-U.S. Sovereign Government, Supranational and Government-Related
4,355,861

 
—

 
—
%
Total Fixed maturities, at fair value
$
24,998,550

 
$
757,313

 
3.0
%
Equity securities, at fair value
988,710

 
—

 
—
%
Short-term investments, at fair value
347,674

 
—

 
—
%
Total investments available for sale
$
26,334,934

 
$
757,313

 
2.9
%
Cash equivalents (2)
2,256,640

 
—

 
—
%
Other investments (3)
928,743

 
124,475

 
13.4
%
Other assets (4)
59,330

 
12,453

 
21.0
%
Total assets carried at fair value
$
29,579,647

 
$
894,241

 
3.0
%
Liabilities
 

 
 

 
 

Financial instruments sold, but not yet purchased (5)
$
31,150

 
$
—

 
—
%
Other liabilities (6)
68,400

 
31,363

 
45.9
%
Total liabilities carried at fair value
$
99,550

 
$
31,363

 
31.5
%
____________
(1)
Covered Bonds with a fair value of $763.6 million are included within Other asset-backed securities.
(2)
Cash equivalents balances subject to fair value measurements include certificates of deposit and money market funds.
(3)
The Other investments balances exclude certain structured transactions including certain investments in project finance transactions and a payment obligation (for further information, see Item 8, Note 7, “Other Investments,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013) that has provided liquidity financing to a structured credit vehicle as a part of a third party medium term note facility. These Other investments are carried at amortized cost, which totaled $275.8 million at June 30, 2014.
(4)
Other assets include derivative instruments, reported on a gross basis.
(5)
Financial instruments sold, but not yet purchased, are included within “Payable for investments purchased” on the balance sheets.
(6)
Other liabilities include derivative instruments, reported on a gross basis.
At June 30, 2014, our Level 3 assets represented approximately 3.0% of assets that are measured at fair value and represented approximately 2% of total assets. Our Level 3 liabilities represented approximately 31.5% of liabilities that are measured at fair value but less than 1% of total liabilities at June 30, 2014.
Changes in the Fair Value of Level 3 Assets and Liabilities
See Item 1, Note 4, “Fair Value Measurements,” to the Unaudited Consolidated Financial Statements included herein, for an analysis of the change in fair value of Level 3 Assets and Liabilities.
Unpaid Losses and Loss Expenses
We establish reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and losses incurred but not reported. These reserves are calculated using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. Our reserving practices and the establishment of any particular reserve reflects our judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against us.

79

Gross unpaid losses and loss expenses totaled $20.3 billion and $20.5 billion at June 30, 2014 and December 31, 2013, respectively. The table below represents a reconciliation of our P&C unpaid losses and loss expenses for the six months ended June 30, 2014:
(U.S. dollars in thousands)
Gross unpaid
losses and
loss
expenses
 
Unpaid
losses and
loss
expenses
recoverable
 
Net
unpaid losses
and loss
expenses
Balance at December 31, 2013
$
20,481,065

 
$
(3,414,735
)
 
$
17,066,330

Losses and loss expenses incurred
1,905,658

 
(246,273
)
 
1,659,385

Losses and loss expenses (paid) / recovered
(2,147,530
)
 
332,189

 
(1,815,341
)
Foreign exchange and other
42,741

 
(5,036
)
 
37,705

Balance at June 30, 2014
$
20,281,934

 
$
(3,333,855
)
 
$
16,948,079

While we regularly review the adequacy of established reserves for unpaid losses and loss expenses, no assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. In the future, if such reserves develop adversely, such deficiency would have a negative impact on future results of operations. For further discussion, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - 1) Unpaid Loss and Loss Expenses and Unpaid Loss and Loss Expenses Recoverable,” and Item 8, Note 10, “Losses and Loss Expenses,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable
In the normal course of business, we seek to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk assumed in various areas of exposure with other insurers or reinsurers. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve our ultimate liability to the insureds. Accordingly, the losses and loss expense reserves on the balance sheets represent our total unpaid gross losses. Unpaid losses and loss expense recoverable relates to estimated reinsurance recoveries on the unpaid loss and loss expense reserves.
Net reinsurance recoverables were $3.4 billion at June 30, 2014 and December 31, 2013. At June 30, 2014 and December 31, 2013, net reinsurance balances receivable were $150.0 million and $118.9 million, respectively. The table below presents our net paid and unpaid losses and loss expenses recoverable and reinsurance balances receivable as follows:
(U.S. dollars in thousands)
June 30, 2014
 
December 31, 2013
Reinsurance balances receivable
$
182,314

 
$
163,066

Reinsurance recoverable on future policy benefits (excluding balances related to the Life Retro Arrangements)
20,415

 
20,493

Reinsurance recoverable on unpaid losses and loss expenses
3,380,648

 
3,456,088

Bad debt reserve on unpaid losses and loss expenses recoverable and reinsurance balances receivable
(79,109
)
 
(85,532
)
Net paid and unpaid losses and loss expenses recoverable and reinsurance balances receivable
$
3,504,268

 
$
3,554,115


80

LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to generate sufficient cash flows to meet the short and long-term cash requirements of our business operations. As a global insurance and reinsurance company, one of our principal responsibilities to clients is to ensure that we have ready access to funds with which to settle large unforeseen claims. We would generally expect that positive cash flow from operations (underwriting activities and investment income) will be sufficient to cover cash outflows under most future loss scenarios. However, there is a possibility that unforeseen demands could be placed on us due to extraordinary events and, as such, our liquidity needs may change. Such events include, among other things: several significant catastrophes occurring in a relatively short period of time resulting in material incurred losses; rating agency downgrades of our core insurance and reinsurance subsidiaries that would require posting of collateral in connection with our letter of credit and revolving credit facilities; return of unearned premiums and/or the settlement of derivative transactions and large scale uncollectible reinsurance recoverables on paid losses (as a result of coverage disputes, reinsurers' credit problems or decreases in the value of collateral supporting reinsurance recoverables). Any one or a combination of such events may cause a liquidity strain for us. In addition, a liquidity strain could also occur in an illiquid market, such as that which was experienced in 2008. Investments that may be used to meet liquidity needs in the event of a liquidity strain may not be liquid due to inactive markets, or may have to be sold at a significant loss as a result of depressed prices. Because each subsidiary focuses on a more limited number of specific product lines than is collectively available from the consolidated group of companies, the mix of business tends to be less diverse at the subsidiary level. As a result, the probability of a liquidity strain, as described above, may be greater for individual subsidiaries than when liquidity is assessed on a consolidated basis. If such a liquidity strain were to occur in a subsidiary, XL-Ireland may be required to contribute capital to the particular subsidiary and/or curtail dividends from the subsidiary to support holding company operations, which may be difficult given that XL-Ireland is a holding company and has limited liquidity.
A downgrade below “A-” of our principal insurance and reinsurance subsidiaries by either S&P or A.M. Best, which is three notches below the current S&P financial strength rating of “A+” (Stable) and two notches below the A.M. Best financial strength rating of “A” (Stable) of these subsidiaries, may trigger cancelation provisions in a significant amount of our assumed reinsurance agreements and may potentially require us to return unearned premiums to cedants. In addition, due to collateral posting requirements under our letter of credit and revolving credit facilities, such a downgrade may require the posting of cash collateral in support of certain “in use” portions of these facilities. Specifically, a downgrade below “A-” by A.M. Best would constitute an event of default under our two largest credit facilities and may trigger such collateral requirements. In certain limited instances, such downgrades may require that we return cash or assets to counterparties or to settle derivative and/or other transactions with the respective counterparties. See Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Holding Company Liquidity
As holding companies, XL-Ireland and XL-Cayman have no operations of their own and their assets consist primarily of investments in subsidiaries. XL-Ireland's principal uses of liquidity are ordinary share-related transactions, including dividend payments to holders of its ordinary shares as well as share buybacks, capital investments in its subsidiaries and certain corporate operating expenses. XL-Cayman's principal uses of liquidity are preference share related transactions, including dividend payments to its preference shareholders as well as preference share buybacks from time to time, interest and principal payments on debt, dividends to XL-Ireland and certain corporate operating expenses. All outstanding debt securities are issued by XL-Cayman.
XL-Ireland's and XL-Cayman's future cash flows largely depend on the availability of dividends or other permissible payments from subsidiaries to make principal and interest payments on debt, to pay operating expenses and ordinary and preferred shareholder dividends, to make capital investments in subsidiaries and to pay other obligations that may arise from time to time. The ability of our subsidiaries to pay dividends to us or return capital from shareholders' equity is limited by applicable laws and regulations of the various jurisdictions in which we operate, certain additional required regulatory approvals and financial covenants contained in our letters of credit and revolving credit facilities. The payment of dividends to the holding companies by our principal operating subsidiaries is regulated under the laws of various jurisdictions including Bermuda, the U.K., Ireland and Switzerland, certain insurance statutes of various states in the United States in which the principal operating subsidiaries are licensed to transact business, the other jurisdictions where we have regulated subsidiaries and regulations of the Society of Lloyd's. See Item 8, Note 23, “Statutory Financial Data,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion and details regarding the dividend capacity of our major operating subsidiaries. See also Item 1A, “Risk Factors - Our holding company structure and certain regulatory and other constraints affect our ability to pay dividends, make payments on our debt securities and make other payments,” included in our Annual Report on Form 10-K for the year ended December 31, 2013. No assurance can be given that our subsidiaries will pay dividends in the future to XL-Ireland and XL-Cayman.

81

Under Irish law, share premium was required to be converted to “distributable reserves” for XL-Ireland to pay cash dividends and redeem and buyback shares following the redomestication transaction in which all of the ordinary shares of XL-Cayman were exchanged for all of the ordinary shares of XL-Ireland. On July 23, 2010, the Irish High Court approved XL-Ireland's conversion of share premium to $5.0 billion of distributable reserves, subject to the completion of certain formalities under Irish Company law. These formalities were completed in early August 2010. At June 30, 2014, XL-Ireland had $3.3 billion in distributable reserves.
At June 30, 2014, XL-Ireland and XL-Cayman held cash and investments, net of liabilities associated with cash sweeping arrangements, of $17.6 million and $1.4 billion, respectively, compared to $12.7 million and $1.6 billion, respectively, at December 31, 2013.
All of our outstanding debt at June 30, 2014 was issued by XL-Cayman. The ability of XL-Cayman, like that of XL-Ireland, to obtain funds from its subsidiaries to satisfy any of its debts, including obligations under guarantees, is subject to certain contractual restrictions, applicable laws and statutory requirements of the various countries in which we operate, including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom. For details of the required statutory capital and surplus for our principal operating subsidiaries, see Item 8, Note 23, “Statutory Financial Data,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
See also the Consolidated Statements of Cash Flows in Item 1, Financial Statements included herein.
Sources of Liquidity
At June 30, 2014, on a consolidated basis we had cash and cash equivalents of approximately $3.1 billion as compared to approximately $1.8 billion at December 31, 2013. We have three main sources of cash flows - those provided by operations, investing activities and financing activities:
(U.S. dollars in thousands)
June 30, 2014
 
June 30, 2013
Operating activities
$
353,629

 
$
359,653

Investing activities
$
1,569,409

 
$
(42,438
)
Financing activities
$
(666,530
)
 
$
(492,150
)
Effects of exchange rate changes on foreign currency cash
$
13,799

 
$
(23,361
)
Operating Cash Flows
Historically, cash receipts from operations, consisting of premiums and investment income, generally have provided sufficient funds to pay losses as well as operating expenses of our subsidiaries and to fund dividends payable by our subsidiaries to XL-Ireland. Cash receipts from operations are generally derived from the receipt of investment income on our investment portfolio as well as the net receipt of premiums less claims and expenses related to our underwriting activities in our P&C and life run-off operations. Our operating subsidiaries provide liquidity in that premiums are generally received months or even years before losses are paid under the policies related to such premiums. Premiums and acquisition expenses are settled based on terms of trade as stipulated by an underwriting contract, and generally are received within the first year of inception of a policy when the premium is written, but can be up to three years on certain reinsurance business assumed. Operating expenses are generally paid within a year of being incurred. Claims, especially for casualty business, may take a much longer time before they are reported and ultimately settled, requiring the establishment of reserves for unpaid losses and loss expenses. Therefore, the amount of claims paid in any one year is not necessarily related to the amount of net losses incurred, as reported in the consolidated statement of income.
During the six months ended June 30, 2014, net cash flows provided by operating activities were $353.6 million compared to net cash flows provided by operating activities of $359.7 million for the same period in 2013. Although net income was lower during the six months ended June 30, 2014, that decrease was more than offset by increases in other components of non-cash working capital, primarily, the loss on sale of subsidiary, resulting in similar levels of net cash flows from operating activities compared to the same period of 2013.
Investing Cash Flows
Generally, positive cash flow from operations and financing activities is invested in our investment portfolio, including investments in our affiliates, or the acquisition of subsidiaries.
Net cash provided by investing activities was $1,569.4 million in the six months ended June 30, 2014 compared to net cash used of $42.4 million for the same period in 2013. These cash flows were associated with the normal purchase and sale of portfolio investments. As further outlined in Item 1, Note 3, “Sale of Life Reinsurance Subsidiary,” to the Unaudited

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Consolidated Financial Statements included herein, the company received sale proceeds of $570 million in cash during the six months ended June 30, 2014.
Certain of our invested assets are held in trust and pledged in support of insurance and reinsurance liabilities as well as credit facilities. Such pledges are largely required by our operating subsidiaries that are “non-admitted” under U.S. state insurance regulations, in order for the U.S. cedant to receive statutory credit for reinsurance. Also, certain deposit liabilities and annuity contracts require the use of pledged assets. As further outlined in Item 1, Note 6, “Investments - Pledged Assets,” to the Unaudited Consolidated Financial Statements included herein, certain assets of the investment portfolio are pledged as collateral under our letter of credit facilities. At June 30, 2014 and December 31, 2013, the Company had $16.1 billion and $15.5 billion in pledged assets, respectively.
Financing Cash Flows
Cash flows related to financing activities include ordinary share-related transactions, the payment of dividends, the issue or repayment of preference ordinary shares and deposit liability transactions. During the six months ended June 30, 2014, net cash flows used in financing activities was $666.5 million compared to net cash used of $492.2 million for the same period in 2013. During the six months ended June 30, 2014 and 2013, financing cash flows were predominantly impacted by share buybacks and the repayment of deposit liabilities. For information regarding share buyback activity, see "Other Key Focuses of Management - Buybacks of Ordinary Shares" included herein.
In addition, the Company maintains credit facilities that provide liquidity. Details of these facilities are described below in “Capital Resources.”
Capital Resources
At June 30, 2014 and December 31, 2013, we had total shareholders' equity of $11.4 billion and $11.3 billion, respectively. In addition to ordinary share capital, we depend on external sources of financing to support our underwriting activities in the form of:
a.
debt;
b.
preference shares;
c.
letter of credit facilities and other sources of collateral; and
d.
revolving credit facilities.
In particular, we require, among other things:
▪
sufficient capital to maintain our financial strength and credit ratings, as issued by several ratings agencies, at levels considered necessary by management to enable our key operating subsidiaries to compete;
▪
sufficient capital to enable our regulated subsidiaries to meet the regulatory capital levels required in the United States, the U.K., Bermuda, Ireland, Switzerland and other key markets;
▪
letters of credit and other forms of collateral that are required to be posted or deposited, as the case may be, by our operating subsidiaries that are “non-admitted” under U.S. state insurance regulations in order for the U.S. cedant to receive statutory credit for reinsurance. We also use letters of credit to support our operations at Lloyd's; and
▪
revolving credit facilities to meet short-term liquidity needs.
The following risks are associated with our requirement to renew or obtain new credit facilities:
▪
the credit available from banks may be reduced due to market conditions resulting in our need to pledge our investment portfolio to customers, which could result in a lower investment yield;
▪
we may be downgraded by one or more rating agencies, which could materially and negatively impact our business, financial condition, results of operations and/or liquidity; and
▪
the volume of business that our subsidiaries that are not admitted in the United States are able to transact could be reduced if we are unable to obtain letter of credit facilities at an appropriate amount.

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Consolidation within the banking industry may result in the aggregate amount of credit provided to us being reduced. We attempt to mitigate this risk by identifying and/or selecting additional banks that can participate in the credit facilities upon renewal. See Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
The following table summarizes the components of our current capital resources as follows:
(U.S. dollars in thousands)
June 30, 2014
 
December 31, 2013
Non-controlling interests - Series D preference ordinary shares
$
345,000

 
$
345,000

Non-controlling interests - Series E preference ordinary shares
999,500

 
999,500

Non-controlling interests - Other
29,788

 
7,165

Ordinary share capital
10,034,289

 
9,997,633

Total ordinary shares and non-controlling interests
$
11,408,577

 
$
11,349,298

Notes payable and debt
2,261,638

 
2,260,436

Total
$
13,670,215

 
$
13,609,734

Ordinary Share Capital
The following table reconciles the opening and closing ordinary share capital positions as follows:
(U.S. dollars in thousands)
June 30, 2014
 
December 31, 2013
Ordinary shareholders’ equity – beginning of period
$
9,997,633

 
$
10,510,077

Net income (loss) attributable to ordinary shareholders
(23,544
)
 
1,059,916

Share buybacks
(351,653
)
 
(675,616
)
Share issues
3,082

 
12,665

Ordinary share dividends
(88,269
)
 
(162,043
)
Change in accumulated other comprehensive income
470,377

 
(783,363
)
Share-based compensation and other
26,663

 
35,997

Ordinary shareholders’ equity – end of period
$
10,034,289

 
$
9,997,633

Debt
The following table presents our debt under outstanding securities and lenders' commitments at June 30, 2014:
 
 
 
 
 
 
 
Payments Due by Period
(U.S. dollars in thousands)
Commitment/
Debt
 
In Use/
Outstanding
 
Year of
Expiry
 
Less than
1 Year
 
1 to 3
Years
 
3 to 5
Years
 
After 5
Years
5-year revolver
$
1,000,000

 
$
—

 
2018
 
$
—

 
$
—

 
$
—

 
$
—

5.25% Senior Notes
600,000

 
599,808

 
2014
 
600,000

 
—

 
—

 
—

2.30% Senior Notes
300,000

 
297,010

 
2018
 
—

 
—

 
300,000

 
—

5.75% Senior Notes
400,000

 
396,876

 
2021
 
—

 
—

 
—

 
400,000

6.375% Senior Notes
350,000

 
348,865

 
2024
 
—

 
—

 
—

 
350,000

6.25% Senior Notes
325,000

 
322,983

 
2027
 
—

 
—

 
—

 
325,000

5.25% Senior Notes
300,000

 
296,096

 
2043
 
—

 
—

 
—

 
300,000

 
$
3,275,000

 
$
2,261,638

 
 
 
$
600,000

 
$
—

 
$
300,000

 
$
1,375,000

Adjustment to carrying value - impact of fair value hedges
 
 
$
814

 
 
 
 

 
 

 
 

 
 

Total
$
3,275,000

 
$
2,262,452

 
 
 
 

 
 

 
 

 
 

“In Use/Outstanding” data represent June 30, 2014 accreted values. “Payments Due by Period” data represents ultimate redemption values.
In addition, see Item 8, Note 13, “Notes Payable and Debt and Financing Arrangements,” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 for further information.
At June 30, 2014, banks and investors provided us with $3.3 billion of debt capacity, of which $2.3 billion was utilized. This debt capacity consists of:

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▪
a revolving credit facility of $1.0 billion; and
▪
senior unsecured notes of approximately $2.3 billion issued by XL-Cayman. These notes require XL-Cayman to pay a fixed rate of interest during their terms. At June 30, 2014, there were six outstanding issues of senior unsecured notes:
▪
$600 million senior notes due September 2014, with a fixed coupon of 5.25%. The security is publicly traded. The notes were issued in two tranches of $300 million aggregate principal amount each - one tranche at 99.432% and the other at 98.419% with aggregate net proceeds of $590.9 million. Related expenses of the offering amounted to $2.7 million.
▪
$300 million senior notes due December 2018, with a fixed coupon of 2.30%. The security is publicly traded. The notes were issued at 99.69% and net proceeds were $296.6 million. Related expenses of the offering amounted to $2.5 million.
▪
$400 million senior notes due October 2021, with a fixed coupon of 5.75%. The security is publicly traded. The notes were issued at 100.0% and net proceeds were $395.7 million. Related expenses of the offering amounted to $4.3 million.
▪
$350 million senior notes due November 2024, with a fixed coupon of 6.375%. The security is publicly traded. The notes were issued at 100.0% and net proceeds were $347.8 million. Related expenses of the offering amounted to $2.2 million.
▪
$325 million of senior notes due May 2027, with a fixed coupon of 6.25%. The security is publicly traded. The notes were issued at 99.805% and net proceeds were $321.9 million. Related expenses of the offering amounted to $2.5 million.
▪
$300 million senior notes due December 2043, with a fixed coupon of 5.25%. The security is publicly traded. The notes were issued at 99.77% and net proceeds were $296.0 million. Related expenses of the offering amounted to $3.3 million.
At June 30, 2014, $575 million of letters of credit were issued under the 2013 Citi Agreements (as defined below) and therefore this facility is not available for revolving credit loans.
Preferred Shares and Non-controlling Interest in Equity of Consolidated Subsidiaries
The Series D preference ordinary shares and the Series E preference ordinary shares were issued by XL-Cayman. Accordingly, these instruments represent non-controlling interests in our consolidated financial statements and are presented as non-controlling interest in equity of consolidated subsidiaries. At both June 30, 2014 and December 31, 2013, the face values of the outstanding Series D and Series E preference ordinary shares were $345.0 million and $999.5 million, respectively.
Letter of Credit Facilities and other sources of collateral
At June 30, 2014, we had seven letter of credit (“LOC”) facilities in place with total availability of $3.6 billion, of which $1.9 billion was utilized.
 
 
 
 
 
 
 
Amount of Commitment Expiration by Period
(U.S. dollars in thousands)
Commitment/
Debt
 
In Use/
Outstanding
 
Year of
Expiry
 
Less than
1 Year
 
1 to 3
Years
 
3 to 5
Years
 
After 5
Years
LOC Facility (1) (2)
$
1,000,000

 
$
38,346

 
2018
 
$
—

 
$
—

 
$
1,000,000

 
$
—

LOC Facility (2)
1,000,000

 
813,890

 
2018
 
—

 
—

 
1,000,000

 
—

LOC Facility
750,000

 
305,756

 
Continuous
 
—

 
—

 
—

 
750,000

LOC Facility
250,000

 
137,826

 
Continuous
 
—

 
—

 
—

 
250,000

LOC Facility (3)
275,000

 
275,000

 
2015
 
—

 
275,000

 
—

 
—

LOC Facility (3)
200,000

 
200,000

 
2015
 
—

 
200,000

 
—

 
—

LOC Facility (3)
100,000

 
100,000

 
2016
 
—

 
100,000

 
—

 
—

Total LOC facilities
$
3,575,000

 
$
1,870,818

 
 
 
$
—

 
$
575,000

 
$
2,000,000

 
$
1,000,000

____________
(1)
This letter of credit facility includes $1.0 billion that is also included in the “5-year revolver” listed under Debt. See the discussion regarding the Syndicated Credit Agreements (defined below).
(2)
We have the option to increase the size of the facilities under the Syndicated Credit Agreements by an additional $500 million across both such facilities.
(3)
We have the option to increase the maximum amount of letters of credit and revolving credit loans available under the 2013 Citi Agreements, with the lender's and issuing lender's consent.

85

In November 2013 we (i) entered into two new credit agreements (together, the "Syndicated Credit Agreements"), which provided for an aggregate amount of outstanding letters of credit and revolving credit loans of up to $2 billion, subject to certain options to increase the size of the facilities, and (ii) terminated the secured credit agreements dated March 25, 2011 and December 9, 2011, and the unsecured credit agreement dated December 9, 2011, which had provided for an aggregate amount of outstanding letters of credit and revolving credit loans up to $3 billion.
The Syndicated Credit Agreements consist of (i) a secured credit agreement, which provides for issuance of letters of credit up to $1 billion and (ii) an unsecured credit agreement, which provides for issuance of letters of credit and revolving credit loans up to $1 billion. We have the option to increase the maximum amount of letters of credit available by an additional $500 million across the facilities under the Syndicated Credit Agreements.
The commitments under the Syndicated Credit Agreements expire on, and such credit facilities are available until, the earlier of (i) November 22, 2018 and (ii) the date of termination in whole of the commitments upon an optional termination or reduction of the commitments by the account parties or upon the occurrence of certain events of default.
The availability of letters of credit under the secured portion of the Syndicated Credit Agreements is subject to a borrowing base requirement, determined on the basis of specified percentages of the face value of eligible categories of assets varying by type of collateral. In the event that such credit support is insufficient, we could be required to provide alternative security to cedants. This could take the form of insurance trusts supported by our investment portfolio or funds withheld (amounts retained by ceding companies to collateralize loss or premium reserves) using our cash resources or combinations thereof. The face amount of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by us and the loss experience of such business.
On May 7, 2013, XL-Cayman entered into a new credit agreement with Citicorp USA, Inc., as administrative agent and issuing lender, and the lenders party thereto, and a continuing agreement for standby letters of credit with Citibank, N.A. On May 13, 2013 and May 15, 2013, XL-Cayman entered into a credit agreement first amendment and credit agreement second amendment, respectively, to such credit agreement (as amended, the “May 2013 Credit Agreement”).
On August 6, 2013, XL-Cayman entered into a new credit agreement with Citicorp USA, Inc., as administrative agent and issuing lender, and the lenders party thereto and a continuing agreement for standby letters of credit with Citibank, N.A. On September 12, 2013, XL-Cayman entered into a credit agreement first amendment to such credit agreement (as amended, the “August 2013 Credit Agreement”).
Additionally, on November 4, 2013, XL-Cayman entered into a new credit agreement with Citicorp USA, Inc., as administrative agent and issuing lender, and the lenders party thereto and a continuing agreement for standby letters of credit with Citibank, N.A. (the "November 2013 Credit Agreement" and, together with the May 2013 Credit Agreement and the August 2013 Credit Agreement, the "2013 Citi Agreements").
Collectively, the 2013 Citi Agreements and the continuing agreements for standby letters of credit provide for issuance of letters of credit and revolving credit loans in an aggregate amount of up to $575 million. XL-Cayman has the option to increase the maximum amount of letters of credit and revolving credit loans available under the 2013 Citi Agreements with the lender's and issuing lender's consent.
The commitments under the 2013 Citi Agreements expire on, and such credit facilities are available until, the earlier of (i) June 20, 2015 (with respect to the May 2013 Credit Agreement), September 20, 2015 (with respect to the August 2013 Credit Agreement) and December 20, 2016 (with respect to the November 2013 Credit Agreement) and (ii) the date of termination in whole of the commitments upon an optional termination or reduction of the commitments by the account parties or upon the occurrence of certain events of default.
In addition to letters of credit, we have established insurance trusts in the United States that provide cedants with statutory credit for reinsurance under state insurance regulation in the United States.
We review current and projected collateral requirements on a regular basis, as well as new sources of collateral. Our objective is to maintain an excess amount of collateral sources over expected uses. We also review our liquidity needs on a regular basis.
Other
For information regarding cross-default and certain other provisions in the Company’s debt and convertible securities documents, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cross-Default and Other Provisions in Debt Instruments,” in our Annual Report on Form 10-K for the year ended December 31, 2013.
See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” below.

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ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The following discussion should be read in conjunction with “Quantitative and Qualitative Disclosures about Market Risk,” presented under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
As described in Item 1, Note 3, "Sale of Life Reinsurance Subsidiary" and Note 6, “Investments,” to the Unaudited Consolidated Financial Statements included herein, in connection with the Life Retro Arrangements, certain fixed maturities were reclassified from held to maturity to available for sale. All of the reclassified securities are included within the 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 GreyCastle. Because we no longer share in the risks and rewards of the underlying performance of the supporting invested assets, disclosures within the quantitative and qualitative disclosures about market risk exclude the Life Funds Withheld Assets.
Market risk represents the potential for loss due to adverse changes in the fair value of financial and other instruments. We are principally exposed to the following market risks: interest rate risk, foreign currency exchange rate risk, credit risk, equity price risk and other related market risks.
The majority of our market risk arises from the investment portfolio, which consists of fixed income securities, alternative investments, public equities, private investments, derivatives, other investments and cash, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, credit spreads, equity prices, foreign currency exchange rates and other related market risks. Our fixed income and equity securities are generally classified as available for sale, and, as such, changes in interest rates, credit spreads on corporate and structured securities, equity prices, foreign currency exchange rates or other related market instruments will have an immediate effect on comprehensive income and shareholders' equity but will not ordinarily have an immediate effect on net income. Nevertheless, changes in interest rates, credit spreads and defaults, equity prices and other related market instruments affect consolidated net income when, and if, a security is sold or impaired.
We may enter into derivatives to reduce risk or enhance portfolio efficiency. For example, we may use derivatives to hedge foreign exchange and interest rate risk related to our consolidated net exposures or to efficiently gain exposure to investments that are eligible under our Investment Policy. From time to time, we may also use instruments such as futures, options, interest rate swaps, credit default swaps and foreign currency forward contracts to manage the risk of interest rate changes, credit deterioration, foreign currency exposures, and other market related exposures as well as to obtain exposure to a particular financial market. Historically, we entered into credit derivatives outside of the investment portfolio in conjunction with the legacy financial guarantee and financial products operations. We seek to manage the risks associated with the use of derivatives through our comprehensive framework of investment decision authorities (“Authorities Framework”). Derivative instruments are carried at fair value with the resulting changes in fair value recognized in income in the period in which they occur. For further information, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein.
This risk management discussion and the estimated amounts generated from the sensitivity and VaR analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, actual developments in the global financial markets and changes in the composition of our investment portfolio. The results of analysis used by us to assess and mitigate risk should not be considered projections of future events of losses. See Item 2, “Cautionary Note Regarding Forward-Looking Statements.”
Interest Rate Risk (Excluding Life Funds Withheld Assets)
Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. Our fixed income portfolio is exposed to interest rate risk. Our liabilities are accrued at a static rate from an accounting standpoint. However, management considers the liabilities to have an economic exposure to interest rate risk and manages the net economic exposure to interest rate risk considering both assets and liabilities. Interest rate risk is managed within the context of our Strategic Asset Allocation ("SAA") process by specifying SAA benchmarks relative to the estimated duration of our liabilities and managing the fixed income portfolio relative to the benchmarks such that the overall economic effect of interest rate risk is within management's risk tolerance. Nevertheless, we remain exposed to interest rate risk with respect to our overall net asset position and more generally from an accounting standpoint since the assets are carried at fair value, while liabilities are accrued at a static rate. From time to time we may utilize derivative instruments to manage or optimize our duration and curve exposures.

87

In addition, while our debt is not carried at fair value and not adjusted for market changes, changes in market interest rates could have an impact on debt values at the time of any refinancing.
Foreign Currency Exchange Rate Risk (Excluding Life Funds Withheld Assets)
Many of our non-U.S. subsidiaries maintain both assets and liabilities in local currencies; therefore, foreign exchange risk is generally limited to net assets denominated in foreign currencies.
Foreign currency exchange rate gains and losses in our consolidated Statements of Income arise for accounting purposes when net assets or liabilities are denominated in foreign currencies that differ from the functional currency of those subsidiaries. While unrealized foreign exchange gains and losses on underwriting balances are reported in earnings, the offsetting unrealized gains and losses on invested assets are recorded as a separate component of shareholders' equity, to the extent that the asset currency does not match that entity's functional currency. This results in an accounting mismatch that will result in foreign exchange gains or losses in the consolidated statements of income depending on the movement in certain currencies. We have formed several branches with Euro and U.K. sterling functional currencies and continue to focus on attempting to limit exposure to foreign exchange risk.
Foreign currency exchange rate risk in general is reviewed as part of our risk management framework. Within the asset liability framework for the investment portfolio, we pursue a general policy of holding the assets and liabilities in the same currency and, as such, we are not generally exposed to the risks associated with foreign exchange movements within the investment portfolio, as currency impacts on the assets are generally matched by corresponding impacts on the related liabilities. However, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations and are not matched by related liabilities. Foreign exchange contracts within the investment portfolio may be utilized to manage individual portfolio foreign exchange exposures, subject to investment management service providers' guidelines established by management. Where these contracts are not designated as specific hedges for financial reporting purposes, we record realized and unrealized gains and losses in income in the period in which they occur. These contracts generally have maturities of three months or less. We may also attempt to manage the foreign exchange volatility arising on certain transactions denominated in foreign currencies. These include, but are not limited to, premiums receivable, reinsurance contracts, claims payable and investments in subsidiaries.
The principal currencies creating our foreign exchange risk are the U.K. sterling, the Euro, the Swiss franc and the Canadian dollar. The following table provides more information on our net exposures to these principal foreign currencies at June 30, 2014 and December 31, 2013:
(Foreign currency in millions)
June 30, 2014
 
December 31, 2013
Euro
331.7

 
88.7

U.K. Sterling
300.0

 
47.3

Swiss Franc
112.1

 
107.9

Canadian Dollar
161.9

 
133.8

Credit Risk (Excluding Life Funds Withheld Assets)
Credit risk relates to the uncertainty of an obligor's continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We are exposed to direct credit risk within our investment portfolio, through general counterparties, including customers and reinsurers, and through certain underwriting activities that include, but are not limited to, surety, workers' compensation, environmental and political risk and trade credit.
We have an established credit risk governance process delegated to the Credit Subcommittee of the Enterprise Risk Management Committee. The governance process is designed to ensure that transactions and activities, individually and in the aggregate, are carried out within established risk tolerances. This process also recognizes the potential for clash event risk(which covers a number of substantially similar claims against multiple policyholders) that could arise from credit events owing to the identified credit risk embedded in certain underwriting businesses, as well as our investment activities and reinsurance relationships. In particular, certain of our underwriting activities expose us to indirect credit risk in that profitability of certain strategies can correlate with credit events at the issuer, industry or country level. We manage these risks through established underwriting policies that operate in accordance with established limit and escalation frameworks.
To manage our exposure to credit risk, we have established a credit risk framework that establishes tolerances for credit risk at various levels of granularity (counterparty, industry, country and underwriting business) and tolerances for credit risk arising from certain clash events. Credit risk capacity is allocated across our businesses and functional areas and regular reporting and aggregation activities are carried out to ensure compliance with our credit risk framework and related tolerances.

88

Credit risk arising from credit sensitive underwriting activities is also managed via our underwriting limit framework. We manage credit risk within the investment portfolio through our Authorities Framework and established investment credit policies, which address the quality of obligors and counterparties, industry limits, and diversification requirements. Our exposure to market credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads.
Credit Risk – Investment Portfolio (Excluding Life Funds Withheld Assets)
Credit risk in the investment portfolio is the exposure to adverse changes in the creditworthiness of individual investment holdings, issuers, groups of issuers, industries and countries. A widening of credit spreads will increase the net unrealized loss position, will increase losses associated with credit-based derivatives where we assume credit exposure, and, if issuer credit spreads increase significantly for an extended period of time or it is a period of increasing defaults, will also likely result in higher OTTI charges. All else held equal, credit spread tightening will reduce net investment income associated with new purchases of fixed maturities. In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes that could have a material adverse effect on our consolidated results of operations or financial condition. The credit spread duration in our fixed income portfolio was 3.4 years at June 30, 2014.
We manage credit risk in the investment portfolio, including fixed income, alternative and short-term investments, through the credit research performed primarily by the investment management service providers. The management of credit risk in the investment portfolio is integrated in our credit risk management governance framework and the management of credit exposures and concentrations within the investment portfolio is carried out in accordance with our risk policies, philosophies, appetites, limits and risk concentrations related to the investment portfolio. In the investment portfolio, we review on a regular basis our asset concentration, credit quality and adherence to our credit limit guidelines. Any issuer over its credit limits or experiencing financial difficulties, material credit quality deterioration or potentially subject to forthcoming credit quality deterioration is placed on a watch list for closer monitoring. Where appropriate, exposures are reduced or prevented from increasing.
The table below shows our aggregate fixed income portfolio by credit rating in percentage terms of our aggregate fixed income portfolio (consisting of corporate debt and U.S. Agency debt and related mortgage-backed securities having and including fixed maturities, short-term investments, cash and cash equivalents and net receivable/(payable) for investment sold/(purchased)) at June 30, 2014:
 
Percentage of
Aggregated Fixed
Income Portfolio (1)(2)
AAA
44.3
%
AA
19.9
%
A
24.3
%
BBB
8.7
%
BB or Below
2.7
%
NR
0.1
%
Total
100.0
%
____________
(1)
The credit ratings above were principally determined based on the weighted average rating of the individual securities from Standard & Poor's, Moody's Investors Service and Fitch Ratings (where available). The credit ratings for U.S. Agency debt and related mortgage-backed securities, whether with implicit or explicit government support, reflects the credit quality rating of the U.S. government for the purpose of these calculations.
(2)
Excludes Life Funds Withheld Assets.
At June 30, 2014, the average credit quality of our aggregate fixed income investment portfolio was “Aa2(AA)". Our $10.8 billion portfolio of government and government related, agency, sovereign and cash holdings was rated "AA+", our $9.9 billion portfolio of corporates was rated “A", and our $6.9 billion structured securities portfolio was rated "AA+".
We are closely monitoring our corporate financial bond holdings given the events of the past six years. The table below summarizes our significant exposures (defined as bonds issued by financial institutions with an amortized cost in excess of $50.0 million) to corporate bonds of financial issuers including Covered Bonds held within our investment portfolio at June 30, 2014, representing both amortized cost and net unrealized gains (losses):

89

 
June 30, 2014
Issuer (by Global Ultimate Parent) (1)(2)
(U.S. dollars in millions)
Weighted
Average
Credit Quality (3)
 
Amortized Cost
 
Unrealized Gain/
(Loss)
WELLS FARGO & COMPANY
A+
 
$
185.8

 
$
4.6

JPMORGAN CHASE & CO.
A
 
178.6

 
1.7

CITIGROUP INC.
A-
 
163.7

 
6.0

RABOBANK NEDERLAND NV
AA-
 
156.5

 
7.9

BANK OF AMERICA CORPORATION
BBB+
 
145.8

 
4.3

THE GOLDMAN SACHS GROUP, INC.
A-
 
116.7

 
6.5

THE BANK OF NOVA SCOTIA
AA
 
109.5

 
1.3

NATIONAL AUSTRALIA BANK LIMITED
AA
 
107.3

 
2.8

UBS AG
AA
 
104.3

 
3.0

WESTPAC BANKING CORPORATION
AA
 
94.0

 
3.2

THE PNC FINANCIAL SERVICES GROUP, INC.
A
 
85.8

 
2.1

LLOYDS BANKING GROUP PLC
AA+
 
84.2

 
5.0

COMMONWEALTH BANK OF AUSTRALIA
AA+
 
82.9

 
2.7

BERKSHIRE HATHAWAY INC.
AA-
 
81.9

 
2.6

MORGAN STANLEY
A-
 
77.9

 
3.4

U.S. BANCORP
A+
 
76.1

 
0.7

BANK OF MONTREAL
AA
 
75.0

 
1.0

ING GROEP N.V.
AA-
 
72.4

 
3.3

HSBC HOLDINGS PLC
A+
 
71.9

 
0.8

AMERICAN EXPRESS COMPANY
A
 
71.5

 
1.9

BNP PARIBAS
A+
 
67.9

 
2.1

BB&T CORPORATION
A
 
66.0

 
0.6

ROYAL BANK OF CANADA
AA
 
64.7

 
1.0

GOVERNMENT OF NETHERLANDS (ABN AMRO)
AAA
 
62.0

 
5.6

____________
(1)
Includes Covered Bonds.
(2)
Excludes Life Funds Withheld Assets.
(3)
The credit rating for each asset reflected above was principally determined based on the weighted average rating of the individual securities from Standard & Poor's, Moody's Investors Service and Fitch Ratings (where available). U.S. Agency debt and related mortgage-backed securities, whether with implicit or explicit government support, reflect the credit quality rating of the U.S. government for the purpose of these calculations
Within our corporate financial bond holdings, we are further monitoring exposures to hybrid securities, representing Tier One and Upper Tier Two securities of various financial institutions. The following table summarizes our top ten exposures to hybrid securities:
 
June 30, 2014
Issuer (by Global Ultimate Parent) (1)
(U.S. dollars in millions)
Tier One
 Amortized Cost
 
Upper Tier Two
Amortized Cost
 
Total
Amortized Cost
 
Net Unrealized
(Loss)
JPMORGAN CHASE & CO.
$
19.6

 
$
—

 
$
19.6

 
$
(3.7
)
AMERIPRISE FINANCIAL, INC.
5.3

 
—

 
5.3

 
(1.0
)
WELLS FARGO & COMPANY
3.2

 
—

 
3.2

 
—

AMERICAN EXPRESS COMPANY
1.0

 
—

 
1.0

 
0.1

AVIVA PLC
0.9

 
—

 
0.9

 
—

STANDARD CHARTERED PLC
—

 
0.8

 
0.8

 
0.1

USB REALTY CORPORATION
0.5

 
—

 
0.5

 
0.1

STATE STREET CORPORATION
0.4

 
—

 
0.4

 
(0.1
)
METLIFE, INC.
0.3

 
—

 
0.3

 
0.1

COMMONWEALTH BANK OF AUSTRALIA
0.2

 
—

 
0.2

 
—

Total
$
31.4

 
$
0.8

 
$
32.2

 
$
(4.4
)
____________
(1)
Excludes Life Funds Withheld Assets.

90

At June 30, 2014, the top 10 corporate financial holdings, which exclude government guaranteed and government sponsored enterprises, represented approximately 5.0% of the aggregate fixed income portfolio and approximately 13.7% of all corporate holdings. The top 10 corporate bond holdings listed below represent the direct exposure to the corporations listed below, including their subsidiaries, and exclude any securitized, credit enhanced and collateralized asset or mortgage-backed securities, cash and cash equivalents, pooled notes and any over-the-counter (“OTC”) derivative counterparty exposures, if applicable, but does include Covered Bonds:
Top 10 Corporate Financial Holdings (1)(2)
 
Percentage of Aggregate
Fixed Income Portfolio
WELLS FARGO & COMPANY
 
0.7%
JPMORGAN CHASE & CO.
 
0.6%
CITIGROUP INC.
 
0.6%
RABOBANK NEDERLAND NV
 
0.6%
BANK OF AMERICA CORPORATION
 
0.5%
THE GOLDMAN SACHS GROUP, INC.
 
0.4%
THE BANK OF NOVA SCOTIA
 
0.4%
NATIONAL AUSTRALIA BANK LIMITED
 
0.4%
UBS AG
 
0.4%
WESTPAC BANKING CORPORATION
 
0.3%
____________
(1)
Corporate issuers include Covered Bonds.
(2)
Excludes Life Funds Withheld Assets.
At June 30, 2014, the top 5 corporate sector exposures listed below represented 27.2% of the aggregate fixed income investment portfolio and 75.2% of all corporate holdings.
Top 5 Sector Exposures (1)
(U.S. dollars in millions)
 
Carrying Value
 
Percentage of
Aggregate
Fixed Income
Portfolio
Financials (2)
 
$
3,078.7

 
11.2
%
Consumer, non-Cyclical
 
1,829.5

 
6.7
%
Consumer, Cyclical
 
947.7

 
3.4
%
Industrial
 
874.3

 
3.2
%
Utilities
 
731.5

 
2.7
%
Total
 
$
7,461.7

 
27.2
%
____________
(1)
Excludes Life Funds Withheld Assets.
(2)
Government-guaranteed securities and Covered Bonds have been excluded from the above figures.
We also have exposure to credit risk associated with our mortgage-backed and asset-backed securities. The table below shows the breakdown of the $6.9 billion structured securities portfolio, of which 84.0% is AAA rated:
(U.S. dollars in millions)
Carrying Value (1)
 
Percentage of
Structured Portfolio
Agency RMBS
$
3,303.0

 
44.2
%
Other ABS (2)
1,310.3

 
21.4
%
CMBS
1,124.3

 
17.9
%
Core CDO (non-ABS CDOs and CLOs)
738.1

 
9.8
%
Non-Agency RMBS
415.5

 
6.7
%
Total
$
6,891.2

 
100.0
%
____________
(1)
Excludes Life Funds Withheld Assets.
(2)
Includes Covered Bonds.
Credit Risk – Other (Excluding Life Funds Withheld Assets)
Credit derivatives are purchased within our investment portfolio and were sold through a limited number of contracts written as part of our previous financial lines business. From time to time, we may purchase credit default swaps to hedge an

91

existing position or concentration of holdings. The credit derivatives are recorded at fair value. For further details with respect to our exposure to credit derivatives, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, alternatives and other investment funds and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be sold or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due. We also have exposure to financial institutions in the form of unsecured debt instruments, derivative transactions, revolving credit facility and letter of credit commitments and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations.
With regard to unpaid losses and loss expenses recoverable and reinsurance balances receivable, we have credit risk should any of our reinsurers be unable or unwilling to settle amounts due to us; however, these exposures are not marked to market. For further information relating to reinsurer credit risk, see Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable.”
We are exposed to credit risk in the event of non-performance by the other parties to our derivative instruments in general; however, we do not anticipate non-performance. The difference between the notional principal amounts and the associated market value is our maximum credit exposure.
Equity Price Risk (Excluding Life Funds Withheld Assets)
Equity price risk is the potential loss arising from changes in the market value of equities. Our equity investment portfolio is exposed to equity price risk. At June 30, 2014, our equity portfolio was approximately $896.6 million as compared to $952.8 million at December 31, 2013. This excludes fixed income fund investments of $92.1 million and $87.4 million at June 30, 2014 and December 31, 2013, respectively, that generally do not have the risk characteristics of equity investments but are treated as equity investments under U.S. GAAP. At June 30, 2014 and December 31, 2013, our direct allocation to equity securities was 2.9% and 2.6%, respectively, of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased). We also estimate the equity risk embedded in certain alternative and private investments. Such estimates are derived from market exposures provided to us by certain individual fund investments and/or internal statistical analyses.
Other Market Risks (Excluding Life Funds Withheld Assets)
Our private investment portfolio is invested in limited partnerships and other entities that are not publicly traded. In addition to normal market risks, these positions may also be exposed to liquidity risk, risks related to distressed investments and risks specific to startup or small companies. At June 30, 2014, our exposure to private investments, excluding unfunded commitments, was $279.3 million, representing 0.9% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) compared to $268.7 million at December 31, 2013.
Our alternative investment portfolio, which is exposed to equity and credit risk as well as certain other market risks, had a total exposure of $1.6 billion representing approximately 5.2% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) at June 30, 2014, as compared to December 31, 2013 when we had a total exposure of $1.5 billion representing approximately 4.2% of the fixed income investment portfolio.
At June 30, 2014 and December 31, 2013, bond index futures outstanding had a net short position of $719.3 million and a net long position of $8.5 million, respectively, and stock index futures outstanding had net long positions of $20.8 million and $27.3 million, respectively. We may reduce our exposure to these futures through offsetting transactions, including options and forwards.
As noted above, we also invest in certain derivative positions that can be impacted by market value movements. For further details on derivative instruments, see Item 1, Note 7, “Derivative Instruments,” to the Unaudited Consolidated Financial Statements included herein.

92

Sensitivity and Value-at-Risk Analysis (Excluding Life Funds Withheld Assets)
The table below summarizes our assessment of the estimated impact on the value of our investment portfolio at June 30, 2014 associated with an immediate and hypothetical: +100bps increase in interest rates, a -10% decline in equity markets, a +100bps widening in spreads and a +10% widening in spreads. The table also reports the 95%, 1-year VaRs for our investment portfolios at June 30, 2014, excluding foreign exchange. The interest rate, spread risk, and VaR shown in the table below exclude Life Funds Withheld Assets.
The table below excludes the impact of foreign exchange rate risk on our investment portfolio. Our investment strategy incorporates asset-liability management, and, accordingly, any foreign exchange movements impact the assets and liabilities approximately equally. See “Foreign Currency Exchange Rate Risk” for further details. We consider the investment portfolio VaR estimated results excluding foreign exchange rate risk to be the more relevant and appropriate metric to consider when assessing the actual risk of the investment portfolio.
The estimated results below also do not include any risk contributions from our various operating affiliates (strategic, investment manager or financial operating affiliates) or certain other investments that are carried at amortized cost.
(U.S. dollars in millions)
Interest
Rate
Risk (1)
 
Equity
Risk
(2)
 
Absolute
Spread
Risk (3)
 
Relative
Spread
Risk (4)
 
VaR
(5) (6)
Total Investment Portfolio (7)
$
(981.7
)
 
$
(181.2
)
 
$
(977.4
)
 
$
(68.2
)
 
$
645.6

(I) Fixed Income Portfolio
(975.8
)
 
—

 
(945.6
)
 
(64.7
)
 
641.4

(a) Cash & Short Term Investments
(13.2
)
 
—

 
(12.3
)
 
(0.3
)
 
25.6

(b) Total Government Related
(397.6
)
 
—

 
(269.3
)
 
(11.0
)
 
245.1

(c) Total Corporate Credit
(360.2
)
 
—

 
(392.3
)
 
(32.2
)
 
262.0

(d) Total Structured Credit
(204.7
)
 
—

 
(271.6
)
 
(21.2
)
 
142.1

(II) Non-Fixed Income Portfolio
—

 
(181.2
)
 
—

 
—

 
194.6

(e) Equity Portfolio
—

 
(98.6
)
 
—

 
—

 
100.2

(f) Alternative Portfolio
—

 
(54.4
)
 
—

 
—

 
96.7

(g) Private Investments
—

 
(28.2
)
 
—

 
—

 
23.4

(h) Other
—

 
—

 
—

 
—

 
3.8

____________
(1)
The estimated impact on the fair value of our fixed income portfolio of an immediate hypothetical +100 bps adverse parallel shift in global bond curves.
(2)
The estimated impact on the fair value of our investment portfolio of an immediate hypothetical -10% change in the value of equity exposures in our equity portfolio, certain equity-sensitive alternative investments and private equity investments. This includes our estimate of equity risk embedded in the alternatives and private investment portfolio with such estimates utilizing market exposures provided to us by certain individual fund investments, internal statistical analyses, and/or various assumptions regarding illiquidity and concentrations.
(3)
The estimated impact on the fair value of our fixed income portfolio of an immediate hypothetical +100 basis point increase in all global government related, corporate and structured security spreads to which our fixed income portfolio is exposed. This excludes exposure to credit spreads in our alternative investments, private investments and counterparty exposure.
(4)
The estimated impact on the fair value of our fixed income portfolio of an immediate hypothetical +10% increase in all global government related, corporate and structured security spreads to which our fixed income portfolio is exposed. This excludes exposure to credit spreads in our alternative investments, private investments and counterparty exposure.
(5)
The VaR results are based on a 95% confidence interval, with a one-year holding period, excluding foreign exchange rate risk. Our investment portfolio VaR at June 30, 2014 is not necessarily indicative of future VaR levels as these are based on statistical estimates of possible price changes and, therefore, exclude other sources of investment return such as coupon and dividend income.
(6)
The VaR results are the standalone VaRs, based on the prescribed methodology, for each component of our Total Investment Portfolio. The standalone VaRs of the individual components are non-additive, with the difference between the summation of the individual component VaRs and their respective aggregations being due to diversification benefits across the individual components. In the case of the VaR results for our Total Investment Portfolio, the results also include the impact associated with our Business and Other investments.
(7)
Our Total Investment Portfolio also includes our Business and Other investments that do not form part of our Fixed Income Portfolio or Non-Fixed Income Portfolio. The individual results reported in the above table for our Total Investment Portfolio therefore represent the aggregate impact on our Fixed Income Portfolio, Non-Fixed Income Portfolio and the majority of our Other investments.
Stress Testing (Excluding Life Funds Withheld Assets)
VaR does not provide the means to estimate the magnitude of the loss in the 5% of occurrences when we expect the VaR level to be exceeded. To complement the VaR analysis based on normal market environments, we consider the impact on the investment portfolio in several different stress scenarios to analyze the effect of unusual market conditions. We establish certain stress scenarios that are applied to the actual investment portfolio. As these stress scenarios and estimated gains and losses are based on scenarios established by us, they will not necessarily reflect future stress events or gains and losses from such events. The results of the stress scenarios are reviewed on a regular basis to ensure they are appropriate, based on current

93

shareholders' equity, market conditions and our total risk tolerance. It is important to note that, when assessing the risk of our investment portfolio, we do not take into account either the value or risk associated with the liabilities arising from our operations.
Life Funds Withheld Assets
The table below shows the Life Funds Withheld Assets by credit rating in percentage terms at June 30, 2014:
 
Percentage of
Aggregated Fixed
Income Portfolio (1)
AAA
16.5
%
AA
27.7
%
A
31.7
%
BBB
23.7
%
BB or Below
0.4
%
NR
—%

Total
100.0
%
____________
(1)
The credit ratings above were principally determined based on the weighted average rating of the individual securities from Standard & Poor's, Moody's Investors Service and Fitch Ratings (where available). The credit ratings for U.S. Agency debt and related mortgage-backed securities, whether with implicit or explicit government support, reflect the credit quality rating of the U.S. government for the purpose of these calculations.
At June 30, 2014, the average credit quality of the Life Funds Withheld Assets was “A1/A+".
At June 30, 2014, the top 5 corporate sector exposures listed below represented 48.6% of the Life Funds Withheld Assets.
Top 5 Sector Exposures
(U.S. dollars in millions)
 
Carrying Value
 
Percentage of
Aggregate
Fixed Income
Portfolio
Financials (1)
 
$
884.5

 
15.6
%
Utilities
 
713.3

 
12.6
%
Consumer, non-Cyclical
 
482.7

 
8.5
%
Communications
 
397.1

 
7.0
%
Industrial
 
275.4

 
4.9
%
Total
 
$
2,753.0

 
48.6
%
____________
(1)
Government-guaranteed securities and Covered Bonds have been excluded from the above figures.


94

ITEM 4.
 
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective and provided reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting identified in connection with our evaluation required pursuant to Rules 13a-15 or 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
We are subject to legal proceedings as described in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material developments to such proceedings during the three months ended June 30, 2014.
We are subject to litigation and arbitration in the normal course of our business. These lawsuits and arbitrations principally involve claims on policies of insurance and contracts of reinsurance and are typical for us and for the property and casualty insurance and reinsurance industry in general. Such claims proceedings are considered in connection with our loss and loss expense reserves. Reserves in varying amounts may or may not be established in respect of particular claims proceedings based on many factors, including the legal merits thereof. In addition to litigation relating to insurance and reinsurance claims, we are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance or reinsurance policies. These types of actions typically involve, among other things, allegations of underwriting errors or misconduct, employment disputes, actions brought by or on behalf of shareholders or disputes arising from business ventures. The status of these legal actions is actively monitored by management.
Legal actions are subject to inherent uncertainties, and future events could change management's assessment of the probability or estimated amount of potential losses from pending or threatened legal actions. If management believes that, based on available information, it is at least reasonably possible that a material loss (or additional material loss in excess of any accrual) will be incurred in connection with any legal actions, we disclose an estimate of the possible loss or range of loss, either individually or in the aggregate, as appropriate, if such an estimate can be made, or disclose that an estimate cannot be made. Based on our assessment at June 30, 2014, no such disclosures are considered necessary.
ITEM 1A.
 
RISK FACTORS
Refer to Item 1A., "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2013 for further information.


95

ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliate Purchasers
The following table provides information about purchases by the Company during the three months ended June 30, 2014 of its ordinary shares:
 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number
 of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased
Under the Plans or
Programs (1) (2)
April 1, 2014 to April 30, 2014
1,846,953

 
$
31.06

 
1,845,411

 
835.3 million
May 1, 2014 to May 31, 2014
1,743,441

 
$
32.00

 
1,743,441

 
779.5 million
June 1, 2014 to June 30, 2014
1,887,151

 
$
32.79

 
1,887,151

 
717.6 million
Total
5,477,545

 
$
31.96

 
5,476,003

 
717.6 million
____________
(1)
Shares purchased in connection with the vesting of restricted shares granted under our restricted stock plan do not represent shares purchased as part of publicly announced plans or programs. All such purchases were made in connection with satisfying tax withholding obligations of those employees. These shares were not purchased as part of our share buyback program.
(2)
For information regarding our share buyback activity see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Key Focuses of Management - Buybacks of Ordinary Shares," included herein.
ITEM 6.
 
EXHIBITS
 
 
 
The following exhibits are filed as exhibits to this Quarterly Report:
 
 
 
3.1*
 
Amended and Restated Memorandum and Articles of Incorporation of XL Group plc
 
 
 
10.1*
 
Sale and Purchase Agreement, dated May 1, 2014, between GreyCastle Holdings Ltd. and XL Insurance (Bermuda) Ltd
 
 
 
10.2*
 
Retrocession Agreement, dated May 30, 2014, between XL Re Ltd and XL Life Reinsurance (SAC) Ltd. (for itself and acting in respect of its segregated account XL-1)
 
 
 
10.3*
 
Retrocession Agreement, dated May 30, 2014, between XL Re Europe SE and XL Life Reinsurance (SAC) Ltd. (for itself and acting in respect of its segregated account XL-1)
 
 
 
10.4*
 
Retrocession Agreement, dated May 30, 2014, between XL Re Ltd (UK Branch) and XL Life Reinsurance (SAC) Ltd. (for itself and acting in respect of its segregated account XL-1)
 
 
 
12*
 
Statements regarding computation of ratios
 
 
 
31*
 
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
32*
 
Section 1350 Certification
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
*
Filed herewith.

96

SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 7, 2014
 
 
 
XL Group plc
 
 
(Registrant)
 
 
/s/ MICHAEL S. MCGAVICK
 
 
 
 
 
 
 
 
Name: Michael S. McGavick
 
 
Title: Chief Executive Officer and Director
 
 
XL Group plc
 
 
 
Date:
August 7, 2014
 
 
 
/s/ PETER R. PORRINO
 
 
 
 
 
 
 
 
Name: Peter R. Porrino
 
 
Title: Executive Vice President and Chief Financial Officer
 
 
XL Group plc


97
Exhibit 3.1 Amended and Restated Memorandum and Articles
Exhibit 3.1






Companies Acts 1963 to 2013

 
A PUBLIC COMPANY LIMITED BY SHARES
 
    

MEMORANDUM AND ARTICLES OF ASSOCIATION

of

XL GROUP PUBLIC LIMITED COMPANY

    
 
Incorporated the 12th day of March 2010
 


    




 
 
 



Companies Acts 1963 to 2013
 
A PUBLIC COMPANY LIMITED BY SHARES
 
    
MEMORANDUM OF ASSOCIATION
-of-
XL GROUP PUBLIC LIMITED COMPANY
(as amended by special resolutions dated 13 May 2010, 16 June 2010 and 25 April 2014)
1.
The name of the Company is XL Group Public Limited Company.
2.
The Company is to be a public limited company.
3.
The objects for which the Company is established are:
3.1
To carry on the business of an investment and holding company in all of its branches, and to acquire by purchase, lease, concession, grant, licence or otherwise such businesses, options, rights, privileges, lands, buildings, leases, underleases, stocks, shares, debentures, debenture stock, bonds, obligations, reversionary interests, annuities, policies of assurance, certificates of deposit, treasury bills, trade bills, bank acceptances, bills of exchange, fixed rate securities, variable or floating rate securities, and securities of all kinds created, issued or guaranteed by any government, sovereign, ruler, commissioners, body or authority, supreme, state, municipal, local, supranational or otherwise, in any part of the world, or by any corporation, bank, association or partnership, whether with limited or unlimited liability constituted or carrying on business or activities in any part of the world, units of or participation in any unit trust scheme, mutual fund or collective investment scheme in any part of the world, policies of insurance and assurance, domestic and foreign currency and any present or future rights and interests to or in any of the foregoing and other property and rights and interests in property as the Company shall deem fit and generally to hold, manage, develop, lease, sell or dispose of the same; to subscribe for the same either conditionally or otherwise; to enter into underwriting, stocklending and repurchase and similar contracts with respect thereto, to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof and from time to time to sell, exchange, lend, vary or dispose of and grant and dispose of options over any of the foregoing, to acquire, dispose of, invest in and hold by way of investment any derivative instrument relating to any of the foregoing and to deposit money (or place money on current account) with such persons in such currencies and otherwise on such terms as may seem expedient and to do all of the foregoing as principal, agent or broker; and to vary any of the investments of the Company; to establish, carry on, develop and extend investments and holdings and to sell, dispose of or otherwise turn the same to

 
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account and to coordinate the policy and administration of any corporations of which the Company is a member or which are in any manner controlled by or connected with the Company.
3.2
To exercise and enforce all rights and powers conferred to or incidental upon the ownership of any shares, stock obligations or other securities acquired by the Company including without prejudice to the generality of the foregoing all such powers of veto or control as may be conferred by virtue of the holding by the Company of such special proportion of the issued or nominal amount thereof and to provide managerial and other executive, supervisory and consultant services for or in relation to any corporation in which the Company is interested upon such terms as may be thought fit.
3.3
To acquire any such shares and other securities as are mentioned in the preceding paragraphs by subscription, syndicate participation, tender, purchase, exchange or otherwise and to subscribe for the same, either conditionally or otherwise, and to guarantee the subscription thereof and to exercise and enforce all rights and powers conferred by or incidental to the ownership thereof.
3.4
To co-ordinate the administration, policies, management, supervision, control, research, planning, trading and any and all other activities of, and to act as financial advisers and consultants to, any corporation or corporations now or hereafter incorporated or acquired which may be or may become a Group Company of, or an Affiliate of or to any corporation or corporations now or hereafter incorporated or acquired (which are not Group Companies) with which the Company may be or may become associated.
3.5
To provide financing and financial investment, management and advisory services to any Group Company or Affiliate, which shall include granting or providing credit and financial accommodation, lending and making advances with or without interest to any Group Company or Affiliate and lending to or depositing with any bank funds or other assets to provide security (by way of mortgage, charge, pledge, lien or otherwise) for loans or other forms of financing granted to such Group Company or Affiliate by such bank.
3.6
To lease, acquire by purchase or otherwise and hold, sell, dispose of and deal in real property and in personal property of all kinds wheresoever situated.
3.7
To enter into any guarantee, contract of indemnity or suretyship and to assure, support or secure with or without consideration or benefit the performance of any obligations of any person or persons and to guarantee the fidelity of individuals filling or about to fill situations of trust or confidence.
3.8
To acquire or undertake the whole or any part of the business, property and liabilities of any person carrying on any business that the Company is authorized to carry on.

 
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3.9
To apply for, register, purchase, lease, acquire, hold, use, control, license, sell, assign or dispose of patents, patent rights, copyrights, trade marks, formulae, licences, inventions, processes, distinctive marks, technology and know-how and the like conferring any exclusive or non-exclusive or limited right to use or any secret or other information as to any invention or technology which may seem capable of being used, for any of the purposes of the Company or the acquisition of which may seem calculated directly or indirectly to benefit the Company, and to use, exercise, develop or grant licences in respect of or otherwise turn to account the property rights or information so acquired.
3.10
To enter into partnership, merger, consolidation, amalgamation or into any arrangement for sharing of profits, union of interests, co-operation, joint venture, reciprocal concession or otherwise with any person carrying on or engaged in or about to carry on or engage in any business or transaction that the Company is authorized to carry on or engage in or any business or transaction capable of being conducted so as to benefit the Company.
3.11
To take or otherwise acquire and hold securities in any other corporation, including securities of XL Capital Ltd, an exempted company organized under the laws of the Cayman Islands, having objects altogether or in part similar to those of the Company or any Group Company or carrying on any business capable of being conducted so as to benefit the Company or any Group Company.
3.12
To lend money to any employee or to any person having dealings with the Company or any Group Company or with whom the Company or any Group Company proposes to have dealings or to any other corporation (including any Group Company) any of whose shares are held directly or indirectly by the Company or any Group Company.
3.13
To apply for, secure or acquire by grant, legislative enactment, assignment, transfer, purchase or otherwise and to exercise, carry out and enjoy any charter, licence, power, authority, franchise, concession, right or privilege, that any government or authority, corporation or public body may be empowered to grant, and to pay for, aid in and contribute toward carrying it into effect and to assume any liabilities or obligations incidental thereto and to enter into any arrangements with any governments, authorities or public bodies, supreme, municipal, local or otherwise, that may seem conducive to the Company’s objects or any of them.
3.14
To perform any duty or duties imposed on the Company by or under any enactment and to exercise any power conferred on the Company by or under any enactment.
3.15
To incorporate or cause to be incorporated any one or more subsidiaries (within the meaning of Section 155 of the Companies Act 1963) of the Company for the purpose of carrying on any business.

 
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3.16
To issue securities of the Company (or contracts, options or warrants to subscribe for, or other rights or interests in, or in respect of, such securities) directly to any employees of the Company or Group Company, in consideration for employment or other services performed by those employees and to establish and support or aid in the establishment and support of associations, institutions, funds or trusts for the benefit of employees, directors or consultants or former employees, directors or consultants of the Company or its predecessors or any Group Companies or Affiliates, or the dependants or connected persons of such employees, directors or consultants or former employees, directors or consultants and grant gratuities, pensions and allowances, including the establishment of share option schemes or employee share schemes, enabling employees, directors or consultants of the Company or other persons aforesaid to become shareholders in the Company, or otherwise to participate in the profits of the Company upon such terms and in such manner as the Company thinks fit, and to make payments towards insurance or for any object similar to those set forth in this paragraph.
3.17
To establish and contribute to any scheme for the purchase by trustees of shares in the Company to be held for the benefit of the Company’s employees or the employees of any Group Companies or Affiliates and to lend or otherwise provide money to the trustees of such schemes or the Company’s employees or the employees of any Group Companies or Affiliates to enable them to purchase shares of the Company.
3.18
To grant bonuses to any person or persons who are or have been in the employment of the Company or any Group Companies or Affiliates or any person or persons who are or have been directors of, or consultants to, the Company or any of its Group Companies or Affiliates.
3.19
To establish any scheme or otherwise to provide for the purchase by or on behalf of customers of the Company or of any Group Company or Affiliate of shares in the Company.
3.20
To subscribe or guarantee money for charitable, benevolent, educational or religious objects or for any exhibition or for any public, general or useful objects.
3.21
To promote any corporation for the purpose of acquiring or taking over any of the property and liabilities of the Company or any Group Company or Affiliate or for any other purpose that may benefit the Company or any Group Company or Affiliate.
3.22
To purchase, lease, take in exchange, hire or otherwise acquire any personal property and any rights or privileges that the Company considers necessary or convenient for the purposes of its business.
3.23
To construct, maintain, alter, renovate and demolish any buildings or works necessary or convenient for its objects.

 
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3.24
To construct, improve, maintain, work, manage, carry out or control any roads, ways, tramways, branches or sidings, bridges, reservoirs, watercourses, wharves, factories, warehouses, electric works, shops, stores and other works and conveniences that may advance the interests of the Company or any Group Company or Affiliate and contribute to, subsidize or otherwise assist or take part in the construction, improvement, maintenance, working, management, carrying out or control thereof.
3.25
To raise and assist in raising money for, and aid by way of bonus, loan, promise, endorsement, guarantee or otherwise, any person and guarantee the performance or fulfilment of any contracts or obligations of any person, and in particular guarantee the payment of the principal of and interest on the debt obligations of any such person.
3.26
To borrow or raise finance or secure the payment of money (including money in a currency other than the currency of Ireland) in such manner as the Company shall think fit and in particular by the issue of debentures or any other securities (or contracts, options or warrants to subscribe for, or other rights or interests in, or in respect of, such securities), perpetual or otherwise, charged upon all or any of the Company’s property, both present and future, including its unissued capital or otherwise and to purchase, redeem or pay off any such securities.
3.27
To enter into, invest or engage in, acquire, hold or dispose of any financial instruments or risk management instruments, whether or not of a type currently in existence, and currency exchange, interest rate or commodity or index linked transactions (whether in connection with or incidental to any other contract, undertaking or business entered into or carried on by the Company or whether as an independent object or activity), including securities in respect of which the return or redemption amount is calculated by reference to any index, price or rate, monetary and financial instruments of all kinds, futures contracts, swaps and hedges (including credit default, interest rate and currency swaps and hedges of any kind whatsoever), options contracts, contracts for differences, commodities (including bullion and other precious metals), forward rate agreements, debentures, debenture stock, warrants, commercial paper, promissory notes, mortgage backed securities, asset backed securities, dealings in foreign currency, spot and forward rate exchange contracts, caps, floors, collars, and any other foreign exchange, interest rate or commodity or index linked arrangements, and such other instruments whether for the purpose of making a profit or avoiding a loss or managing a currency or interest rate exposure or any other purpose and to enter into any contract for and to exercise and enforce all rights and powers conferred by or incidental, directly or indirectly, to such transactions or the termination of any such transactions.
3.28
To carry on the business of financing and re-financing whether asset based or not (including financing and re-financing of financial assets), including managing financial assets with or without security in whatever currency including financing or re-financing by way of loan, acceptance credits, commercial paper, euro medium

 
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term bonds, euro bonds, asset-backed securities, securitisation, synthetic securitisation, collateralised debt obligations, bank placements, leasing, hire purchase, credit sale, conditional sale, factoring, forfeiting, invoice discounting, note issue facilities, project financing, bond issuances, participation and syndications, assignment, novation, factoring, discounting, participation, sub-participation, derivative contracts, securities/stock lending contracts, repurchase agreements or other appropriate methods of finance and to discount mortgage receivables, loan receivables and lease rentals for persons wherever situated in any currency whatsoever, and to do all of the foregoing as principal, agent or broker.
3.29
To remunerate any person or corporation for services rendered or to be rendered in placing or assisting to place or guaranteeing the placing of any of the shares of the Company’s capital or any debentures, debenture stock or other securities of the Company or of any Group Company or Affiliate or in or about the formation or promotion of the Company, any Group Companies or Affiliate or the conduct of their business.
3.30
To draw, make, accept, endorse, discount, execute and issue bills of exchange, promissory notes, bills of lading, warrants and other negotiable or transferable instruments.
3.31
To sell, lease, exchange or otherwise dispose of the undertaking of the Company or any part thereof as an entirety or substantially as an entirety for such consideration as the Company thinks fit.
3.32
To sell, improve, manage, develop, exchange, lease, dispose of, turn to account or otherwise deal with the property of the Company in the ordinary course of its business.
3.33
To adopt such means of making known the products of the Company or of any Group Company or Affiliate as may seem expedient, and in particular by advertising, by purchase and exhibition of works of art or interest, by publication of books and periodicals and by granting prizes and rewards and making donations.
3.34
To cause the Company to be registered and recognized in any foreign jurisdiction, and designate persons therein according to the laws of that foreign jurisdiction or to represent the Company and to accept service for and on behalf of the Company of any process or suit.
3.35
To allot and issue fully-paid shares of the Company in payment or part payment of any property purchased or otherwise acquired by the Company or for any past services performed for the Company or any Group Company.
3.36
To distribute among the members of the Company in cash, kind, specie or otherwise as may be resolved, by way of dividend, bonus or in any other manner considered

 
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advisable, any property of the Company, subject always to the provisions of the Companies Acts 1963 to 2013 and any other applicable law.
3.37
To promote freedom of contract, and to resist, insure against, counteract and discourage interference therewith, to join any lawful federation, union or association or do any other lawful act or thing with a view to preventing or resisting directly or indirectly any interruption of or interference with the Company’s or any other trade or business or providing or safeguarding against the same, or resisting or opposing any strike, movement or organisation, which may be thought detrimental to the interests of the Company or any Group Companies or its or their employees and to subscribe to any association or fund for any such purposes.
3.38
To establish agencies and branches.
3.39
To take or hold mortgages, hypothecations, liens and charges to secure payment of the purchase price, or of any unpaid balance of the purchase price, of any part of the property of the Company of whatsoever kind sold by the Company, or for any money due to the Company from purchasers and others and to sell or otherwise dispose of any such mortgage, hypothecation, lien or charge.
3.40
To pay all costs and expenses of or incidental to the incorporation and organization of the Company.
3.41
To invest and deal with the moneys of the Company not immediately required for the other objects of the Company in such manner as may be determined.
3.42
To do any of the things authorized by this memorandum as principals, agents, contractors, trustees or otherwise, and either alone or in conjunction with others.
3.43
To do all such other things as are incidental or conductive to the attainment of the objects and the exercise of the powers of the Company.
3.44
To make voluntary dispositions of all or any part of the property and rights of the Company and to make gifts thereof or gratuitous payments either for no consideration or for a consideration less than the market value of such property or rights or the amount of cash payment or by all or any such methods.
3.45
To receive voluntary dispositions of all or any part of the property and rights of any other corporation and to receive gifts thereof or gratuitous payments either for no consideration or for a consideration less than the market value of such property or rights or the amount of cash payment or by all or any such methods.
3.46
To the extent permitted by law, to give whether directly or indirectly, any kind of financial assistance for the purchase of shares in or debentures of the Company or any corporation which is at any given time the Company’s holding company.

 
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3.47
To carry on any other business, except the issuing of policies of insurance, which may seem to the Company capable of being conveniently carried on in connection with the above, or calculated directly or indirectly to enhance the value of or render profitable any of the Company’s property or rights.
4.
The liability of the members is limited.
5.
The share capital of the Company is €40,000 and US$9,999,900 divided into 40,000 Subscriber Shares of €1 each, 500,000,000 Ordinary Shares of US$0.01 each and 499,990,000 Undesignated Shares of US$0.01 each.
6.
For the purposes of this memorandum of association, (a) the terms “corporation”, “Group Company” and “Affiliate” have the meanings ascribed to such terms in the articles of association of the Company, (b) the words “including” and “includes” shall be deemed to be followed by the words “ without limitation,” and (c) unless a clear contrary intention appears, the word “or” shall be deemed to be used in the inclusive sense of “and/or.”
7.
The objects specified in each paragraph of clause 3 of this memorandum of association shall, except where otherwise expressed in such paragraph, be in no way limited or restricted by reference to, or inference from, the terms of any other paragraph in that clause.

 
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We, the several persons whose names, addresses and descriptions are subscribed, wish to be formed into a Company in pursuance of this memorandum of association, and we agree to take the number of shares in the capital of the Company set opposite our respective names.
Names, address and descriptions of Subscribers
 
 
 
Number of shares taken by each Subscriber
 
 
 
 
 




XL Capital Ltd                                One
5 Fort Street
Grand Cayman
Cayman Islands
British West Indies

Limited Liability Company


________________________________________________________________________________

Dated

Witness to the above signature:
Name:

Address:


 
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Companies Acts 1963 to 2013
COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
of
XL GROUP PUBLIC LIMITED COMPANY
TABLE OF CONTENTS



 
11
 


 
Page

PRELIMINARY
13

REGISTERED OFFICE
17

SHARE CAPITAL AND VARIATION OF RIGHTS
17

SHARES – ALLOTMENTS AND ISSUANCES
19

SHARES – ALLOTMENTS AND ISSUANCES
21

INCREASE OF CAPITAL
22

ALTERATION OF CAPITAL
22

REDUCTION OF CAPITAL
23

CERTIFICATES
23

LIEN
24

REGISTER OF SHAREHOLDERS
24

REGISTER OF DIRECTORS AND SECRETARY
25

TRANSFER OF SHARES
25

TRANSMISSION OF SHARES
27

GENERAL MEETINGS
28

NOTICE OF GENERAL MEETINGS
29

PROCEEDINGS AT GENERAL MEETINGS
29

VOTING
32

PROXIES AND CORPORATE REPRESENTATIVES
34

APPOINTMENT AND REMOVAL OF DIRECTORS
37

RESIGNATION AND DISQUALIFICATION OF DIRECTORS
42

DIRECTORS’ REMUNERATION AND EXPENSES
42

DIRECTORS’ INTERESTS
43

POWERS OF THE BOARD
44

DELEGATION OF THE BOARD’S POWERS
44

PROCEEDINGS OF THE BOARD
45

OFFICERS AND EXECUTIVES
46

MINUTES
47

SECRETARY
48

THE SEAL
48

DIVIDENDS AND OTHER PAYMENTS
48

RESERVES
50

CAPITALISATION OF RESERVES
50

RECORD DATES
53

UNTRACED SHAREHOLDERS
53

SERVICE OF NOTICES AND OTHER DOCUMENTS
54

SHAREHOLDER RIGHTS PLAN
56

WINDING UP
56

INDEMNIFICATION
57

ALTERATION OF ARTICLES
60




 
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PRELIMINARY
1.
The regulations contained in Table A in the First Schedule to the Companies Act 1963 shall not apply to the Company.
2.
In these articles, unless the context otherwise requires:
“1963 Act” means the Companies Act 1963;
“1983 Act” means the Companies (Amendment) Act 1983;
“1990 Act” means the Companies Act 1990;
“address” includes any number or address used for the purposes of communication by way of electronic mail or other electronic communication;
“Affiliate” of any person means any other person that directly or indirectly controls, is controlled by, or is under common control with, such person;
“Assistant Secretary” means any person appointed and so designated by the Secretary or the Board to assist the Secretary (and specific references in these articles to functions that may be performed by an Assistant Secretary do not limit such general role of assisting the Secretary);
“Auditor” or “Auditors” means the auditor or auditors at any given time of the Company;
“beneficial ownership” means “beneficial ownership” as that term is defined in Rule 13d-3 promulgated under the Exchange Act and “beneficial owner” and “beneficially own” and variants thereof, will be interpreted accordingly;
“Board” means the board of directors at any given time of the Company;
“clear days” means, for purposes of any period of notice required to be given under these articles, the days between (and in each case excluding) (i) the day when the notice is given or deemed to be given and (ii) the day of the event for which such notice is given or on which such notice is to take effect;
“Companies Acts” means the Companies Acts 1963 to 2013, and all statutory instruments which are to be read as one with, or construed, or to be read together with such Acts;
“Company” means the company whose name appears in the heading to these articles;
“Controlled Shares” in reference to any person means: (i) all shares of the Company directly, indirectly or constructively owned by such person within the meaning of Section 958 of the Internal Revenue Code of 1986 of the United States of America; and (ii) all shares of the Company directly, indirectly or constructively owned by any person or “group” of persons within the meaning of Section 13(d) (3) of the Exchange Act;

 
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“corporation” means any body corporate, corporation, company, partnership, limited liability company or other legal entity;
“Covered Arrangement” means, with respect to any person and as of any date, any agreement, arrangement or understanding (including any swaps or other derivative or short positions, profit interests, options, hedging transactions, and securities lending or borrowing arrangement) to which such person or its Affiliates is, directly or indirectly, a party as of such date (A) with respect to shares of the Company or (B) the effect or intent of which is to mitigate loss to, manage the potential risk or benefit of share price changes (increases or decreases) for, or increase or decrease the voting power of such person or any of its Affiliates with respect to securities of the Company or which may have payments based in whole or in part, directly or indirectly, on the value (or change in value) of any securities of the Company (other than, in each such case, interests in investment companies registered under the Investment Company Act of 1940 of the United States of America);
“Director” means a director at any given time of the Company;
“electronic communication” has the meaning given to those words in the Electronic Commerce Act 2000;
“electronic signature” has the meaning given to those words in the Electronic Commerce Act 2000;
“EUR”, “€” and “euro” mean the currency of Ireland;
“Exchange Act” means the Securities Exchange Act of 1934 of the United States of America;
“Governmental Entity” means any government or subdivision thereof, or governmental, judicial, legislative, tax, administrative or regulatory authority or body, whether of Ireland or elsewhere;
“Group Company” means the Company, any holding company of the Company and any subsidiary of the Company or of any such holding company;
“Ordinary Resolution” means a resolution of the Shareholders passed by a simple majority of the votes cast by those present in person or by proxy at a meeting and who are entitled to vote (or, if in writing, signed by all of the Shareholders entitled to attend and vote) at such meeting;
“Ordinary Shares” means ordinary shares of nominal value US$0.01 per share (or such other nominal value as may result from any reorganisation of capital) in the capital of the Company, having the rights and being subject to the limitations set out in these articles;
“Paid Up” means paid up or credited as paid up;

 
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“person entitled by transmission” means a person whose entitlement to a share arises in consequence of the death or bankruptcy of a Shareholder or in any way other than by transfer;
“Redeemable Shares” means shares in the capital of the Company that are redeemable in accordance with the provisions of these articles or the terms of issue of such class or series of shares;
“Register” means the register of members of the Company;
“Registered Office” means the registered office at any given time of the Company;
“Seal” means the common seal of the Company and includes any duplicate seal, securities seal or seal for use abroad;
“Secretary” means the secretary of the Company or, if there are joint secretaries, any of the joint secretaries;
“Share” or “share” means, unless specified otherwise or the context otherwise requires, any share in the capital of the Company;

“Shareholder” means in relation to any share, the person whose name is entered in the Register as the holder of the share or, where the context permits, the persons whose names are entered in the Register as the joint holders of shares;
“Special Resolution” means a special resolution of the Shareholders within the meaning of Section 141 of the 1963 Act;
“Subscriber Shares” means the shares of nominal value €1 per share having the rights and being subject to the limitations set out in these articles;
“subsidiary” and “holding company” have the meanings given to those words in Section 155 of the 1963 Act, except that references in that Section to a company shall include any corporation or other legal entity, whether incorporated or established in Ireland or elsewhere;
“Undesignated Shares” means the shares of nominal value US$0.01 per share (or such other nominal value as may result from any reorganisation of capital) in the capital of the Company, having such rights and being subject to such limitations as may be attached to them pursuant to article 6;
“US dollars” or “US$” means United States dollars, the currency of the United States of America;
“Variation Resolution” means a resolution of the Shareholders of any class or series of Shares (1) passed by a two-thirds majority of those present in person or by proxy at a separate meeting of the Shareholders of such class or series of Shares and who are entitled

 
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to attend and vote at such meeting or (2) in writing signed by all of the Shareholders of such class or series of Shares.
3.
For the purposes of these articles, unless specified otherwise, a contrary intention appears or the context otherwise requires:
(a)
a corporation shall be deemed to be present in person at a meeting if its representative, duly authorised pursuant to these articles or the Companies Acts, is present;
(b)
words importing only the singular number include the plural number and vice versa, and words importing only one gender include the other gender;
(c)
the words “including” and “includes” and any similar words shall be deemed to be followed by the words “without limitation”;
(d)
the word “or” shall be deemed to be used in the inclusive sense of “and/or”;
(e)
except as otherwise specified, the words “herein” and “hereof” and words of similar import shall be deemed to refer to these articles as a whole rather than to any particular portion of these articles;
(f)
references to the “terms of issue” of Shares shall be deemed to mean the terms of issue of those Shares (including, where applicable, the rights attaching to such Shares as set out in these articles) as they may be varied from time to time in accordance with these articles;
(g)
references to a person include any natural person, corporation or other body of persons, whether corporate or not, any trust and any Governmental Entity;
(h)
references to writing shall be construed as including references to printing, lithography, photography, electronic mail and any other modes of representing or reproducing words in a visible form;
(i)
a reference to anything being done by electronic means includes its being done by means of any electronic or other communications equipment or facilities and references to any communication being delivered or received, or being delivered or received at a particular place, include the transmission of an electronic or similar communication, and to a recipient identified in such manner or by such means, as the Board may from time to time approve or prescribe, either generally or for a particular purpose;
(j)
references to a signature or to anything being signed or executed include such forms of electronic signature or other means of verifying the authenticity of an electronic or similar communication as the Board may from time to time approve or prescribe, either generally or for a particular purpose;

 
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(k)
references to a dividend include any dividend or distribution, in cash or by the distribution of assets, paid or distributed to Shareholders out of the profits of the Company available for distribution;
(l)
any words or expressions defined in the Companies Acts, if not otherwise defined in or given a particular meaning by these articles, have the same meaning in these articles;
(m)
any reference to any specific statute, statutory provision, Act, statutory instrument and other legislation is to legislation operative in Ireland unless otherwise specified;
(n)
except as otherwise specified herein, (i) any reference to any statute, statutory provision, Act, statutory instrument or other legislation (whether of Ireland or elsewhere) includes a reference to any modification or re-enactment of it as then in force and to every rule, regulation or order made under it (or under any such modification or re-enactment) and then in force, and (ii) any reference to any rule, regulation or order made under any statute, statutory provision, Act, statutory instrument or other legislation includes a reference to any modification or replacement of such rule, regulation or order then in force;
(o)
the provisions of these articles shall insofar as they relate to any right of Shareholders to receive notice of, attend and vote at general meetings (or pass resolutions in writing in lieu of a vote at a general meeting), relate only to holders of Ordinary Shares or any other class or series of shares which, by virtue of these articles or the terms of the issue of such shares, expressly carry the general right to vote at general meetings of the Company and exclude shares which entitle the holders to vote only in limited circumstances or upon the occurrence of a specified event or condition (whether or not those circumstances have arisen or that event or condition has occurred) and any provision of these articles relating to Special Resolutions, Ordinary Resolutions and the respective voting and approval thresholds attaching thereto will be interpreted accordingly.
REGISTERED OFFICE
4.
The Registered Office shall be at such place in Ireland as the Board from time to time shall decide.
SHARE CAPITAL AND VARIATION OF RIGHTS  
5.
(a)    Without prejudice to the power of the Board to issue and allot shares pursuant to the following articles, the authorised share capital of the Company at the date of adoption of these articles is €40,000 and US$9,999,900, divided into 40,000 Subscriber Shares of €1 each, 500,000,000 Ordinary Shares of US$0.01 each and 499,990,000 Undesignated Shares of US$0.01 each.
(b)
The Ordinary Shares shall entitle the holders thereof to the following rights:

 
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(i)
as regards dividends:
after making all necessary provisions, where relevant, for payment of any preference dividend in respect of any preference shares in the Company then in issue, the Company shall apply any profits or reserves which the Board resolves to distribute in paying such profits or reserves to the holders of the Ordinary Shares in respect of their holdings of such shares pari passu and pro rata to the number of Ordinary Shares held by each of them;
(ii)
as regards capital:
on a return of assets on liquidation, reduction of capital or otherwise, the holders of the Ordinary Shares shall be entitled to be paid the surplus assets of the Company remaining after payment of its liabilities (subject to the rights of the holders of any preference shares in the Company then in issue, having preference rights on a return of capital) in respect of their holdings of Ordinary Shares pari passu and pro rata to the number of Ordinary Shares held by each of them;
(iii)
as regards voting in general meetings:
subject to the provisions of article 44 and the right of the Company to set record dates for the purpose of determining the identity of Shareholders entitled to notice of or vote at a general meeting, (A) the holders of the Ordinary Shares shall be entitled to receive notice of, and to attend and vote at, general meetings of the Company; and (B) every holder of Ordinary Shares present in person or by proxy shall have one vote for each Ordinary Share held by him;
(iv)
as regards redemption:
(A) if an Ordinary Share is not listed on a recognised stock exchange within the meaning of the 1990 Act, it shall be automatically converted into a Redeemable Share on, and from the time of, the existence or creation of an agreement, transaction or trade (“arrangement”) between the Company and any person (who may or may not be a Shareholder) pursuant to which the Company acquires or will acquire Ordinary Shares, or an interest in Ordinary Shares, from the relevant person. In these circumstances, the Ordinary Share concerned shall have the same characteristics as any other Ordinary Share in accordance with these articles save that it shall be redeemable in accordance with the arrangement. The acquisition of such Ordinary Shares in accordance with this clause (iv)(A) by the Company shall constitute the redemption of a Redeemable Share in accordance with Part XI of the 1990 Act;
(B) if an Ordinary Share is listed on a recognised stock exchange within the meaning of the 1990 Act, the provisions of clause (iv)(A) shall apply unless

 
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the Board resolves, prior to the existence or creation of any relevant arrangement, that the arrangement concerned is to be treated as an acquisition of shares pursuant to article 7, in which case the arrangement shall be so executed;
(v)
as regards certificates:
it shall be a condition of every issuance of Ordinary Shares that, unless the Board resolves otherwise (either generally or in any particular case or cases), holders of Ordinary Shares will not be entitled to receive a share certificate in respect of any Ordinary Shares except upon request and on such other terms as the Board may in its sole discretion determine.
(c)
Subject to the Companies Acts, all or any of the rights at any time attached to any class or series of shares at any time in issue may, unless otherwise expressly provided in the terms of issue of the shares of that class or series, from time to time, be varied with the sanction of a Variation Resolution of that class or series.
(d)
The special rights conferred upon the holders of any shares or class or series of shares shall not, unless otherwise expressly provided in the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu with them.
(e)
Notwithstanding any other provision of these articles, the nominal value of the issued share capital of the Company which is not redeemable will in no event be less than one tenth of the nominal value of the total issued share capital of the Company.
(f)
The Subscriber Shares shall carry the same rights as the Ordinary Shares, save that, in addition to the provisions of article 5(b)(iv), the Subscriber Shares will be automatically converted to redeemable shares, redeemable at par at the option of the Company immediately on the issue by the Company of any Ordinary Shares, representing not less than 10% in nominal value of the issued share capital of the Company.
SHARES – ALLOTMENTS AND ISSUANCES
6.
(a)     The Company may, in accordance with the provisions of these articles issue any shares in its capital with such preferred or deferred or other special rights and privileges or such limitations, conditions and restrictions, whether in regard to dividend, voting, return of capital, redemption or otherwise as it may determine. Without prejudice to the generality of the foregoing, the Company may, subject to articles 6(c) and 6(d), issue and redeem redeemable shares and the Board is generally and unconditionally authorized to exercise all powers of the Company to do so.
(b)
Subject to the Companies Acts and the expiration dates contained in articles 6(c) and 6(d), the unissued shares of the Company (whether forming part of the original share capital or any increased capital) shall be at the disposal of the Board, which may

 
19
 


offer, allot, grant options, warrants or other rights over or otherwise deal with or dispose of them to such persons, at such times and for such consideration and generally on such terms and conditions as the Board may from time to time determine.
(c)
The Board is, for the purposes of Section 20 of the 1983 Act, generally and unconditionally authorised to exercise all powers of the Company to allot and issue relevant securities (as defined by the said Section 20) up to the amount of the Company’s authorised share capital and to allot and issue any shares purchased by the Company pursuant to the provisions of Part XI of the 1990 Act and held as treasury shares and this authority shall expire five years from the date of adoption of these articles or in accordance with any renewal of such authority from time to time. The Company may before the expiry of such authority make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Board may allot equity securities in pursuance of such an offer or agreement as if the power conferred by this article 6(c) had not expired.
(d)
The Board is hereby empowered pursuant to Sections 23 and 24(1) of the 1983 Act to allot equity securities within the meaning of the said Section 23 for cash pursuant to the authority conferred by article 6(c) as if Section 23(1) of the 1983 Act did not apply to any such allotment. The Company may before the expiry of such authority make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Board may allot equity securities in pursuance of such an offer or agreement as if the power conferred by this article 6(d) had not expired.
(e)
Subject to the Companies Acts and to the rights conferred on the holders of any other class or series of shares and without prejudice to the generality of article 6(b), the Board is empowered to cause Undesignated Shares to be issued from time to time as shares of one or more class or series of shares (including as Ordinary Shares) and may:
(i)
fix the distinctive designation of such class or series and the number of shares which shall constitute such class or series, which number may be increased (except as otherwise provided by the Board in creating such class or series) or decreased (but not below the number of shares thereof then in issue) from time to time by resolution of the Board;
(ii)
determine that they are to be redeemed (the manner and terms of redemption in all cases to be set by the Board) on the happening of a specified event or on a given date;
(iii)
determine that they may be redeemed (the manner and terms of redemption in all cases to be set by the Board) at the option of the Company;
(iv)
determine that they may be redeemed (the manner and terms of redemption in all cases to be set by the Board) at the option of the holder;

 
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(v)
fix the shares with any such other preferred, deferred, qualified, special or other rights, privileges, preferences, limitations and conditions or such restrictions, whether in regard to dividend, voting, return of capital, redemption, conversion or otherwise, as the Board in its sole discretion shall determine; and
(vi)
subject to article 5(c), vary any of the matters specified in clauses (i) through (v) of this article 6(e) in respect of any Undesignated Shares issued pursuant to this article 6.
(f)
Without prejudice to the generality of the foregoing, the Board may make provision for the issue and allotment of shares that do not carry any voting rights.
(g)
Subject to any requirement to obtain the approval of shareholders under any laws, regulations or the rules of any stock exchange to which the Company is then subject and any other applicable law, the Board is authorised, from time to time, in its discretion, to grant such persons, including Directors, for such periods and upon such terms as the Board deems advisable, (i) options to purchase or subscribe for or (ii) commitments to issue at a future date, such number of shares of any class or classes or of any series as the Board may deem advisable, and to cause warrants or other appropriate instruments evidencing such options or commitments to be issued.
(h)
The Company may, insofar as the Companies Acts or any other applicable law permits, pay commission or brokerage fees to any person in consideration of a person subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in the Company or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the Company on such terms and subject to such conditions as the Board may determine, including by paying cash or allotting and issuing Paid Up shares.  
(i)
No share of the Company shall be issued unless it is Paid Up. Except as otherwise expressly provided by these articles, no Shareholder shall be liable to make any additional payment to the Company in respect of any share beyond the initial consideration agreed with the Company at or before the time of issue thereof.
COMPANY PURCHASES
7.
Subject to the Companies Acts, the Company may, without prejudice to any relevant special rights attached to any class or series of shares, pursuant to Section 211 of the 1990 Act, purchase any of its own shares, including any Redeemable Shares, whether in the market, by tender or by private agreement, at such prices (whether at nominal value or above or below nominal value) and otherwise on such terms and conditions as the Board may from time to time determine and without any obligation to purchase on any pro rata basis as between Shareholders or Shareholders of the same class or series (the whole or any part of the amount payable on any such purchase may be paid or satisfied otherwise than in cash, to the extent permitted by the Companies Acts) and may cancel any shares so purchased or hold

 
21
 


them as treasury shares (as defined in Section 209 of the 1990 Act) and may reissue any such shares as shares of any class or classes or series.
8.
Except only as otherwise provided in these articles, as ordered by a court of competent jurisdiction or as otherwise required by law, the Company shall be entitled to treat the registered holder of any share as the absolute owner of it and accordingly no person shall be recognised by the Company as holding any share upon trust, and the Company shall not be bound by or required in any way to recognise (even when having notice of it) any equitable, contingent, future or partial interest or other right in any share except an absolute right to the entirety of the share in the registered holder of it. This shall not preclude the Company from requiring the Shareholders or a transferee of shares to furnish the Company with information as to the beneficial ownership of (or other interest of any person in) any share.
INCREASE OF CAPITAL
9.
The Company may from time to time by Ordinary Resolution increase its authorised share capital by such sum, to be divided into shares of such nominal value, as such Ordinary Resolution shall prescribe.
10.
Any new shares shall be subject to all of the provisions of these articles with reference to lien, transfer, transmission and otherwise.
ALTERATION OF CAPITAL
11.
(a)     The Company may from time to time by Ordinary Resolution:
(i)
consolidate and divide all or any of its share capital into shares of larger nominal value than any of its existing shares;
(ii)
sub-divide its shares or any of them into shares of smaller nominal value than is fixed by its memorandum of association, subject to Section 68(1)(d) of the 1963 Act; and
(iii)
cancel shares which, at the date of the passing of the relevant Ordinary Resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its authorised share capital by the amount of the shares so cancelled.
(b)
Where any difficulty arises in regard to any division, consolidation, sub-division or cancellation under this article 11, the Board may settle the same as it thinks expedient and, in particular, may arrange for the sale of the shares representing fractions and the distribution of the net proceeds of sale in due proportion among the Shareholders who would have been entitled to the fractions, except that any proceeds in respect of any holding which are less than a sum fixed by the Board may be retained for the benefit of the Company. For the purpose of any such sale the Board may authorise some person to transfer the shares representing fractions to the purchaser, who shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale.

 
22
 


REDUCTION OF CAPITAL
12.
Subject to the Companies Acts and to any confirmation or consent required by law or these articles, the Company may from time to time by Special Resolution authorise the reduction in any manner of its issued share capital, any capital redemption reserve fund or any share premium account.
13.
In relation to any such reduction, the Company may by Special Resolution determine the terms upon which the reduction is to be effected, including, in the case of a reduction of part only of a class or series of shares, those shares to be affected.
CERTIFICATES
14.
(a)    Shares shall be issued in registered form. It shall be a condition of issue of every Share that no Shareholder shall, upon becoming the holder of that Share (irrespective of the class or series of Shares concerned), be entitled to a share certificate for that Share or any shares of any class or series held by him (nor, on transferring a part of his holding, to a certificate for the balance), unless otherwise provided by these articles or the terms of issue of such class or series of shares.
(b)
Share certificates, if issued, shall be in such form as the Board may from time to time prescribe, subject to the requirements of the Companies Acts. No fee shall be charged by the Company for issuing a share certificate. In the case of a share held jointly by several persons, delivery of a certificate in their joint names to one of several joint holders shall be sufficient delivery to all.
15.
If a share certificate is worn-out or defaced, or alleged to have been lost or destroyed, it may be replaced without fee but on such terms (if any) as to evidence and indemnity and to payment of any exceptional costs and out of pocket expenses of the Company in investigating such evidence and preparing such indemnity as the Board may think fit and, in case of wearing-out or defacement, on delivery of the certificate to the Company. The Board may require any such indemnity to be secured in such manner as the Board may think fit.
16.
(a)    All certificates for shares (other than letters of allotment, scrip certificates and other like documents) shall, except to the extent that the terms of issue of such shares otherwise provide, be issued under Seal. Each certificate shall be signed by a person or persons then authorized pursuant to article 93 to affix the Seal over his signature.
(b)
The Board may determine, either generally or in any particular case, that any signature on certificates for shares (or certificates or agreements or other documents evidencing the issue by the Company of awards under any share option, share incentive or other form of employee benefits plan adopted by the Company from time to time) need not be autographic but may be affixed to such certificates, agreements or other documents by some mechanical means or may be facsimiles printed on such certificates, agreements or other documents. If any person who has signed, or whose facsimile signature has been used on, any such certificate, agreement or other document ceases for any reason to hold his office or authority to

 
23
 


sign such certificates, agreements or other documents, such certificate, agreement or other document may nevertheless be issued as though that person had not ceased to hold such office or authority to sign such certificates, agreements or other documents.
LIEN
17.
The Company shall have a first and paramount lien on every share for all debts and liabilities of any Shareholder to the Company, whether presently due or not, payable in respect of such share. The Company’s lien on a share shall extend to all dividends and other monies payable in respect thereof. The Board may at any time, either generally or in any particular case, waive any lien that has arisen or declare any share to be wholly or in part exempt from the provisions of this article. The registration of a transfer of any such share shall operate as a waiver of the Company’s lien (if any) thereon.
18.
(a)    The Company may sell, in such manner as the Board may think fit, any share on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently due nor until the expiration of 14 clear days after a notice, stating and demanding payment of the sum presently due and giving notice of the intention to sell in default of such payment, has been served on the holder of the share or the person entitled by transmission to it.
(b)
The net proceeds of sale by the Company of any shares on which it has a lien shall be applied in or towards payment or discharge of the debt or liability in respect of which the lien exists so far as the same is due, and any residue shall (subject to a like lien for debts or liabilities not presently due as existed upon the share prior to the sale) be paid to the holder of, or the person entitled by transmission to, the share immediately before such sale. For giving effect to any such sale the Board may authorise some person to transfer the share to the purchaser. The purchaser shall be registered as the holder of the share and he shall not be bound to see to the application of the purchase money, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings relating to the sale. If a share, which is to be sold as provided for in this article 18, is held in uncertificated form (as such term is used in the Companies Act 1990 (Uncertificated Securities) Regulations 1996), the Board may authorise some person to do all that is necessary under the Companies Act, 1990 (Uncertificated Securities) Regulations 1996 to put such share into certificated form prior to its sale.
REGISTER OF SHAREHOLDERS
19.
(a)    The Register shall be kept in the manner prescribed by the Companies Acts at the Registered Office or at such other place as may be authorised by the Board from time to time consistent with the Companies Acts.
(b)
The Register may be closed at such times and for such periods as the Board may from time to time decide, subject to Section 121 of the 1963 Act. Except during such time as it is closed, the Register shall be open to inspection in the manner

 
24
 


prescribed by the Companies Acts at such times as the Board may from time to time determine.
(c)
Unless the Board so determines, no Shareholder or intending Shareholder shall be entitled to have entered in the Register, or otherwise recognized by the Company, any indication of any trust or any equitable, beneficial, contingent, future, fractional or partial interest in any share, and if any such entry exists or is permitted by the Board it shall not be deemed to abrogate any provisions of these articles provided that no interest will be entered in the Register unless permitted by the Companies Acts.
REGISTER OF DIRECTORS AND SECRETARY
20.
The Secretary shall maintain a register of the Directors and Secretary of the Company as required by the Companies Acts. The register of Directors and Secretary shall be open to inspection in the manner prescribed by the Companies Acts at such times as the Board may from time to time determine.
TRANSFER OF SHARES
21.
Subject to the Companies Acts, to such of the restrictions contained in these articles as may be applicable and to the terms of the issue and rights and privileges attaching to any class or series of share, any Shareholder may transfer all or any of his shares (of any class or series) by an instrument of transfer in the usual common form or in any other form which the Board may from time to time approve. The instrument of transfer may be endorsed on the certificate (if any) issued in respect of the share.
22.
(a)    The instrument of transfer of a Share shall be signed by or on behalf of the transferor and the transferor shall be deemed to remain the holder of the Share until the name of the transferee is entered in the Register in respect of it. The instrument of transfer need not be signed by or on behalf of the transferee. All instruments of transfer may be retained by the Company. The foregoing provisions of this article 22(a) and the provisions of article 22(b) shall not limit the rights of the Company provided in articles 17 and 18.
(b)
Upon receipt of instructions in writing by a transferor, the instrument of transfer of any share may be executed for and on behalf of the transferor by the Secretary or an Assistant Secretary, and the Secretary or Assistant Secretary shall be deemed to have been irrevocably appointed agent for the transferor of such share or shares with full power to execute, complete and deliver in the name of and on behalf of the transferor of such share or shares all such transfers of shares held by the transferor in the share capital of the Company. Any document which records the name of the transferor, the name of the transferee, the class (or series) and number of shares agreed to be transferred, the date of the agreement to transfer shares and the price per share, shall, once executed by the transferor or the Secretary or Assistant Secretary as agent for the transferor in accordance with the first sentence of this article 22(b), be deemed to be a proper instrument of transfer for the purposes of Section 81 of the 1963 Act.

 
25
 


Neither the title of the transferee nor the title of the transferor shall be affected by any irregularity or invalidity in the proceedings in reference to the transfer should the Board so determine.
(c)
The Company, at its absolute discretion and insofar as the Companies Acts or any other applicable law permit, may, or may procure that a subsidiary of the Company shall, pay Irish stamp duty arising on a transfer of shares on behalf of the transferee of such shares of the Company. If stamp duty resulting from the transfer of shares in the Company which would otherwise be payable by the transferee is paid by the Company or any subsidiary of the Company on behalf of the transferee, then in those circumstances, the Company shall, on its behalf or on behalf of its subsidiary (as the case may be), be entitled to (i) seek reimbursement of the stamp duty from the transferee, (ii) set-off the stamp duty against any dividends payable to the transferee of those shares and (iii) to claim a first and permanent lien on the shares on which stamp duty has been paid by the Company or its subsidiary for the amount of stamp duty paid (and the provisions of articles 17 and 18 shall apply to such lien).
(d)
Notwithstanding the provisions of these articles and subject to the Companies Acts, title to any shares in the Company may also be evidenced and transferred without a written instrument in accordance with Section 239 of the 1990 Act or any regulations made thereunder. Subject to the Companies Acts, the Board shall have power to permit any class or series of shares to be held in uncertificated form (as such term is used in the Companies Act 1990 (Uncertificated Securities) Regulations 1996) and to implement any arrangements it thinks fit for such evidencing and transfer which accord with such regulations and in particular shall, where appropriate, be entitled to disapply or modify all or part of the provisions of these articles with respect to the requirement for written instruments of transfer and share certificates (if any), in order to give effect to such regulations.
(e)
Nothing in these articles shall preclude the Board from recognising the renunciation of the allotment of any share by an allottee in favour of some other person on such terms and subject to such conditions as the Board may from time to time decide.
(f)
The Board may decline to register any transfer:
(i)
if the instrument of transfer is not duly stamped, if required, and lodged at the Registered Office or any other place as the Board may from time to time specify for the purpose, accompanied by the certificate (if any) for the shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer;
(ii)
unless a registration statement under the Securities Act of 1933 of the United States of America is in effect with respect to such transfer or such transfer is exempt from registration and, if requested by the Board, a written opinion from counsel reasonably acceptable to the Board is obtained to the effect that such transfer is exempt from registration; or

 
26
 


(iii)
without prejudice to the foregoing, in the absolute discretion of the Board and without assigning any reason therefor, subject to any limitation on such right of the Board imposed by law.
(g)
The Board shall decline to register a transfer of Shares if it appears to the Board, whether before or after such transfer, that the effect of such transfer would be to increase the number of the Controlled Shares of any person to 10% or any higher percentage of any class of voting Shares or of the total issued Shares or of the voting power of the Company. The Board may, in its discretion, advise any person that any transfer which would increase the number of such person’s Controlled Shares to 10% or any higher percentage of any class of voting Shares or the total issued Shares or voting power of the Company may not be made and will not be recognised for any purpose and any such transfer purported to have been made to such person after receipt of such notice by such person shall be null and void.
(h)
Subject to any directions of the Board from time to time in force, the Secretary or Assistant Secretary may exercise the powers and discretions of the Board under article 22(f) and articles 21 and 23.
(i)
The registration of transfers may be suspended at such time and for such periods as the Board may from time to time determine, provided always that such registration shall not be suspended for more than 30 days in any year except as may be required by applicable law.
23.
(a)    If the Board declines to register a transfer it shall, within one month after the date on which the instrument of transfer was lodged, send to the transferee notice of such refusal.
(b)
No fee shall be charged by the Company for registering any transfer or for making any entry in the Register concerning any other document relating to or affecting the title to any share (except that the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed on it in connection with such transfer or entry).
TRANSMISSION OF SHARES
24.
In the case of the death of a Shareholder, the survivor or survivors, where the deceased was a joint Shareholder, or the estate representative, where he or she was sole Shareholder, shall be the only person or persons recognised by the Company as having any title to his shares; but nothing in these articles shall release the estate of a deceased Shareholder from any liability in respect of any share held by him solely or jointly with other persons. In this article, estate representative means the person to whom appropriate authority has been granted to represent or administer or otherwise manage the estate of a deceased Shareholder under the laws applicable to the estate of the deceased Shareholder or, if there is no such person, such other person as the Board may in its absolute discretion determine to be the person recognised by the Company for the purpose of this article.

 
27
 


25.
(a)    Subject to article 22(f), any person entitled by transmission to a share may, upon the production of such evidence as may be properly required by the Board from time to time, elect either to be registered himself as the holder of the share or to have some person nominated by him registered as the transferee of the share.
(b)
Subject to article 22(f) and article 25(c), if such person entitled by transmission to a share elects to be registered as holder of the share, he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. If he elects to have his nominee registered, he shall signify his election by signing an instrument of transfer of such share in favour of his nominee.
(c)
All of the provisions of these articles relating to the right to transfer and the registration of transfers of shares shall apply to any such notice or instrument of transfer as if the death or bankruptcy of the Shareholder or other event giving rise to the transmission had not occurred and the notice or instrument of transfer were an instrument of transfer signed by such Shareholder.
26.
A person entitled by transmission to a share shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Shareholder in respect of the share, be entitled to exercise any right in respect of the share in relation to meetings of the Company; provided, however, that the Board may at any time give notice requiring a person entitled by transmission to a share to elect either to be registered himself or to transfer the share, and if the notice is not complied with within 90 clear days after the date such notice is given, the Board may withhold payment of any dividend, other monies payable, scrip dividend or capitalisation issue of shares or other similar benefit in respect of the share until the requirements of the notice have been complied with.
27.
Subject to any directions of the Board from time to time in force, the Secretary or Assistant Secretary may exercise the powers and discretions of the Board under articles 24, 25 and 26.
GENERAL MEETINGS
28.
The Board may, whenever it thinks fit (and, to the extent required by the Companies Acts, shall, on the requisition in writing of Shareholders holding such number of shares as is prescribed by Section 132 of the 1963 Act), convene a general meeting in the manner provided for in these articles and the Companies Acts.
29.
In accordance with the Companies Acts, the Board shall convene and the Company shall in each year hold a general meeting as its annual general meeting in addition to any other meeting in that year, and shall specify the meeting as such in the notices calling it. Each such annual general meeting shall be held within such time period as required by Section 131 of the 1963 Act. Subject to Section 140 of the 1963 Act, all general meetings may be held outside of Ireland. All general meetings other than annual general meetings shall be called extraordinary general meetings.

 
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30.
Each general meeting shall be held at such time and place as specified in the notice of meeting.
31.
Subject to the Companies Acts, all of the provisions of these articles (including article 44) relating to meetings and resolutions of Shareholders (other than to meetings of any separate class or series of Shareholders) shall apply mutatis mutandis to (a) any separate meeting of ordinary Shareholders and (b) any separate meeting of any other class or series of Shareholders, except as otherwise expressly provided in the terms of issue of such other class or series of shares.
NOTICE OF GENERAL MEETINGS
32.
Subject to Sections 133 and 141 of the 1963 Act, any annual general meeting and any extraordinary general meeting shall be called by at least thirty clear days’ notice. The notice of a general meeting shall specify the place, day and time of the meeting (including any satellite meeting place arranged for the purposes of article 38) and, in the case of an extraordinary general meeting, the general nature of the business to be considered. Notice of every general meeting shall be given in any manner permitted by these articles to all Shareholders (other than those who, under the provisions of these articles or the terms of issue of the shares which they hold, are not entitled to receive such notice from the Company) and to each Director and to the Auditors.
33.
The accidental omission to give notice of a meeting or (in cases where instruments of proxy are sent out with the notice) the accidental omission to send such instrument of proxy to, or the non-receipt of notice of a meeting or such instrument of proxy by, any person entitled to receive such notice shall not invalidate the proceedings at that meeting. A Shareholder present, either in person or by proxy, at any general meeting of the Company or of the holders of any class or series of shares in the Company, will be deemed to have received notice of that meeting and, where required, of the purpose for which it was called.

PROCEEDINGS AT GENERAL MEETINGS
34.
All business shall be deemed special that is transacted at an extraordinary general meeting, and also all that is transacted at an annual general meeting, the consideration of the accounts, balance sheets and the reports of the Directors and Auditors, the election of Directors, the re-appointment of the retiring Auditors and the fixing of the remuneration of the Auditors.
35.
The chairman of the Board, if any, or, in his absence, another Director designated by the chairman of the Board shall preside as chairman at every general meeting of the Company. If neither the chairman of the Board nor such other Director designated by the chairman of the Board is present within 30 minutes after the time appointed for holding the meeting, the Shareholders present shall choose one of their number to be chairman of the meeting. The chairman of the meeting shall take such action as he thinks fit to promote the proper and orderly conduct of the business of the meeting as laid down in the notice of the meeting.

 
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36.
(a)    Subject to Section 141 of the 1963 Act and the requirements of the Companies Acts, anything which may be done by resolution in general meeting may, without a meeting and without any previous notice being required, be done by resolution in writing, signed by all of the Shareholders entitled generally to vote at general meetings who at the date of the resolution in writing would be entitled to attend a meeting and vote on the resolution and if described as a special resolution shall be deemed to be a Special Resolution or a special resolution of the class, as applicable. Such resolution in writing may be signed in as many counterparts as may be necessary. This article 36 shall not apply to those matters required by the Companies Acts to be carried out in a meeting.
(b)
For the purposes of any written resolution under this article 36, the date of the resolution in writing is the date when the resolution is signed by, or on behalf of, the last Shareholder to sign and any reference in any enactment to the date of passing of a resolution is, in relation to a resolution in writing made in accordance with this article 36, a reference to such date.
(c)
A resolution in writing made in accordance with this article 36 is as valid as if it had been passed by the Company in general meeting.
37.
No business shall be transacted at any general meeting or adjourned meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment or election of a chairman, which shall not be treated as part of the business of the meeting. Unless a higher or lower quorum is required by the Companies Acts or these articles, two or more Shareholders (or if there is only one Shareholder of the relevant class or series of Shareholders, then one Shareholder) present in person or by proxy and holding shares representing at least 50 percent of the issued shares carrying the right to vote at such meeting shall be a quorum; provided, that no quorum shall exist for the purpose of considering or passing any Special Resolution unless the Shareholder or Shareholders present in person or by proxy hold Shares representing at least two-thirds of the issued Shares carrying the right to vote at such meeting.
38.
(a)    Subject to the Companies Acts, the Board may resolve to enable persons entitled to attend a general meeting of the Company to do so by simultaneous attendance and participation at a satellite meeting place anywhere in the world and by such electronic means as the Board may from time to time approve. The Shareholders present at any such satellite meeting place in person or by proxy and entitled to vote shall be counted in the quorum for, and shall be entitled to vote at, the meeting in question if the chairman is satisfied that the conditions referred to in articles 38(b)(i), 38(b)(ii) and 38(b)(iii) have been met.
(b)
If it appears to the chairman of a general meeting that the place of the meeting (or any satellite meeting) specified in the notice convening the meeting is inadequate to accommodate all persons entitled and wishing to attend, then the meeting nevertheless is duly constituted and its proceedings nevertheless are valid if the chairman is satisfied that adequate facilities have been made available, whether at

 
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the place of the meeting or elsewhere, to ensure that each such person who is unable to be accommodated at the place of the meeting is able to:
(i)
communicate simultaneously and instantaneously with the persons present at the other meeting place or places, whether by the use of microphones, loud-speakers, audio-visual or other communications equipment or facilities;
(ii)
have access to all documents which are required by the Companies Acts and these articles to be made available at the meeting; and
(iii)
participate in any poll required to vote on any resolutions of the Company;
and in that case the chairman may elect to use such adequate facilities described in the preceding sentence for the purposes of the meeting and any provision of these articles relating to meetings shall apply to any meeting so extended by the use of such facilities.
(c)
The chairman of the general meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place. If it appears to the chairman of the general meeting that the facilities at the principal meeting place or any satellite meeting place are or become inadequate for the purposes referred to in articles 38(b)(i), 38(b)(ii) and 38(b)(iii), then the chairman may, without the consent of the meeting, adjourn the general meeting. All business conducted at that general meeting up to the time of such adjournment shall be valid.
39.
Each Director and the Auditors shall be entitled to attend and speak at any general meeting of the Company or of any class or series of Shareholders.
40.
The Board may make any security arrangements which it considers appropriate relating to the holding of a general meeting of the Company, including arranging for any person attending a meeting to be searched and for items of personal property which may be taken into a meeting to be restricted, and any person who fails to comply with any such arrangements may be refused entry to the meeting.
41.
(a)    Subject to the Companies Acts, a resolution may only be put to a vote at a general meeting of the Company if:
(i)
it is proposed by or at the direction of the Board; or     
(ii)
it is proposed at the direction of a court of competent jurisdiction;
(iii)
it is proposed with respect to an extraordinary general meeting in the requisition in writing for such meeting made by such number of Shareholders as is prescribed by (and such requisition in writing is made in accordance with) Section 132 of the 1963 Act; or
(iv)
the chairman of the meeting in his discretion decides that the resolution may properly be regarded as within the scope of the meeting.

 
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(b)
No amendment may be made to a resolution, at or before the time when it is put to a vote, unless the chairman of the meeting in his discretion decides that the amendment or the amended resolution may properly be put to a vote at that meeting.
(c)
If the chairman of the meeting in his discretion rules a resolution or an amendment to a resolution admissible or out of order (as the case may be), the proceedings of the meeting or on the resolution in question shall not be invalidated by any error in his ruling. Any ruling by the chairman of the meeting in relation to a resolution or an amendment to a resolution shall be final and conclusive, subject to any subsequent order by a court of competent jurisdiction.
42.
(a)    At any general meeting, whether or not a quorum is present, the chairman may, with the consent of the meeting, and shall if so directed by the meeting, adjourn the meeting from time to time and place to place without notice other than announcement at the meeting. Other than announcement at the meeting, notice of any adjourned meeting or of any business to be transacted at an adjourned meeting shall not be required to be given, except as provided in article 42(c) and except where expressly required by applicable law.
(b)
At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called, but only those Shareholders entitled to vote at the meeting as originally notified shall be entitled to vote at any adjournment or adjournments thereof.
(c)
If an adjournment is for 30 days or more or for an indefinite period, a notice of the adjourned meeting shall be given in the manner specified in article 32.
VOTING
43.
Except where a greater majority is required by the Companies Acts or these articles, any question proposed for consideration at any general meeting of the Company shall be decided by an Ordinary Resolution and all resolutions put to the Shareholders will be decided on a poll.
44.
(a)    Every Shareholder owning shares conferring the right to vote present in person or by proxy at any general meeting shall have one vote (or such other number of votes as may be specified in the terms of issue of such shares or in these articles), for each such share registered in such Shareholder’s name in the Register on the date fixed pursuant to the provisions of article 106 or 107, as applicable, as the record date for the determination of Shareholders entitled to vote at such meeting, provided that if and so long as the votes conferred by the Controlled Shares of any person constitute 10% or more of the votes conferred by the issued shares of the Company, each issued share comprised in such Controlled Shares shall confer only a fraction of a vote that would otherwise be applicable according to the following formula:
[(T divided by 10) – 1] divided by C

 
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Where: “T” is the aggregate number of votes conferred by all the issued shares of the Company; and “C” is the number of votes conferred by the Controlled Shares of such person.
For the purposes of this article, “person” shall include any “group” of persons within the meaning of Section 13(d)(3) of the Exchange Act.
(b)
If, as a result of giving effect to the foregoing provisions of this article 44 or otherwise, the votes conferred by the Controlled Shares of any person would otherwise represent more than 10% of the votes conferred by all of the issued shares of the Company, the votes conferred by the Controlled Shares of such person shall be reduced in accordance with the foregoing provisions of this article 44. Such process shall be repeated until the votes conferred by the Controlled Shares of each person represent no more than 10% of the votes conferred by all of the issued shares of the Company.
(c)
Notwithstanding the foregoing provisions of this article 44, after having applied the provisions thereof as best as they consider reasonably practicable, the Board may make such final adjustments to the aggregate number of votes conferred by the Controlled Shares of any person that it considers fair and reasonable in all the circumstances to ensure that such votes represent less than 10% of the aggregate voting power of the votes conferred by all of the issued shares of the Company.
45.
The Board may, before any meeting of Shareholders, determine the time set for a poll, the manner in which any poll is to be taken and the manner in which votes are to be counted, which may include provision for votes to be cast by electronic means by persons present in person or by proxy at the meeting and for the appointment of scrutineers. To the extent not so determined by the Board, such matters shall be determined by the chairman of the meeting. A person appointed to act as a scrutineer need not be a Shareholder.
46.
Votes may be cast on the poll either personally or by proxy. A person entitled to more than one vote need not use all of his votes or cast all of the votes he uses in the same way.
47.
The result of a poll shall, subject to any provisions of these articles or applicable law relating to approval thresholds, be deemed to be the resolution of the meeting.
48.
In the case of an equality of votes at a meeting, the motion shall be deemed to be lost and the chairman of the meeting shall not be entitled to a second or casting vote.
49.
In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holding. Joint holders of more than one share shall, subject to any terms determined by the Board and subject to article 22(f), be entitled to split the holdings into several holdings with their names in different orders so as to enable one or more joint holders to attend and vote.
50.
Subject to article 51, a Shareholder who is a patient for any purpose of any statute or applicable law relating to mental health or in respect of whom an order has been made by

 
33
 


any court in Ireland (or elsewhere having jurisdiction) for the protection or management of the affairs of persons incapable of managing their own affairs may vote, by his legal guardian, receiver, committee or other person in the nature of a legal guardian, receiver, committee or other person appointed by such court, and such legal guardian, receiver, committee or other person may vote by proxy and may otherwise act and be treated as such Shareholder for the purpose of meetings of Shareholders.
51.
Evidence to the satisfaction of the Board of the authority of any person claiming the right to vote under article 50 shall be produced at the Registered Office (or at such other place as may be specified for the deposit of instruments of proxy) not later than the last time by which an instrument appointing a proxy must be deposited in order to be valid for use at the meeting or adjourned meeting or on the holding of the poll at or on which that person proposes to vote and, in default, the right to vote shall not be exercisable.
52.
No objection may be raised to the qualification of any voter or to the counting of, or failure to count, any vote except at the meeting at which the vote objected to is given or tendered. Any objection so raised shall be referred to the chairman of the meeting, whose decision shall be final and conclusive. Except as otherwise decided by the chairman, every vote counted and not disallowed at the meeting shall be valid and every vote disallowed or not counted shall be invalid. Notwithstanding the foregoing, however, if the chairman of the meeting considers that such action is necessary to determine accurately the vote count, the chairman may, in his discretion, whether or not an objection has been raised, defer until after the conclusion of the meeting a decision as to the proper application of article 44 to any vote at such meeting. If the decision has been so deferred, then the chairman of the meeting or, if the decision has not been reached within 90 days of the meeting, the Board, shall make the decision and the decision shall be final and conclusive.
PROXIES AND CORPORATE REPRESENTATIVES
53.
(a)    A Shareholder may appoint one or more persons as his proxy, with or without the power of substitution, to represent him and vote on his behalf in respect of all or some only of his shares at any meeting of Shareholders (including an adjourned meeting). A proxy need not be a Shareholder.
(b)
A Shareholder that is a corporation may appoint any individual (or two or more individuals in the alternative) as its representative to represent it and vote on its behalf at any meeting of Shareholders (including an adjourned meeting) and such a corporate representative may exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were a Shareholder who is an individual.
(c)
A Shareholder that is a corporation may appoint more than one such representative (with or without appointing any persons in the alternative) at any such meeting provided that such appointment specifies the number of shares in respect of which each such appointee is authorised to act as representative, not exceeding in aggregate the number of shares held by the appointor and carrying the right to attend and vote at the relevant meeting.

 
34
 


(d)
The appointment of a proxy or a corporate representative in relation to a particular meeting shall, unless the contrary is stated in the instrument of appointment, be valid for any adjournment of the meeting.
54.
A Shareholder may appoint a standing proxy, with or without the power of substitution, or (if a corporation) a standing representative (with or without appointing any persons in the alternative) by delivery to the Registered Office (or at such other place as the Board may from time to time specify for such purpose) of evidence of such appointment. The appointment of such a standing proxy or representative shall be valid for every meeting of Shareholders and adjourned meeting until such time as it is revoked by notice to the Company, but:
(a)
the appointment of a standing proxy or representative may be made on an irrevocable basis in which case the Company may recognise the vote of the proxy or representative given in accordance with the terms of the appointment, to the exclusion of the vote of the Shareholder, until such time as the appointment ceases to be effective in accordance with its terms;
(b)
notwithstanding article 54(a), the appointment of a standing proxy or representative shall be deemed to be suspended at any meeting (or any poll taken subsequently to any meeting with respect to business on the agenda for such meeting) at which (i) the Shareholder is present in person and votes or (ii) in respect of which the Shareholder has specifically appointed another proxy or representative in respect of the same shares, which proxy or representative is present in person and votes in respect of such shares; and
(c)
the Board may from time to time require such evidence as it deems necessary as to the due execution and continuing validity of the appointment of any standing proxy or representative and, if it does so, the appointment of the standing proxy or representative shall be deemed to be suspended until such time as the Board determines that it has received the required evidence or other evidence satisfactory to it.
55.
(a)    A proxy may be appointed by an instrument in writing in any common form or in such other form as the Board may approve, such instrument being executed under the hand of the appointor or of his attorney or agent authorised by him in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. A proxy may also be appointed in such other manner as the Board may from time to time approve.
(b)
The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of that power or authority, shall, subject to the following provisions of this article 55(b), be deposited at such place or address as is specified for that purpose in the notice convening the meeting, before the time appointed for the taking of the relevant poll and, in default, the instrument of proxy shall not be treated as valid. Where the instrument appointing a proxy is in electronic form, it may be so received where an address has been specified by the Company for that purpose: (i) in the notice convening the meeting;

 
35
 


(ii) in any form of appointment of proxy sent out by the Company in relation to the meeting; or (iii) in any invitation contained in an electronic communication to appoint a proxy issued by the Company in relation to the meeting.
(c)
If the terms of appointment of a proxy include a power of substitution, any proxy appointed by substitution under such power shall be deemed to be the proxy of the Shareholder who conferred such power. All of the provisions of these articles relating to the execution and delivery of an instrument or other form of communication appointing or evidencing the appointment of a proxy shall apply, mutatis mutandis, to the instrument or other form of communication effecting or evidencing such an appointment by substitution.
56.
A vote given by proxy or a representative, whether a standing proxy or a representative or proxy or representative relating to a particular meeting, shall be valid notwithstanding the previous death or insanity of the principal (in the case of a proxy), or revocation of the appointment of the proxy or representative or of the authority under which it was executed unless notice of such death, insanity or revocation was received by the Company at the Registered Office (or at any other place as may be specified for the delivery of instruments or other forms of communication appointing or evidencing the appointment of proxies and representatives in the notice convening the meeting or in any other information sent to Shareholders by or on behalf of the Board in relation to the meeting) before the commencement of the meeting or adjourned meeting at which the vote is given.
57.
Without limiting the foregoing, the Board may from time to time permit appointments of a proxy to be made by means of a telephonic, electronic or internet communication or facility and may in a similar manner permit supplements to, or amendments or revocations of, any such telephonic, electronic or internet communication or facility to be made. The Board may in addition prescribe the method of determining the time at which any such telephonic, electronic or internet communication or facility is to be treated as received by the Company. The Board may treat any such telephonic, electronic or internet communication or facility which purports to be or is expressed to be sent on behalf of a Shareholder as sufficient evidence of the authority of the person sending that instruction to send it on behalf of that Shareholder.
58.
Subject to the Companies Acts, the Board may also at its discretion waive any of the provisions of these articles relating to the execution and deposit of an instrument or other form of communication appointing or evidencing the appointment of a proxy or a representative or any ancillary matter (including any requirement for the production or delivery of any instrument or other communication to any particular place or by any particular time or in any particular way) and, in any case in which it considers it appropriate, may accept such verbal or other assurances as it thinks fit as to the right of any person to attend and vote on behalf of any Shareholder at any meeting of Shareholders.



 
36
 


APPOINTMENT OF DIRECTORS
59.
(a)    At 25 April 2014, the Board is divided into three classes. There is no distinction in the voting or other powers and authorities of Directors of different classes. Subject to article 60(e), all Directors will be designated as either class I, class II or class III Directors. Subject to article 60(e), the Board shall from time to time by resolution determine the respective numbers of class I Directors, class II Directors and class III Directors, but each class shall consist as nearly as possible of one-third of the total number of Directors constituting the Board. The resolution appointing any Director must designate the Director as a class I, class II or class III Director.
(b)
Upon the resignation or termination of office of any Director, if a new Director shall be appointed to the Board he will be designated to fill the vacancy arising and shall, for the purposes of these articles, and subject to article 60(e), constitute a member of the class of Directors represented by the person that he replaces.
60.
(a)    Each class I Director shall (unless his office is vacated in accordance with these articles) continue to serve until the conclusion of the annual general meeting of the Company held in the calendar year 2015 and subsequently shall (unless his office is vacated in accordance with these articles) serve for a one year term concluding at the annual general meeting after such class I Directors together were last appointed or re-appointed.
(b)
Each class II Director shall (unless his office is vacated in accordance with these articles) continue to serve until the conclusion of the annual general meeting of the Company held in the calendar year 2015 and subsequently shall (unless his office is vacated in accordance with these articles) serve for a one year term concluding at the annual general meeting after such class II Directors together were last appointed or re-appointed.
(c)
Each class III Director shall (unless his office is vacated in accordance with these articles) continue to serve until the conclusion of the annual general meeting of the Company held in the calendar year 2016 and subsequently shall (unless his office is vacated in accordance with these articles) serve for a one year term concluding at the annual general meeting after such class III Directors were last appointed or re-appointed.
(d)
Any Director whose term of office is expiring at an annual general meeting will be eligible for re-appointment and will in any case retain office until the close of that meeting.
(e)
The designation of a Director as class I, class II or class III shall be abolished for the purposes of these articles with effect from:
(i)
in the case of class I and class II, the conclusion of the annual general meeting of the Company held in the calendar year 2015; and
(ii)
in the case of class III, the conclusion of the annual general meeting of the Company held in the calendar year 2016, and

 
37
 


upon the abolition of the designation of all Directors as any of class I, class II or class III, the Directors shall, subject to these articles and the Companies Acts, each serve for a term concluding at the annual general meeting occurring after such Directors were last appointed or re-appointed.
61.
(a)    No person shall be appointed a Director, unless nominated in accordance with the provisions of this article 61. Nominations of persons for appointment as Directors may be made:
(i)
by the Board;
(ii)
with respect to election at an annual general meeting, by any Shareholder who holds Ordinary Shares or other shares carrying the general right to vote at general meetings of the Company, who is a Shareholder at the time of the giving of the notice provided for in article 61(b) and at the time of the relevant annual general meeting, and who timely complies with the notice procedures set forth in this article 61;
(iii)
with respect to election at an extraordinary general meeting requisitioned in accordance with Section 132 of the 1963 Act, by a Shareholder or Shareholders who hold Ordinary Shares or other shares carrying the general right to vote at general meetings of the Company and who make such nomination in the written requisition of the extraordinary general meeting in accordance with article 28 and in compliance with the other provisions of these articles and the Companies Acts relating to nominations of directors and the proper bringing of special business before an extraordinary general meeting; and
(iv)
by holders of any class or series of shares in the Company then in issue having special rights to nominate or appoint Directors in accordance with the terms of issue of such class or series, but only to the extent provided in such terms of issue
(clauses (ii), (iii) and (iv) being the exclusive means for a Shareholder to make nominations of persons for election to the Board).
(b)
Any Shareholder who holds Ordinary Shares or other shares carrying the general right to vote at general meetings of the Company may nominate a person or persons for election as Director at an annual general meeting only if (in addition to the requirements of article 61(a)(ii)) written notice of such Shareholder’s intent to make such nomination is given in accordance with the procedures set forth in this article 61, either by personal delivery or by mail, postage prepaid, to the Secretary of the Company at the address of the Secretary (x) until a notice of the Company’s 2011 annual general meeting has been sent to Shareholders, specified in the proxy statement sent to shareholders of XL Capital Ltd with respect to its 2010 annual general meeting and (y) thereafter, specified in the notice of an annual general meeting or accompanying proxy statement last sent to Shareholders prior to the

 
38
 


delivery of such Shareholder’s written notice of nomination (or, if no such address was specified, at the Registered Office) not later than the close of business not less than 90 and not more than 120 clear days prior to the one-year anniversary date of the immediately preceding annual general meeting (or, in the case of the 2011 annual general meeting, of the 2010 annual general meeting of XL Capital Ltd), provided, however, that if the date of the annual general meeting is more than 30 clear days before or after the anniversary date of the immediately preceding annual general meeting (or, in the case of the 2011 annual general meeting, of the 2010 annual general meeting of XL Capital Ltd), such notice of nomination shall be given not later than the later of (i) the close of business 30 clear days prior to the date of such annual general meeting or (ii) the close of business on the day that is 10 clear days after the first public announcement of the date of such annual general meeting. In no event shall any adjournment of an annual general meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a Shareholder’s notice as described above.
(c)
Each notice of a Shareholder’s intent to make a nomination delivered pursuant to article 61(b) and each requisition in writing delivered pursuant to article 28 that sets forth a notice of a Shareholder’s or Shareholders’ intent to nominate one or more persons for election as a Director shall, in each case, set forth:
(i)
as to the Shareholder or Shareholders giving notice and each beneficial owner, if different, on whose behalf the nomination is made, (A) the name and address of each such Shareholder and each such beneficial owner, (B) the class or series and number of Shares of which each such Shareholder and each such beneficial owner, respectively (and their respective Affiliates, naming such Affiliates), is, directly or indirectly, the registered or beneficial owner as of the date of such notice or requisition in writing, (C) a description of the material terms of any Covered Arrangement to which each such Shareholder and each such beneficial owner, and their respective Affiliates, directly or indirectly, is a party as of the date of such notice or such requisition in writing, (D) any other information relating to each such Shareholder and each such beneficial owner that would be required to be disclosed in a proxy statement in connection with a solicitation of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act (whether or not then applicable to the Company and whether or not any such Shareholder or beneficial owner intends to solicit proxies) (the disclosures to be made pursuant to the foregoing clauses (i)(B), (i)(C) and (i)(D), the “Shareholder Disclosable Interests”), and (E) a representation that each such Shareholder is a registered holder of Shares entitled to vote at the relevant meeting of Shareholders and intends to appear in person or by proxy at the relevant meeting to nominate the person or persons specified in the notice or requisition in writing; provided, however, that “Shareholder Disclosable Interests” shall not include any such disclosures with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is giving such notice solely as a

 
39
 


result of being the Shareholder directed to prepare and submit the notice required by this article 61 on behalf of one or more beneficial owners;
(ii)
a description of all arrangements or understandings between each such Shareholder and each such beneficial owner, and their respective Affiliates, and each nominee or any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Shareholder or Shareholders;
(iii)
as to each person whom the Shareholder or Shareholders propose to nominate for election as a Director, (A) all information relating to such person as would have been required to be included in a proxy statement filed in connection with a solicitation of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act (whether or not then applicable to the Company and whether or not the Shareholder or Shareholders intend to solicit proxies), (B) a description of the material terms of any Covered Arrangement to which such nominee or any of his or her Affiliates is a party as of the date of such notice or requisition in writing, and (C) the written consent of each nominee to being named in the notice or requisition in writing as a nominee and to serving as a Director if so elected; and
(iv)
an undertaking by each such Shareholder and each such beneficial owner to (A) notify the Company in writing of any changes in the information provided in such notice or requisition in writing pursuant to clauses (i), (ii) and (iii) above as of the record date for determining Shareholders entitled to vote at the relevant meeting of Shareholders promptly (and, in any event, within five business days) following the later of the record date or the date notice of the record date is first disclosed by public announcement and (B) deliver to the Company an updated notification of such information thereafter within two business days of any change in such information and, in any event, within five hours after the close of business (at the location at which the meeting is to take place) on the business day preceding the meeting date updated as of such close of business.
(d)
No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in these articles. Except as otherwise provided by law, the Board or the chairman of any meeting of Shareholders to elect Directors may determine in good faith that a nomination was not made in compliance with the procedures set forth in the foregoing provisions of this article 61; and if the Board or the chairman of the meeting should so determine, it shall be so declared to the meeting, and the defective nomination shall be disregarded. Notwithstanding anything in these articles to the contrary, unless otherwise required by law, if a Shareholder intending to make a nomination at a meeting of Shareholders in accordance with this article 61 does not timely appear in person or by proxy at the meeting to present the nomination, such nomination shall

 
40
 


be disregarded, notwithstanding that appointments of proxy in respect of such nomination may have been received by the Company or any other person.
(e)
Notwithstanding the foregoing provisions of this article 61, any Shareholder or Shareholders intending to make a nomination at a meeting of Shareholders in accordance with this article 61, and each related beneficial owner, if any, shall also comply with all applicable requirements of the Exchange Act with respect to the matters set forth in these articles; provided, however, that any references in these articles to the Exchange Act are not intended to and shall not limit the requirements applicable to nominations made or intended to be made in accordance with clause (ii) or clause (iii) of article 61(a).
(f)
Nothing in this article 61 shall be deemed to affect any rights of the holders of any class or series of shares to elect or appoint Directors pursuant to any applicable terms of issue of any such shares.
62.
The number of Directors shall (subject to automatic increases to accommodate the exercise of the rights of holders of any class or series of shares then in issue having special rights to nominate or appoint Directors in accordance with the terms of issue of such class or series) not be less than 3 nor more than 13. The continuing Directors may act notwithstanding any vacancy in their body, provided that if the number of the Directors is reduced below the fixed minimum number, the remaining Director or Directors shall appoint, as soon as practicable, an additional Director or additional Directors to make up such minimum or shall convene a general meeting of the Company for the purpose of making such appointment.
63.
(a)    Subject to articles 61 and 62, and subject to the rights of any holders of any class or series of Shares then in issue having special rights to nominate or appoint Directors in accordance with the terms of issue of such class or series, Directors shall be individuals appointed as follows:
(i)
by Shareholders by Ordinary Resolution at the annual general meeting in each year or at any extraordinary general meeting called for the purpose in accordance with the other provisions of these articles;
(ii)
by the Board in accordance with the last sentence of article 62 and in accordance with article 83; or
(vii)
so long as there are in office a sufficient number of Directors to constitute a quorum of the Board in accordance with article 82, the Directors shall have the power at any time and from time to time to appoint any person to be a Director, either to fill a vacancy in the Board or as an addition to the existing Directors, but so that the total number of Directors shall not any time exceed the maximum number provided for in these articles.
(b)
If at any meeting of Shareholders (or on a subsequent poll with respect to business on the agenda for such meeting) resolutions are passed in respect of the election or re-election (as the case may be) of Directors which would result in the maximum

 
41
 


number of Directors fixed in accordance with these articles being exceeded, then those Director(s), in such number as exceeds such maximum fixed number, receiving at that meeting (or on a subsequent poll with respect to business on the agenda for such meeting) the lowest number of votes in favour of election or re-election (as the case may be) shall, notwithstanding the passing of any resolution in their favour, not be elected or re-elected (as the case may be) to the Board; provided, that this article shall not limit the rights of holders of any class or series of shares then in issue having special rights to nominate or appoint Directors in accordance with the terms of issue of such class or series; provided, further, that nothing in this article 63(b) will require or result in the removal of a Director whose election or re-election to the Board was not voted on at such meeting.
(c)
A Director appointed by the Board under 63(a)(ii) or 63(a)(iii) (unless he is removed from office or his office is vacated in accordance with these articles) will hold office until his term of office expires under article 60(a), 60(b) or 60(c) as relevant.
(d)
Directors are not entitled to appoint alternate directors.
(e)
A Director shall not require a share qualification.
RESIGNATION, REMOVAL AND DISQUALIFICATION OF DIRECTORS
64.
The office of a Director shall be vacated:
(a)
if he resigns his office, on the date on which notice of his resignation is delivered to the Secretary at the principal executive offices of the Company or tendered at a meeting of the Board or on such later date as may be specified in such notice; or
(b)
on his being prohibited by law from being a Director; or
(c)
on his ceasing to be a Director by virtue of any provision of the Companies Acts.
65.
The Company may, in accordance with Section 182 of the 1963 Act, remove any Director before the expiration of his term of office notwithstanding anything in these articles or in any agreement between the Company and such Director. Such removal shall be without prejudice to any claim such Director may have for damages for breach of any contract of service between him and the Company.
DIRECTORS’ REMUNERATION AND EXPENSES
66.
Each Director shall be entitled to receive such fees for his services as a Director, if any, as the Board may from time to time determine. Each Director shall be paid all expenses properly and reasonably incurred by him in the conduct of the Company’s business or in the discharge of his duties as a Director, including his reasonable traveling, hotel and incidental expenses in attending and returning from meetings of the Board or any committee of the Board or general meetings.

 
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67.
The Board may from time to time determine that, subject to the requirements of the Companies Acts, all or part of any fees or other remuneration payable to any Director of the Company shall be provided in the form of shares or other securities of the Company or any subsidiary of the Company, or options or rights to acquire such shares or other securities, on such terms as the Board may decide.
DIRECTORS’ INTERESTS
68.
(a)    A Director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company shall comply with the provisions of Section 194 of the 1963 Act.
(b)
A Director may vote in respect of any contract or proposed contract in which he has declared his interest in accordance with article 68(a) and will be counted in the quorum at any meeting on which any such vote is proposed.
69.
(a)    A Director of the Company may be or become a director or other officer of, or otherwise interested in, any corporation promoted by the Company or in which the Company may be interested as shareholder or otherwise, and no such Director shall be accountable to the Company for any remuneration or other benefits received by him as a director or officer of, or from his interest in, such other corporation unless the Company otherwise directs.
(b)
A Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his office of Director for such period and on such terms as to remuneration and otherwise as the Board may determine, and no Director or intending Director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company in which any Director is in any way interested, be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement by reason of such Director holding that office or of the fiduciary relation thereby established.
(c)
Any Director may act by himself or his firm in a professional capacity for the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; but nothing herein contained shall authorise a director or his firm to act as Auditor.





 
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POWERS OF THE BOARD
70.
Subject to the provisions of the Companies Acts and these articles, the Board shall manage the business and affairs of the Company and may exercise all of the powers of the Company as are not required by the Companies Acts or by these articles to be exercised by the Company in general meeting. No alteration of these articles shall invalidate any prior act of the Board which would have been valid if that alteration had not been made. The powers given by this article shall not be limited by any special power given to the Board by these articles and, except as otherwise expressly provided in these articles, a meeting of the Board at which a quorum is present shall be competent to exercise all of the powers, authorities and discretions vested in or exercisable by the Board.
71.
The Board may exercise all of the powers of the Company to borrow or raise money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to Part III of the 1983 Act, to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any other person.
72.
The Company may exercise the powers conferred by Section 41 of the 1963 Act with regard to having an official seal for use abroad and such powers shall be vested in the Board.
73.
All cheques, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for money paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time determine.
74.
The Board may exercise all of the powers of the Company to grant or procure the grant or provision of benefits, including pensions, annuities or other allowances, to or for any person, including any Director or former Director, who has held any executive office or employment with, or whose services have directly or indirectly been of benefit to, the Company or any Group Company or Affiliate or otherwise associated with any of them or a predecessor in business of the Company or of any such other corporation, and to or for any relation or dependant of any such person, and to contribute to any fund and pay premiums for the purchase or provision of any such benefit, or for the insurance of any such person.
75.
The Board may cause the voting power conferred by the shares in any other corporation or other person held or owned by the Company to be exercised in such manner in all respects as the Board thinks fit, including the exercise of votes in favour of any resolution appointing the Directors or any of them to be directors or officers of such other corporation or person or voting or providing for the payment of remuneration to any such Directors as the directors or officers of such other corporation or person.
DELEGATION OF THE BOARD’S POWERS
76.
The Board may by power of attorney or otherwise (including by a duly passed resolution) appoint any person to be the attorney or agent of the Company and may delegate to such person any of the Board’s powers, authorities and discretions (with power to sub-delegate)

 
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for such period and subject to such conditions as it may think fit. The Board may revoke or vary any such appointment or delegation. Any such power of attorney or resolution or other document may contain such provisions for the protection and convenience of persons dealing with any such attorney or agent as the Board may think fit.
77.
The Board may from time to time provide for the management of the affairs of the Company in such manner as it shall think fit and the provisions contained in article 78 shall be without prejudice to the general powers conferred by this article.
78.
(a)    The Board may delegate any of its powers, authorities and discretions (with power to sub-delegate) to any committee, consisting of such person or persons (whether Directors or not) as it thinks fit. The Board may make any such delegation on such terms and conditions with such restrictions as it thinks fit and either collaterally with, or to the exclusion of, its own powers and may from time to time revoke or vary such delegation. Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations or limitations that may be imposed on it by the Board. The power to delegate to a committee extends to all of the powers, authorities and discretions of the Board generally (including those conferred by article 71) and shall not be limited by the fact that in certain provisions of these articles, but not in others, express reference is made to a committee or to particular powers, authorities or discretions being exercised by the Board or by a committee of the Board.
(b)
The meetings and proceedings of any committee of the Board consisting of two or more members shall be governed by the provisions contained in these articles for regulating the meetings and proceedings of the Board so far as they are capable of applying and are not superseded by any regulations imposed by the Board except that, unless otherwise determined by the Board, the quorum necessary for the transaction of business at any committee meeting shall be two members.
PROCEEDINGS OF THE BOARD
79.
The Board may meet to conduct business, adjourn and otherwise regulate its meetings (including notice thereof) as it thinks fit. Except where a greater majority is required by these articles, questions arising at any meeting shall be determined by a majority of the votes cast at a meeting at which there is a quorum. In the case of an equality of votes the motion shall be deemed to be lost and the chairman of the meeting shall not be entitled to a second or casting vote.
80.
A meeting of the Board may at any time be summoned by the chairman of the Board or by the chief executive officer, if he is a Director. The Secretary or any Assistant Secretary shall also summon a meeting of the Board on the requisition of a Director. Such meeting of the Board shall be summoned in such manner and with such prior notice as the Board may from time to time determine (including as to the manner of giving notice), which notice shall set forth the general nature of the business to be considered, unless notice is waived in accordance with the following article.

 
45
 


81.
A Director may waive notice of any meeting either prospectively or retroactively or at the meeting in question. A Director in attendance at a meeting shall be deemed to have waived notice of such meeting. The provisions of article 33 shall apply mutatis mutandis with respect to notices of meetings of Directors.
82.
The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be one-third of the Directors currently in office.
83.
The continuing Directors may act notwithstanding any vacancy in the Board, but if and so long as their number is reduced below the number fixed by or pursuant to article 82 as the necessary quorum of Directors the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose.
84.
At any meeting of the Board, the chairman of the Board shall preside or, in his absence, any Director holding the position of chief executive officer. However, if no chairman of the Board or Director holding the position of chief executive officer is present at the time appointed for holding the meeting, the Directors present may choose one of their number to be chairman of the meeting.
85.
A resolution in writing (in one or more counterparts), signed at the relevant time by all of the Directors then in office or all of the members of a committee of Directors then in office shall be as valid and effectual as if it had been passed at a meeting of the Directors or committee as the case may be duly convened and held.
86.
A meeting of the Board or any committee thereof may be held by such electronic means as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting. Such a meeting will be deemed to take place where the largest group of those participating in the meeting is physically present together or, if there is no such group, where the chairman of the meeting then is.
87.
All acts done by the Board or by any committee or by any person acting as a Director or member of a committee or any person authorised by the Board or any committee shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any Director or such committee or person acting as aforesaid or that they or any of them were disqualified or had vacated their office, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director, member of such committee or person so authorised.
OFFICERS AND EXECUTIVES
88.
(a)    The Board may elect a chairman of the Board and determine the period for which he is to hold office and may appoint any person (whether or not a Director) to fill the position of chief executive officer (who may be the same person as the chairman of the Board). The chairman of the Board shall vacate that office if he vacates his

 
46
 


office as a Director (otherwise than by the expiration of his term of office at a general meeting of the Company at which he is re-appointed).
(b)
The Board may from time to time appoint one or more of its body to hold any office or position with the Company for such period and on such terms as the Board may determine and may revoke or terminate any such appointment. Any such revocation or termination shall be without prejudice to any claim for damages that such Director may have against the Company or the Company may have against such Director for any breach of any contract of service between him and the Company that may be involved in such revocation or termination or otherwise. Any person so appointed shall receive such remuneration, if any (whether by way of salary, commission, participation in profits or otherwise), as the Board may determine.
(c)
In addition, the Board may appoint any person, whether or not he is a Director, to hold such executive or official position (except that of Auditor) as the Board may from time to time determine. The same person may hold more than one office or executive or official position.
(d)
Any person elected or appointed pursuant to this article 88 shall hold his office or other position for such period and on such terms as the Board may determine and the Board may revoke or vary any such election or appointment at any time by resolution of the Board. Any such revocation or variation shall be without prejudice to any claim for damages that such person may have against the Company or the Company may have against such person for any breach of any contract of service between him and the Company which may be involved in such revocation or variation. If any such office or other position becomes vacant for any reason, the vacancy may be filled by the Board.
(e)
Except as provided in the Companies Acts or these articles, the powers and duties of any person elected or appointed to any office or executive or official position pursuant to this article 88 shall be such as are determined from time to time by the Board.
(f)
The use or inclusion of the word “officer” (or similar words) in the title of any executive or other position shall not be deemed to imply that the person holding such executive or other position is an “officer” of the Company within the meaning of the Companies Acts.
MINUTES
89.
(a)    The Board shall cause minutes to be made and books kept for the purpose of recording all of the proceedings and attendance at meetings of the Board and of any committee of the Board and at meetings of the Shareholders and of any class or series of Shareholders of the Company.
(b)
Subject to the requirements of the Companies Acts, the Board shall from time to time determine whether and to what extent and at what times and places and under

 
47
 


what conditions or regulations the minutes of meetings of the Shareholders and of any class or series of Shareholders of the Company (but not minutes of meetings of the Board or any committee of it) shall be open to the inspection of Shareholders not being Directors and no Shareholder (who is not a Director) shall have any right to inspect any account or book or document of the Company except as conferred by applicable law or authorised by the Board or, in a general meeting, by the Company.
SECRETARY
90.
The Secretary shall be appointed by the Board at such remuneration (if any) and on such terms as it may think fit and any Secretary so appointed may be removed by the Board. Any revocation or variation of such position shall be without prejudice to any claim for damages that such person may have against the Company or the Company may have against such person for any breach of any contract of service between him and the Company which may be involved in such revocation or variation or otherwise.
91.
The duties of the Secretary shall be those prescribed by the Companies Acts, together with such other duties as shall from time to time be prescribed by the Board, and in any case, shall include the making and keeping of records of the votes, doings and proceedings of all meetings of the Shareholders and the Board of the Company, and committees, and the authentication of records of the Company.
92.
A provision of the Companies Acts or these articles requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as, or in the place of, the Secretary.
THE SEAL
93.
(a)    The Company, in accordance with article 72, may have for use in any territory outside Ireland one or more additional Seals, each of which shall be a duplicate of the Seal with or without the addition on its face of the name of one or more territories, districts or places where it is to be used and a securities seal as provided for in the Companies (Amendment) Act 1977.
(b)
Any Authorized Person may affix the Seal of the Company over his signature alone to any document of the Company required to be authenticated or executed under Seal. Subject to the Companies Acts, any instrument to which a Seal is affixed shall be signed by one Authorized Person. As used in this article 93(b), “Authorized Person” means (i) any Director, the Secretary or any Assistant Secretary, and (ii) any other person authorized for such purpose by the Board from time to time (whether, in the case of this clause (ii), identified individually or collectively and whether identified by name, title, function or such other criteria as the Board may determine).
DIVIDENDS AND OTHER PAYMENTS
94.
(a)    The Board may from time to time declare and pay such dividends to the Shareholders as appear to the Directors to be justified by the profits of the Company.

 
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(b)
The Board may declare and pay dividends in any currency that the Board in its discretion shall choose.
95.
Except insofar as the terms of issue of any shares otherwise provide, all shares outstanding on the record date for a dividend shall rank equally for such dividend.
96.
The Board may deduct from any dividend or other moneys payable to a Shareholder (either alone or jointly with another) by the Company on or in respect of any shares all sums of money (if any) due from him (either alone or jointly with another) to the Company in respect of shares of the Company.
97.
No dividend or other moneys payable by the Company on or in respect of any share shall bear interest against the Company, unless the terms of issue of that share otherwise expressly provide.
98.
(a)    Any dividend or other sum payable in cash to the holder of a share may be paid by cheque, wire transfer or other means approved by the Board and, in the case of a cheque, may be sent through the post addressed to the holder at his address in the Register (or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the share at his registered address as appearing in the Register).
(b)
Every such cheque or wire transfer shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of one or more of the holders and shall be sent at his or their risk and payment of the cheque or wire transfer by the bank on which it is drawn or from which it is transferred (as the case may be) shall constitute a good discharge to the Company.
(c)
In addition, any dividend or other sum payable to the holder of a share may be paid by a bank or other funds transfer system or by such other means as may be approved by the Board and to or through such person as the holder or joint holders may direct in writing, and the Company shall have no responsibility for any sums lost or delayed in the course of any such transfer or when it has acted on any such direction.
(d)
Any one of two or more joint holders may give an effectual receipt for any dividend or other moneys payable or property distributable in respect of the shares held by such joint holders.
99.
(a)    If (i) a payment for a dividend or other sum payable in respect of a share sent by the Company to the person entitled to it in accordance with these articles is left uncashed or is returned to the Company and, after reasonable enquiries, the Company is unable to establish any new address or, with respect to a payment to be made by a funds transfer system, a new account, for that person or (ii) such a payment is left uncashed or returned to the Company on two consecutive occasions, the Company shall not be obliged to send any dividends or other sums payable in respect of that share to that person until he notifies the Company of an address or, where the

 
49
 


payment is to be made by a funds transfer system, details of the account, to be used for the purpose.
(b)
Subject to any applicable abandoned property, escheat or similar laws, any dividend or other distribution in respect of a share which is unclaimed for a period of 6 years from the date on which it became payable shall be forfeited and shall revert to the Company. The payment by the Company of any unclaimed dividend or other distribution payable on or in respect of a share into a separate account shall not constitute the Company a trustee in respect of it.
100.
The Board may, insofar as the Companies Acts permit, direct payment or satisfaction of any dividend or other distribution wholly or in part by the distribution of specific assets and, in particular, of fully or partly Paid Up shares or other securities of any other corporation; and, where any difficulty arises in regard to such dividend or distribution, the Board may settle it as it thinks expedient, and in particular may authorise any person to sell and transfer any fractions, or may ignore fractions altogether, and may fix the value for distribution or dividend purposes of any such specific assets, and may determine that cash payments shall be made to any Shareholders on the basis of the values so fixed in order to secure equality of distribution, and may vest any such specific assets in trustees as may seem expedient to the Board.
RESERVES
101.
The Board may, before declaring any dividend or other distribution, set aside out of the profits of the Company such sums as it thinks proper as reserves which shall, at the discretion of the Board, be applicable for any purpose of the Company and pending such application may, also at such discretion, either be employed in the business of the Company or be invested in such manner as the Board lawfully determines. The Board may also without placing the same to reserves carry forward any sums that it may think it prudent not to distribute.
CAPITALISATION OF RESERVES
102.
(a)    The Board may cause any sum standing to the credit of any of the Company’s reserves (including any capital redemption reserve fund or share premium account) or to the credit of the profit and loss account to be capitalised and applied on behalf of the Shareholders who would have been entitled to receive the same if the same had been distributed by way of dividend and in the same proportions either in or towards paying up amounts for then unpaid on any shares held by them respectively or in paying up in full unissued shares or debentures of the Company of a nominal amount equal to the sum capitalised (such shares or debentures to be allotted and distributed credited as fully paid up to and amongst such holders in the proportions aforesaid) or partly in one way and partly in another, so however, that the only purpose for which sums standing to the credit of the capital redemption reserve fund or the share premium account shall be applied shall be those permitted by Sections 62 and 64 of the 1963 Act.

 
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(b)
The Board may capitalise any part of the amount standing to the credit of any of the Company’s reserve accounts or to the credit of the profit and loss account which is not available for distribution by applying such sum in paying up in full unissued shares to be allotted as fully paid bonus shares to those Shareholders of the Company who would have been entitled to that sum if it were distributed by way of dividend (and in the same proportions), and the Board shall give effect to such resolution.
103.
In pursuance of any act of the Board under article 102, the Board shall make all appropriations and applications of the undivided profits resolved to be capitalised thereby and all allotments and issues of fully paid shares or debentures, if any, and generally shall do all acts and things required to give effect thereto with full power to the Board to make such provision as it shall think fit for the case of shares or debentures becoming distributable in fractions (and, in particular, without prejudice to the generality of the foregoing, to sell the shares or debentures represented by such fractions and distribute the net proceeds of such sale amongst the Shareholders otherwise entitled to such fractions in due proportions) and also to authorise any person to enter on behalf of all of the Shareholders concerned into an agreement with the Company providing for the allotment to them respectively credited as fully paid up of any further shares or debentures to which they may become entitled on such capitalisation or, as the case may require, for the payment up by the application thereto of their respective proportions of the profits resolved to be capitalised of the amounts remaining unpaid on their existing shares and any agreement made under such authority shall be effective and binding on all such Shareholders.
104.
(a)    Whenever a capitalisation issue of shares is made under article 102, the Board may, subject to the rights attached to any particular class or series of shares, also decide to offer any Shareholder the right to elect to forego his entitlement to receive additional shares under such capitalisation issue (or such part of his entitlement as the Board may determine) and to receive instead a payment in cash (a “cash option”) in accordance with the following provisions of this article 104.
(b)
The amount payable under and all other terms of the cash option shall be decided by the Board, which may fix a limit on the extent to which an election for the cash option shall be effective (whether by reference to a part of any Shareholder’s total entitlement to additional shares or to the total number of additional shares in respect of which all such elections may be made on any occasion).
(c)
The Board shall give notice to the Shareholders of their rights of election in respect of the cash option and shall specify the procedure to be followed in order to make an election.
(d)
Payments to those Shareholders who elect to receive cash instead of their entitlement to further shares under such a capitalisation issue (“cash electors”) may, to the extent permitted by the Companies Acts, be made either (i) out of profits or reserves of the Company available for the payment of dividends or (ii) out of the net proceeds of sale of the shares to which the cash electors would have been entitled under such capitalisation issue but for their election to receive cash, or partly in one way and

 
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partly in the other, as the Board determines. To the extent that the Board determines that payment is to be made as in (ii) above, the Board shall be entitled to sell the additional shares to which the cash electors would have been entitled, to appoint some person to transfer those shares to the purchaser (who shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale). The net proceeds of sale shall be applied in or towards payment of the amounts due to cash electors in respect of their cash entitlement and, to the extent that they exceed that entitlement, may be retained by the Company for its benefit.
(e)
The Board may decide that Shareholders resident in territories where, in the opinion of the Board, compliance with local laws or regulations would be unduly onerous if those Shareholders were to receive additional shares, shall be deemed to have exercised rights of election to receive cash.
(f)
The Board may determine that any sums due in respect of a cash option to all or some of those Shareholders whose registered addresses are in a particular territory shall be paid in a currency or currencies other than US dollars and, if it does so, the Board may fix or otherwise determine the basis of conversion into the other currency or currencies and payment of that converted amount in that currency shall be in full satisfaction of the entitlement to such sum.
105.
(a)    The Board may, subject to the rights attached to any particular class or series of shares, offer any Shareholder the right to elect to receive further shares, credited as paid up, instead of cash in respect of all (or some part) of any dividend (a “scrip dividend”) in accordance with the following provisions of this article 105.
(b)
The basis of allotment of the further shares shall be decided by the Board so that, as nearly as may be considered convenient, the value of the further shares, including any fractional entitlement, is equal to the amount of the cash dividend which would otherwise have been paid. For these purposes the value of the further shares shall be calculated in such manner as may be determined by the Board, but the value shall not in any event be less than the nominal value of a share.
(c)
The Board shall give notice to the Shareholders of their rights of election in respect of the scrip dividend and shall specify the procedure to be followed in order to make an election.
(d)
The dividend or that part of it in respect of which an election for the scrip dividend is made shall not be paid and instead further shares shall be allotted in accordance with elections duly made and the Board shall capitalise a sum equal to not less than the aggregate nominal value of, nor more than the aggregate “value” (as determined under article 105(b)) of, the shares to be allotted, as the Board may determine out of such sums available for the purpose as the Board may consider appropriate.
(e)
The Board may decide that the right to elect for any scrip dividend shall not be made available to Shareholders resident in any territory where, in the opinion of the Board,

 
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compliance by the Company with local laws or regulations would be unduly onerous.
(f)
The Board may do all acts and things considered necessary or expedient to give effect to the provisions of a scrip dividend election and the issue of any shares in accordance with the provisions of this article 105, and may make such provisions as it thinks fit for the case of shares becoming distributable in fractions (including provisions under which, in whole or in part, the benefit of fractional entitlements accrues to the Company rather than to the Shareholders concerned).
(g)
The Board may from time to time establish or vary a procedure for election mandates, under which a holder of shares may, in respect of any future dividends for which a right of election pursuant to this article 105 is offered, elect to receive further shares in lieu of such dividend on the terms of such mandate.
RECORD DATES
106.
(a)    The Board may fix, in advance, a date as the record date for the purpose of determining the Shareholders entitled to notice of, or to vote at, any meeting of the Shareholders or any adjournment thereof, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board.
(b)
The Board may fix, in advance, a date as the record date for the purpose of determining the Shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares, or in order to make a determination of the Shareholders for the purpose of any other lawful action, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than 90 calendar days prior to such payment, allotment or other action.
107.
If no record date is fixed for the determination of Shareholders entitled to notice of or to vote at a meeting of Shareholders or Shareholders entitled to receive payment of a dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares, or in order to make a determination of the Shareholders for the purpose of any other such lawful action, the date on which notice of the meeting is issued or the date on which the resolution of the Board declaring such dividend or approving any other such lawful action is adopted, as the case may be, shall be the record date for such determination of Shareholders. When a determination of Shareholders entitled to vote at any meeting of Shareholders has been made as provided in this article, such determination shall apply to any adjournment thereof.
UNTRACED SHAREHOLDERS
108.
(a)    The Company shall be entitled to sell at the best price reasonably obtainable at the time of sale the shares of a Shareholder or the shares to which a person is entitled by transmission if and provided that:

 
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(i)
during a period of six years no dividend in respect of those shares has been claimed and at least three cash dividends have become payable on the shares in question;
(ii)
on or after expiry of that period of six years the Company has inserted an advertisement in a newspaper circulating in the area of the last-registered address at which service of notices upon the Shareholder or person entitled by transmission may be effected in accordance with these articles and in a national newspaper published in the relevant country, giving notice of its intention to sell such shares;
(iii)
during that period of six years and the period of three months following the publication of such advertisement the Company has not received any communication from such Shareholder or person entitled by transmission; and
(iv)
if so required by the rules of any securities exchange upon which the shares in question are then listed, notice has been given to that exchange of the Company’s intention to make such sale.
(b)
The Company’s power of sale shall extend to any share which, on or before the date or first date on which any advertisement referred to in clause (ii) of article 108(a) appears, is issued (by way of bonus or otherwise) in respect of a share to which article 108(c) applies.
(c)
To give effect to any such sale the Board may authorise some person to transfer the shares to the purchaser who shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net proceeds of sale shall belong to the Company which shall be obliged to account to the former Shareholder or person entitled by transmission for an amount equal to such proceeds and shall enter the name of such former Shareholder or person entitled by transmission in the books of the Company as a creditor for such amount (and, provided that the Company shall have complied with this article 108 and any applicable abandoned property, escheat or similar laws, the Company shall have no other liability to any person). No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments as the Board may from time to time think fit.
SERVICE OF NOTICES AND OTHER DOCUMENTS
109.
Any notice or other document may be sent to, served on or delivered to any Shareholder by the Company either personally or by sending it by electronic record, facsimile, through the post (by airmail where applicable) in a pre-paid letter addressed to such Shareholder at his address as appearing in the Register or by any other means permitted under applicable law.

 
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Acknowledgement of receipt shall not be required and is not a condition of valid service of due notice.
110.
Any notice or other document shall be deemed to have been served or delivered:
(a)
if given by facsimile, 24 hours after the time such facsimile is transmitted and the appropriate confirmation is received
(b)
if mailed, 24 hours after deposited in the mail, in a postage-prepaid letter addressed to the Shareholder at his address as it appears in the Register;
(c)
if sent by email or other electronic transmission, 24 hours after such email or other electronic submission is transmitted; or
(d)
if published as an electronic record on a website, 24 hours after the time that the notice or other document is published on the website, provided the Shareholder has previously consented to receipt of notice by means of such delivery as provided in article 113 or otherwise; and
(e)
if given by any other means, when delivered at the applicable address;
and in proving such service or delivery, it shall be sufficient to prove that the notice or document was properly addressed, stamped and put in the post, except in respect of electronic means of service where the record of the Company’s or its agent’s system shall be deemed to be the definitive record of delivery.
111.
For purposes of these articles and the 1963 Act, a document shall be deemed to have been sent to a Shareholder if a notice is given, served, sent or delivered to the Shareholder in accordance with article 109 and the notice specifies the website or hyperlink or other electronic link at or through which the Shareholder may obtain a copy of the relevant document.
112.
Any notice of a general meeting of the Company shall be deemed to be duly given to a shareholder, or other person entitled to it, if it is sent to him by cable, telex, telecopier, electronic mail or other mode of representing or reproducing words in a legible and non-transitory form at his address as appearing in the Register or any other address given by him to the Company for this purpose. Any such notice shall be deemed to have been served 24 hours after its dispatch.
113.
Any requirement in these articles for the consent of a Shareholder in regard to the receipt by such Shareholder of electronic mail or other means of electronic communications approved by the Board, including the receipt of the Company’s audited accounts and the Directors’ and auditors’ reports thereon, shall be deemed to have been satisfied where the Company has sent written notice to the Shareholder informing him of its intention to use electronic communications for such purposes and the Shareholder has not, within four weeks of the issue of such notice, served an objection in writing to the Company to such proposal. Where a Shareholder has given, or is deemed to have given, his consent to the receipt by

 
55
 


such Shareholder of electronic mail or other means of electronic communications approved by the Board, he may revoke such consent at any time by requesting the Company to communicate with him in written form; provided, however, that such revocation shall not take effect until 5 days after written notice of the revocation is received at the Registered Office (or at such other place as may be specified by the Board from time to time).
114.
In the case of joint holders of a Share, service or delivery of any notice or other document on or to the joint holder first named on the Register shall for all purposes be deemed as sufficient service on or delivery to all of the joint holders.
115.
Any notice or other document delivered, sent or given to a shareholder in any manner permitted by these articles shall, notwithstanding that such shareholder is then dead or bankrupt or that any other event has occurred, and whether or not the Company has notice of the death or bankruptcy or other event, be deemed to have been duly served or delivered in respect of any share registered in the name of such shareholder as sole or joint holder unless his name shall, at the time of the service or delivery of the notice or document, have been removed from the Register as the holder of the share, and such service or delivery shall for all purposes be deemed as sufficient service or delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share.
116.
In the case of a person entitled by transmission to a share whose entitlement has been noted in the Register, any notice or other document shall be served on or delivered to him as if he were the holder of that share and his address noted in the Register were his registered address. A notice may be given by the Company to any other person entitled by transmission to a share by sending it through the post in a prepaid letter addressed to such person by name or by title of representatives of the deceased or official assignee in bankruptcy or by any like description at the address supplied for the purpose by the person claiming to be so entitled, or (until such an address has been so supplied) by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred.
117.
The signature (whether electronic signature, an advanced electronic signature or otherwise) to any notice to be given by the Company may be written (in electronic form or otherwise) or printed.
SHAREHOLDER RIGHTS PLAN
118.
Subject to applicable law, the Board is hereby expressly authorised to adopt any shareholder rights plan or similar plan, agreement or arrangement pursuant to which, under circumstances provided therein, some or all shareholders will have rights to acquire Shares or interests in Shares at a discounted price, upon such terms and conditions as the Board deems expedient and in the best interests of the Company.
WINDING UP

 
56
 


119.
If the Company is wound up, the liquidator may, with the sanction of a Special Resolution and any other sanction required under applicable law:
(a)
divide among the Shareholders in cash or in kind the whole or any part of the assets of the Company (whether they consist of property of the same kind or not) and for such purposes set such value as he deems fair on any property to be so divided and determine how such division shall be carried out as between the Shareholders or different classes or series of Shareholders (without prejudice to the rights attaching to any class or series of shares by virtue of these articles or the terms of issue of any such shares); and
(b)
vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator thinks fit, but so that no Shareholder shall be compelled to accept any shares or other assets upon which there is any liability.
120.
In case of a sale by the liquidator under Section 260 of the 1963 Act, the liquidator may by the contract of sale agree to bind all of the Shareholders for the allotment to the Shareholders direct of the proceeds of sale in proportion to their respective interests in the Company and may further by the contract set a time at the expiration of which obligations or shares not accepted or required to be sold shall be deemed to have been irrevocably refused and be at the disposal of the Company, but so that nothing herein contained shall be taken to diminish, prejudice or affect the rights of dissenting Shareholders conferred by the said Section.
121.
The power of sale of the liquidator shall include a power to sell wholly or partially for debentures, debenture stock, or other obligations of another corporation, either then already constituted or about to be constituted for the purpose of carrying out the sale.
INDEMNIFICATION
122.
(a)    Subject to articles 122(g) and 122(h), the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action, suit or proceeding by or in the right of the Company) by reason of the fact that he or she is or was an Indemnified Person, against expenses (including legal fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnified Person in connection with such action, suit or proceeding if such Indemnified Person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, or reasonably believed to be in or not opposed to the best interests of the relevant employee benefit plan of the Company or any Group Company, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnified Person (i) did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company, or

 
57
 


reasonably believed to be in or not opposed to the best interests of such employee benefit plan, and (ii) with respect to any criminal proceeding, had reasonable cause to believe his or her conduct was unlawful.
(b)
Subject to articles 122(g) and 122(h), the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favour by reason of the fact that he or she is or was an Indemnified Person, against expenses (including legal fees) actually and reasonably incurred by such Indemnified Person in connection with such action, suit or proceeding if such Indemnified Person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, or reasonably believed to be in or not opposed to the best interests of the relevant employee benefit plan of the Company or any Group Company, and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Indemnified Person shall have been adjudged to be liable for willful neglect or willful default in the performance of his or her duty to the Company or to such employee benefit plan unless and only to the extent that the Irish High Court or the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such Indemnified Person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.
(c)
Subject to articles 122(g) and 122(h), to the extent that an Indemnified Person shall be successful on the merits or otherwise in defense, of any action, suit or proceeding referred to in articles 122(a) and 122(b) above, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including legal fees) actually and reasonably incurred by him or her in connection therewith.
(d)
Any indemnification under articles 122(a) and 122(b) above (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the Indemnified Person is proper in the circumstances because he or she has met the applicable standard of conduct set forth in articles 122(a) and 122(b). Such determination shall be made (i) by the Board by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable (or, even if obtainable, if a quorum of disinterested Directors so directs), by independent legal counsel in a written opinion, or (iii) by the Shareholders entitled to vote at general meetings of the Company.
(e)
The Board shall have power to purchase and maintain insurances for the benefit of any persons who are or were at any time Indemnified Persons or employees or agents of the Company, or any Group Company or of any other corporation or employee benefit plan in which the Company or any Group Company has any direct or indirect interest, including insurance against any liability incurred by such persons

 
58
 


in respect of any act or omission in the actual or purported performance of their duties or powers or offices in relation to the Company or such other corporation.
(f)
Subject to articles 122(g) and 122(h), expenses incurred by an Indemnified Person in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the manner provided in article 122(d), upon receipt of an undertaking by or on behalf of the Indemnified Person to repay such amount unless it shall ultimately be determined that he or she is entitled to be indemnified by the Company as authorized in this article 122.
(g)
The provisions for indemnity contained in these articles shall have effect to the fullest extent permitted by law, but shall not extend to any matter which would render them void pursuant to the Companies Acts.
(h)
The rights to indemnification and reimbursement of expenses provided by these articles are in addition to (i) any other rights to which a person may be entitled, including any other rights under these articles, under any other applicable bye-laws or articles of any other corporation, under any agreement, under any insurance purchased by the Company or any Group Company, pursuant to any vote of shareholders or disinterested Directors, or pursuant to the direction (however embodied) of any court of competent jurisdiction, both as to action in his or her official capacity while holding such office and as to action in another capacity while holding such office, and (ii) the power of the Company to indemnify or otherwise make payments (without prior commitment upon the authorization of the Board) of the type contemplated by this article 122 in respect of any person who is or was an employee, office holder or director of the Company or of another corporation, any joint venture, trust or other enterprise which he is serving or has served at the request of the Company. The indemnification provided by this article shall continue as to a person who has ceased to be an Indemnified Person and shall inure to the benefit of his heirs, executors and administrators.
(i)
In this article 122, the term “Indemnified Person” means any officer of the Company (including any Director or Secretary) or any other person appointed pursuant to article 88, any member of a committee constituted under article 78, any person acting as an office holder of the Company, any person holding any other executive or official position of the Company, any employee or agent of the Company, and any person serving at the request of the Company as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise or in a fiduciary or other capacity with respect to any employee benefit plan maintained by the Company or any Group Company. As used in this article, references to the “Company” include all constituent companies in a consolidation or merger in which the Company or a predecessor to the Company by consolidation or merger was involved.

 
59
 


(j)
To the fullest extent permitted under Irish law, no Director, officer of the Company or other person appointed pursuant to article 88 (each, a “Covered Person”) shall be liable or answerable for the acts, receipts, neglects, or defaults of any other Covered Person or for joining in any receipt or other act for conformity or for any loss or expense happening to the Company through the insufficiency or deficiency of any security in or upon which any of the monies of the Company shall be invested or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person with whom any monies, securities or effects shall be deposited, or for any loss occasioned by any error of judgment or oversight on his or her part, or for any other loss, damage, or misfortune whatever which shall happen in or about the execution of the duties of his or her office or other position with the Company or in relation thereto, unless the same happen through his or her own willful neglect or willful default.
ALTERATION OF ARTICLES
123.
The Company may by Special Resolution amend or alter these articles of association.





 
60
 

Exhibit 10.1 Sale and Purchase Agreement
Exhibit 10.1

EXECUTION VERSION








Dated May 1, 2014



GREYCASTLE HOLDINGS LTD
and
XL INSURANCE (BERMUDA) LTD
SALE AND PURCHASE AGREEMENT








 

Contents
Clause
Page
1.    INTERPRETATION
2
2.    SALE AND PURCHASE
16
3.    CONDITIONS, TERMINATION, AND STEPS TO COMPLETION
16
4.    CONDUCT OF BUSINESS BEFORE COMPLETION
18
5.    EFFECT OF TERMINATION AND PURCHASER TERMINATION FEE
20
6.    CONSIDERATION AND CAPITALISATION OF THE COMPANY
21
7.    COMPLETION
22
8.    RECONCILIATION AMOUNT
23
9.    THE SELLER’S WARRANTIES AND UNDERTAKINGS
28
10.    THE PURCHASER’S WARRANTIES AND UNDERTAKINGS
30
11.    SPECIFIC PERFORMANCE
30
12.    EFFECT OF COMPLETION
31
13.    REMEDIES AND WAIVERS
31
14.    FURTHER ASSURANCE
31
15.    ENTIRE AGREEMENT
32
16.    NOTICES
32
17.    ANNOUNCEMENTS
33
18.    CONFIDENTIALITY
34
19.    ACKNOWLEDGMENTS BY THE PURCHASER
35
20.    COSTS AND EXPENSES
36
21.    COUNTERPARTS
36
22.    INVALIDITY
36
23.    CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
37

i
 

24.    CHOICE OF GOVERNING LAW
37
25.    JURISDICTION
37
26.    LEGAL REPRESENTATION
38
27.    AGENT FOR SERVICE OF PROCESS
38

SCHEDULES
 
 
 
Schedule 1
Conditions
Schedule 2
Steps to Completion
Schedule 3
Conduct of Business before Completion
Schedule 4
Completion Arrangements
Schedule 5
Warranties
Schedule 6
Limitation on Liability of the Seller
Schedule 7
Tax Covenant
Schedule 8
Basic Information about the Company
Schedule 9
Purchaser’s Warranties
Schedule 10
Reconciliation Methodologies
Schedule 11
Reference Reconciliation Amount Calculation Report
Schedule 12
Company Capitalisation Plan



EXHIBITS
 
 
 
Exhibit A
Form of Transitional Services Agreement
Exhibit B
Form of Administration Services Agreement
Exhibit C
Form of Commutation Agreements
Exhibit D
Form of Contingent Capital Commitment Letter
Exhibit E
Form of Investor Support and Undertakings Agreement
Exhibit F
Form of Retrocession Agreements
Exhibit G
Form of Bye-Laws of the Company


ii
 

THIS AGREEMENT is dated May 1, 2014
BETWEEN:
(1)
XL INSURANCE (BERMUDA) LTD, a limited company registered in Bermuda with company registration number 12809, and with its registered office at O’Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda (the “Seller”); and
(2)
GREYCASTLE HOLDINGS LTD, an exempted company incorporated and registered in Bermuda with company registration number 48944 and with its registered office at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda (the “Purchaser”).
WHEREAS:
(A)
The Seller, through its subsidiaries, XL Re Ltd, a Bermuda reinsurer (“XL Re”), the registered UK branch of XL Re (“XL Re (UK Branch)”), and XL Re Europe SE, an Irish reinsurer (“XL Europe”, and together with XL Re and XL Re (UK Branch), the “Ceding Companies”), are engaged in the Reinsured Business;
(B)
The Seller has formed, and is the sole beneficial owner of the entire issued share capital (the “Shares”) of XL Life Reinsurance (SAC) Ltd, a segregated accounts company registered in Bermuda (the “Company”);
(C)
The Ceding Companies currently cede a portion of the Reinsured Business to XL Life Ltd, a Bermuda reinsurer (“Life”);
(D)
In connection with the transactions contemplated by this agreement, at or prior to Completion, the Seller intends to, and to cause the Ceding Companies and Life to, take the following actions:    
(a)
the Ceding Companies shall recapture the portion of the Reinsured Business retroceded to Life (the “Recaptured Business”); and
(b)
following the recapture of the Recaptured Business, (1) the Ceding Companies shall cede to a segregated account of the Company (the “Retrocessionaire”), via 100% quota share reinsurance, the Reinsured Business (as defined below) pursuant to the terms of the Retrocession Agreements (as defined below) and (2) the Seller shall procure the Retrocessionaire to be capitalized;
(E)
On the Completion Date:
(a)
The Seller has agreed to sell, and the Purchaser has agreed to purchase and pay for the Shares, in each case on the terms and subject to the conditions of this agreement; and

1
 

(b)
XL Services (UK) Ltd (“XL Services”) and the Company shall enter into the Transitional Services Agreement in the form set out in Exhibit A (the “Transitional Services Agreement”) pursuant to which, among other things, XL Services shall provide the Company with certain administrative and information technology services for a transitional period following the Completion Date; and
(F)
Concurrently with the execution of this agreement, (1) the Purchaser has caused an amount equal to the Consideration to be deposited into an escrow account subject to the terms of an escrow agreement (the “Escrow Account”), dated as of May 1, 2014, among the Escrow Agent (as defined below) and the Purchaser (the “Escrow Agreement”) and the Escrow Agent has delivered evidence of such deposit to each of the Purchaser and the Seller and (2) the Purchaser has delivered the Investor Undertakings Letter Agreements to the Seller (each, an “Investor Undertakings Letter Agreement”), duly executed by each investor party identified therein (the “Investors”) (and, in certain cases, shareholders of such Investors).
IT IS AGREED as follows:
1.
INTERPRETATION
1.1
In this agreement:
“Administration Services Agreement”
means the Administration Services Agreement among XL Re (UK Branch), XL Re Europe (through its registered UK branch) (together with XL Re (UK Branch), the “Services Recipients”), XL Services and the Purchaser Service Provider in respect of the Reinsured Business and certain other life insurance businesses of the Retained Group to be finalised and entered into prior to Completion in accordance with paragraph 1(b) of Schedule 2, in the form set out in Exhibit B;
“Affiliates”
means, with respect to any person, at the time in question, any other person controlling, controlled by or under direct or indirect common control with such person. For this purpose, “control” means the power to direct or cause the direction of the management or policies of a person through the ownership of securities, by contract or otherwise and the terms “controlling” and “controlled” have meanings correlative to the foregoing. From and after the Completion Date, the Company shall be deemed to be an Affiliate of the Purchaser and not the Seller;

2
 

“Agent”
has the meaning set out in clause 27.1;
“Alternative Transaction”
has the meaning set out in clause 3.5;
“Business Day”
means a day (other than a Saturday or a Sunday) on which banks are open for business in Bermuda, New York and London;
“Business Plan”
means the Purchaser’s business plan in respect of the Reinsured Business (prepared by the Purchaser in a form reasonably acceptable to the Seller), which will form part of the Purchaser’s application for consent/no-objection from the Bermuda Monetary Authority to the change of shareholder controller (as defined in the Insurance Act) of the Company;
“Ceding Companies”
has the meaning set out in Recital A;
“Claim”
means any claim made by a party to this agreement arising out of, or in connection with this agreement;
“Commutation Agreements”
means each of the commutation agreements to be entered into by and between Life and a Ceding Company in the agreed form as set out in Parts I, II, and III of Exhibit C;
“Companies Act”
means the Bermuda Companies Act 1981 as enacted and amended from time to time;
“Company”
has the meaning set out in Recital B;
“Company Capitalisation Plan”
means the Investment Assets to be contributed to the Company to reflect the agreed pro forma balance sheet of the Company as of the Reference Date, as set out in Schedule 12;
“Completion”
means completion of the sale and purchase of the Shares under and in accordance with this agreement;
“Completion Date”
means the last Business Day of the month following the day on which the last in time of the Conditions relevant to Completion shall have been:
 
(a)    fulfilled in accordance with this agreement; or
 
(b)    in the case of the Conditions that can be waived in full, such Conditions have been waived in full;

3
 

 
or such other date as the parties may agree, save that the Completion Date shall not be later in time than the Long Stop Date unless the parties have agreed otherwise in writing;
“Conditions”
means the conditions set out in Schedule 1 and each of them a “Condition”;
“Consideration”
means an amount equal to five hundred seventy million dollars ($570,000,000);
“Data Protection Legislation”
means the applicable data protection and privacy laws, regulations and rules from time to time in each jurisdiction in which the Ceding Companies carry on or at any time have carried on the Reinsured Business;
“Data Room”
means the contents of the electronic data room as at 1.00 p.m. (Bermuda time) on 1 May 2014, established by or on behalf of the Seller with respect to the Reinsured Business, as listed in the Data Room Index;
“Data Room Index”
means the index listing the documents in the Data Room, a copy of which is annexed to the Disclosure Letter;
“Deed of Charge”
means the deed of charge in respect of certain assets of the Company to be entered into among the Retrocessionaire, XL Re and XL Europe on the Completion Date, the form of which is attached as an annex to each of the Retrocession Agreements;
“Disclosure Letter”
means the letter dated the same date as this agreement written by the Seller to the Purchaser for the purposes of clauses 1.2(u), 4.1(a) and 9, paragraph 5.1 of Schedule 5, and certain definitions in this clause 1.1 and delivered to the Purchaser’s Solicitors before the execution of this agreement;
 
 

4
 

“Draft Notice of Control”
means each substantially completed draft Notice of Control in the agreed form to be submitted to the Bermuda Monetary Authority on behalf of the Purchaser and each relevant member of the Purchaser Group in respect of their acquisition of control of the Company for the purposes of fulfilling the Condition in paragraph 1 of Schedule 1;

“Escrow Account”
has the meaning set out in Recital F;
“Escrow Agent”
means the escrow agent of the Escrow Account;
“Escrow Agreement”
has the meaning set out in Recital F;
“Estimated Reconciliation Amount Calculation Report”
has the meaning set out in clause 8.1(a);
“Final Reconciliation Amount Calculation Report”
has the meaning set out in clause 8.2(b)(xiii);
“Governmental Authority”
means any supranational, national, regional, provincial, local, municipal or other political instrumentality or subdivision thereof and any entity or body exercising executive, legislative, judicial, regulatory, administrative or taxing functions of or pertaining to government, including any court, authority, agency, commission, board or other similar body;
“Initial Funding Assets”
means, for purposes of the asset transfers and payments to be made by the Seller or any of the Ceding Companies in accordance with Clause 6.2(b) and Clause 3.5 of the applicable Retrocession Agreement to the Funds Withheld Accounts (as defined in the applicable Retrocession Agreement) of XL Re, XL Re (UK Branch) and XL Europe, respectively, or the Retrocessionaire, the cash or investment assets set out on Appendix B, Appendix D and Appendix E, respectively, to Schedule 10 to the extent still owned by the applicable Ceding Company as of applicable date; provided, however, that to the extent the market value of such cash or investment assets as determined by a third-party pricing service reasonably selected

5
 

 
by the Seller are (i) less than the amount to be transferred to pursuant to Clause 6.2(b) and Clause 3.5 of the Retrocession Agreements, the “Initial Funding Assets” shall also include such additional investment assets reasonably acceptable to the parties and/or cash with an aggregate  market value as determined by a third-party pricing service reasonably selected by the Seller as of the applicable date equal to such shortfall and (ii) greater than the amount to be transferred pursuant to Clause 6.2(b) and Clause 3.5 of the Retrocession Agreements, the“Initial Funding Assets” shall exclude such investment assets reasonably acceptable to the parties and/or cash that are set out on the applicable Appendix with an aggregate market value as determined by a third-party pricing service reasonably selected by the Seller as of the applicable date equal to such shortfall;
“Initial Reconciliation Amount Calculation Report Dispute Notice”
has the meaning set out in clause 8.2(b)(i);
“Initial Reconciliation Amount Expert”
has the meaning set out in clause 8.2(b)(iv);
“Initial Reconciliation Amount Calculation Report Dispute Notice”
has the meaning set out in clause 8.2(b)(i);
“Insurance Act”
means the Bermuda Insurance Act 1978 as enacted and amended from time to time and its related regulations;
“Investment Assets”
means the investment assets owned by the Ceding Companies or Life in respect of the Reinsured Business;
“Investor Contingent Capital Commitment Letter”
means the investor contingent capital commitment letter to be entered into at Completion, substantially in the form of Exhibit D;
“Investor Support and Undertakings Agreement”
means the investor support and undertakings agreement to be entered into at Completion, substantially in the form of Exhibit E;
“Investor Undertakings Letter Agreement”
has the meaning set out in Recital F;
 
 
 
 
 
 

6
 

“Investors”
has the meaning set out in Recital F;
“Law”
means any national, provincial, regional or local law, statute, ordinance, rule, regulation or regulatory guidance imposed by or on behalf of a Governmental Authority, non-governmental regulatory agency or securities exchange;
“Liabilities”
means all liabilities, losses, damages, payments, charges, claims, actions, penalties, fines, demands, proceedings, expenses and costs;
“LIBOR”
means the London Inter-Bank Offered Rate of interest for three-month deposits of Euro-Dollars displayed on page “LIBOR01” of the Reuters Monitor Money Rates Service (or any other page that replaces “LIBOR01” for the purpose of displaying the British Bankers’ Association (“BBA”) interest settlement rates for such deposits of Euro-Dollars in the London Inter‑Bank market) on the date of determination, or in the event that the Reuters Money Rates Service, or any successor thereto, no longer provides such information, such other service as may be agreed by the parties hereto that provides the BBA interest settlement rates for such deposits of Euro-Dollars in the London Inter-Bank market and any other information previously provided on the page “LIBOR01”;
“Life”
has the meaning set out in Recital C;
“Long Stop Date”
means 1 August 2014;
“Material Adverse Effect”
means a material adverse effect on the results of operations or financial condition of the Reinsured Business taken as a whole, except that in no event shall any of the following states of facts, circumstances, changes, occurrences or effects, individually or in the aggregate, be deemed to constitute or be taken into account in determining whether a “Material Adverse Effect” has occurred or is reasonably likely to occur:
 
(a)    changes in conditions in the global economy or capital, banking, currency or financial markets generally, including changes in interest or exchange rates;

7
 

 
(b)    changes or events affecting generally any or all of the sectors in which the Reinsured Business operates, including the life insurance or reinsurance sectors;
 
(c)    actions specifically permitted to be taken or omitted pursuant to this agreement or the Transaction Documents or with the Purchaser’s consent;
 
(d)    any of the matters fairly disclosed in or pursuant to the Disclosure Letter;
 
(e)    changes or proposed changes in applicable Law or applicable accounting standards or the interpretations or enforcement of any of the foregoing;
 
(f)    any downgrade or potential downgrade of the financial strength, claims paying ability, insurance or other ratings of the Seller or any of its Affiliates;
 
(g)    acts of terrorism or war, including the engagement by Bermuda, the United Kingdom, Ireland, the United States of America or any other country in hostilities, and whether or not pursuant to a declaration of a national emergency or war, or any pandemics, earthquakes, hurricanes, tropical storms, floods, fires, tornadoes or other natural disasters; or
 
(h)    any failure in and of itself to meet any of the Seller’s or any of its Affiliates’ internal or analysts’ or rating agencies’ forecasts or projections relating to the Reinsured Business.
 
 
 
 

8
 

“Notice of Control”
in respect of the Bermuda Monetary Authority, means each such application and/or submission as may be required under any applicable laws, regulations, rules and guidance to be submitted on behalf of the Purchaser and each relevant member of the Purchaser Group in respect of their acquisition of control of the Company for the purposes of fulfilling the Condition in paragraph 1 of Schedule 1;

“Operating Guidelines”
means the guidelines applicable to the Seller and, with respect to the Reinsured Business, the Ceding Companies, set out in the “Pertinent Tax Guidelines Applicable to XL Group” as made available to the Purchaser in the Data Room;
“Opinion Counsels”
has the meaning set out in paragraph 5 of Schedule 1;
“Opinions”
has the meaning set out in paragraph 5 of Schedule 1;
“Participation Agreement”
means the participation agreement to be entered into among the Company, the Retrocessionaire, XL Re and XL Europe on the Completion Date, the form of which is attached as a schedule to each of the Retrocession Agreements;
“Payment”
has the meaning set out in clause 1.2(p);
“Payment Obligation”
has the meaning set out in clause 1.2(p);
“Proceedings”
means any proceeding, suit or action arising out of or in connection with this agreement or its subject matter (including its validity, formation at issue, effect, interpretation, performance or termination) or any transaction contemplated by this agreement;
“Professional Belief”
means a belief arising out of the exercise of professional judgment to the standard reasonably to be expected from a person qualified in the area concerned exercising due skill and care in the exercise of such judgment;
 
 

9
 

“Purchaser Group”
means the Purchaser, each of its subsidiaries, any holding company of the Purchaser (and any person deemed to be a controlling shareholder or controlling person of any such holding company) and all other subsidiaries of any such holding company from time to time (including, after Completion, the Company);
“Purchaser Service Provider”
means GreyCastle Services Limited, a company incorporated in England and Wales, whose registered office is at 20-22 Bedford Row, London, WC1R 4JS, United Kingdom;
“Purchaser Termination Fee”
means an amount equal to forty million dollars ($40,000,000);
“Purchaser’s Solicitors”
means Debevoise & Plimpton LLP;
“Purchaser’s Warranties”
means, unless otherwise specified, the warranties set out in Schedule 9 given by the Purchaser; and
“Qualifying Claim”
has the meaning set out in clause 10.3(a);
“Recaptured Business”
has the meaning set out in Recital D(a);
“Regulatory Authorities”
means such Governmental Authorities in any jurisdiction from time to time that regulate the conduct of insurance businesses or companies and/or financial services businesses or firms or the sale or marketing of insurance contracts, and “Regulatory Authority” means any of them;
“Reconciliation Amount”
means, for any Ceding Company, the amount reflected on line item D (Total Reconciliation Amount by Ceding Company) with respect to such Ceding Company on the Reconciliation Amount Calculation Report, Estimated Reconciliation Amount Calculation Report, Initial Reconciliation Amount Calculation Report or Final Reconciliation Amount Calculation Report, as applicable;
“Reconciliation Amount Calculation Report”
means a report that (a) is prepared in the same format as the Reference Reconciliation Amount Calculation Report and in accordance with the notes thereto and (b) sets forth a calculation of the Reconciliation Amount;

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“Reconciliation Methodologies”
means the procedures and methods set out in the Reconciliation Methodologies in Schedule 10 and in accordance with the same procedures and methods as utilized in the preparation of the Reference Reconciliation Amount Calculation Report;
“Reference Date”
means 1 January 2014;
“Reference Reconciliation Amount Calculation Report”
means the Reference Reconciliation Amount Calculation Report set out in Schedule 11;
“Reinsurance Transaction”
has the meaning set out in paragraph 4 of Schedule 1;
“Reinsured Business”
means the single premium annuity and non-single premium annuity business of the Ceding Companies comprised by the Specified Treaties;
“Relevant Consent”
has the meaning set out in paragraph 4 of Schedule 2;
“Relevant Tax Date”
means 24 April 2014;
“Retained Group”
means the Seller, the Ceding Companies, Life and their respective subsidiaries from time to time, any holding company of the Seller or any Ceding Company, Life and all other subsidiaries of any such holding company (excluding in any case, the Company);
“Retained Group Member”
means a member of the Retained Group;
“Retrocession Agreements”
means each of the retrocession agreements to be entered into by and between a Ceding Company and the Company in the form of Parts I, II, and III of Exhibit F, subject to such changes as are agreed between the parties to finalise the documents at Parts II and III;
“Retrocessionaire”
has the meaning set out in Recital D(b);
“Seller Group”
has the meaning set out in clause 26;
“Seller’s Solicitors”
means Clifford Chance LLP and Skadden, Arps, Slate, Meagher & Flom LLP;
 
 
 
 
 
 

11
 

“Shares”
has the meaning set out in Recital B;
“Specified Reports”
means the reports and documents identified as Specified Reports set out in the Disclosure Letter;
“Specified Treaties”
means the treaties and agreements set out in Schedule 1 to each of the Retrocession Agreements;
“Sum Recovered”
has the meaning set out in paragraph 8.3 of Schedule 6;
“Tax/tax” or “Taxation”
any tax and any duty, levy, contribution or charge in the nature of tax, whether supranational, domestic or foreign, and, any penalty or interest connected therewith;
“Tax Authority”
means any taxing, revenue or other authority (whether within or outside the United Kingdom and Ireland) competent to impose any liability to, or assess or collect, any Tax;
“Tax Covenant”
means the tax covenant contained in Schedule 7;

“Tax Document”
means the Tax Returns, claims and other documents which the Seller are required to prepare on behalf of the Company under Part B of Schedule 7 to this agreement;
“Tax Returns”
means any return required to be made to any Tax Authority;
“Tax Warranties”
means the Warranties set out in paragraphs 4.2 and 15 of Schedule 5 and “Tax Warranty” shall be construed accordingly;
“Third Party Claim”
has the meaning set out in paragraph 8.1 of Schedule 6;
“Transaction Documents”
means:
 
(a)    this agreement;
 
(b)    the Disclosure Letter;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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(c)    the Escrow Agreement;
 
(d)    the Transitional Services Agreement;
 
(e)    the Retrocession Agreements;
 
(f)    the Administration Services Agreement;
 
(g)    the Deed of Charge;
 
(h)    each Investor Undertakings Letter Agreement;
 
(i)    the Investor Support and Undertakings Agreement;
 
(j)    the Investor Contingent Capital Commitment Letter;
 
(k)    the Participation Agreement;
 
(l)    the Commutation Agreements;
 
and each of the agreements, exhibits, annexes, schedules and other attachments thereto and any other agreements which are designated as Transaction Documents by agreement between the Seller and the Purchaser;
“Transfer Taxes”
means any transfer, documentary, sales, use, stamp, registration and transaction tax or other such taxes and fees (including any penalty, fine, surcharge, interest, charges or additions to tax payable in relation to any such taxes and fees);
“Transitional Services Agreement”
has the meaning set out in Recital E(b);
“Warranties”
means, unless otherwise specified, the warranties set out in Schedule 5 given by the Seller;
“Working Hours”
means 9.00 a.m. to 5.00 p.m. on a Business Day;
“XL Europe”
has the meaning set out in Recital A;
“XL Re”
has the meaning set out in Recital A;
“XL Re (UK Branch)”
has the meaning set out in Recital A; and
“XL Services”
has the meaning set out in Recital E(b).

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1.2
In this agreement, unless otherwise specified:
(a)
references to clauses, paragraphs and Schedules are to clauses and paragraphs of, and Schedules to, this agreement;
(b)
a reference to any Law shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified or re-enacted except to the extent that any amendment or modification made after the date of this agreement would increase or alter the liability of the Seller under this agreement;
(c)
references to a “company” shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;
(d)
references to a “person” shall be construed so as to include any individual, firm, company, government, state or agency of a state or any joint venture, association or partnership (whether or not having separate legal personality);
(e)
use of any gender includes the other genders;
(f)
the expressions “accounting reference date”, “accounting reference period”, “allotment”, “body corporate”, “paid up”, and “profit and loss account”, shall have the meaning given in the Companies Acts;
(g)
references to writing shall include any modes of reproducing words in a legible and non-transitory form;
(h)
references to times of the day are to Bermuda time;
(i)
the words “include”, “includes” and “including” shall be construed as if they were followed by the words “without limitation”;
(j)
headings to clauses, paragraphs and Schedules are for convenience only and do not affect the interpretation of this agreement;
(k)
the Schedules form part of this agreement and shall have the same force and effect as if expressly set out in the body of this agreement, and any reference to this agreement shall include the Schedules;
(l)
the word “agreement” means this agreement as amended or supplemented, together with all recitals and all Schedules attached hereto or incorporated by reference, and the words “hereof”, “herein”, “hereto”, “hereunder” and other words of similar import shall refer to this agreement in its entirety and not to any particular clause, paragraph or Schedule of this agreement;
(m)
words importing the singular include the plural and vice versa, and words importing a gender include every gender;

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(n)
“agreed form” means in a form agreed by the parties to this agreement and signed (for the purposes of identification only) by or on behalf of the Seller and the Purchaser prior to the execution of this agreement, as such form may be amended by agreement between the Seller and the Purchaser prior to Completion;
(o)
references to any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official, or any legal concept or thing and references to any statute or statutory provision shall in respect of any jurisdiction other than England be deemed to include what most nearly approximates in that jurisdiction to the English legal term, statute or statutory provision;
(p)
any indemnity or covenant to pay (the “Payment Obligation”) being given on an “after-Tax basis” or expressed to be “calculated on an after-Tax basis” means that to the extent that the amount payable pursuant to such Payment Obligation (the “Payment”) is subject to a deduction or withholding required by law in respect of Tax or is chargeable to any Tax in the hands of the recipient or any Tax credit, repayment or other Tax benefit is available as set out in clause 1.2(p)(ii) below then the Payment shall be adjusted so as to ensure that, after taking into account:
(i)
the amount of Tax required to be deducted or withheld from, and the Tax chargeable on such amount (including on the increased amount); and
(ii)
any Tax credit, repayment or other Tax benefit which is available to the indemnified party or the recipient of the Payment solely as a result of the matter giving rise to the Payment Obligation or as a result of receiving the Payment,
(which amount of Tax and Tax credit, repayment or other Tax benefit is to be determined taking into account its value, certainty of availability and timing of its utilisation by the recipient in its absolute discretion at the shared expense of both parties and is to be certified as such to the party making the Payment); the recipient of the Payment is in the same position as it would have been in if there had been no such deduction, withholding, Tax charge or Tax credit, repayment or other Tax benefit;
(q)
references to “costs” and/or “expenses” incurred by a person shall, for the purposes of any indemnity or re-imbursement provision under which another person bears the cost of any such “costs” and/or “expenses”, not include any amount in respect of VAT comprised in such costs or expenses for which either that person or, if relevant, any other member of the VAT group to which that person belongs is entitled to repayment or credit as input tax;

15
 

(r)
in construing this agreement the so-called “ejusdem generis” rule does not apply and accordingly the interpretation of general words is not restricted by (i) being preceded by words indicating a particular class of acts, matters or things; or (ii) being followed by particular examples;
(s)
reference to any party shall include that party’s personal representatives, successors and permitted assigns (including any person resulting from or continuing after any amalgamation, merger, consolidation or similar transaction in which a party participates);
(t)
references to “£” shall mean U.K. pounds and references to “$” shall mean U.S. dollars; and
(u)
a reference in this agreement to “so far as the Seller is aware” means, in respect of a particular matter, the actual knowledge of those individuals listed in the Disclosure Letter after making due enquiry.
1.3
The parties hereto have participated jointly in the negotiation and drafting of this agreement. In the event an ambiguity or question of intent or interpretation arises (including as to the intention of the parties), this agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favouring or disfavouring any party by virtue of the authorship of any of the provisions.
2.
SALE AND PURCHASE
2.1
On and with effect from Completion, subject to the provisions of this agreement, the Seller shall sell or (as the case may be) procure the sale with full title guarantee and the Purchaser shall purchase the Shares free from all charges and encumbrances and from all other rights exercisable by third parties, together with all rights attached or accruing to them at Completion.
2.2
The Seller waives or (as the case may be) will procure the waiver of all rights of pre-emption over any of the Shares conferred upon it by the articles of association or equivalent constitutional documents of the Company or in any other way, and undertakes to take all reasonable steps necessary to ensure that any rights of pre-emption over any of the Shares are waived at the cost and expense of the Seller.
3.
CONDITIONS, TERMINATION, AND STEPS TO COMPLETION
3.1
The sale and purchase of the Shares pursuant to this agreement are in all respects conditional upon fulfilment or (where applicable and subject to clause 3.3 below), waiver of the Conditions.

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3.2
The parties agree to each perform their respective obligations set out in Schedule 2 during the period from the date of this agreement until the earlier of the Completion Date or this agreement being terminated in accordance with its terms.
3.3
The Purchaser and the Seller may agree in writing to extend the period in which all or part of any of the Conditions are to be satisfied. The Purchaser may by written notice to the Seller waive in whole or in part the Conditions set out in paragraphs 2 and 3 of Schedule 1. The Seller may by written notice to the Purchaser waive in whole or in part the Conditions set out in paragraphs 4, 5 and 6 of Schedule 1. No party hereto may waive in whole or in part the Condition set out in paragraph 1 of Schedule 1.
3.4
If:
(a)
both parties agree in writing that the Condition in paragraph 1 of Schedule 1 will not be able to be fulfilled on or before the Long Stop Date;
(b)
on or before the Long Stop Date, any Governmental Authority of competent jurisdiction with valid enforcement authority shall have enacted, enforced or entered any Law or final and non-appealable order that prohibits the consummation of the transactions contemplated by this agreement or any other Transaction Document; or
(c)
on the Long Stop Date, any of the Conditions in Schedule 1 have not been either:
(i)
fulfilled by the Purchaser and/or the Seller, as the case may be; or
(ii)
subject to and in accordance with clause 3.3 the subject of a written notice of waiver of the Condition, duly delivered from the Seller or the Purchaser to the other party,
then either the Seller or the Purchaser may terminate this agreement upon written notice of such termination to the other (provided, that the right to terminate this agreement under this clause 3.4 shall not be available to or on behalf of any party whose action or failure to act in breach of this agreement has been the primary cause of any applicable circumstance referred to in clause (a), (b) or (c) above (other than a party refusing to waive a condition it is permitted to waive pursuant to clause 3.3)).
3.5
From the date hereof through Completion or earlier termination of this agreement, the Seller shall not and shall procure its Affiliates not to, and shall instruct and cause its Affiliates to instruct their respective representatives not to, directly or indirectly, (i) initiate, solicit, knowingly facilitate or knowingly encourage any indication of interest, proposal or offer for an Alternative Transaction (as defined below), (ii) negotiate, accept or enter into any agreement or arrangement (including a letter of intent) with any person (other than the Purchaser or any of its Affiliates or representatives) for an Alternative Transaction or (iii) commit to, enter into or consummate any Alternative Transaction. From the date hereof through Completion or earlier termination of this agreement,

17
 

nothing in this clause 3.5 shall prohibit or limit the Seller, its Affiliates or any of their respective representatives from (X) indicating to any person or entity that it is not permitted to respond to any Alternative Transaction or (Y) discussing the transactions contemplated by this agreement or the other Transaction Documents with any Regulatory Authority or rating agency. For purposes of this clause 3.5, “Alternative Transaction” means, other than any transaction involving the Purchaser or any of its Affiliates or representatives, including any transactions contemplated by this agreement or any other Transaction Document, any sale, acquisition or purchase (including by a merger or amalgamation or via a reinsurance or retrocession arrangement) of (A) any equity interests in the Company or (B) a substantial portion of the assets or liabilities of the Reinsured Business, taken as a whole; provided that any transaction relating to the Reinsured Business between or among the Seller and its Affiliates shall not be deemed to be an Alternative Transaction.
4.
CONDUCT OF BUSINESS BEFORE COMPLETION
4.1
Between the date of this agreement and the earlier of the Completion Date or this agreement being terminated in accordance with its terms:
(a)
the Seller (i) shall (solely with respect to the Reinsured Business), and shall procure that the Company and, solely with respect to the Reinsured Business, the Ceding Companies and Life shall, operate and carry on the Reinsured Business in the ordinary course of business, and (ii) shall not (solely with respect to the Reinsured Business), and shall procure that the Company and, solely with respect to the Reinsured Business, the Ceding Companies and Life shall not, undertake any of the acts or matters listed in Schedule 3; in either case, except (A) with the prior written consent of the Purchaser (which consent shall not be unreasonably conditioned, withheld or delayed), (B) if and to the extent the Seller determines, acting reasonably, that such action is required by applicable Law (and in respect of which the Purchaser shall be, to the extent permitted by applicable Law, notified and reasonably consulted as far in advance as is practicable in the circumstances), (C) if permitted or required by this agreement or any of the Transaction Documents, or (D) as set out in the Disclosure Letter; and
(b)
the Seller shall notify the Purchaser of any matter, circumstance, act or omission which is or may reasonably be expected to be a breach of this clause 4 or as soon as reasonably practicable after the Seller becomes aware of any such matter, circumstance, act or omission; provided, that the failure of the Seller to provide any notice contemplated by this clause 4.1 shall not (x) constitute a failure to satisfy any condition set out in Schedule 1, (y) otherwise relieve any person from its obligation to consummate the transactions contemplated by the Transaction Documents or (z) in and of itself provide the basis for the Purchaser or any other party to seek damages, or increase the level of damages recoverable, in respect of any breach of covenant or warranty.

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4.2
Clause 4.1 shall not operate so as to restrict or prevent:
(a)
any matter reasonably undertaken by the Seller (solely with respect to the Reinsured Business), the Company or any Ceding Company (solely with respect to the Reinsured Business) in an emergency or disaster situation with the intention of minimising any adverse effect thereof (and of which the Purchaser will be promptly notified);
(b)
the completion or performance of any obligations required to be undertaken pursuant to any agreement entered into by the Seller (solely with respect to the Reinsured Business), the Company or any Ceding Company (solely with respect to the Reinsured Business) prior to the date of this agreement (and, in respect of any such obligations which would prevent or have prevented compliance with clause 4.1, the Purchaser will be promptly notified where reasonably practicable);
(c)
any action necessary (in the reasonable belief of the Seller or the relevant Retained Group Member) in order to comply with any requirement of applicable Law (and in respect of any such matter the Purchaser shall be consulted as far in advance as is practicable in the circumstances);
(d)
any matter expressly provided for contemplated in this agreement or the other Transaction Documents or reasonably necessary to give effect to any of them (and in respect of any such matter the Purchaser shall be consulted as far in advance as is practicable in the circumstances); or
(e)
any matter undertaken at the express written request of the Purchaser.
4.3
Subject to applicable legal and regulatory requirements, between the date of this agreement and Completion and upon reasonable notice being given by the Purchaser, the Seller shall, and shall procure that the Company and the Ceding Companies (solely with respect to the Reinsured Business) shall, consult with the Purchaser on a reasonably regular basis (and the Seller shall procure that the Company and the Ceding Companies (solely with respect to the Reinsured Business) shall, (subject to any obligations they may have under existing agreements) allow the Purchaser and its representatives reasonable access during Working Hours to the senior executives of the Company and the Ceding Companies in respect of the Reinsured Business and the books and records of the Ceding Companies relating to the Reinsured Business and such other information reasonably requested by the Purchaser as shall allow them to make a reasonably detailed assessment of the conduct and operation of the Reinsured Business; provided that the Seller and its Affiliates may withhold any document (or portions thereof) or information (A) that is subject to the terms of a non-disclosure agreement with a third party in effect on the date of this agreement or (B) that constitutes privileged attorney-client communications or attorney work product and the transfer of which, or the provision of access to which, as reasonably determined by such party’s counsel, constitutes a waiver of any such privilege; provided, further, that with respect to clauses (A) or (B)

19
 

above, the Seller and its Affiliates will discuss with Purchaser a reasonable solution to transfer the information referred to in this clause 4.3 to Purchaser without violating any such privilege or confidentiality restriction. The Purchaser shall be responsible for, and shall reimburse, all reasonable, out-of-pocket costs incurred by the Seller and its Affiliates in complying with this clause 4.3. Notwithstanding anything to the contrary in this clause 4.3, the Purchaser will have no right to obtain Tax information with respect to the Ceding Companies or the Company except as expressly set out in Schedule 7.
4.4
Between the date of this agreement and the earlier of the Completion Date or this agreement being terminated in accordance with its terms, the Purchaser shall not amend, modify, supplement, terminate or waive any provision of the Escrow Agreement, enter into any side agreement relating thereto, or take any other action that would result in (i) any Investor that is a party to the Escrow Agreement having any right: (x) to the return of funds delivered from the escrow fund governed by the Escrow Agreement, the Purchaser or any Affiliate of the Purchaser or (y) not to fully discharge its obligations thereunder or (ii) any person having the right to, directly or indirectly, delay or prohibit the distribution of funds from the escrow fund governed by the Escrow Agreement.
5.
EFFECT OF TERMINATION AND PURCHASER TERMINATION FEE
5.1
Subject to clause 5.2, if this agreement is terminated in accordance with clauses 3.4, 7.4 or 7.5, then all of the rights and obligations of the parties under this agreement shall end (except for the provisions of this clause 5.1 and clauses 1 and 13 to 25 (inclusive)) but all rights and liabilities of the parties which have accrued before termination shall cease, and each party irrevocably and unconditionally waives such rights and covenants not to bring any Claim or commence any Proceedings in respect thereof; provided, however that neither this clause 5.1 nor any other provision of this agreement shall relieve any party from liability for fraud, fraudulent misrepresentation or intentional and material breach of this agreement prior to such termination.
5.2
If:
(a)
this agreement is terminated by Seller pursuant to clauses 7.4 or 7.5 or
(b)
this agreement is terminated by either party pursuant to clause 3.4 and, at the time of such termination, any Investor has materially breached its obligations under an Investor Undertakings Letter Agreement and such breach has been a primary cause of the failure of the Condition in paragraph 1 of Schedule 1 to be fulfilled,
then in either case the Purchaser shall, no later than one (1) Business Day following the date of such termination, deliver instruction to the Escrow Agent authorizing the release of the Purchaser Termination Fee to the bank account notified by the Seller to the Purchaser.

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5.3
The sole and exclusive remedy of the Seller against the Purchaser and its Affiliates to collect monetary damages for any and all losses, claims, expenses, liabilities or damages suffered or incurred by the Seller prior to Completion will be the Purchaser Termination Fee payable in accordance with clause 5.2 following the termination of this agreement. If Completion occurs, including in the situation that the Seller has obtained a remedy of specific performance against the Purchaser to cause the Purchaser to complete this agreement, the Seller shall not be entitled to receive the Purchaser Termination Fee.
5.4
If the Purchaser fails to promptly pay the Purchaser Termination Fee when due, and, in order to obtain such payment, the Seller commences a suit that results in a judgment against the Purchaser for the amount of the Purchaser Termination Fee, the Purchaser shall cause the Seller to be paid from the Escrow Account, as applicable, all amounts ordered to be paid by the court, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the termination date, to, but excluding, the date of payment.
5.5
Each of the parties hereto acknowledges and agrees that the agreements contained in this clause 5 are an integral part of the transactions contemplated hereby, and that without these agreements, the Seller would not enter into this agreement, and that any amounts payable pursuant to this clause 5 constitute a genuine pre-estimate of loss.
5.6
Nothing in this clause 5 shall limit the entitlement of the parties to seek to obtain an injunction, specific performance or other equitable relief as contemplated by clause 11.
5.7
The Seller shall, within one (1) Business Day following receipt of such written instruction from the Purchaser with respect to the disposition of the relevant funds from the Escrow Account following a termination of this agreement, either (a) provide written acknowledgement with respect to such instruction or (b) deliver a written notice to the Escrow Agent and the Purchaser disputing the basis of such instruction.
6.
CONSIDERATION AND CAPITALISATION OF THE COMPANY
6.1
The total consideration for the sale of the Shares shall be the payment by the Purchaser of the Consideration. Consideration shall be paid from the Escrow Account.
6.2
On or prior to the date that the Company, the Retrocessionaire and each of the Ceding Companies enter into the Retrocession Agreements, the Seller shall (a) cause the Ceding Companies to pay to the Retrocessionaire on a funds withheld basis the amount set out in Line D “Total Premiums Receivable” of the Company Capitalisation Plan in the manner and on the terms set forth in the Retrocession Agreements, (b) contribute, or cause to be contributed, to the Retrocessionaire by means of a deposit or credit to one or more of the funds withheld accounts to be established under the Retrocession Agreements Initial Funding Assets with an aggregate market value as of the date of contribution as determined by a third-party pricing service reasonably selected by the Seller equal to the amount set out in in Line E “Deemed Contribution to the Funds Withheld Accounts” of the Company Capitalisation Plan and (c) cause cash and/or

21
 

investment assets as may be reasonably selected by the Purchaser from the investment assets then-owned by the Seller and that were previously communicated to the Purchaser for such purposes with an aggregate market value as of the date of contribution as determined by a third-party pricing service reasonably selected by the Seller equal to the amount set out in Line F “Required Capital Contribution” of the Company Capitalisation Plan to be contributed to an account of the Retrocessionaire.
6.3
Prior to the entry of the Company, the Retrocessionaire and each of the Ceding Companies into the Retrocession Agreements, the Seller shall procure that the cash and/or investment assets set forth on Appendices A and C to the Reconciliation Methodologies are maintained in the applicable Security Accounts (as defined in the Retrocession Agreements) and not sold, transferred or otherwise removed from such accounts, except, in each case, (i) in connection with the payment or settlement of Losses (as defined in the Retrocession Agreement) or other expenses expressly permitted to be deducted from such Security Accounts under the terms of the related Security Agreements (as defined in the Retrocession Agreement) and Retroceded Policies (as defined in the Retrocession Agreement) following December 31, 2013 (provided that Seller shall consult with the Purchaser prior to selling any investments in the Security Accounts) or (ii) as expressly permitted by this Agreement or the Reconciliation Methodologies.  The parties acknowledge that any investment income received in respect of the assets in the Security Accounts shall be credited to the Security Accounts.

7.
COMPLETION
7.1
Completion shall take place no later than 11.00 a.m. on the Completion Date. Completion will take place at the offices of Attride‑Stirling & Woloniecki at Crawford House, 50 Cedar Avenue, Hamilton HM11, Bermuda or at such other place as the parties may agree in writing.
7.2
At Completion the Seller shall do those things listed in Part A of Schedule 4 and the Purchaser shall do those things listed in Part B of Schedule 4.
7.3
Neither the Purchaser nor the Seller shall be obliged to complete the sale and purchase of any of the Shares unless the sale and purchase of all of the Shares is completed simultaneously.
7.4
If the respective obligations of the Seller and/or the Purchaser under clause 7.2 and Schedule 4 are not complied with on the Completion Date, subject always to clause 3.4, the Purchaser (in the case of non-compliance by the Seller) or, as the case may be, the Seller (in the case of non-compliance by the Purchaser) may:
(a)
defer Completion (so that the provisions of this clause 7 shall apply to Completion as so deferred); or

22
 

(b)
proceed to Completion as far as practicable (without limiting its rights under this agreement); or
(c)
terminate this agreement by notice in writing to the other party.
7.5
Either party may terminate this agreement at any time prior to Completion by written notice to the other party if such other party fails to comply in all material respects with or perform any of its agreements, covenants, conditions or obligations hereunder that are required to be performed or complied with by it prior to the date of such termination and such breach is not cured within thirty (30) days following receipt by the breaching party of written notice from the non-breaching party requesting such breach to be cured (or such lesser period if such thirty (30) day period would otherwise lapse beyond the Long Stop Date).
7.6
For the avoidance of doubt but without limiting clause 13, any party’s right to terminate this agreement in accordance with clauses 3.4, 7.4 or 7.5 is not exclusive of any of the rights, powers and remedies provided by law.
8.
RECONCILIATION AMOUNT
8.1
Determination of Completion Reconciliation Amounts.
(a)
The Seller shall prepare and, at least five (5) Business Days prior to the anticipated Completion Date, deliver to the Purchaser a Reconciliation Amount Calculation Report estimated as of the anticipated Completion Date (the “Estimated Reconciliation Amount Calculation Report”) in accordance with the Reconciliation Methodologies and in the same format as the Reference Reconciliation Amount Calculation Report for the period commencing as of the Reference Date and ending immediately prior to the Completion Date.
8.2
Determination of Final Reconciliation Amounts.
(a)
Within sixty (60) Business Days following the Completion Date, the Seller shall prepare and deliver to the Purchaser a Reconciliation Amount Calculation Report as of the Completion Date (the “Initial Reconciliation Amount Calculation Report”), which shall be prepared in accordance with the Reconciliation Methodologies and in the same format as the Reference Reconciliation Amount Calculation Report for the period commencing as of the Reference Date and ending immediately prior to the Completion Date.
(b)
Initial Reconciliation Amount Calculation Report Review and Dispute:
(i)
If the Purchaser has any objection to any line item or items set out in the Initial Reconciliation Amount Calculation Report on the basis of (1) manifest arithmetic error or (2) the Initial Reconciliation Amount Calculation Report not being prepared in accordance with the

23
 

requirements set out in clause 8.2(a), the Purchaser shall deliver a detailed written statement describing such objections to the Purchaser within forty-five (45) Business Days of receipt thereof (the “Initial Reconciliation Amount Calculation Report Dispute Notice”), which shall set out the particular line item or items to which the Purchaser is objecting, the specific dollar amount proposed by the Purchaser for each such item or items, a detailed explanation of the nature and rationale for each such objection and a narrative description of how the dollar amount proposed by the Purchaser for each such item or items objected to was derived.
(ii)
The Purchaser shall, and shall cause the Company to, provide the Seller and its representatives, upon the prior written request of the Seller, reasonable access to the books and records of the Company, including internal accounting records of the Company, and shall make reasonably available to the Seller and its representatives employees of the Purchaser and the Company, as and to the extent reasonably necessary for, and for the sole purpose of, this clause 8.2. The Seller shall, and shall cause the Ceding Companies to, provide the Purchaser and its representatives, upon the prior written request of the Purchaser, reasonable access to the books and records of the Ceding Companies relating to the Reinsured Business, including internal accounting records of the Ceding Companies relating to the Reinsured Business, and shall make reasonably available to the Purchaser and its representatives employees of the Ceding Companies involved in the Reinsured Business engaged in the preparation of the Initial Reconciliation Amount Calculation Report, as and to the extent reasonably necessary for, and for the sole purpose of, this clause 8.2.
(iii)
The Purchaser shall be conclusively deemed to have accepted the Initial Reconciliation Amount Calculation Report except as and to the extent that the Purchaser has objected to a particular line item or items in accordance with clause 8.2(b)(i) as set out in the Initial Reconciliation Amount Calculation Report Dispute Notice.
(iv)
If the Purchaser and the Seller are unable to reach a final resolution on all of the Seller’s objections relating to the Initial Reconciliation Amount Calculation Report within thirty (30) Business Days after the Purchaser has received the Seller’s Initial Reconciliation Amount Calculation Report Dispute Notice, either the Purchaser or the Seller may submit the remaining matters in dispute to a jointly selected internationally recognized accounting firm that is not the auditor or independent accounting firm of any of the parties, which firm shall select an independent and impartial partner, who is a chartered accountant, to act as expert (the “Initial Reconciliation Amount Expert”) within ten (10)

24
 

Business Days of that firm’s selection by the parties, or as soon as practicable thereafter; provided, however, that if the parties are unable to select such accounting firm within forty-five (45) Business Days after the Purchaser has received the Seller’s Initial Reconciliation Amount Calculation Report Dispute Notice, any party may request the Institute of Chartered Accountants in England & Wales to appoint, within ten (10) Business Days from the date of such request or as soon as practicable thereafter, a partner in an internationally recognized accounting firm that is not the auditor or independent accounting firm of any of the parties, who is a chartered accountant and who is independent and impartial, to act as the Initial Reconciliation Amount Expert for purposes of this clause 8.2(b). Notwithstanding anything to the contrary in this clause 8.2(b)(iv), to the extent that any matters remaining in dispute between the Purchaser or the Seller involve legal matters or matters of contractual interpretation, such disputes shall not be submitted to the Initial Reconciliation Amount Expert pursuant to this clause 8.2(b) for resolution and shall instead be subject to resolution in accordance with clause 25.
(v)
Within ten (10) Business Days of the appointment of the Initial Reconciliation Amount Expert, the Purchaser shall provide the Initial Reconciliation Amount Expert with a copy of the Initial Reconciliation Amount Calculation Report (as modified by any adjustments agreed to in writing by the parties), and the Purchaser and the Seller shall each prepare and deliver to the Initial Reconciliation Amount Expert a detailed written report of such line item or items remaining in dispute, which report shall set out the specific dollar amount proposed by such party for each such item or items and a detailed explanation of the basis and rationale for such party’s positions.
(vi)
The Initial Reconciliation Amount Expert’s review and determination shall be limited to matters objected to by the Seller and shall determine, on the basis of the standards set out in clause 8.2(b)(i), whether and to what extent (if any) the Initial Reconciliation Amount Calculation Report requires adjustment. The Initial Reconciliation Amount Expert shall not review any line items or make any determination with respect to any matter other than those matters set out in the Initial Reconciliation Amount Calculation Report Dispute Notice that remain in dispute (or any other line items affected thereby).
(vii)
The Initial Reconciliation Amount Expert shall request any additional information required to make its determination from the parties within thirty (30) calendar days of its receipt of the detailed written reports of the parties pursuant to clause 8.2(b)(ii). The Purchaser and the Seller shall reasonably cooperate with the Initial Reconciliation Amount Expert

25
 

and shall provide any non-privileged information and documentation requested by the Initial Reconciliation Amount Expert, including any internal accounting records or work papers, and make reasonably available to the Initial Reconciliation Amount Expert employees of the Purchaser and the Company, on the one hand, and the Seller, on the other hand, in each case that have been involved in the preparation of the Initial Reconciliation Amount Calculation Report or the Initial Reconciliation Amount Calculation Report Dispute Notice, as applicable. Any information and documentation provided by the Purchaser or the Seller to the Initial Reconciliation Amount Expert shall concurrently be provided to the other party to the extent not already so provided.
(viii)
The Initial Reconciliation Amount Expert shall within thirty (30) calendar days of receiving all information required to make a determination issue a written determination finally resolving any remaining objections to the Initial Reconciliation Amount Calculation Report, which determination shall not award amounts above or below, as applicable, the amounts proposed by the Purchaser in the Initial Reconciliation Amount Calculation Report, on the one hand, and the amounts proposed by the Seller in its Initial Reconciliation Amount Calculation Report Dispute Notice, on the other hand. The Initial Reconciliation Amount Expert’s determination shall include a reasonably detailed accounting of any required change to the Initial Reconciliation Amount Calculation Report. The Purchaser and the Seller shall require the Initial Reconciliation Amount Expert to provide its determination within thirty (30) Business Days after its appointment, and otherwise as soon as practicable. In any event, the Initial Reconciliation Amount Expert is required to prepare a written determination and give notice (including a copy) of the determination to the Purchaser and Seller within a maximum of three months of the appointment of the Initial Reconciliation Amount Expert.
(ix)
If the Initial Reconciliation Amount Expert dies or becomes unwilling or incapable of acting, or does not deliver the determination within the time required by this clause 8.2(b) then:
(A)
either party may apply to the Institute of Chartered Accountants in England & Wales to discharge the Initial Reconciliation Amount Expert and to appoint a replacement Initial Reconciliation Amount Expert with the required expertise; and
(B)
this clause 8.2(b) shall apply to the new Initial Reconciliation Amount Expert as if he were the first Initial Reconciliation Amount Expert appointed.

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(x)
The Initial Reconciliation Amount Expert shall act as an expert and not as an arbitrator. The determination of the Initial Reconciliation Amount Expert shall be set out in writing and shall be final and binding upon the parties in the absence of manifest error or fraud and may be enforced in any court having jurisdiction; provided, however, that within five (5) Business Days after the transmittal of the Initial Reconciliation Amount Expert’s determination, any party may request in writing to the Initial Reconciliation Amount Expert, with a copy thereof provided to the other party hereto in accordance with clause 16, with such request solely limited to the Initial Reconciliation Amount Expert correcting any clerical, typographical or computational errors in such determination. The other party shall have five (5) Business Days to respond to the Initial Reconciliation Amount Expert in writing to such request, with a copy thereof provided to the other party hereto in accordance with clause 16. The Initial Reconciliation Amount Expert shall dispose of such request if no response was received during such five (5) Business Day period from the other party, within seven (7) Business Days after receiving such request or, if such a response was received during such period, within three (3) Business Days of its receipt of such a response.
(xi)
The Purchaser, on the one hand, and the Seller, on the other hand, shall each bear the respective fees and costs incurred by such party in connection with the matters set out in this clause 8.2(b), except that all fees and disbursements of the Initial Reconciliation Amount Expert (including any fees and costs of any advisers appointed by the Initial Reconciliation Amount Expert) shall be paid by the party who has a greater proportion of matters submitted to the Initial Reconciliation Amount Expert resolved against it by the Initial Reconciliation Amount Expert.
(xii)
Each party shall act reasonably and co-operate to give effect to the provisions of this clause 8.2(b) and otherwise do nothing to hinder or prevent the Initial Reconciliation Amount Expert from reaching his determination.
(xiii)
The “Final Reconciliation Amount Calculation Report” shall mean the Initial Reconciliation Amount Calculation Report, together with any revisions thereto made pursuant to this clause 8.2(b), including, if necessary, the determination of the Initial Reconciliation Amount Expert.
(xiv)
The Final Reconciliation Amount Calculation Report shall be final and binding upon the parties hereto for purposes of the payment, if any, contemplated by clause 8.2(c).
(c)
Calculation of Post-Completion Adjustments.

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(i)
If the Reconciliation Amount for any Ceding Company shown on the Final Reconciliation Amount Calculation Report exceeds the Reconciliation Amount shown on the Estimated Reconciliation Amount Calculation Report for such Ceding Company, the Seller shall cause such Ceding Company to pay to the Retrocessionaire an amount equal to such excess in accordance with the terms and conditions of the Retrocession Agreements, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the Completion Date, to, but excluding, the date of payment; and
(ii)
If the Reconciliation Amount for any Ceding Company shown on the Final Reconciliation Amount Calculation Report is less than the Reconciliation Amount shown on the Estimated Reconciliation Amount Calculation Report for such Ceding Company, the Purchaser shall cause the Retrocessionaire to pay to such Ceding Company an amount equal to such shortfall in accordance with the terms and conditions of the Retrocession Agreements, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the Completion Date, to, but excluding, the date of payment.
9.
THE SELLER’S WARRANTIES AND UNDERTAKINGS
9.1
Subject to the provisions of clause 19, the Seller warrants to the Purchaser that each of the Warranties listed in Schedule 5 is true and accurate as at the date of this agreement.
9.2
The Purchaser’s right to recover if a Warranty has been breached shall be excluded or limited as set out in this clause 9 and Schedule 6.
9.3
The Purchaser’s right to be indemnified under the Tax Covenant shall be limited as set out in Schedule 6 and paragraph 6 of Schedule 7.
9.4
The only Warranties given:
(a)
in respect of Tax are those contained in paragraphs 4.2 and 15 of Schedule 5 and none of the other Warranties shall be deemed to be given in relation to Tax; and
(b)
in respect of insurance matters are those contained in paragraph 10 of Schedule 5 and none of the other Warranties shall be deemed to be given in relation to insurance matters.
9.5
The Purchaser shall not be entitled to claim that any fact, matter or circumstance causes any of the Warranties to be breached if and to the extent that such fact, matter or circumstance is fairly disclosed in the Disclosure Letter.

28
 

9.6
The Warranties are qualified only by the facts and circumstances contained or referred to in this agreement, the Transaction Documents, the Data Room, the Disclosure Letter or in any of the documents annexed to the Disclosure Letter.
9.7
Except as provided in paragraph 5, 9.1 and 10.1 of Schedule 5, the Purchaser acknowledges and agrees that the Seller gives no warranty, representation or undertaking as to the accuracy or completeness of any information (including, without limitation, any of the forecasts, estimates, projections, statements of intent or statements of opinion) provided to the Purchaser or any of its advisers or agents (howsoever provided).
9.8
The Purchaser acknowledges and agrees that it shall not make a Claim in respect of any fact, matter or circumstance of which the Purchaser was aware at or prior to the date hereof. For the purposes of this agreement, any fact, matter or circumstance of which the Purchaser is aware shall be deemed to include the actual knowledge, information or belief of Raymond J Brooks, which he has or should have had if he had knowledge of the contents of the Disclosure Letter, the contents of the Data Room, any documents annexed to the Disclosure Letter and any written report or analysis prepared by the Purchaser’s professional advisers in connection with this agreement or the transactions contemplated hereunder.
9.9
The Purchaser undertakes to the Seller (for itself and on behalf of each other member of the Retained Group) that, in the absence of fraud, it has no rights against and may not make any claim against the Seller, any other member of the Seller Group or any director, officer, employee, lawyer, accountant, banker or other adviser, agent, sub-contractor or broker of the Seller or any other member of the Seller Group on whom it may have relied before agreeing to any term of, or entering into, this agreement any Transaction Document or other document referred to herein or therein other than as expressly set out herein or therein.
9.10
The Purchaser acknowledges that it does not rely on and has not been induced to enter into this agreement on the basis of any warranties, representations, covenants, undertakings, indemnities or other statements whatsoever, other than those expressly set out in this agreement.
9.11
Each of the Warranties shall be construed as a separate and independent warranty and (except where expressly provided to the contrary) shall not be limited or restricted by reference to or inference from the terms of any other Warranty.
9.12
If Completion occurs, except for claims for specific performance under clause 11, the provisions in this clause 9 shall be, in the absence of fraud, the sole and exclusive remedy for any breach or inaccuracy of any Warranty. The Purchaser acknowledges (for itself and on behalf of each other member of the Purchaser Group) that the only remedies available to it and them in respect of this agreement (and the Transaction Documents) are damages for breach of contract and none of them shall have any right to rescind or terminate this agreement or any Transaction Document or any of the transactions contemplated hereby or thereby either for breach of contract (including any Warranty)

29
 

or for negligent or innocent misrepresentation or otherwise; provided, however, that the provisions of this clause 9.12 shall not exclude any liability or any right to rescind this agreement or any Transaction Document in respect of any statement made fraudulently by the Seller prior to execution of this agreement or any right which the Purchaser or any member of the Purchaser’s Group may have in respect of fraudulent misrepresentation.
10.
THE PURCHASER’S WARRANTIES AND UNDERTAKINGS
10.1
The Purchaser warrants to the Seller that each of the Purchaser Warranties set out in Schedule 5 is true and accurate as at the date of this agreement.
10.2
Each of the Purchaser’s Warranties shall be construed as a separate and independent warranty and (except where expressly provided to the contrary) shall not be limited or restricted by reference to or inference from the terms of any other Purchaser’s Warranty.
10.3
From and after Completion, the Purchaser shall have no Liability in respect of any Claim by the Seller unless:
(a)
the amount of the Liability pursuant to that individual Claim exceeds one million dollars ($1,000,000) (each a “Qualifying Claim”); and
(b)
the aggregate amount of all Qualifying Claims exceeds six million dollars ($6,000,000) in which event the Purchaser shall be liable for the entire amount of such Qualifying Claims and not merely the excess over such threshold.
10.4
From and after Completion, the maximum aggregate Liability of the Purchaser in relation to Claims under this agreement and in respect of the warranties contained in the Administration Services Agreement shall not exceed one hundred and ninety-nine million five hundred thousand dollars ($199,500,000).
10.5
The limitations of Liability contained in this clause 10 shall not apply to any Liability for any Claim to the extent that the same is attributable to fraud or fraudulent misrepresentation on the part of the Purchaser.
11.
SPECIFIC PERFORMANCE
11.1
Each of the parties hereto agrees that where the other party breaches any provision of this agreement, then damages may not be a sufficient remedy and the non-breaching party shall be entitled to seek such legal or equitable remedies or relief as are available to it, including injunctive relief (whether interim or final) and specific performance. Furthermore, each party hereto agrees that if the other party brings an action seeking an equitable remedy to enforce the provisions of this agreement, neither of them will oppose the granting of such remedy, whether on the ground that there is or are suitable alternative remedy(ies) or otherwise. Notwithstanding the foregoing, the Seller will not

30
 

seek such legal or equitable remedy or relief if the Purchaser Termination Fee has been paid.
12.
EFFECT OF COMPLETION
12.1
Any provision of this agreement and any other documents referred to in it which by its terms is required to be performed after Completion shall survive Completion until it has been performed or satisfied. Any provision of this agreement required to be performed by such party before Completion which has not been performed at or before Completion shall not survive Completion; provided, that a party may deliver a Claim for breach thereof so long as it gives written notice of such Claim specifying in reasonable detail the matter which gives rise to the Claim, the nature of the Claim and the amount claimed, as soon as reasonably practicable after the Claim has arisen or after the claiming party realised that a Claim would, could or might be made, and in any event by no later than 18 months from the Completion Date.
13.
REMEDIES AND WAIVERS
13.1
This agreement may only be varied in writing signed by each of the parties.
13.2
No delay or omission by any party to this agreement in exercising any right, power or remedy provided by Law or under this agreement or any other documents referred to in it shall:
(a)
affect that right, power or remedy; or
(b)
operate as a waiver thereof.
13.3
The single or partial exercise of any right, power or remedy provided by Law or under this agreement shall not preclude any other or further exercise of it or the exercise of any other right, power or remedy.
13.4
Except as otherwise expressly provided in this agreement, the rights, powers and remedies provided in this agreement are cumulative and not exclusive of any rights, powers and remedies provided by Law.
14.
FURTHER ASSURANCE
Each of the parties shall, from time to time, on being required to do so by any of the other parties, do or procure the doing of all such acts and/or execute or procure the execution of such documents in a form satisfactory to the party concerned, as the party concerned may consider necessary for giving full effect to this agreement and securing to each party the full benefit of the rights, powers and remedies conferred upon it in this agreement.

31
 

15.
ENTIRE AGREEMENT
15.1
This agreement and the Transaction Documents constitute the whole and only agreement between the parties relating to the subject matter of this agreement and the Transaction Documents and supersede all previous agreements, whether written or oral between the parties in relation to these transactions. Accordingly, all other terms, conditions, representations, warranties and any other statements which would otherwise be implied (by law or otherwise) shall not form part of this agreement or the Transaction Documents. In entering into this agreement and the Transaction Documents, each party to this agreement acknowledges that it is not relying upon any pre-contractual statement which is not expressly set out in them.
15.2
The Purchaser (for itself and on behalf of each other member of the Purchaser Group) confirms that:
(a)
in entering into this agreement it has agreed not to rely on any representation (including without limitation any misrepresentation or any misstatement), warranty, collateral contract, assurance, covenant, indemnity, undertaking or commitment which is not expressly set out in this agreement or the Transaction Documents; and
(b)
in any event, without prejudice to any liability for fraudulent misrepresentation or fraudulent misstatement, the only rights or remedies in relation to any representation (including without limitation any misrepresentation or any misstatement), warranty, collateral contract, assurance, covenant, indemnity, undertaking or commitment given or action taken in connection with this agreement or with any of the Transaction Documents are contained or referred to in this agreement or such Transaction Document, and for the avoidance of doubt and without limitation, neither party has any other right or remedy (whether by way of a claim for contribution or otherwise) in tort (including negligence) or for misrepresentation (whether negligent or otherwise, and whether made prior to, and/or in, this agreement).
16.
NOTICES
16.1
A notice under this agreement shall only be effective if it is in writing (other than writing on the screen of a visual display unit and e-mail which shall not be treated as writing for the purposes of this clause 16.1).
16.2
Notices under this agreement shall be sent to a party to this agreement at its address and for the attention of the individual set out below:

32
 

Party and title of individual
Address
Telephone No.
GreyCastle Holdings Ltd.
Clarendon House, 2 Church Street, Hamilton, HM 11, Bermuda
441 295 1422
FAO: The Secretary
 
 
 
 
 
Party and title of individual
Address
Telephone No.
XL Insurance (Bermuda) Ltd
One Bermudiana Road, Hamilton, HM 08, Bermuda
441 294 7222
FAO: Corporate Secretary
 
 
provided that a party may change its notice details on giving notice to the other party of the change in accordance with this clause 16.2.
16.3
Any notice given under this agreement shall be deemed to have been duly given as follows:
(a)
if delivered personally, on delivery; and
(b)
if sent by first class inland post, two clear Business Days after the date of posting.
16.4
Any notice given under this agreement outside Working Hours in the place to which it is addressed shall be deemed not to have been given until the start of the next period of Working Hours in such place.
16.5
The provisions of this clause 16.5 shall not apply in relation to the service of any claim form, application notice, order or judgment or other document relating to any Proceedings.
17.
ANNOUNCEMENTS
17.1
No announcement concerning the subject matter of this agreement or any of the Transaction Documents shall be made by the Seller on the one hand or the Purchaser on the other hand without the prior written approval of the other party, such approval not to be unreasonably withheld or delayed. This clause 17.1 does not apply in the circumstances described in clause 17.2.
17.2
Any party may make an announcement concerning the sale of the Shares or any ancillary matter if required by:
(a)
Law; or
(b)
any securities exchange or regulatory or governmental body or any Tax Authority to which that party is subject, wherever situated, whether or not the requirement has the force of law, in which case the party concerned shall take all such steps

33
 

as may be reasonable and practicable in the circumstances to agree the contents of such announcement with the other before making such announcement.
17.3
The restrictions contained in this clause 17 shall continue to apply after Completion or termination of this agreement without limit in time.
18.
CONFIDENTIALITY
18.1
Each party to this agreement shall treat as confidential all information obtained as a result of entering into or performing this agreement which relates to:
(a)
the provisions of this agreement;
(b)
the negotiations relating to this agreement;
(c)
the subject-matter of this agreement;
(d)
in the case of the Purchaser, the Retained Group; or
(e)
in the case of the Seller, the Purchaser, the Purchaser Group and the Company.
18.2
The Purchaser shall, and the Purchaser shall procure that the Company shall, treat as confidential all information received or obtained as a result of entering into or performing this agreement which relates to any Retained Group Member. The Seller shall treat as confidential all information obtained as a result of entering into or performing this agreement which relates to either the Purchaser, the Purchaser Group or, following Completion, the Company.
18.3
The Purchaser shall, and shall procure that the Company shall, (i) treat as confidential and (ii) not disclose or use for any marketing purposes all information regarding customers and policyholders of Retained Group Members who are not customers or policyholders of the Company, to the extent that such information was obtained prior to Completion in connection with:
(a)
the Company being a member of the same group of companies as the Seller and its subsidiary undertakings; or
(b)
the Company having access to any books and records, personnel or information technology systems of any Retained Group Member.
Each undertaking contained in this clause 18.3 shall be construed as a separate undertaking and if one or more of the undertakings is held to be against the public interest or unlawful or in any way an unreasonable restraint of trade, the remaining undertakings shall continue to bind the Purchaser.

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18.4
Notwithstanding the other provisions of this clause 18, any party may disclose confidential information:
(a)
if and to the extent required by the law of any relevant jurisdiction;
(b)
if and to the extent required by any securities exchange, Governmental Authority, Regulatory Authority or Tax Authority to which that party is subject, wherever situated, whether or not the requirement has the force of law;
(c)
if and to the extent required to vest the full benefit of this agreement in that party;
(d)
to its professional advisers, auditors, actuaries and bankers;
(e)
to the Company (in the case of any disclosure by the Purchaser) or to any Retained Group Member (in the case of any disclosure by the Seller);
(f)
if and to the extent necessary to carry out shared service arrangements with third parties which any Retained Group Member may enter into from time to time with the Company;
(g)
if and to the extent necessary to perform its obligations under any of the Transaction Documents;
(h)
to a credit rating agency;
(i)
if and to the extent the information has come into the public domain through no fault of that party;
(j)
if and to the extent (in the case of any disclosure by the Seller) the Purchaser or (in the case of any disclosure by the Purchaser) the Seller has given prior written consent to the disclosure; or
(k)
in the case of Seller, the Ceding Companies or any other Retained Group Member, to the cedents in respect of the Reinsured Business.
Any information to be disclosed pursuant to clauses 18.4(a) or 18.4(b) shall, where practicable in the circumstances and not otherwise prohibited, be disclosed only after notice to the Purchaser (in the case of any disclosure by the Seller) or the Seller (in the case of any disclosure by the Purchaser).
19.
ACKNOWLEDGMENTS BY THE PURCHASER
Notwithstanding anything to the contrary in this agreement or any other Transaction Document, the Purchaser acknowledges and agrees that the Seller makes no representation, warranty, covenant or agreement with respect to, and nothing contained in this agreement, any other Transaction Document or in any other agreement, document or instrument to be delivered in connection with the transactions contemplated hereby,

35
 

is intended or shall be construed to be a representation or warranty (express or implied), covenant or agreement of the Seller, the Company or any member of the Retained Group, for any purpose of this agreement, any other Transaction Document or any other agreement, document or instrument to be delivered in connection with the transactions contemplated hereby, with respect to (i) the adequacy, sufficiency or adverse development of the reserves of the Company or the Reinsured Business, (ii) the effect of the adequacy, sufficiency or adverse development of the reserves of the Company or the Reinsured Business on any “line item” or asset, liability or equity amount and (iii) the recoverability of any reinsurance recoverables under any retrocession agreement. Furthermore, subject to paragraph 5.1 of Schedule 5, the Purchaser acknowledges and agrees that no fact, condition, circumstance or event relating to or affecting the development of the reserves of the Company or the Reinsured Business may be used, directly or indirectly, to demonstrate or support the breach of any representation, warranty, covenant or agreement contained in this agreement, any other Transaction Document or any other agreement, document or instrument to be delivered in connection with the transactions contemplated hereby.
20.
COSTS AND EXPENSES
Save as expressly provided otherwise in this agreement or any of the Transaction Documents, each party to this agreement shall pay its own costs and expenses in relation to the negotiations leading up to the sale and purchase of the Shares and the preparation, execution and carrying into effect of this agreement, the Transaction Documents and all other documents referred to in any of them. The Purchaser shall be responsible for the payment of any Transfer Taxes arising in relation to the purchase of the Shares.
21.
COUNTERPARTS
21.1
This agreement may be executed in any number of counterparts, and by the parties to it on separate counterparts, but shall not be effective until each party has executed at least one counterpart.
21.2
Each counterpart shall constitute an original of this agreement, but all the counterparts shall together constitute but one and the same instrument.
22.
INVALIDITY
If at any time any provision of this agreement is or becomes illegal, invalid or unenforceable in any respect under the Law of any jurisdiction, that shall not affect or impair:
(a)
the legality, validity or enforceability in that jurisdiction of any other provision of this agreement; or
(b)
the legality, validity or enforceability under the Law of any other jurisdiction of that or any other provision of this agreement.

36
 

23.
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
23.1
The parties to this agreement do not intend that any term of this agreement should be enforceable, by virtue of the Contracts (Rights of Third Parties) Act 1999, by any person who is not a party to this agreement.
23.2
All benefits conferred by this agreement on any Retained Group Member shall be enforceable by the Seller as trustee for and on behalf of the relevant Retained Group Member.
23.3
From and after Completion, any benefits conferred by this agreement on the Company shall be enforceable by the Purchaser as trustee for and on behalf of the Company.
24.
CHOICE OF GOVERNING LAW
This agreement and all non‑contractual or other obligations arising out of or in connection with it or its subject matter are governed by English law.
25.
JURISDICTION
25.1
Other than as set out in clause 8.2, the courts of England have exclusive jurisdiction to settle any dispute arising from or connected with this agreement (a “Dispute”) including a dispute regarding the existence, validity or termination of this agreement or the consequences of its nullity.
25.2
The parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary.
25.3
The parties agree that the documents which start any Proceedings relating to a Dispute and any other documents required to be served in relation to such Proceedings may be served on the Purchaser in accordance with clause 24. These documents may, however, be served in any other manner allowed by law. This clause 25.3 applies to all Proceedings wherever started.
25.4
The Purchaser irrevocably agrees to indemnify, keep indemnified and hold harmless the Seller or any of its Affiliates on an after‑Tax basis against and from all claims, demands, applications, actions, Proceedings, orders, judgments, assessments, penalties, liabilities, damages, losses (including, without limitation, any losses whatsoever which arise out of any delay in the Purchaser being able to prosecute Proceedings under clause 25.1), interest, costs and expenses (including, without limitation, all fees and disbursements whatsoever of legal and other advisors) which the Seller or any of its Affiliates may suffer or incur as a result of any breach of, or failure to comply with, the exclusive jurisdiction agreement in clause 25.1 by the Purchaser.

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26.
LEGAL REPRESENTATION
Each of the parties hereby agrees that each of Seller’s Solicitors may serve as counsel to the Seller and its Affiliates (individually and collectively, the “Seller Group”), on the one hand, and the Company, on the other hand, in connection with the negotiation, preparation, execution and delivery of this agreement and the consummation of the transactions contemplated hereby, and that, following Completion and the other transactions contemplated by the Transaction Documents, each of Seller’s Solicitors may serve as counsel to any member of the Seller Group or any director, partner, officer, employee or Affiliate of any member of the Seller Group in connection with any litigation, claim or obligation arising out of or relating to this agreement or the transactions contemplated by the Transaction Documents notwithstanding such representation and each of the parties hereby consents thereto and waives any conflict of interest arising therefrom, and each of the parties shall procure any Affiliate thereof to consent to waive any conflict of interest arising from such representation. The Purchaser agrees that, as to all communications among each of Seller’s Solicitors, the Company, the Seller and their respective Affiliates that relate to the transactions contemplated by this agreement, the attorney-client privilege and the expectation of client confidence belongs to the Seller and its Affiliates, as applicable, and may be controlled by the Seller and its Affiliates and shall not pass to or be claimed by any of the Purchaser or the Company. Notwithstanding the foregoing, in the event that a dispute arises between the Purchaser or the Company, on the one hand, and a third party (other than any member of the Seller Group), on the other hand, after Completion, the Company may assert the attorney-client privilege to prevent disclosure of confidential communications by each of Seller’s Solicitors to such third party; provided, however, that the Company may not waive such privilege without the prior written consent of the Seller. This clause 26 is for the benefit of the Seller Group and such persons are intended third party beneficiaries of this clause 26.
27.
AGENT FOR SERVICE OF PROCESS
27.1
Each party which is not a company incorporated in England and Wales shall at all times maintain an agent for service of process in England. The Seller irrevocably appoints XL Services UK Ltd. of 70 Gracechurch St, London EC3V 0XL, United Kingdom and the Purchaser irrevocably appoints the Purchaser Service Provider (each such entity or any replacement agent appointed pursuant to clause 27.3 the “Agent”) as its agent for such purpose.
27.2
Without prejudice to any other permitted mode of service, each party agrees that service of any claim form, notice or other document for the purpose of any Proceedings begun in England shall be duly served upon it if served on the Agent in any manner permitted by the Civil Procedure Rules, whether or not it is forwarded to the party.
27.3
If for any reason the Agent appointed by any party at any time ceases to act as such, the party shall promptly appoint another such agent and promptly notify the other parties of the appointment and the new agent’s name and address. If the party concerned does

38
 

not make such an appointment within seven (7) Business Days of such cessation, then any other party may do so on its behalf and shall notify the other parties if it does so.


39
 

AS WITNESS this agreement has been signed by the parties (or their duly authorised representatives) on the date stated at the beginning of this agreement.

Signed by
for and on behalf of GREYCASTLE HOLDINGS LTD.
)
)
)
/s/ Raymond J. Brooks
Title: CEO
 
 
 
Signed by
for and on behalf of XL INSURANCE (BERMUDA) LTD
)
)
)
/s/ Stanley Lee
Title: SVP, Chief Financial Officer

















 

Schedule 1
Conditions

1.
Regulatory Consent (Bermuda)
(a)    
(i)
The Bermuda Monetary Authority under Section 30D of the Insurance Act having given written notification that it has no objection to the person(s) nominated by the Purchaser becoming a shareholder controller (as defined in the Insurance Act) of the Company; or
(ii)
if such notice has not been given, the period for the Bermuda Monetary Authority giving a corresponding notice of objection having elapsed without the Bermuda Monetary Authority having given any such notice of objection; and
(b)
The Bermuda Monetary Authority under the relevant provisions of the Exchange Control Act 1972 (and related regulations) having given written notification that it has no objection to the person(s) nominated by the Purchaser becoming a shareholder of the Company.
2.
Capitalisation of the Company
The transactions contemplated by clause 6.2 of the agreement having been completed.
3.
The Seller’s Warranties and Covenants
Each of the Warranties contained in paragraphs 1, 3, 4 and 13 of Schedule 5 being true and correct on the date of this agreement as if made on the date of this agreement and as of the Completion Date (except to the extent that any such Warranties are given as of a particular date or relate solely to a particular date or period, in which case such Warranties being true and correct as of such date or period), except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifiers therein) would not, individually or in the aggregate, have a Material Adverse Effect. Each other Warranty contained in Schedule 5 being true and correct on the date of this agreement as if made on the date of this agreement (except to the extent that any such Warranties are given as of a particular date or relate solely to a particular date or period, in which case their being true and correct as of such date or period), except where the failure to be true and correct (without regard to any materiality or Material Adverse Effect qualifiers therein) would not, individually or in the aggregate, have a Material Adverse Effect. Each of the covenants of the Seller and its Affiliates contained in Schedule 3 having been complied with in all material respects in accordance with the terms of this agreement.




 

4.
Prudential Regulation Authority, Financial Conduct Authority and Central Bank of Ireland Review
The Prudential Regulation Authority, the Financial Conduct Authority and the Central Bank of Ireland having indicated to the Seller that it has received in a form satisfactory to the Seller, acting reasonably, all the information it had requested or required in relation to the proposed retrocession of the Reinsured Business, the entry into the Administration Services Agreement and any related investment management arrangements (the “Reinsurance Transaction”) and the Prudential Regulation Authority and, to the extent they decide necessary, the Financial Conduct Authority,  having issued to the Seller a no-objection letter or other such comfort reasonably acceptable to the Seller with respect to the Reinsurance Transaction without imposing or seeking to impose any material condition thereon or on the Sellers and its Affiliates or imposing any material capital requirements.
5.
Legal Opinion
The Seller and the Ceding Companies having received opinions from their respective Bermuda and United Kingdom legal advisors (the “Opinion Counsels”), each in form and substance satisfactory to the Seller that each of the segregated accounts at the Company that will hold the Reinsured Business, the Deed of Charge, the Participation Agreement and any related security arrangements in respect of the Reinsured Business will be enforceable for the sole benefit of the Ceding Companies and/or Seller to the exclusion of any other person (collectively, the “Opinions”); provided, that (i) the substantially final forms of Opinions shall have been provided to the Purchaser prior to the date hereof and (ii) each Opinion shall be provided to the Seller and the Ceding Companies by the respective Opinion Counsel immediately prior to the Completion Date except to the extent of any event or change in Law occurring after the date of this agreement which, in the reasonable determination of such Opinion Counsel, would cause such Opinion to be incorrect if it were to be provided by such Opinion Counsel immediately prior to Completion.
6.
The Purchaser’s Warranties and Covenants
Each Purchaser’s Warranty contained in Schedule 9 being true and correct on the date of this agreement as if made on the date of this agreement (except to the extent that any such Purchaser’s Warranties are given as of a particular date or relate solely to a particular date or period, in which case such Purchaser’s Warranties being true and correct as of such date or period), except where the failure to be true and correct (without regard to any materiality or similar qualifiers therein) would not, individually or in the aggregate, have a material adverse effect on the ability of the Purchaser to consummate the transactions contemplated by the Transaction Documents. Each of the Purchaser’s covenants under this agreement having been complied with in all material respects in accordance with the terms of this agreement.





 


Schedule 2
Steps to Completion

1.
The Seller and the Purchaser shall each:
(a)
use their reasonable endeavours to fulfil or procure the fulfilment of the Conditions as soon as practicable and in any event before the Long Stop Date;
(b)
co-operate in a commercially reasonable manner to take the actions set forth in clause 2 of the form of Administration Services Agreement as if such agreement were in effect as of the date of this agreement.  Notwithstanding anything to the contrary herein, as soon as reasonably practicable and in any case no later than two (2) weeks after the date of this agreement, the Seller shall cause XL Services and the Services Recipients to, and the Purchaser shall cause the Purchaser Service Provider to, enter into the Administration Services Agreement;
(c)
use their reasonable endeavours to finalise any Transaction Documents (other than as set out in paragraph 1(b) above) as at the date of this agreement as soon as practicable and in any event before the Long Stop Date; and
(d)
keep the other informed about any material developments regarding the fulfilment of any Condition or any matter, fact or circumstance which will or would reasonably be expected to prevent any of the Conditions from being satisfied on or prior to the Long Stop Date of which it becomes aware, and shall notify the other promptly upon it becoming aware of the fulfilment of any Condition; provided, that the failure of a party to provide any notice contemplated by this paragraph 1(d) shall not (x) constitute a failure to satisfy any condition set out in Schedule 1, (y) otherwise relieve any person from its obligation to consummate the transactions contemplated by the Transaction Documents or (z) in and of itself provide the basis for any party to seek damages in respect of any breach of covenant or warranty.
2.
The Purchaser shall:
(a)
keep the Seller informed as to any material developments regarding the fulfilment of each of the Conditions and any other Relevant Consent; and
(b)
notify the Seller and provide copies any material communications from any Governmental Authority, non-governmental regulatory agency or securities exchange relating to the status or timing of any Relevant Consent where such communications have not been independently or simultaneously supplied to the Seller;
(c)
to the extent reasonably practicable, provide the Seller with the right to review in advance, and to the extent practicable, to consult with the Purchaser, in each case subject to applicable Law, the portion of any filing made with,




 

communication with or written materials submitted to, any Governmental Authority, non-governmental regulatory agency or securities exchange by the Purchaser in connection with any Relevant Consent;
(d)
promptly deal and communicate with, and prepare all submissions and communications to any Governmental Authority, non-governmental regulatory agency or securities exchange in relation to obtaining any Relevant Consent on a basis which is at all times consistent with the Business Plan;
(e)
inform the Seller in advance of all proposed meetings or telephone calls which are arranged in advance with Governmental Authorities, non-governmental regulatory agencies or securities exchanges in relation to Relevant Consents;
(f)
where reasonably requested by the Seller and where permitted by the Governmental Authority, non-governmental regulatory agency or securities exchange concerned, allow persons nominated by the Seller to attend all meetings, and participate in all telephone calls, with such Governmental Authority, non-governmental regulatory agency or securities exchange and, where appropriate, to make oral submissions at such meetings or during such telephone calls provided that, in any such case, the meeting or telephone call is arranged in advance and such entitlement shall apply to such part of the meeting or telephone call as relates (or, as applicable, to the extent to which they relate) to the status or timing of any Relevant Consent;
(g)
provide (i) to the Seller any information regarding the Purchaser reasonably requested by the Seller or any Governmental Authority, non-governmental regulatory agency or securities exchange in connection with the Condition set out in paragraph 4 of Schedule 1 and (ii) any information reasonably requested by the Seller (in connection with any Relevant Consent being sought by the Seller) or any Governmental Authority, non-governmental regulatory agency or securities exchange to such person in connection with any other Relevant Consent, in each case as promptly as practicable following any such request;
(h)
be primarily responsible for the fulfilment of the Condition set out in paragraph 1 of Schedule 1 and accordingly shall:
(i)
on or prior to 12 May 2014 submit to each relevant Regulatory Authority (or instruct such submission on its behalf) a signed Notice of Control (attaching the Business Plan as required) relating to the Purchaser and each relevant member of the Purchaser Group in respect of their proposed acquisition of control of the Company, which is in all material respects in the form of the relevant Draft Notice of Control and which the Purchaser acting reasonably regards as duly completed in accordance with applicable Law and guidance given by the relevant Regulatory Authority;




 

(ii)
promptly provide such information, and make available such personnel as may be reasonably requested, to each relevant Regulatory Authority in relation to itself and the Purchaser Group, and any explanation or clarification of or further information in relation to any aspect of the relevant Notice of Control to be submitted in accordance with paragraph 2(h)(i) of this Schedule 2 as such Regulatory Authority may require in connection therewith; and
(i)
to the extent permitted by applicable Law, request confidential treatment of all communications, documents and other information filed with or submitted to any Governmental Authority in connection with any filings, notifications or submissions made with respect to the transactions contemplated by the Transaction Documents.
3.
The Seller shall:
(a)
keep the Purchaser informed as to progress towards fulfilment of each of the Conditions and any other Relevant Consent; and
(b)
notify the Purchaser and provide copies of the portion of any material communications from any Governmental Authority, non-governmental regulatory agency or securities exchange relating to the status or timing of any Relevant Consent solely in respect of the purchase and sale of the Shares or the Retrocession Agreements where such communications have not been independently or simultaneously supplied to the Purchaser;
(c)
to the extent practicable and subject to applicable Law, provide the Purchaser with the right to review in advance and to consult with the Seller, solely with respect to any filing made with, communication with or written materials submitted to, any Governmental Authority, non-governmental regulatory agency or securities exchange by the Company solely in respect of transactions contemplated by this agreement and any of the Transaction Documents;
(d)
promptly deal and communicate with, and prepare all submissions and communications to, Governmental Authorities, non-governmental regulatory agencies or securities exchanges in relation to Relevant Consents;
(e)
inform the Purchaser in advance of all proposed meetings or telephone calls which are arranged in advance with governmental or regulatory bodies or other persons (including any Regulatory Authority or securities exchange) in relation to the Conditions;
(f)
provide (i) to the Purchaser any information regarding the Seller or the Seller Group reasonably requested by the Purchaser or any Governmental Authority, non-governmental regulatory agency or securities exchange in connection with the Condition set out in paragraph 1 of Schedule 1 and (ii) any information reasonably requested by the Purchaser (in connection with any Relevant Consent being sought by the Purchaser) or any Governmental Authority, non-




 

governmental regulatory agency or securities exchange to such person in connection with any other Relevant Consent, in each case as promptly as practicable following any such request;
(g)
where reasonably requested by the Purchaser and where permitted by the governmental or regulatory body or other person concerned and in the Seller’s reasonable opinion the attendance of the Purchaser will not adversely affect the outcome of that meeting, allow persons nominated by the Purchaser to attend meetings, and participate in telephone calls, with such Governmental Authority, non-governmental regulatory agency or securities exchange that have been planned solely in respect of the transactions contemplated by this agreement and any of the Transaction Documents as either relates to the identity of the Purchaser and, to the extent any Governmental Authority, non-governmental regulatory agency or securities exchange wishes to discuss matters relating to the Purchaser in any other meeting, to use its reasonable endeavours to promptly notify Purchaser. The foregoing shall not apply to any discussions with Seller or its Affiliates that do not relate to the transactions contemplated by this agreement or any of the Transaction Documents, in whole or in part;
(h)
be primarily responsible for the fulfilment of the Condition set out in paragraph 4 of Schedule 1 and accordingly shall promptly provide such information to each relevant Regulatory Authority in relation to itself and the Seller Group, and any explanation or clarification of or further information in relation to any aspect of the relevant application from the Seller and each relevant member of the Seller Group as such Regulatory Authority may require in connection therewith;
(i)
to the extent permitted by applicable Law, request confidential treatment of all communications, documents and other information filed with or submitted to any Governmental Authority, non-governmental regulatory agency or securities exchange in connection with any filings, notifications or submissions made with respect to the transactions contemplated by the Transaction Documents; and
(j)
cause the bye-laws of the Company to be adopted substantially in the form of Exhibit G.
4.
For the purposes of Schedule 2, “Relevant Consent” means any consent, approval or action of any Governmental Authority, non-governmental regulatory agency or securities exchange necessary for Completion to take place or which could otherwise materially affect whether or not Completion occurs or any of the arrangements among any of the Seller (or any Ceding Company or Life), the Company and the Purchaser (or any member of the Purchaser Group) as contemplated in this agreement or any of the Transaction Documents.
5.
Neither the Seller, on the one hand, nor the Purchaser or any member of the Purchaser Group, on the other hand, shall take or cause to be taken any action that could reasonably be expected to materially delay, impair or impede receipt of any Relevant Consent or the satisfaction of any Condition.




 

Schedule 3
Conduct Of Business Before Completion
The acts and matters referred to in clause 4.1 are each of the following, and shall be applicable only to the Company unless otherwise specified herein:
(a)
Sell or dispose of, grant, terminate or modify any options or rights in respect of, or attaching to, any shares or loan capital.
(b)
Create, allot, issue, repay or redeem any shares or loan capital (other than any issue of fully paid shares by the Company to the Seller or an Affiliate of the Seller for cash funds immediately available to the relevant company on allotment of such shares).
(c)
Grant any option over or other right to subscribe for or purchase any shares or any uncalled capital, or issue any security convertible into shares.
(d)
Reduce any uncalled or unpaid liability in respect of its share capital, or any capital redemption reserve or share premium account.
(e)
Alter the provisions of its memorandum, bye-laws or any document forming part of the governing instrument of any segregated accounts of the Company.
(f)
Pass any resolution by its members in general meeting except resolutions passed in respect of ordinary business at an annual general meeting.
(g)
Purchase any shares, or conduct any reorganisation or reduction of share capital.
(h)
Enter into any contract or agreement with any person or, other than in connection with its incorporation and organisation, assume or incur, any liability, obligation or expense.
(i)
Declare, pay or otherwise make any non-cash dividend or other distribution on any shares or other equity interest.
(j)
Acquire or agree to acquire an interest in a corporate body, or merge, amalgamate or consolidate with a corporate body or any other person, or participate in any kind of corporate reconstruction.
(k)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, sell or dispose or assign or transfer or pledge by any other means whatsoever, any Investment Asset held in respect of the Reinsured Business, other than in the ordinary course of business pursuant to its applicable investment guidelines or otherwise consistent with past practice or as contemplated by Schedule 11.
(l)
Make any advance, loan, deposit or gift of money to any person.
(m)
Create or grant any mortgage, pledge, lien, charge, assignment or hypothecation or other security interest or encumbrance on, over or affecting any part of the assets of the Company.
(n)
Give any guarantee or indemnity other than in connection with its incorporation and organisation.




 

(o)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, change the investment policies in respect of Investment Assets held in respect of the Reinsured Business.
(p)
Make any capital commitment or expenditure other than in connection with its incorporation and organisation.
(q)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company, enter into, materially vary or terminate any outbound reinsurance or reassurance contract which is material to the Reinsured Business.
(r)
Change its residence for Taxation purposes.
(s)
Discontinue to a jurisdiction outside of Bermuda or transfer its registration to any jurisdiction other than Bermuda.
(t)
Change its accounting reference date.
(u)
Change its auditors or make any material change to its accounting or actuarial practices or policies, except where such change is recommended by its auditors as a consequence of a change in generally accepted accounting practices or policies applicable to companies carrying on businesses of a similar nature, or as a consequence of a change in Law.
(v)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, discontinue or cease to operate all or a material part of the Reinsured Business.
(w)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company, make any material changes to the terms and conditions of any Specified Treaty other than in the ordinary course of business.
(x)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, alter the practice of the Reinsured Business regarding the treatment of premium arrears and policy cancellations from that existing at the date of this agreement.
(y)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, commence, settle, abandon or compromise any litigation or arbitration proceedings involving a claim or liability in excess of £200,000, except for any such proceedings in relation to (i) any matter relating to this agreement, (ii) any complaints made or claims brought by policyholders in respect of policies sold or issued by any of the Ceding Companies solely with respect to the Reinsured Business (iii) to the extent required by the rules of or any guidance issued by any Regulatory Authority, or (iv) any matter within the scope of a current accounting provision provided it is within the amount of such provision.
(z)
Employ, engage or dismiss (otherwise than for cause) any employee or enter into any agreement with any consultant.
(aa)
With respect to the Company or any person acting on behalf of the Company, act in non-compliance with the Operating Guidelines.




 

(bb)
Conduct or carry out any business or trading activity.
(cc)
With respect to the Company or, solely in respect of the Reinsured Business, any Ceding Company or Life, enter into any agreement, arrangement or undertaking (conditional or otherwise) to do any of the foregoing.
(dd)
Hold a board meeting of the Company outside Bermuda or have any director attend a board meeting of the Company from outside Bermuda.






 

Schedule 4
Completion Arrangements

PART A
The Seller’s Obligations


At Completion, the Seller shall:
1.
deliver to the Purchaser or the Purchaser’s Solicitors:
(a)
duly executed transfers in respect of the Shares in favour of the Purchaser and (where a second shareholder is necessary) its nominee and share certificates (or an indemnity in a form acceptable to the Purchaser acting reasonably) for the Shares in the name of the Seller in the name of the relevant registered holder;
(b)
such waivers or consents as are necessary to enable the Purchaser or its nominees to be registered as holders of the Shares;
(c)
a voting power of attorney in the agreed form in respect of the Shares;
(d)
duly executed counterparts of each of the Transaction Documents (other than the Administration Services Agreement), on behalf of itself and its Affiliates, insofar as not delivered or due for delivery upon execution of this agreement; and
(e)
the letter of appointment of its Agent, countersigned by the Agent acknowledging its appointment.
2.
make available to the Purchaser at the registered office of the Company:
(a)
the statutory books (which shall be written up to but not including the Completion Date), the certificate of incorporation (and any certificate of incorporation on change of name), and common seal (if any) of the Company;
(b)
executed copies of the resignation letters in the agreed form of such directors and/or secretary of the Company as are notified by the Purchaser to the Seller at least 5 Business Days prior to Completion; and
(c)
a copy (certified as correct by the secretary of the Seller, the Company or any Ceding Company (as the case may be) or by the Seller’s Solicitors) of the authority under which each of the Transaction Documents has been executed by the Seller, the Company or any Ceding Company (as applicable).




 

3.
procure board meetings of the Company to be held at which:
(a)
it shall be resolved that the transfers to take effect as at the Completion Date relating to the Shares shall be approved for registration and each transferee registered as the holder of those Shares in the register of members;
(b)
provided that they may be lawfully so appointed, each of the persons nominated by the Purchaser shall be appointed directors or secretary of the Company, as the Purchaser shall direct, such appointments to take effect immediately after Completion;
(c)
the resignations referred to in paragraph 2(b) of this Part shall be tendered and accepted so as to take effect at the close of the meeting; and
(d)
any powers of attorney or authorities granted by the Company in favour of the Seller or any Ceding Company shall be terminated.

PART B
The Purchaser’s Obligations
1.
At Completion, the Purchaser shall:
(a)
deliver written instruction to the Seller for acknowledgement, and upon receipt of the Seller’s acknowledgement, promptly deliver written instruction to the Escrow Agent authorising the release of the Consideration to the bank account notified by the Seller to the Purchaser;
(b)
deliver to the Seller or the Seller’s Solicitors, counterpart originals of:
(i)
duly executed counterparts of each of the Transaction Documents (other than the Administration Services Agreement and the Escrow Agreement) on behalf of itself and its Investors and Affiliates, insofar as not delivered or due for delivery upon execution of this agreement;
(ii)
a copy (certified as correct by the secretary of the Purchaser or by the Purchaser’s Solicitors) of the authority under which each of the Transaction Documents has been executed by the Purchaser or its Affiliates (as applicable);
(iii)
consents of each of the persons nominated by the Purchaser to be appointed director or secretary of the Company; and
(iv)
the letter of appointment of its Agent, countersigned by the Agent acknowledging its appointment.
(c)
Notwithstanding anything herein to the contrary, the Purchaser’s obligation to fund the Consideration is not relieved to the extent the Escrow Property (as




 

defined in the Escrow Agreement) is less than five hundred seventy million dollars ($570,000,000).






 

Schedule 5
Warranties
1.
Ownership of the Shares
1.1
The Seller is the sole beneficial owner of the Shares.
1.2
There is no mortgage, charge, pledge, lien or other form of security interest or encumbrance on, over or affecting the Shares or any of them and there is no agreement or commitment to give or create any.
2.
Capacity
2.1
The Seller is a company validly existing under the laws of Bermuda.
2.2
The Seller has the requisite power and authority to enter into and perform each of the Transaction Documents to which it is a party.
2.3
The obligations of the Seller under this agreement constitute, and the obligations of the Seller under the Transaction Documents will when executed and delivered constitute, binding obligations of the Seller in accordance with their respective terms.
2.4
Subject to the fulfilment or (where applicable) waiver of the Conditions, the execution and delivery of, and the performance by the Seller of its obligations under, this agreement and the other Transaction Documents to which it is a party will not:
(a)
result in a material breach of any provision of the memorandum or articles of association of the Seller;
(b)
result in a material breach of, or constitute a default under, any agreement or instrument to which the Seller is a party or by which the Seller is bound;
(c)
result in a breach of any order, judgment or decree of any court or governmental agency to which the Seller is a party or by which the Seller is bound; or is applicable to the Reinsured Business;
(d)
require the consent of the shareholders of (i) the Seller, (ii) the Company or (iii) any Ceding Company; or
(e)
except as expressly provided for in this agreement or any other Transaction Document, require any of the Seller or the Ceding Companies (in each case, solely with respect to the Reinsured Business) to obtain any consent or approval of, or give any notice to or make any registration with, any Governmental Authority which has not been obtained or made at the date hereof, in any such case on an unconditional basis which cannot be revoked (save pursuant to any legal or regulatory entitlement to revoke the same other than by reason of any misrepresentation or misstatement or governmental approvals).




 

3.
Corporate Matters
3.1
The Shares constitute the whole of the allotted and issued share capital of the Company and have been validly issued and allotted and are fully paid up.
3.2
Other than this agreement, there is no agreement or commitment outstanding which calls for the allotment, issue or transfer of, or accords to any person the right to call for the allotment, issue or transfer of, any shares (including the Shares) or any debentures in or securities of the Company.
3.3
None of the Shares are subject to any rights of pre-emption or restrictions on transfer.
3.4
The Company does not have any interest in any body corporate or undertaking (other than through Investment Assets held in the ordinary course of business).
3.5
The information given in Schedule 8 is true and accurate save with respect to any non-material administrative errors.
3.6
The copies of the bye-laws, memorandum of association of the Company and the documents comprising the governing instrument of the segregated accounts of the Company which have been made available to the Purchaser are complete and accurate, have attached to them copies of all shareholders’ resolutions required so to be attached and fully set out the rights and restrictions attaching to each class of share capital of the Company to which they relate.
3.7
The copies of the bye-laws, memorandum of association of the Company and the documents comprising the governing instrument of the segregated accounts of the Company have not been amended at any time since formation.
3.8
All documents which should have been delivered by the Company to its registry have been so delivered.
3.9
The business of the Company is being conducted in accordance with its memorandum of association and bye‑laws and any documents comprising the governing instrument of any segregated accounts of the Company and so far as the Seller is aware the Company has not entered into any ultra vires transactions.
3.10
The Company is a company validly existing under the laws of Bermuda and has the power and authority under its constitutional documents to conduct its business as conducted as at the date of this agreement.
3.11
There has been no failure by the Company or its officers to comply with the provisions of the Companies Act, including the provisions as to filing of returns, particulars, resolutions and other documents with Governmental Authorities or to comply with all legal requirements in connection with the formation of the Company and with issues of shares and other securities that has had a Material Adverse Effect.




 

3.12
The Company has not employed any person or entered into agreements with any consultant.
3.13
The Company is not currently trading, nor has it ever traded prior to the Retrocession Agreements being entered into between the Company and the Ceding Companies.
4.
Absence of Changes Since Reference Date; Regulatory Returns
4.1
Since the Reference Date (or, in the case of the Company, since the date of its formation) until the date of this agreement, other than as contemplated by the Transaction Documents:
(a)
there has been no adverse change in the financial position of the Reinsured Business individually or as a whole that has had or would reasonably be expected to have a Material Adverse Effect;
(b)
the Company has not entered into any agreement or contract, or incurred, or agreed to provide a guarantee over, any indebtedness;
(c)
the Company has not committed to make any expenditure on capital account;
(d)
no resolution in general meeting or written resolution of the shareholders of the Company has been passed other than resolutions relating to its formation and organisation and the routine business of annual general meetings;
(e)
no change in the accounting reference period of any of the of the Ceding Companies in respect of the Reinsured Business or the Company has been made;
(f)
no interim or final dividend or other distribution has been declared, paid or otherwise made by the Company;
(g)
the Company has not created, allotted, issued, acquired, repaid, repurchased or redeemed share or loan capital (whether conditionally or not) or made an agreement or undertaken an obligation to do any of those things;
(h)
all claims arising under contracts of reinsurance constituting the Reinsured Business have been processed in the ordinary course, and otherwise consistently with the manner in which such processing has been operated in the twelve months prior to the Reference Date;
(i)
the Company has not lent any money to any person;
(j)
the Company has not created or granted any mortgage, pledge, lien, charge, assignment or hypothecation or other security interest or encumbrance on, over or affecting any part of the assets of the Company;
(k)
except in the ordinary course of business, no debtor has been released by the Company on terms that he pays less than the book value of any debt and no debt has been written off or has proved to be irrecoverable to any extent;
(l)
the Company has not conducted or carried out any business or trading activity; and




 

(m)
the Company has not discontinued to a jurisdiction outside Bermuda nor has it been registered in any other jurisdiction other than Bermuda.
4.2
Since 9 April 2014 until the date of this agreement, other than as contemplated by the Transaction Documents, the Company has been in compliance with the Operating Guidelines.
4.3
The returns filed by each of the Ceding Companies with each competent Regulatory Authority pursuant to any law relating to prudential matters, or any regulation or rule of such Regulatory Authority relating to prudential matters, in respect of the year ended 31 December 2013 were made in compliance in all respects which are material to the Reinsured Business taken as a whole with all such laws, regulations and rules.
5.
Actuarial Matters
5.1
The Seller has provided to the Purchaser or its Representatives prior to the date hereof the Specified Reports relating to the Reinsured Business. The factual data set out in the Specified Reports (i) were derived from the books and records of the Ceding Companies, (ii) with respect to the in-force files comprising a portion thereof, were based on the Specified Treaties and (iii) reflected in all material respects factual information that is consistent with the underlying information received by the Ceding Companies from the applicable cedents under the Specified Treaties, except to the extent any such factual information received from the applicable cedents was modified or excluded by the Seller or its Affiliates on the basis of Professional Belief. None of the persons identified in the Disclosure Letter have any actual knowledge of material errors in information provided from cedents that are contained in the Specified Reports that were identified during the ordinary course audit process performed by the Ceding Companies.
5.2
No cedent under the Specified Treaties has given objections, either in writing or so far as the Seller is aware, orally, to the amount of collateral held in respect of any single premium annuity treaty of such cedent that is included in the Specified Treaties.
6.
Contracts and Commitments
6.1
As of the date of this agreement, the Company is not a party to any contract with any person.
7.
Powers of Attorney
The Company has not given any power of attorney or other authority (express, implied or ostensible) which is still outstanding or effective to any person to enter into any contract or commitment on its behalf other than to its directors, officers and employees to enter into routine trading contracts in the normal course of their duties.
8.
Borrowings
8.1
The Company does not have any indebtedness for borrowed money.




 

8.2
The Company has not lent or agreed to lend any money which has not been repaid to it nor does it own the benefit of any debt.
9.
Hedging
9.1
The Data Room contains copies of all relevant contracts in relation to each outstanding material derivative agreement entered into by the Company, including any stock lending and repurchase agreements.
10.
Reinsurance
10.1
True and complete copies of all of the in-force third party reinsurance contracts to which any of the Ceding Companies is party and which is material to the Reinsured Business taken as a whole have been made available to Milliman, Inc. So far as the Seller is aware, there is no material breach of, or any invalidity or grounds for determination, rescission, avoidance or repudiation of any such contact.
10.2
There are no outstanding claims by any of the Ceding Companies under any of the reinsurance contracts referred to in paragraph 10.1 of this Schedule 5 which are disputed in writing and are of an amount in excess of £200,000 for a single event or series of similar events.
10.3
So far as the Seller is aware, no circumstances exist which would render any of the reinsurance contracts referred to in paragraph 10.1 of this Schedule 5 unenforceable by reason of non-disclosure or any notified claim made thereunder irrecoverable owing to non-compliance by any of the Ceding Companies with the terms thereof.
10.4
Since the Reference Date, there has been no single claim (over £200,000) against any party to any reinsurance contract referred to in paragraph 10.1 of this Schedule 5 outstanding or made by any of the Ceding Companies which such other party has refused in writing to meet in part or which such other party has provided written notice of dispute of such claim.
11.
Regulatory and Compliance
11.1
As of the date hereof, all material authorisations, licences, consents, permissions and approvals required for or in connection with the carrying on of the Reinsured Business are in full force and effect in each country where such business is being carried on.
11.2
Copies of all correspondence during the twelve months ending on the date of this agreement between any of the Ceding Companies and the Company, on the one hand, and any Regulatory Authority, on the other hand, with respect to material regulatory matters solely relating to the Reinsured Business have been made available to the Purchaser.
11.3
None of the authorisations, licences, consents, permissions or approvals referred to in paragraph 11.1 (above) have been revoked, suspended, cancelled, not renewed,




 

materially varied or made subject to any material restriction or condition (in whole or in part) and no such revocation, suspension, cancellation, non-renewal, material variance or material restriction or condition has been threatened in writing by any Regulatory Authority prior to the date of this agreement.
11.4
During the two years prior to the date of this agreement, except for routine assessments, there has been no written notification from any Regulatory Authority that any of the Ceding Companies and the Company is or has been the subject of any inquiry, investigation, injunction or restitution order, by a Regulatory Authority in connection with the Reinsured Business which has had or is likely to have a Material Adverse Effect.
11.5
None of the Ceding Companies and/or the Company has received in the two years prior to the date of this agreement any written notice from any Regulatory Authority or other governmental agency alleging any non-compliance with any statute, regulation, decree or judgment of a court in connection with the Reinsured Business which has not been remedied and which is likely to have a Material Adverse Effect.
11.6
During the two years prior to the date of this agreement, each of the Ceding Companies and the Company has in all material respects carried on its business and operations with respect to the Reinsured Business in material compliance with the relevant rules (including but not limited to anti-money laundering rules) of each Regulatory Authority from which it has received an authorisation, licence, consent, permission or approval and has in all material respects during the two year period carried on its business and operations in compliance with all applicable laws relating to its conduct of regulated business.
11.7
Each of the Ceding Companies and the Company has filed all material reports, data and other information, applications and notices required to be filed with or otherwise provided to the relevant Regulatory Authority during the two years prior to the date of this agreement in connection with the Reinsured Business.
11.8
As of the date of this agreement, none of the Ceding Companies and the Company is a claimant or defendant in or otherwise a party to any material litigation, arbitration, regulatory or disciplinary proceedings with any Regulatory Authority in connection with the Reinsured Business which are in progress and which is in relation to the Reinsured Business nor have any such proceedings been threatened in writing by or against the Ceding Companies and the Company, in each case where those proceedings would have a Material Adverse Effect.
11.9
During the two years prior to the date of this agreement, none of the Ceding Companies and the Company nor any of their respective directors or employees has been investigated or audited (in the case of any employee, in connection with any act or omission in the course of his employment) in connection with the Reinsured Business, resulting in the Regulatory Authority imposing any material fines or penalties or exercising any other material disciplinary measure.




 

11.10
Details of all current regulatory authorisations, licences, permission, registrations, certificates, approvals or consents held by any Ceding Company in respect of the Reinsured Business or the Company are in the Data Room.
11.11
The Investment Assets of each of the Ceding Companies and the Company held in connection with the Reinsured Business consist of securities and other investments in which such person is permitted to invest under the applicable laws, regulations and supporting rules in the jurisdictions where such person is regulated.
12.
Litigation
12.1
As of the date of this agreement, none of the Ceding Companies or the Company is (otherwise than as claimant in the collection of debts arising in the ordinary course of business other than for outstanding premiums) engaged in any litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings, whether as claimant, defendant or otherwise, in connection with the Reinsured Business which has a value on its own (or when aggregated with matters of the same underlying cause) of £200,000 or more.
12.2
As of the date of this agreement, so far as the Seller is aware, there is not any threatened litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings by or against any of the Ceding Companies in connection with the Reinsured Business, which has a value on its own (or when aggregated with matters of the same underlying cause) of £200,000 or more.
12.3
As of the date of this agreement, no unsatisfied judgment which has a value on its own of £200,000 or more is outstanding against any of the Ceding Companies in connection with the Reinsured Business.
13.
Insolvency and Winding Up
13.1
No order has been made and no resolution has been passed for the winding up of the Ceding Companies or the Company and no petition has been presented for the purpose of winding up any of the Ceding Companies or the Company or for a provisional liquidator or examiner to be appointed in respect of any of the Ceding Companies or the Company.
13.2
No action is being taken to strike any of the Ceding Companies or the Company off the register under such person’s jurisdiction of registration or incorporation.
13.3
No administration order has been made and no petition or application for such an order has been made or presented and no administrator has been appointed and no procedure has been commenced with a view to the appointment of an administrator in respect of any of the Ceding Companies or the Company.




 

13.4
No receiver (which expression shall include an administrative receiver or deemed official receiver) has been appointed in respect of any of the Ceding Companies or the Company or all or any of its or their assets.
13.5
No composition or similar arrangement with creditors (including a voluntary arrangement) has been proposed under any relevant insolvency legislation in respect of any of the Ceding Companies or the Company.
13.6
No moratorium under any relevant insolvency legislation is in force in respect of any of the Ceding Companies or the Company.
13.7
None of the Ceding Companies or the Company is insolvent, or unable to pay its debts as they fall due, within the meaning of any relevant insolvency legislation, or has stopped paying its debts as they fall due.
14.
Data Protection
14.1
None of the Ceding Companies has, in connection with the Reinsured Business, received a notice (including any information or enforcement notice), letter or complaint from any competent data protection authority alleging a breach by such member of any applicable Data Protection Legislation or requesting information relating to its data protection policies or practices or has been ordered to pay any administrative or other fine by any competent data protection authority relating to breach by such member of any applicable Data Protection Legislations.
14.2
No order has been made against any of the Ceding Companies for the rectification, blocking, erasure or destruction of any data under any applicable Data Protection Legislation that is material to the Reinsured Business.
14.3
Within the last three years prior to the date of this agreement:
(a)
no actions, prosecutions, claims or enforcements have been brought under applicable Data Protection Legislation against any of the Ceding Companies in respect of the Reinsured Business; and
(b)
so far as the Seller is aware, no actions, prosecutions, claims or enforcements have been brought under applicable Data Protection Legislation against any current or former officer of any of the Ceding Companies in respect of the Reinsured Business or any current or former employee of any of the Ceding Companies in respect of the Reinsured Business relating to conduct by such officer or employee at a time when such person was an officer or employee of the relevant person and in the context of the performance of his or her duties as an officer or employee of the relevant person.




 

15.
Tax
Tax Liabilities
15.1
All Tax that is shown as due and payable in the Tax Returns which are referred to in paragraph 15.2 below for which the Company is liable (including amounts required by applicable law to be deducted or withheld by the Company in respect of payments made by it) and which has fallen due for payment has been duly paid.
Tax returns
15.2
All notices, computations and Tax Returns which ought to have been submitted to a Tax Authority by the Company have been properly and duly so submitted and all such notices, computations and Tax Returns submitted to a Tax Authority are true, accurate and complete in all material respects and are not the subject of any material dispute with a Tax Authority.
15.3
All material records which the Company is required by Law to keep for Tax purposes since the Relevant Tax Date have been duly kept.
15.4
The Company has not requested from any Tax Authority any extensions of time for the filing of any currently outstanding Tax Returns or other documents relating to Tax.
Penalties and interest
15.5
The Company has not since the date of its formation paid or become liable to pay any interest, penalty, surcharge or fine by virtue of any statutory provision relating to Tax.
Concessions and arrangements
15.6
The amount of Tax chargeable on the Company has not been affected to any material extent by any special concession, agreement or other formal or informal arrangement with any Tax Authority (not being a concession, agreement or arrangement available to companies generally).
Investigations
15.7
The Company has not since the Relevant Tax Date been subject to and is not currently subject to any non-routine investigation or audit by any Tax Authority.
Tax grouping
15.8
The Company has not, nor has the Company at any time had, its Tax affairs dealt with on a consolidated basis or formed a fiscal unity.
Tax residence




 

15.9
So far as the Seller is aware, the Company (i) is not treated for any Tax purpose as resident in a country other than Bermuda, and (ii) has not had a branch, agency or permanent establishment for corporate income tax purposes in a jurisdiction other than Bermuda.
Agreements with Tax Authorities
15.10
There is no agreement or arrangement between the Company and any Tax Authority pursuant to which the Company is authorised not to comply with a requirement which, but for such agreement or arrangement, would be its statutory obligation.
Disputes
15.11
There is no dispute or disagreement outstanding with any Tax Authority nor, so far as the Seller is aware, is any contemplated by any Tax Authority at the date of this agreement regarding any material liability or potential material liability to any Tax (including penalties or interest) recoverable from the Company or regarding the availability of any material relief from Tax of the Company.
Treaty Studies
15.12
Based upon a report prepared by an internationally reputable consulting firm dated December 31, 2010, as of such date, at least 85% of the outstanding common shares of XL Group plc were owned by institutional shareholders based in the United States.






 

Schedule 6
Limitation on Liability of The Seller
 
1.
Application of this Schedule
The parties intend that all of the provisions of this Schedule 6 apply to any Claim against the Seller (for the avoidance of doubt this does not include any claim against the Seller for any breach of the Tax Warranties or any claim under the Tax Covenant, which shall be subject solely to the provisions of the Tax Covenant and to paragraphs 2(a)(ii), 2(b), 3.2, 4, 7, 8 and 11 only of this Schedule 6, and solely with respect to any claim against the Seller for any breach of the Tax Warranties, to paragraph 5 of this Schedule 6).
2.
Time Period
The Seller shall not be liable in respect of any Claim unless the Purchaser shall have:
(a)
given written notice of such Claim specifying in reasonable detail the matter which gives rise to the Claim, the nature of the Claim and (to the extent reasonably available to the Purchaser) the amount claimed, as soon as reasonably practicable after the Claim has arisen or after the Purchaser realised that a Claim would, could or might be made, and in any event by no later than the date specified below:
(i)
in the case of a Claim (other than a Claim under the Tax Warranties or the Tax Covenant): 18 months from the Completion Date;
(ii)
in the case of a Claim under the Tax Warranties or the Tax Covenant: seven years from the Completion Date; and
(b)
unless otherwise agreed in writing by the Seller or unless the relevant Claim has previously been settled between the Seller and the Purchaser, commenced and validly served Proceedings in respect of the relevant Claim within six months of the date of notification of such Claim in accordance with paragraph 2(a) above.
3.
Quantum
3.1
The Seller shall have no Liability in respect of any Claim by the Purchaser unless:
(a)
the individual Claim is a Qualifying Claim; and
(b)
the aggregate amount of all Qualifying Claims exceeds six million dollars ($6,000,000) in which event the Seller shall be liable for the entire amount of such Qualifying Claims.
3.2
The maximum aggregate Liability of the Seller (and its Affiliates) in relation to Claims under this agreement, under the Tax Covenant and claims in respect of the warranties




 

contained in the Administration Services Agreement, shall not exceed one hundred and ninety-nine million five hundred thousand dollars ($199,500,000).
4.
Contingent Liabilities
The Seller shall have no Liability in respect of any Claim which is based on any Liability which is contingent unless and until such contingent Liability becomes an actual Liability and is due and payable but this paragraph 4 shall not operate to avoid a claim made in respect of a contingent Liability within the time limit specified in paragraph 2(a) above and containing such details as are specified in paragraph 2(a) above provided that Proceedings in respect of the Claim have been commenced by being both issued and validly served on the Seller, within three months of such contingent Liability becoming an actual Liability.
5.
Other Exclusions
5.1
The Seller shall not be liable in respect of any Claim if and to the extent that:
(a)
the Claim would not have arisen but for a breach by the Purchaser of any of its obligations under this agreement or any other Transaction Document;
(b)
such Claim is caused or increased by any voluntary act, omission, transaction or arrangement carried out by: (A) the Company or any Ceding Company at the written request, or with the written consent, of the Purchaser before Completion; (B) the Company after Completion (other than in the ordinary and proper course of the Reinsured Business as carried out at the date of this agreement); or (C) the Purchaser or any other member of the Purchaser Group (other than the Company) before or after Completion;
(c)
it relates to any Liability which arises as a result of the passing of, or any change in, any law, rule, regulation or administrative practice of any Governmental Authority (including the interpretation thereof) including (without prejudice to the generality of the foregoing) any increase in the rates of Taxation, any imposition of Taxation, any withdrawal of relief from Taxation or any extra-statutory concessions of any Tax Authority, in each case, not actually (or prospectively) in effect at the date of this agreement;
(d)
it relates to any Liability which arises as a result of any change after Completion of the date to which the Company or any other member of the Purchaser Group makes up its accounts or in the accounting policies or practices of them;
(e)
it relates to any Liability, which would not have arisen but for a cessation, or any change in the nature or conduct, of any trade carried on by any the Company at Completion, being a cessation or change occurring on or after Completion;
(f)
the subject of the Claim has been or is made good or is otherwise compensated for without cost, to the Purchaser or any other member of the Purchaser Group; or




 

(g)
the Claim is increased by virtue of either the Purchaser or any other member of the Purchaser Group failing to comply with the provisions of paragraph 6 below.
5.2
The Seller shall not have any Liability in respect of any Claim for any punitive, indirect, economic or consequential loss, loss of profit or loss of opportunity.
5.3
The limitations of Liability contained in this Schedule 6 shall not apply to any Liability for any Claim to the extent that the same is attributable to fraud or fraudulent misrepresentation on the part of the Seller.
6.
Conduct of Claims
6.1
If the Purchaser or any other member of the Purchaser Group becomes aware of any claim by a third party which might result in a Claim being made or any other matter or circumstance which could give rise to a Claim, the Purchaser shall:
(a)
procure that notice thereof is promptly (and in any event within 30 days of becoming aware of it) given to the Seller as regards any such claim, matter or circumstance but shall (subject to the remaining provisions of this paragraph 6) retain conduct of such claim, subject to consultation and the provision of information to the Seller;
(b)
allow, and shall procure that the Company shall provide, reasonable access to the Seller and its representatives upon reasonable notice and during normal business hours to investigate the matter or circumstance alleged to give rise to such claim and whether and to what extent any amount is payable in respect of such claim, and for such purpose the Purchaser shall, and shall procure that the Company and the relevant Purchaser Group companies shall, give all such reasonable information (however stored or recorded) and reasonable assistance, including access to premises and personnel, and the right to examine and copy or photograph any assets, accounts, documents and records, as the Seller or its representatives may reasonably request;
(c)
subject to the Seller agreeing to reimburse and indemnify the Purchaser against its reasonable costs and expenses:
(i)
take all such action and institute any Proceedings, and give any information and assistance, as the Seller may reasonably request to:
(A)
dispute, resist, appeal, compromise, defend, remedy or mitigate the matter; or
(B)
enforce against a person (other than the Seller) the rights of any member of the Purchaser Group in relation to the matter.
6.2
If a Claim is as a result of, or in connection with, a claim by or Liability to, a third party, then the Purchaser shall not, and shall procure that no other member of the Purchaser Group shall, admit Liability in respect of the claim, and shall procure that the claim




 

shall not be compromised, disposed of or settled without the prior written consent of the Seller (such consent not to be unreasonably withheld, delayed or conditioned).
7.
Recovery Only Once
No Liability shall attach to the Seller in respect of any Claim to the extent that the same loss has been recovered by the Purchaser under any other Warranty or term of this agreement or any other document entered into pursuant hereto and accordingly the Purchaser may only recover once in respect of the same loss.
8.
Recovery From Insurers, Other Persons and Tax Benefits
8.1
Where the Purchaser or any other member of the Purchaser Group is at any time entitled to recover from some other person (including from any insurer under any insurance policy) any sum in respect of a matter giving rise to a Claim (such claim a “Third Party Claim”) the Purchaser shall, and shall procure that the other relevant member of the Purchaser Group shall, take all reasonable steps to enforce recovery under such Third Party Claim. In the event that the Purchaser or any other member of the Purchaser Group shall recover any amount from such other person, the amount of the claim against the Seller shall be reduced by the amount so recovered less all reasonable costs of recovery.
8.2
If at any time the Seller pays to the Purchaser an amount in respect of a Claim and the Purchaser or any other member of the Purchaser Group subsequently recovers or becomes entitled to recover from another person an amount which is referable to the matter giving rise to the Claim, the Purchaser shall immediately notify the Seller and, if relevant, shall, and shall procure that that member of the Purchaser Group shall, take such action as the Seller may reasonably require to enforce the recovery against the person in question and:
(a)
if the Purchaser has already received an amount in satisfaction of a Claim and the amount received in respect of the Claim is more than the Sum Recovered (as defined in paragraph 8.3 below) the Purchaser shall immediately pay to the Seller the Sum Recovered;
(b)
if the Purchaser has already received an amount in satisfaction of a Claim and the amount received in respect of the Claim is less than or equal to the Sum Recovered, the Purchaser shall immediately pay to the Seller an amount equal to the amount paid by the Seller; and
(c)
if the Purchaser has not already received an amount in satisfaction of a Claim, the amount of the Claim for which the Seller would have been liable shall be reduced by and to the extent of the Sum Recovered.
8.3
For the purposes of paragraph 8, “Sum Recovered” means an amount equal to the total of the amount recovered from the other person plus any interest in respect of the amount recovered from the person less all reasonable costs and expenses not received from the




 

other person (but excluding internal costs) incurred by the Company or any member of the Purchaser Group in recovering the amount from the person.
8.4
Where the particular Liability suffered or incurred by the Purchaser or any other member of the Purchaser Group in respect of which the Purchaser would, but for this paragraph 8.4, be entitled to bring a Claim is used by any member of the Purchaser Group to offset any past, present or future Liability to Tax, any Claim shall be reduced or extinguished to the extent of the amount of Tax saved less any reasonable costs and expenses (but excluding internal costs) incurred by the Company, the Purchaser or the relevant member of the Purchaser Group in connection with the relevant Liability, provided that the Purchaser shall use, or cause the Company or another member of the Purchaser Group to use, the particular Liability in priority to any other Liability available to offset against any past, present or future Liability to Tax.
9.
Mitigation
The Purchaser shall take all reasonable action to mitigate any loss suffered by it or any other member of the Purchaser Group in respect of a matter giving rise to a Claim and nothing in this Schedule 6 restricts or limits the general obligation at law of the Purchaser to mitigate any loss or damage which it may incur in consequence of a matter giving rise to a Claim.
10.
Remediable Breach
The Seller shall not be liable in respect of any Claim to the extent that within 10 days following receipt of notification thereof in accordance with paragraph 2 of this Schedule 6 the matter giving rise to such claim is remedied to the reasonable satisfaction of the Purchaser without cost or disruption to the Company.
11.
General
If, at any time after the date of this agreement, the Seller wishes to insure against its Liability in respect of Claims, the Purchaser shall provide such information as a prospective insurer may reasonably require before effecting the insurance.





 

Schedule 7
Tax Covenant

PART A
General

1.
INTERPRETATION
1.1
In this Schedule 7, unless the contrary intention appears, words and expressions defined in this agreement have the same meaning and any provisions in this agreement concerning matters of construction or interpretation shall also apply and:
“Accounting Period” means any period by reference to which any income, profits or gains, or any other amounts relevant for the purposes of Tax, are measured or determined;
“Event” includes, any event, transaction (including the execution of and Completion of this agreement), act, omission or occurrence of any nature whatsoever and whether or not the Company or the Purchaser is a party to it (or any event, transaction, act, omission or occurrence deemed to occur for Tax purposes);
“Paragraph 2 Liability” has the meaning ascribed to it in paragraph 6(b) of Part A to this Schedule 7;
“Post-Completion Relief” means a Relief arising as a consequence of or in connection with an Event occurring after Completion or any income profits or gains earned, accrued and received after Completion;
“Potential Liability” means a liability to or claim for Tax which may result in a claim against the Seller under this Schedule 7, or which may result in a claim against the Seller for a breach of a Tax Warranty;
“Pre‑Completion Tax Affairs” means the Tax affairs of the Company for which the Seller is responsible under sub-paragraph 1.1 of Part B to this Schedule 7; and
“Relief” means any loss, allowance, credit, relief, deduction or set-off in respect of Tax or any right to a repayment of Tax.
1.2
In this Schedule 7, references to:
(a)
“profits” include income, profits or gains of any description and from any source;
(b)
profits earned on or before a certain date or in respect of a certain period include profits treated as, or deemed to be, earned on or before that date or in respect of that period for Tax purposes;
(c)
“profits earned” include profits earned, accrued or received (or treated as, or deemed to be, earned, accrued or received for Tax purposes);




 

(d)
“Tax” includes, (a) in a case where Tax for which the Company is liable is discharged by another person, the amount corresponding to that Tax for which the Company is, after that discharge, liable, and (b) Tax for which the Company is liable on behalf or for the account of another person; and
(e)
For the purposes of this Schedule 7, the Company shall be deemed to be liable for a payment of Tax, and to make that payment of Tax, if the Company would be liable for that payment of Tax but for the use or setting off against profits or against a liability to pay Tax of Post-Completion Relief.
1.3
In this Schedule 7, unless the contrary intention appears, a reference to a paragraph or paragraphs is a reference to a paragraph or paragraphs of this Schedule 7.
1.4
The headings in this Schedule 7 do not affect its interpretation and unless otherwise specified, a reference to any statute or statutory provision shall be construed as a reference to the same as it may have been, or may from time to time be, amended, modified or re-enacted.
2.
COVENANT
2.1
The Seller covenants with the Purchaser that, from and after Completion, subject to the following provisions of this Schedule 7, the Seller will pay to the Purchaser, to the extent possible by way of repayment of the Consideration (but not so as to limit the amount payable where not wholly possible), an amount equal to:
(a)
any payment of Tax made or to be made by the Company, the liability for which arises as a result of or in respect of any Event or Events occurring on or before Completion (other than Tax arising in respect of income, profits or gains earned after Completion as a result of any such Event or Events or in connection with the Retrocession Agreements) or which arises in consequence of or in respect of any income, profits or gains earned, accrued or received on or before Completion; and
(b)
any out-of-pocket costs or expenses reasonably and properly incurred by the Purchaser or the Company solely and directly in connection with any payment of Tax or the non-availability, loss, reduction or cancellation of a right to a repayment of Tax as is, in each case, referred to in the preceding paragraphs or in connection with any action taken in avoiding, resisting or settling any such payment of Tax or such non-availability, loss, reduction or cancellation of a right to a repayment of Tax.
3.
CLAIMS AND PAYMENT
3.1
A payment to be made by the Seller under paragraph 2 of this Part shall be made in cleared and immediately available funds within ten Business Days from the date the Purchaser notifies the Seller that such payment is due.




 

3.2
If the Seller defaults in making any payment when due of any sum payable under this Schedule 7, it shall pay simple interest on that sum at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365‑day year, from and including the date on which payment is due, to, but excluding, the date of actual payment (after as well as before judgment).
4.
EXCLUSIONS
The covenants contained in paragraph 2 of this Part shall not extend to any liability otherwise falling within this Schedule 7 to the extent that:
(a)
The liability would not have arisen (or would have been reduced) but for a voluntary act or omission carried out or effected by the Company after Completion, or carried out or effected at any time by the Company, the Seller or any Ceding Company at the direction of the Purchaser or any member of the Purchaser Group, other than an act or omission which:
(i)
is in the ordinary course of business as carried on by the Company at Completion and could not reasonably have been avoided;
(ii)
is carried out or effected pursuant to a legally binding obligation entered into on or before Completion;
(iii)
is required by law or any regulatory, financial reporting or accounting practice or requirement;
(iv)
is the preparation of submission of a tax return or computation or other information to a Tax Authority;
(v)
is one that the Purchaser or the party in question could not foresee or could not reasonably have foreseen would give rise to that liability; or
(vi)
has been procured by the Seller without the consent of the Purchaser; or
(b)
it would not have arisen but for a breach by the Purchaser of any of its obligations under this agreement or any other Transaction Document; or
(c)
it relates to any liability which arises as a result of the passing of, or any change in, any law, rule, regulation or possible practice of any Governmental Authority (including the interpretation thereof) including (without prejudice to the generality of the foregoing) any increase in the rates of Taxation, any imposition of Taxation, any withdrawal of relief from Taxation or any extra-statutory concessions of any Tax Authority, in each case, not actually (or prospectively) in effect at the date of this agreement, except to the extent that the liability should reasonably have been anticipated as a result of an announcement made or draft legislation published relating to that change before Completion.




 

5.
LIMITATIONS
The liability of the Seller under this Schedule 7 shall be limited as follows:
(a)
as set out in Schedule 6;
(b)
the Seller shall not be liable in respect of any amount otherwise due under the covenants contained in paragraph 2 of this Part (for the purposes of this paragraph 5, a “Paragraph 2 Liability”) if, and to the extent that, the matter giving rise to the Paragraph 2 Liability: (i) is the subject of a claim under the Seller’s Warranties and the Purchaser has received all payments in full relating thereto under this agreement; (ii) is the subject of a claim hereunder and the Purchaser has received a payment in respect thereof; or (iii) has been compensated for by a claim under this agreement or any Transaction Document; and
(c)
in no circumstances shall the Purchaser be entitled to recover from the Seller more than once under this Schedule 7, this agreement or any Transaction Document in respect of the same loss, cost, damage or liability.
6.
DEDUCTIONS FROM PAYMENTS, ETC.
6.1
All sums payable by either party (for these purposes, the “payer”) to the other party (for these purposes, the “payee”) under this Schedule 7 shall be paid free and clear of all deductions and withholdings whatsoever, and without any rights of counterclaim and set-off, save only as may be required by law.
6.2
If any deductions or withholdings are required by law to be made from any of the sums payable as mentioned in paragraph 6.1, the Seller shall be obliged to pay to the Purchaser such additional amount as will ensure that the net amount received by the Purchaser under this Schedule 7 will equal the full amount it would have received in the absence of any such requirement to make a deduction or withholding.
6.3
If, following the payment of an additional amount under paragraph 6.2, the Purchaser subsequently obtains a saving, reduction, credit or payment in respect of the deduction or withholding giving rise to such additional amount, the Purchaser shall pay to the Seller a sum equal to the amount of such saving, reduction, credit or payment (in each case to the extent of the additional amount), such payment to be made within seven days of the receipt of the saving, reduction, credit or payment as the case may be.
6.4
If any sum payable by the Seller to the Purchaser under this Schedule 7 is subject to Tax in the hands of the Purchaser, the Seller shall pay such additional amount as shall ensure that the net amount received by the Purchaser shall be the amount that the payee would have received if the payment had not been subject to Tax.
6.5
The Seller will inform the Purchaser of the result of any study conducted within twelve (12) months of the date of this agreement prepared by an outside expert engaged by the




 

Seller or its Affiliates regarding the ownership of the common shares of XL Group plc by shareholders based in the United States.
PART B
Conduct of the Tax Affairs of the Company
1.
MANAGEMENT OF PRE-COMPLETION TAX AFFAIRS
1.1
Subject to and in accordance with the provisions of this paragraph, the Seller or its duly authorised agents, in respect of all Accounting Periods ending on or before Completion and at the expense of the Purchaser, shall:
(a)
prepare and submit the Tax Returns of the Company;
(b)
prepare and submit on behalf of the Company all claims, elections, surrenders, disclaimers, notices and consents for the purposes of Tax; and
(c)
subject to paragraph 3 of this Part, deal with all matters relating to Tax which concern or affect the Company, including the conduct of all negotiations and correspondence and the reaching of all agreements relating thereto or to any Tax Documents, but excluding payment of Tax.
1.2
All documents prepared under paragraph 1.1 of this Part shall be prepared in a manner consistent with past practices of the Company and without a change of any accounting method except to the extent necessary to comply with applicable law.
1.3
The Seller or its duly authorised agents shall deliver all Tax Documents which are required to be signed by or on behalf of the Company to the Purchaser for authorisation and signing. If a time limit applies in relation to any Tax Document, the Seller shall ensure that the Purchaser receives the Tax Document no later than ten Business Days before the expiry of the time limit (such period to be five Business Days in relation to any Tax Document that is required to be filed on a monthly basis).
1.4
If the Seller or its duly authorised agent fails to deliver a Tax Document to which a time limit applies within the period specified in paragraph 1.3 of this Part, the Seller shall notify the Purchaser of such failure as soon as reasonably practicable and the Purchaser shall be permitted to arrange for the preparation and submission of the Tax Document.
1.5
The Seller shall procure that:
(a)
the Purchaser receives copies of all written correspondence with any Tax Authority insofar as it is relevant to the Pre-Completion Tax Affairs and is kept reasonably informed of the progress of all Pre-Completion Tax Affairs;
(b)
the Purchaser is afforded the opportunity to comment within a reasonable period of time on any Tax Document prior to its submission to the relevant Tax Authority and that its reasonable comments are taken into account;




 

(c)
no material correspondence is submitted to or material agreement reached with any Tax Authority without the prior written approval of the Purchaser, not to be unreasonably withheld, conditioned or delayed;
(d)
no Tax Document is submitted to any Tax Authority which is not, so far as the Seller is aware, complete, true and accurate in all material respects, and not misleading; and
(e)
prior to Completion, the Company holds a board meeting in Bermuda to approve the Retrocession Agreements, and any director of the Company shall only attend such board meeting of the Company from Bermuda.
1.6
The Purchaser shall procure that:
(a)
the Seller and its duly authorised agents are afforded such access (including the taking of copies) to the books, accounts and records of the Company and such other assistance as it or they reasonably require to enable the Seller to discharge its obligations under paragraph 1.1 of this Part; and
(b)
the Seller is promptly sent a copy of any communication from any Tax Authority insofar as it relates to the Pre-Completion Tax Affairs.
1.7
The Purchaser shall be under no obligation to procure the authorisation or signing of any Tax Document delivered to it under paragraph 1.3 of this Part which it considers in its reasonable opinion to be false or misleading in a material respect, but for the avoidance of doubt shall be under no obligation to make any enquiry as to the completeness or accuracy thereof.
2.
CONDUCT OF OTHER TAX AFFAIRS
2.1
Subject to paragraph 3 of this Part, and subject to the following subparagraphs, the Purchaser or its duly authorised agents shall have sole conduct of all Tax affairs of the Company which are not Pre-Completion Tax Affairs and shall be entitled to deal with such Tax affairs in any way in which it, in its absolute discretion, considers fit, save that it shall not conduct such Tax affairs in a manner that could increase or cause liability of the Seller to make a payment under this Schedule 7.
2.2
In respect of any Accounting Period commencing prior to Completion and ending after Completion (a “Straddle Period”) the Purchaser shall procure that the Tax Returns of the Company shall be prepared on a basis which is consistent with the manner in which those Tax Returns were prepared for all Accounting Periods ending prior to Completion, and for these purposes, “Tax Returns” shall include the Tax Returns that were prepared by any Ceding Company and which now to be prepared by the Company. The provisions of paragraph 1.5 shall apply to the Straddle Period mutatis mutandis.
2.3
The Seller shall provide such assistance as the Purchaser shall reasonably request in preparing all Tax Returns relating to the Straddle Period.




 

3.
NOTIFICATION OF CLAIMS AND CONDUCT OF DISPUTES
3.1
If the Purchaser or the Company receives any letter, enquiry notice, demand or notification which may give rise to a Potential Liability, the Purchaser shall give notice to the Seller of that Potential Liability (including reasonably sufficient details of such Potential Liability, the due date for any payment and the time limits for any appeal, and so far as reasonably practicable the amount involved) as soon as reasonably practicable (and in any event not more than twenty Business Days before the expiry of any applicable time limit for appeal or action to be taken).
3.2
The Purchaser shall take (or procure that the Company shall take) such action as the Seller may reasonably request in writing to avoid, dispute, resist, appeal, compromise or defend any Potential Liability (a “Disputed Potential Liability”), but only provided that the Seller shall first (to the Purchaser’s reasonable satisfaction) indemnify the Purchaser and / or the Company (as reasonably required by the Purchaser) against any losses, damages, costs or expenses which it may suffer or incur as a result of taking such action (including any additional liability to Tax).
3.3
The Seller shall have the right (if it so wishes) to control any proceedings (including the right to deal directly with the relevant Tax Authority) taken in connection with a Disputed Potential Liability, provided that the Seller shall:
(a)
keep the Purchaser fully and promptly informed of all matters known to it, or to its advisers, concerning the Disputed Potential Liability;
(b)
promptly provide the Purchaser with copies of all documents, notes (including notes of conversations and meetings) and correspondence relating to the Disputed Potential Liability;
(c)
obtain the Purchaser’s prior written approval (not to be unreasonably withheld or delayed) of the appointment of solicitors or other professional advisers;
(d)
submit to the Purchaser for prior written approval (not to be unreasonably withheld, conditioned or delayed) any communication (written or otherwise) relating to the Disputed Potential Liability and shall make any amendments the Purchaser shall reasonably request; and
(e)
not settle or compromise the Disputed Potential Liability or agree any matter in the conduct of the Disputed Potential Liability without the Purchaser’s prior written approval (not to be unreasonably withheld, conditioned or delayed).
If the Seller does not control any proceedings taken in connection with a Disputed Potential Liability, or if it does but the relevant Tax Authority continues to correspond or deal directly with the Company or the Purchaser, the provisions of this paragraph 3.3 of this Part shall apply mutatis mutandis to the Purchaser which shall be required to procure that the above actions are carried out with respect to the Seller.




 

3.4
Without prejudice to the liability of the Seller under this Schedule 7, the Purchaser shall not be obliged to take or procure the taking of any action under paragraph 3.2 of this Part in respect of any Potential Liability and the Seller shall not take or procure any action under paragraph 3.3 of this Part:
(a)
to the extent that it would involve the Company contesting any Disputed Potential Liability before any court or other appellate body unless, in the written opinion of an appropriately qualified member of an international firm of chartered accountants, lawyers or tax advisers (provided that the relevant firm has not been instructed by, or otherwise involved in advising, the Company on Tax in the relevant jurisdiction for the relevant period or subsequent periods), an appeal would be reasonable in all the circumstances having regard to the amounts involved and the likelihood of success; or
(b)
where the Potential Liability or action derives from or arises out of or is in connection with any dishonest or fraudulent act or omission or wilful default by or of the Seller at any time or by or of the Company prior to Completion; or
(c)
should the Seller, following receipt of written notice of the Potential Liability from the Purchaser in accordance with paragraph 3.1 of this Part:
(i)
fail within twenty Business Days (or if less, five Business Days before the expiry of any time limit for an appeal that has been notified to the Seller) to serve notice on the Purchaser under either paragraph 3.2 or 3.3 of this Part (and for the avoidance of doubt, exercise by the Seller of its rights under either paragraph 3.2 or 3.3 shall mean that this paragraph 3.4(c) does not apply); or
(ii)
fail to adequately indemnify the Purchaser and/or the Company (as appropriate) pursuant to paragraph 3.2 of this Part; or
(d)
if, in the Purchaser’s reasonable opinion, the action requested by the Seller pursuant to paragraph 3.2 of this Part is likely to affect adversely the liability of the Purchaser or the Company to Tax or is unreasonable or contrary to the legal obligations of any of them; or
(e)
if the Company would be required to appeal against any assessment or demand for Tax where it is a requirement for such an appeal that the Tax be paid unless payment is made by the Seller to the Purchaser of an amount equal to such Tax and in respect of it within any appropriate time limit; or
(f)
should it require the Company to fail to make a payment of Tax at the time necessary to avoid incurring any fine, penalty, surcharge, interest or other imposition or surcharge liability notice in respect of any unpaid Tax.
3.5
Neither the Purchaser nor the Company shall be subject to any claim by or liability to the Seller for non-compliance with any of the foregoing provisions of this paragraph 3




 

of this Part if the Purchaser or the Company has acted in accordance with the instructions of the Seller.





 

Schedule 8
Basic Information About The Company
XL Life Reinsurance (SAC) Ltd.
 
 
Registered number:
49002
 
Date of incorporation:
24 April 2014
 
Place of incorporation:
Hamilton, Bermuda
 
Address of registered office:
O’Hara House, One Bermudiana Road, Hamilton HM08, Bermuda
 
Authorised share capital:
US $250,000
 
Issued share capital:
US $250,000
 
Members
Name
Number of Shares held
 
XL Insurance (Bermuda) Ltd
250,000 shares of US $1.00 each
Directors:
Seamus MacLoughlin
 
 
Mark Twite
 
 
Mary Hayward
 
Secretary:
Georgette D. Barit
 






 


Purchaser’s Warranties

1.
Capacity
1.1    The Purchaser is a company validly existing under the laws of Bermuda.
1.2
The Purchaser has the requisite power and authority to enter into and perform its obligations under each of the Transaction Documents to which it is a party.
1.3    Each of the Investors is a shareholder of the Purchaser.
1.4
The obligations of the Purchaser under this agreement constitute, and the obligations of the Purchaser under the Transaction Documents will when executed and delivered constitute, binding obligations of the Purchaser in accordance with their respective terms.
1.5
Subject to the fulfilment or (where applicable) waiver of the Conditions, the execution and delivery of, and the performance by the Purchaser of its obligations under, each of the Transaction Documents to which it is a party will not:
(a)
result in a material breach of any provision of the memorandum or articles of association of the Purchaser;
(b)
result in a material breach of, or constitute a material default under, any agreement or instrument to which the Purchaser is a party or by which the Purchaser is bound;
(c)
result in a material breach of any order, judgment or decree of any court or governmental agency to which the Purchaser is a party or by which the Purchaser is bound;
(d)
require the consent of the shareholders of the Purchaser; or
(e)
require the Purchaser to obtain any consent or approval of, or give any notice to or make any registration with, any Governmental Authority which has not been obtained or made at the date hereof, in any such case on an unconditional basis which cannot be revoked (save pursuant to any legal or regulatory entitlement to revoke the same other than by reason of any misrepresentation or misstatement or governmental approvals that would not, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents).
1.6
Other than the consent set out in paragraph 1 of Schedule 1, there are no Relevant Consents required to be obtained by the Purchaser or any member of the Purchaser Group.




 

2.
Litigation
2.1
As of the date of this agreement, the Purchaser is not engaged in any litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings, whether as claimant, defendant or otherwise, that would, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.
2.2
As of the date of this agreement, there is not threatened any litigation, arbitration or other dispute resolution process, or administrative or criminal proceedings by or against the Purchaser that would, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.
3.
Escrow Agreement
As of the date of this agreement, (a) the Escrow Agreement has not been amended or modified in any manner and (b) no member of the Purchaser Group has entered into any agreement, side letter or other arrangement relating to the financing of the Consideration or transactions contemplated by this agreement, other than as set out in the Escrow Agreement. There are no conditions to the release of the amounts funded by the investors in the Purchaser into the Escrow Account other that set out in Schedule 1. None of the Investors has any right or claim to recover any amount funded under the Escrow Agreement other than in connection with the release of the escrow funds governed by the Escrow Agreement in accordance with the terms thereof following the termination of this agreement.
4.
Regulatory and Compliance
4.1
All material authorisations, licences, consents, permissions and approvals required by the Purchaser or any other member of the Purchaser Group are in full force and effect.
4.2
None of the authorisations, licences, consents, permissions or approvals referred to in paragraph 4.1 (above) have been revoked, suspended, cancelled, not renewed, materially varied or made subject to any material restriction or condition (in whole or in part) and no such revocation, suspension, cancellation, non-renewal, material variance or material restriction or condition has been threatened in writing by any Regulatory Authority prior to the date of this agreement.
4.3
During the two years prior to the date of this agreement, there has been no written notification from any Regulatory Authority that any of the Purchaser or any other member of the Purchaser Group is or has been the subject of any inquiry, investigation, injunction or restitution order by a Regulatory Authority that would, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.




 

4.4
Each of the Purchaser and each other member of the Purchaser Group has filed all material reports, data and other information, applications and notices required to be filed with or otherwise provided to the relevant Regulatory Authority during the two years prior to the date of this agreement other than to the extent that the failure to make such filing would not, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.
4.5
As of the date of this agreement, none of the Purchaser or any other member of the Purchaser Group is a claimant or defendant in or otherwise a party to any material litigation, arbitration, regulatory or disciplinary proceedings with any Regulatory Authority in connection with the Reinsured Business which are in progress and that would, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.
4.6
During the two years prior to the date of this agreement, none of the Purchaser or any other member of the Purchaser Group nor any of their respective directors, employees or controlling persons has been investigated or audited (in the case of any employee, in connection with any act or omission in the course of his employment), other than any such investigations or audits that would not, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.
4.7
None of the Purchaser or any other member of the Purchaser Group nor any of their respective directors, employees or controlling persons has in the six years ended on the date of this agreement been refused any material authorisation or permission that would, individually or in the aggregate, reasonably be expected to materially delay or prevent Completion or the other transactions contemplated by the Transaction Documents.





 


Schedule 10
Reconciliation Methodologies





 


Schedule 11
Reference Reconciliation Amount Calculation Report









 

Schedule 12
Company Capitalisation Plan







Exhibit 10.2 Retrocession Agreement - XL Re Ltd
Exhibit 10.2

 
EXECUTION VERSION
 
 
 
 
XL RE LTD
AND
XL LIFE REINSURANCE (SAC) LTD. (FOR ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
 
RETROCESSION AGREEMENT
 






 


CONTENTS
Clause
Page
1.    Interpretation
1
2.    Insuring Clause
17
3.    Retrocession Premium
18
4.    Time on Risk Adjustment
19
5.    Effective Date and Termination
20
6.    Reporting Information
23
7.    Relevant Accounts
23
8.    Collateral Obligations
25
9.    Audit Rights
27
10.    Undertakings
28
11.    Agreed Capital and Dividends
30
12.    Negative Pledge
31
13.    Segregated Accounts
32
14.    Retrocessionaire Capital Account
33
15.    Set-Off
33
16.    Confidentiality
33
17.    Data Protection
34
18.    Currency
35
19.    Announcements
35
20.    Costs
36
21.    Further Assurance
36
22.    Entire Agreement
36
23.    Waivers
37
24.    Contracts (Rights of Third Parties) Act 1999
37
25.    Severability
37


 


26.    Variation
37
27.    Assignment and Subcontracting
37
28.    Notices
38
29.    Governing Law
38
30.    Expert Resolution
39
31.    Jurisdiction
39
32.    Process Agent
40
33.    Delays, Errors and Omissions
40
34.    Counterparts
40
 
 
Schedule 1 Retroceded Policies
 
Part A SPA Business
 
Part B Non-SPA Business
 
Part C Security Agreements
 
Part D Ancillary Documents
 
Schedule 2 Client Account Reporting Information
 
Part A Client Account Report Information
 
Part B Relevant Account Report Information
 
Part C Client Account Report Format
 
Schedule 3 Agreed Capital Level
 
Schedule 4 Investment Management Arrangements
 
Part A Management of Retrocedant Assets
 
Part B Management of Retrocessionaire's Assets
 
Part C Disputes
 
Part D Delivery of Reports and Notices
 
Part E Liability of XL GIL and the XL Retrocedants
 
Schedule 5 Initial Funds-Withheld Portfolio
 


 


 
 
Agreed Form Documents
 
1. Client Account Report
 
2. Relevant Account Report
 
3. SIMA(s)
 
4. Non-SPA Retrocedant Guidelines
 
5. SPA Retrocedant Guidelines
 
6. Participation Agreement
 
7. Retrocessionaire Guidelines
 
8. Deed of Charge
 
9. Investment Management Governance and Operating Framework
 








 


THIS AGREEMENT is made on May 30, 2014
BETWEEN:
(1)
XL Re Ltd, a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton HM08, Bermuda (the "Retrocedant");
(2)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda (the "Company"); and
(3)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda acting in respect of its segregated account XL‑1 (the "Retrocessionaire"),
each a "Party" and together "the Parties".
INTRODUCTION:
(A)
The Company is incorporated in Bermuda as a segregated accounts company pursuant to the SAC Act (as defined below), licensed as a Class C insurer pursuant to the Insurance Act (as defined below) and has established the Retrocessionaire for the purpose of reinsuring the Retroceded Policies.
(B)
The Retrocedant has agreed that the Retrocessionaire will reassure it in respect of the Retroceded Policies.
(C)
The Parties wish to record the terms of the above agreement in this Agreement.
The Parties agree as follows:
1.
INTERPRETATION
"Account Date" means 1 January 2014 and thereafter each 1 April, 1 July, 1 October and 1 January in each year and the last "Account Date" shall be the first such date falling after the last Reporting Date;
"Actuary" means the Retrocedant's Actuary and/or the Retrocessionaire's Actuary (as the context requires);
"Administration Services Agreement" means the services agreement to be entered into between the Service Provider and XL Services UK Limited, the Retrocedant (acting through its UK branch) and XL Re Europe (acting through its UK branch) providing for the transfer of certain resources from the XL Group to the Service Provider and the provision of certain administration services for the benefit of the XL Retrocedants;

- 1 -

 


"Affiliate" means with respect to any person, at the time in question, any other person controlling, controlled by or under direct or indirect common control with such person. For this purpose "control" means the power to direct or cause the direction of the management or policies of a person through the ownership of securities, by contract or otherwise and the terms "controlling" and "controlled" shall be construed accordingly;
"Agreed Capital Level" means as at a Relevant Date, the amount determined in accordance with the provisions of Schedule 3;
"Applicable Law and Regulation" means, at any time, and in respect of a Party, any and all of the following as applicable to that Party and in force at that time:
(a)
legislation (including enactments, statutes, statutory instruments, treaties, regulations, orders, directives, by-laws and decrees) and common law, in each case applicable to the relevant Party from time to time in the context of the performance of its obligations under the Agreement or enjoyment of its rights under this Agreement;
(b)
binding regulatory rules and binding codes of conduct, directions, rules and guidance issued by the BMA (or any rules from time to time in force which replace such rules), such rules and guidance as reasonably interpreted by a Party in accordance with any specific advice or individual guidance provided to that Party by the relevant regulator in respect of that rule (a "Regulatory Requirement"); and
(c)
judgments, resolutions, decisions, orders, directions, notices, demands or other requirements of a competent court, tribunal or the BMA;
"Balance" means for the purposes of calculating a Call Amount or Return Amount the balance standing to the credit of a Relevant Account valued in accordance with the Valuation Basis, which shall be deemed to be increased by the amount of $2.1m in the case of the Funds-Withheld Accounts, but only until such time as any amount due to the Retrocedant or the Retrocessionaire pursuant to Clause 4.2.1 or 4.2.2, as applicable, is paid; provided, however, that in no event shall the Balance take into account any assets deposited in or credited to such Relevant Account by the Retrocedant or on its behalf by a member of the XL Group as contemplated by Clause 7.8;
"Base Amount" means in respect of a Security Account, the amount the Retrocedant is required to maintain in that Security Account pursuant to the Security Agreement applicable to such Security Account, or as operated by the Retrocedant as at the date of this Agreement;
"BMA" means the Bermuda Monetary Authority;
"Board Resolution" means the resolution approved by the Board on 25 April 2014 pursuant to which the Retrocessionaire was created;
"Buffer Percentage" means 1%;

- 2 -

 


"Business Day" means any day other than a Saturday or Sunday or public or bank holiday in England and Bermuda;
"Buyer's Group Undertaking" means Holdco or a company which is, at any time on or after the date of this Agreement, a subsidiary or holding company of Holdco or a subsidiary of a holding company of Holdco and includes the Company after the date of completion of the sale of the Company to Holdco pursuant to the Sale and Purchase Agreement;
"Call Amount" means in respect of:
(a)
a Security Account, the amount (if any) by which the Balance of that Security Account as of any Valuation Date is less than the Collateral Amount for that Security Account as of such Valuation Date; or
(b)
the Funds-Withheld Accounts, the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is less than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;
"Call Amount Default" means, with respect to any Relevant Account, the failure by the Retrocessionaire to pay any Call Amount with respect to such Relevant Account on or prior to the Due Date therefor in accordance with the terms of this Agreement and such Call Amount Default shall be deemed to continue until such time as the Call Amount due in respect of such Relevant Account (as adjusted as of any Valuation Date), together with all interest accrued thereon in accordance with Clause 8.10, is paid by the Retrocessionaire to the Retrocedant;
"Call Amount Default Period" means the period commencing as of the Business Day immediately following the occurrence of either a Call Amount Default as defined in this Agreement or a "Call Amount Default" as defined in either of the other XL Retrocession Agreements and shall continue until such time as no Call Amount Default under this Agreement nor any "Call Amount Default" as defined in either of the other XL Retrocession Agreements is continuing;
"Call Notice" has the meaning given to it in Clause 8.4;
"Capital Notice" has the meaning given to it in Clause 11.2;
"Capital Notice Challenge" has the meaning given to it in Clause 11.3;
"Capital Requirements" means the regulatory capital requirements of the Company and/or the Retrocessionaire calculated in accordance with the Insurance Act;
"Centre of Main Interest" has the meaning given to it in the EC Council Regulation of 29 May 2000 on insolvency proceedings (1346/2000/EC);
"Change of Control" means the occurrence of an event following the completion of the sale of the Company and the Retrocessionaire to Holdco pursuant to the Sale and Purchase Agreement whereby:

- 3 -

 


(a)
Holdco or the Investors, in aggregate, ceases to legally and beneficially own 100% of the issued and outstanding ordinary shares of capital stock of the Company or any such shares become subject to any encumbrance that is not removed within 30 days;
(b)
Holdco ceases to be the sole beneficial owner of the Retrocessionaire or any such beneficial interest become subject to any encumbrance;
(c)
the Company or the Retrocessionaire amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person any right to acquire any securities of the Company or the Retrocessionaire;
(d)
the Retrocessionaire transfers, including by way of reinsurance, all or substantially all of its business, liabilities or assets;
(e)
Holdco amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person other than the Investors any right to acquire any securities of Holdco; or
(f)
any Investor sells, disposes of or transfers any of its interest in Holdco other than pursuant to a transfer permitted by the Investor Support and Undertakings Agreement;
"Client Account Report " means the report in the agreed form to be delivered pursuant to Clause 6.1, reflecting the Client Account Report Information in respect of each Retroceded Policy;
"Client Account Report Information" means the information specified in Part A of Schedule 2, to be provided by the Retrocedant in respect of each Retroceded Policy and reflected in the Client Account Report;
"Client Account Reporting Period" means a period of one Quarter;
"Closing Excess Assets" means $35m at the date of this Agreement, reducing by $7m on each of the first five anniversaries of this Agreement;
"Collateral Amount" means:
(a)
in the case of a Security Account, the sum of: (i) the Base Amount as at the Relevant Date; and (ii) an amount as at the Relevant Date, equal to the Base Amount multiplied by the Buffer Percentage; or
(b)
in the case of the Funds-Withheld Accounts, the sum of: (i) the aggregate Value of the Funds-Withheld Reserves as at the Relevant Date; and (ii) an amount as at the Relevant Date equal to the Funds-Withheld Reserves multiplied by the Buffer Percentage;

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"Collateral Fee" means an interest rate equal to the 5-year U.S. treasury bond rate plus 700 basis points;
"Collateral Fee Payment Date" has the meaning given to it in Clause 8.9;
"Collateral Fee PIK Amount" means, as of any date, the amount of any Collateral Fees added to the Collateral Fee PIK Amount pursuant to Clause 8.9, less the amount of any Collateral Fee PIK Amounts repaid by the Retrocessionaire pursuant to Clause 8.9;
"Constitutional Documents" means the following documents:
(a)
the memorandum of association of the Company;
(b)
the bye-laws of the Company; and
(c)
the Participation Agreement;
"Conversion Rate" means, in respect of any amount to be converted from one currency into a second currency, the relevant rate used by the Retrocedant in the preparation of its accounts will be treated as the prevailing rate as at the Relevant Date;
"Costs" means all losses, liabilities, costs (including legal costs and experts' and consultants' fees), charges, expenses, actions, proceedings, claims and demands;
"Cross-Agreement Recapture Event" means an event which gives rise to the obligation to pay a Recapture Amount (as defined in each of the XL Retrocession Agreements respectively) under more than one of the XL Retrocession Agreements;
"Currency Block" means, in respect of the Retrocedant, all Retroceded Policies ceded to this Agreement by the Retrocedant that are denominated in a particular currency;
"Custodian" means such authorised person serving from time to time as the custodian of a Security Account and/or the Funds-Withheld Accounts;
"Data Protection Laws" means, in relation to a Party, the laws and regulations applicable to that Party regulating data protection, data privacy and/or the protection of personal and/or sensitive information, including, where applicable: the relevant principles of the Insurance Code of Conduct issued by the Bermuda Monetary Authority in February 2010 relating to the safeguard of sensitive information and the requirements for appropriate risk management procedures relating to the same; and laws implementing EU Directive 95/46/EC (including for example the UK Data Protection 1998);
"Deed of Charge" means the Bermuda law governed fixed and floating charge entered into on the same date as this Agreement between (1) the Retrocessionaire; (2) the Retrocedant; (3) XL Re (UK) and (4) XL Re Europe;
"Difference" means the amount (whether positive or negative) determined by the sum of: (i) the Recapture Amount determined by the Retrocedant's Actuary; less (ii) the Recapture Amount determined by the Expert pursuant to Clause 30;
"Dispute" has the meaning given to it in Clause 31.1;

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"Distribution" means every description of dividend or distribution of the Retrocessionaire's assets to its beneficial owner(s) whether in cash or otherwise;
"Due" has the meaning given under section 4.90(4) of the Insolvency Rules 1986;
"Due Date" has the meaning given to it in Clause 8.10;
"Effective Date" means 1 January 2014;
"Event of Default" means any event or circumstance referred to in Clause 5.2;
"Expert" has the meaning given to it in Clause 30.1;
"Funds-Withheld Accounts" means the cash and securities accounts established by the Retrocedant in relation to the Non-SPA Business, for the purposes of this Agreement;
"Funds-Withheld Assets" means the assets from time to time deposited in or otherwise standing to the credit of the Funds-Withheld Accounts;
"Funds-Withheld Reserves" means in respect of the Retroceded Policies relating to the Non-SPA Business identified with a reserve basis "B" in Schedule 1, an amount as at the Relevant Date, equal to 110% of the amount of the reserves calculated in accordance with the methodology the Retrocedant reflects in the XL Group financial reports in accordance with US GAAP (or such other accounting principles, practices or standards as may succeed US GAAP);
"Guidance Notes" means the guidance notes issued by the Insurance Department of the BMA, as amended or supplemented from time to time;
"Guidelines" means the Non-SPA Retrocedant Guidelines and/or the SPA Retrocedant Guidelines as the context requires;
"Holdco" means GreyCastle Holdings Ltd, a company incorporated under the laws of Bermuda whose registered office is at Clarendon House, 2 Church Street, Hamilton, Bermuda;
"In-Force" means, in respect of any reassurance or retrocession treaty or agreement, such treaty or agreement if, and only if, the Retrocedant has any liability or potential liability under it;
"Initial Funds-Withheld Portfolio" means the cash and investment assets set out in Schedule 5.
"Insolvency Event" means, in respect of the Company, the Retrocessionaire or Holdco (unless otherwise specified below):
(a)
that person is or becomes insolvent, it is, or becomes, unable, or admits its inability to pay, its debts as they fall due, suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors (or any class of them) with a view to rescheduling any of its indebtedness;

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(b)
the value of the assets of that person is or becomes less than its liabilities (taking into account contingent and prospective liabilities), in each case calculated and determined on the basis of, and by reference to either the relevant regulatory returns or the relevant accounts;
(c)
a moratorium is declared in respect of that person’s indebtedness;
(d)
any corporate action, regulatory action, legal proceedings, or other procedure or step is taken for:
(i)
the suspension of payments by, or a moratorium of any indebtedness, winding-up (including a petition for winding up presented against the Company by the BMA pursuant to Section 35 of the Insurance Act), dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise, but in each case other than a voluntary and solvent liquidation, or a reorganisation, for the purposes of reconstruction or amalgamation) of, that person;
(ii)
a composition, compromise, assignment or arrangement with one or more of that person’s creditors or any class of them;
(iii)
the appointment of a liquidator, receiver, administrative receiver, administrator, examiner, trustee in bankruptcy, compulsory manager or other similar officer in respect of all or substantially all of that person’s assets (including, in the case of the Retrocessionaire, the appointment of a receiver over its business and assets in accordance with the provisions of the SAC Act); or
(iv)
enforcement of any security over all or a substantial part of that person’s assets, and
where such corporate action, legal proceedings or other procedure or step is taken by any third party other than that person and its directors, the action, proceedings, procedure or step (as the case may be) is not discharged, stayed or dismissed within fifteen (15) days;
(e)
an encumbrancer takes possession of the whole or any substantial part of the assets of that person or distress or execution is levied or enforced upon or sued out against the whole or any substantial part of that person's assets and, in the case of any of the foregoing events, the matter is not discharged, stayed or dismissed within fifteen (15) days;
(f)
any matter, or the occurrence of any event, in any jurisdiction which corresponds with, or has an effect equivalent to, or is otherwise analogous to, any of the matters or events referred to at any of (a) to (e) (in each case inclusive) above; or
(g)
the Retrocessionaire or the Company ceases or suspends or threatens to cease or suspend all or a material part of its operations or business for a period of more than 20 Business Days;

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"Insurance Act" means the Insurance Act 1978 (as amended) of Bermuda and its related regulations;
"Interests" means all rights and obligations of a Non-Lead Investor in connection with its direct or indirect investment in the Retrocessionaire and its obligations in respect of Investor Capital Calls, including its obligations set out in the Investor Support and Undertakings Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement);
"Investment Management Costs" means any Costs consisting of: (i) investment management fees and other costs or expenses of any XL External Managers, (ii) costs or expenses of any Custodians, and (iii) costs and expenses of third-party accountants, in each case that are suffered or incurred by the Retrocedant or XLGIL in connection with the operation of the Security Accounts and/or the Funds-Withheld Accounts, in the case of clause (iii) not to exceed three basis points of the assets under management in the Security Accounts and the Funds-Withheld Accounts per annum and, in each such case, including, without limitation, (x) any costs and expenses incurred in terminating or appointing any XL External Managers or Custodians, and (y) any withholding payments, taxes, fees, duties, levies and contributions or charges in the nature of a tax (whether supranational, domestic or foreign) on or associated with any of the foregoing amounts (including, without limitation, VAT and any E.U. “financial transactions tax” or similar taxes), and any penalty or interest connected therewith. In addition, following a Retrocessionaire Change of Authority, Investment Management Costs shall also include all of the foregoing types of Costs suffered or incurred by the Retrocedant or XLGIL in managing the assets of the Retrocessionaire, as well as any: (i) investment management fees and other costs or expenses of any Retrocessionaire Managers (including any costs and expenses incurred in terminating or appointing any Retrocessionaire Managers), (ii) third party costs and expenses incurred by XLGIL in connection with the management of the assets of the Retrocessionaire, and (iii) XLGIL's internal costs and expenses incurred in connection therewith (including the cost of the time expended by personnel of XLGIL with respect to any such activities).
"Investment Management Governance and Operating Framework" means the governance framework in the agreed form in relation to investment management to be adopted by the Retrocessionaire;
"Investor Capital Calls" means the mandatory commitments imposed on the Investors under the Sale and Purchase Agreement, the Investor Support and Undertaking Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement), requiring them to contribute cash to the Retrocessionaire upon the terms and conditions set forth therein;
"Investor Contingent Capital Commitment Letter" has the meaning given in the Sale and Purchase Agreement;
"Investor Support and Undertakings Agreement" means the agreement between the XL Retrocedants, the Retrocessionaire, the Company, Holdco and the Investors dated on or about 30 May 2014;

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"Investors" means all holders of share capital from time to time in Holdco;
"Lead Investors" means the Investors so identified in the Investor Support and Undertakings Agreement and such other person who from time to time acquires the rights and/or obligations of such persons, whether by assignment, novation, operation of law or otherwise;
"Losses" means, without limiting in any way the provisions of Clause 2.4, the gross amount of any:
(a)
liability for losses, claims, payments, other Costs made and/or incurred and settlements under or in respect of the Retroceded Policies and risks ceded and attaching to the Retroceded Policies, including ex-gratia payments, "without prejudice" payments, extra contractual payments arising under a Retroceded Policy, punitive settlements and interest payments;
(b)
liability for payments to Underlying Cedants in consequence of recapture, novation or termination of Retroceded Policies, premium rebates, returns (including in respect of errors in calculations performed by an Underlying Cedant prior to the Effective Date), refunds, surrender payments, commissions, brokerage, and profit share payments in respect of the Retroceded Policies;
(c)
regulatory levies (including to the extent applicable levies under the United Kingdom Financial Services Compensation Scheme), but not fines, penalties or other financial sanctions, to the extent referable to the Retroceded Policies;
(d)
any Costs relating to any disputes with Underlying Cedants in respect of a Retroceded Policy;
(e)
any Costs associated with complying with a periodic payment order relating to a Retroceded Policy;
(f)
any Costs, including interest payable, in respect of the late payment of amounts owed under a Retroceded Policy;
(g)
allocated external loss adjustment expenses in respect of the Retroceded Policies; and
(h)
any other Costs relating to the Retrocedant's obligations as reinsurer under the Retroceded Policies which is suffered or incurred by the Retrocedant and which is not otherwise excluded under this Agreement,
and includes, for the avoidance of doubt, any irrecoverable VAT component of the losses in (d) above;
"Maximum Investor Capital Call Amount" means as of any date the aggregate maximum amounts under all Investor Contingent Capital Commitment Letters;
"Non-Lead Investor" means any Investor other than a Lead Investor;
"Non-SPA Business" means the Retroceded Policies identified in Part B of Schedule 1;

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"Non-SPA Premium" has the meaning given to it in Clause 3.1.2;
"Non-SPA Retrocedant Guidelines" means the investment guidelines in the agreed form in relation to the management of the Funds-Withheld Assets, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Notice of Challenge" has the meaning given to it in Clause 8.13;
"Participation Agreement" means the agreement between the Company, the Retrocessionaire and the XL Retrocedants establishing a participation interest in the Retrocessionaire in favour of the XL Retrocedants, dated on or about the date of this Agreement;
"Period of Risk" means the period commencing on the Effective Date and ending on the earlier of: (a) the date on which the last of the Retroceded Policies ceases to be In-Force; or (b) the date on which the Retroceded Policies are recaptured in accordance with Clause 5;
"Permitted Assets" means:
(a)
in respect of the SPA Business, assets permitted to be held in the Security Accounts under both the relevant Security Agreement and the SPA Retrocedant Guidelines; or
(b)
in respect of the Non-SPA Business, assets permitted to be held under the Non-SPA Retrocedant Guidelines;
"Potential Event of Default" means any event or circumstance which might reasonably be expected to become an Event of Default;
"Premium" means together the SPA Premium and the Non-SPA Premium;
"Proceedings" has the meaning given to it in Clause 31.3;
"Process Agent" has the meaning given to it in Clause 32.1;
"Quarter" means a calendar quarter ending on one of 31 March, 30 June, 30 September or 31 December in any relevant year;
"Recapture Agreement Period" has the meaning given to it in Clause 5.4;
"Recapture Amount" means the sum of:
(a)
an amount equal to the Reserves in respect of the recaptured Retroceded Policies, calculated as at the relevant Valuation Date; less
(b)
an amount equal to the aggregate Value as at the relevant Valuation Date, of the assets deposited in or otherwise standing to the credit of all of the Relevant Accounts, subject to Clause 5.7;

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"Reinsured Event" means any and all risks reinsured by the Retrocedant pursuant to the Retroceded Policies;
"Relevant Accounts" means the Security Accounts and/or the Funds-Withheld Accounts as the context requires;
"Relevant Account Information" means the information in Part B of Schedule 2 to be provided by the Retrocedant in respect of each Relevant Account and to be reflected in the Relevant Account Report;
"Relevant Account Period" means each period from and including an Account Date to, but excluding, the next following Account Date, save that on termination of this Agreement the last Relevant Account Period shall be from and including the Account Date falling in the immediately preceding Relevant Account Period to, but excluding, the date of termination;
"Relevant Account Report" means the report in the form to be agreed to be delivered pursuant to Clause 6.2, reflecting the Relevant Account Information in respect of each Relevant Account;
"Relevant Agreement" has the meaning given to it in Clause 5.8.2;
"Relevant Date" means for the purpose of any calculation or the determination of any right or liability, the date as at which such calculation is to be carried out or as at which such right or liability is to be determined as specified in this Agreement or, if such day is not a Business Day, the Business Day immediately preceding such day;
"Replaced Assets" has the meaning given to it in Clause 8.15.1;
"Reporting Date" means the 10th Business Day of each Quarter and the last "Reporting Date" shall be the first such date falling after termination of this Agreement;
"Reserves" means the provisions the Retrocedant is or would be required to make to cover its reinsurance liabilities arising under or in connection with its obligations in respect of the Retroceded Policies following recapture pursuant to Clause 5.3 of the business ceded to the Retrocessionaire, calculated in accordance with Applicable Law and Regulation applying to reinsurers in Bermuda or, if greater, such provisions calculated on the basis on which the Retrocedant operates the SPA Business;
"Retrocedant's Actuary" means the person appointed by the Retrocedant from time to time to perform the function referred to in 4.3.13R of the Supervision Manual of the Relevant Regulator Handbook of Rules and Guidance;
"Retroceded Policies" means, at any time, such of the reassurance and retrocession treaties and agreements listed in Parts A and B of Schedule 1 as are In-Force at that time;
"Retrocessionaire Capital Account" means the account established pursuant to Clause 14;

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"Retrocessionaire Capital Account Assets" means the assets from time to time credited to the Retrocessionaire Capital Account;
"Retrocessionaire Change of Authority" has the meaning given to it in Clause 5.9;
"Retrocessionaire Guidelines" means the investment guidelines in relation to the management of the assets of the Retrocessionaire, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Retrocessionaire IMA(s)" means the investment management agreement(s) entered into from time to time between the Retrocessionaire and one or more Retrocessionaire Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the assets of the Retrocessionaire may be managed on behalf of the Retrocessionaire in accordance with the Retrocessionaire Guidelines, in a form meeting the requirements of the provisions of Schedule 4;
"Retrocessionaire Manager" means any investment manager appointed by the Retrocessionaire in accordance with the provisions of Schedule 4 to manage its assets;
"Retrocessionaire Uncured Breach" has the meaning given to it in paragraph 2.1.1 of Part B of Schedule 4;
"Retrocessionaire's Actuary" means the person appointed from time to time by the Retrocessionaire to perform the function referred to in section 26 of the Bermuda Insurance Act 1978 and the Guidance Note #9;
"Return Amount" means in respect of:
(a)
a Security Account, the amount (if any) by which the Balance of that Security Account as of any Valuation Date is more than the Collateral Amount for that Security Account as of such Valuation Date; or
(b)
the Funds-Withheld Accounts, the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is more than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;
"Return Notice" has the meaning given to it in Clause 8.4;
"SAC Act" means the Segregated Accounts Companies Act 2000 (as amended) of Bermuda;
"Sale and Purchase Agreement" means the agreement between Holdco as "Purchaser" and XL Insurance (Bermuda) Limited as "Seller", dated 1 May 2014;
"Security" means any mortgage, charge (whether fixed or floating, legal or equitable) pledge, lien, assigned by way of security or other security interest securing any obligation of any person.
"Security Account Assets" means the assets from time to time deposited in or otherwise standing to the credit of a Security Account;

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"Security Accounts" means the accounts secured in favour of the Underlying Cedants, established pursuant to the Security Agreements by the Retrocedant to support the Retrocedant's obligations under the Retroceded Policies relating to the SPA Business;
"Security Agreements" means the security agreements which relate to the SPA Business as listed in Part C of Schedule 1 and the ancillary documents relating thereto as listed in Part D of Schedule 1;
"Segregated Account Matters" means any dispute, controversy or claim arising out of or relating to (i) the validity and effectiveness of the establishment and operation of the Company and/or the Retrocessionaire under the SAC Act (ii) the application or interpretation of the SAC Act, or (iii) compliance with or the interpretation or effect of Clause 13 (Segregated Accounts) of this Agreement;
"Service Provider" means GreyCastle Services Limited, a company incorporated under the laws of England and Wales (registered no. 09019536), whose registered office is at 20‑22 Bedford Row, London, WC1R 4JS;
"SIMA" means one or more sub-investment management agreement entered into from time to time between XL GIL acting on behalf of the Retrocedant, the Retrocessionaire and one or more XL External Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the Funds-Withheld Assets and the Security Account Assets may be managed on behalf of the Retrocedant in accordance with the Guidelines, in the agreed form, as revised from time to time in accordance with the provisions of Schedule 4;
"SPA Business" means the Retroceded Policies identified in Part A of Schedule 1;
"SPA Premium" has the meaning given to it in Clause 3.1;
"SPA Retrocedant Guidelines" means the investment guidelines in the agreed form in relation to the management of the Security Account Assets, as may be amended from time to time in accordance with Clause 10.6 and Schedule 4;
"Substitution Notice" has the meaning given to it in Clause 8.14;
"Total Premium" has the meaning given to it in Clause 3.3;
"Transaction Documents" means together this Agreement, the Administration Services Agreement, the SIMA(s), the Security Agreements, the Floating Charge, the Guidelines, the Retrocessionaire IMA(s), the other XL Retrocession Agreements, the Investor Support and Undertakings Agreement, the Constitutional Documents, the Transitional Services Agreement and the Retrocessionaire Guidelines;
"Transitional Services Agreement" has the meaning given to it in the Sale and Purchase Agreement;
"Trigger Event Date" has the meaning given to it in the Investor Support and Undertakings Agreement;

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"UK Regulators" means the Prudential Regulation Authority and the Financial Conduct Authority and any successors thereto;
"Uncured Breach" has the meaning given to it in paragraph 2.3.1 of Part A of Schedule 4;
"Underlying Cedants" means the persons identified in the column headed "Underlying Cedant" in the table in Schedule 1;
"USD" or "$" means the lawful currency of the United States of America;
"Valuation Agent" means:
(a)
with respect to a Security Account, the "Valuation Agent" as defined in a Security Agreement; and
(b)
with respect to the Funds-Withheld Accounts, the Retrocedant's Actuary;
"Valuation Basis" means:
(a)
in the case of a Security Account, the valuation methodology set out in the Security Agreement applicable to such Security Account as applied by the Retrocedant as at the date of this Agreement; and
(b)
in the case of the Funds-Withheld Accounts, the actuarial principles disclosed from time to time to the Retrocessionaire and the Retrocessionaire's Actuary and used by the Retrocedant as at the Relevant Date to value the assets backing the Funds-Withheld Reserves which the Retrocedant is required to maintain for regulatory purposes;
"Valuation Date" means:
(a)
Left intentionally blank
(b)
for the purpose of Clause 4.2, the date of this Agreement; or
(c)
in respect of the calculation of the Recapture Amount the date of termination of this Agreement; or
(d)
when determining if a Call Amount or Return Amount exists in respect of a Security Account, a "Valuation Date" as defined in the relevant Security Agreement; or
(e)
when determining if a Call Amount or a Return Amount exists in respect of a Funds-Withheld Account, the last Business Day of June and December in each year;
"Value" means the value of any assets deposited in or otherwise standing to the credit of a Relevant Account as at the Relevant Date calculated on the relevant Valuation Basis;

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"Working Capital Assets" means all cash or other liquid assets of the Retrocessionaire (excluding amounts due to it from the Retrocedant pursuant to Clause 3);
"XL External Manager" means any investment manager appointed by the Retrocedant to manage the Funds-Withheld Assets and/or the Security Account Assets (as applicable) in accordance with the provisions of Schedule 4;
"XL GIL" means XL Group Investments Ltd, a company incorporated in Bermuda (registered no. EC29781) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, or an Affiliate or successor entity thereof;
"XL Group" means the Retrocedant and any company which is, on or at any time after the date of this Agreement, a subsidiary or holding company of the Retrocedant, or a subsidiary of a holding company of the Retrocedant;
"XL Life" means XL Life Ltd, a company incorporated under the laws of Bermuda (registered no. EC24082) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda;
"XL Re Europe" means XL Re Europe SE (formerly known as, inter alia, XL Re Europe Limited), a European company formed under Council Regulation (EC) No. 2157/2001 of 8 October 2001 (registered no. 423311) whose registered office is at 8 St Stephen's Green, Dublin 2, Ireland;
"XL Re (UK)" means XL Re Ltd, a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda, acting through its UK branch registered in England and Wales whose registered branch address is at XL House, 70 Gracechurch Street, London EC3V 0XL, England;
"XL Retrocedants" means the Retrocedant, XL Re (UK) and XL Re Europe;
"XL Retrocession Agreements" means together, this Agreement, the XL Re (UK) Retrocession Agreement and the XL Re Europe Retrocession Agreement;
"XL Re Europe Retrocession Agreement" means the retrocession agreement between XL Re Europe, the Company and the Retrocessionaire dated the same date as this Agreement;
"XL Re (UK) Retrocession Agreement" means the retrocession agreement between XL Re (UK), the Company and the Retrocessionaire dated the same date as this Agreement; and
"XL Services UK Limited" a company incorporated under the laws of England and Wales (registered no. 02816304), whose registered office is at XL House, 70 Gracechurch Street, London EC3V 0XL, England.

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1.1
In this Agreement, a reference to:
1.1.1
a "holding company" or "subsidiary" shall have the meaning given in Section 86 of the Bermuda Companies Act 1981 as enacted and amended from time to time. A subsidiary and a subsidiary undertaking shall include any person the shares or ownership interests in which are subject to security and where the legal title to the shares or ownership interests so secured are registered in the name of the secured party or its nominee pursuant to such security;
1.1.2
liability under, pursuant to or arising out of (or any analogous expression) any agreement, contract, deed or other instrument includes a reference to contingent liability under, pursuant to or arising out of (or any analogous expression) that agreement, contract, deed or other instrument;
1.1.3
a document in the "agreed form" is a reference to a document in a form approved by the Parties and for the purposes of identification initialled by or on behalf of each Party and annexed hereto;
1.1.4
a statutory provision (except where stated otherwise) includes a reference to the statutory provision as modified or re enacted or both from time to time whether before or after the date of this Agreement and any subordinate legislation made under the statutory provision (as so modified or re enacted) whether before or after the date of this Agreement except to the extent that any modification or re-enactment made after the date of this Agreement would create, increase or alter the liability of any party under this Agreement;
1.1.5
a "person" includes a reference to any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any joint venture, association or partnership, works council or employee representative body (whether or not having separate legal personality);
1.1.6
a person includes a reference to that person's successors and permitted assigns;
1.1.7
a "party" or "Party" includes a reference to that party's or Party's personal representatives, successors and permitted assigns (including any person resulting from or continuing after any amalgamation, merger, consolidation or similar transaction in which a party or Party participates);
1.1.8
a clause, paragraph or schedule, unless the context otherwise requires, is a reference to a clause or paragraph of, or schedule to, this Agreement;
1.1.9
any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall, in respect of any jurisdiction other than England, be deemed to include what most nearly approximates in that jurisdiction to the English legal term and to any English statute shall be construed so as to include equivalent or analogous laws of any other jurisdiction;
1.1.10
a "company" shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;

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1.1.11
writing shall include any modes of reproducing words in a legible and non-transitory form;
1.1.12
the word "agreement," means this agreement as amended or supplemented, together with all recitals and all Schedules attached hereto or incorporated by reference, and the words "hereof," "herein," "hereto," "hereunder" and other words of similar import shall refer to this agreement in its entirety and not to any particular clause, paragraph or Schedule of this agreement;
1.1.13
times of the day is to London time; and
1.1.14
reference to "regulatory capital" means a reference to assets which are admissible under Applicable Law and Regulation for the purpose of determining a person's regulatory capital resources.
1.2
The ejusdem generis principle of construction shall not apply to this Agreement. Accordingly, general words shall not be given a restrictive meaning by reason of their being preceded or followed by words indicating a particular class of acts, matters or things or by examples falling within the general words. Any phrase introduced by the terms "other", "including", "include" and "in particular" or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms.
1.3
References to the Relevant Regulator Handbook of Rules and Guidance, or any other regulations or rules relating to the conduct of (re)insurance business, or to any part thereof, are to be construed as references to such handbook, rules or regulations, or to such part thereof, as amended and in force from time to time or as the same may be replaced from time to time and any reference to any provision of such handbook, rules or regulations, or to any part thereof, is to be construed as a reference to the corresponding provision thereof from time to time as adjusted by the effect of any transitional rules which may be applicable in place thereof or in supplement thereto from time to time.
1.4
The headings in this Agreement do not affect its interpretation.
1.5
The Schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement, and any reference to this Agreement shall include the Schedules.
1.6
Words importing the singular include the plural and vice versa, and words importing a gender include every gender.
2.
INSURING CLAUSE
2.1
Subject to the terms and conditions of this Agreement, with effect on and from the Effective Date the Retrocedant shall cede to the Retrocessionaire and the Retrocessionaire agrees to accept in return for the payment of the Premium in accordance with Clause 3 the cession by way of 100 per cent. quota share reinsurance of the Retrocedant's risks under and attaching to, relating to or arising out of the Retroceded Policies, such that the Retrocessionaire will reinsure and indemnify the Retrocedant in the amount of 100 per cent. of its Losses in respect of such Retroceded Policies.

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2.2
Notwithstanding any other provision of this Agreement, it is agreed that the Losses of the Retrocedant shall include any Loss to the extent that it relates to a liability or payment incurred in respect of a Reinsured Event (whether death, the diagnosis of a critical illness or otherwise) which occurred prior to, on, or after the Effective Date.
2.3
The Retrocessionaire shall discharge its obligations to the Retrocedant under Clause 2.1 by making payments in accordance with Clause 8.6.
2.4
The Retrocessionaire shall pay, as may be paid thereon and unconditionally follow the settlements (including ex gratia, "without prejudice" and any extra contractual settlements) against the Retrocedant and the Retrocessionaire shall be bound by settlements, or payments made by the Retrocedant irrespective of the legal liability of the Retrocedant and shall not be entitled to argue in defence or otherwise allege that the Retrocedant has failed to take all proper and businesslike steps in making the relevant settlement and/or payment.
2.5
The Retrocedant agrees to consult in good faith with the Retrocessionaire in respect of any claim arising under any Retroceded Policy where the claim exceeds GBP500,000.
2.6
The Retrocedant will inform the Retrocessionaire of any such claim within 14 days of receiving notification from the underlying cedant, and, in the event of any disputes, will consult the Retrocessionaire with respect to the appointment of lawyers and experts. The Retrocedant will take into account any comments of the Retrocessionaire, but will not be bound to follow any request or suggestion of the Retrocessionaire. The Retrocedant will handle all claims in a proper and businesslike manner.
2.7
The sole remedy for any breach of Clauses ‎2.5 and 2.6 ‎will be damages for any loss proved; provided that any such claim would not operate as a defence (including by way of setoff) against a claim in respect of the Retrocessionaire’s obligations under Clause 2.1.
3.
RETROCESSION PREMIUM
3.1
The premium payable under this Agreement in respect of the SPA Business (the "SPA Premium") is the aggregate of:
3.1.1
$2,128.8m; and
3.1.2
$0.2m, representing face value (expressed in USD) for the technical payable balances on the agreed 31st December 2013 balance sheet, reduced by a payment by the Retrocessionaire to the Retrocedant at face value (expressed in USD) for the technical receivable balances on the agreed 31st December 2013 balance sheet.
3.2
The premium payable under this Agreement in respect of the Non-SPA Business (the "Non-SPA Premium") is the aggregate of:
3.2.1
$43.5m; and

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3.2.2
$9.8m, representing face value (expressed in USD) for the technical payable balances on the agreed 31st December 2013 balance sheet, reduced by a payment by the Retrocessionaire to the Retrocedant at face value (expressed in USD) for the technical receivable balances on the agreed 31st December 2013 balance sheet.
3.3
The aggregate amount due in respect of the SPA Premium pursuant to Clause 3.1 and the Non-SPA Premium pursuant to Clause 3.2 (such aggregate, the "Total Premium") shall be paid on a funds withheld basis. The Retrocedant shall establish a payable and the Retrocessionaire shall establish a receivable in respect of the Total Premium.
3.4
The Total Premium shall be settled by the Retrocedant (i) offsetting against such premium payable amounts due to the Retrocedant pursuant to Clause 2 of this Agreement and (ii) paying to the Retrocessionaire any Return Amounts arising in respect of the Relevant Accounts as determined pursuant to Clause 8.
3.5
On the date hereof, in respect of both the payment to be made on a funds withheld basis pursuant to Clause 3.2 and the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement, the Retrocedant shall transfer the Initial Funds-Withheld Portfolio to the Funds-Withheld Accounts.
4.
TIME ON RISK ADJUSTMENT
4.1
To put the Parties in the position, as between themselves, that they would each have been in if this Agreement had been entered into on the Effective Date, an adjustment payment will be made in accordance with the provisions of Clause 4.2 below.
4.2
Within 5 Business Days of the determination of the Final Reconciliation Amount Calculation Report pursuant to clause 8.2 of the Sale and Purchase Agreement:
4.2.1
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii) the Total Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement exceeds (b) the "XL Re Completion Amount" (as defined in the letter agreement, dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocedant shall pay an amount equal to such excess to the Retrocessionaire, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment; and
4.2.2
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii) the Total Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement is less than (b)  the "XL Re Completion Amount" (as defined in the letter agreement,

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dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocessionaire shall pay an amount equal to such shortfall to the Retrocedant, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment.
5.
EFFECTIVE DATE AND TERMINATION
5.1
The obligations to reinsure the Retrocedant under this Agreement shall have effect during the Period of Risk only.
5.2
The Retrocedant shall be entitled to terminate this Agreement with immediate effect, (such termination to take effect in accordance with Clause 5.3) by notice in writing to the Retrocessionaire on or at any time after the occurrence of any of the following (each an "Event of Default"):
5.2.1
an Insolvency Event occurring in respect of the Retrocessionaire, the Company or Holdco;
5.2.2
the Company and/or the Retrocessionaire cease to be authorised by the BMA to reinsure the business retroceded to the Retrocessionaire under this Agreement;
5.2.3
the regulatory capital of the Company and/or the Retrocessionaire is less than 100 per cent. of the Company or Retrocessionaire's Capital Requirements;
5.2.4
any steps are taken in respect of the Company which would reasonably be expected to result in the Company's Centre of Main Interest changing from Bermuda;
5.2.5
the claims of the Retrocedant against the Retrocessionaire cease to rank at least pari passu with the claims of the Retrocessionaire's unsecured or unsubordinated reinsurance creditors, except for obligations mandatorily preferred by Applicable Law and Regulations applying to the Retrocessionaire;
5.2.6
other than the non-payment of a Call Amount, the Retrocessionaire is in breach of any payment obligation under this Agreement which is not remedied within 10 Business Days of it receiving written notice from the Retrocedant specifying the breach and requiring it to be remedied;
5.2.7
any Call Amount Default Period continuing for three or more years;
5.2.8
a Change of Control occurs;
5.2.9
a material breach by the Retrocessionaire or the Company of any provision of the SAC Act, the Insurance Act or of the Company's insurance licence which results in the BMA indicating it will exercise its powers of intervention under Section 32 of the Insurance Act;

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5.2.10
a breach by the Retrocessionaire of its obligations pursuant to Clause 11 which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire specifying the breach and requiring it to be remedied;
5.2.11
a breach by the Retrocessionaire or the Company of the Constitutional Documents of the Retrocessionaire, which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire or the Company (as applicable) specifying the breach and requiring it to be remedied; and
5.2.12
the Retrocession Agreement between XL Re (UK) and the Retrocessionaire, or the Retrocession Agreement between XL Re Europe and the Retrocessionaire, each entered into on or around the date hereof is terminated for any reason other than the natural run-off or expiry of the policies retroceded thereunder.
5.3
If written notice to terminate this Agreement is given in accordance with the provisions of Clause 5.2:
5.3.1
upon receipt by the Retrocedant of assets of an aggregate Value equal to the Recapture Amount payable pursuant to Clause 5.5, the Retrocedant shall automatically recapture the reinsurance of all Retroceded Policies ceded by it under this Agreement on the basis that: (i) the Premium has been fully settled; and (ii) the Retrocessionaire's liability to reassure the Retrocedant in respect of those Retroceded Policies shall cease irrevocably and no further payments shall be payable by the Retrocessionaire as a result of the reassurance pursuant to this Agreement (other than payments accrued as at the date of such payment); and
5.3.2
the Retrocessionaire shall pay the Retrocedant the Recapture Amount in accordance with Clause 5.5.
5.4
The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree the Recapture Amount but if they do not do so within 15 Business Days of a notice being served to terminate this Agreement (the "Recapture Agreement Period"), the basis of recapture or any dispute in relation to it or the calculation of the Recapture Amount may be referred by the Retrocedant or the Retrocessionaire to the Expert for resolution pursuant to Clause 30 no later than 10 Business Days after the expiry of Recapture Agreement Period. If the determination of the Recapture Amount is referred for resolution pursuant to Clause 30, pending final agreement or determination the Recapture Amount shall be paid on a provisional basis in accordance with Clause 5.5.2 on the basis of a calculation performed by the Retrocedant's Actuary.
5.5
The Recapture Amount shall be paid as follows:
5.5.1
if the Recapture Amount is agreed within the Recapture Agreement Period, the agreed Recapture Amount shall be paid by or on behalf of the Retrocessionaire within 5 Business Days of agreement; or
5.5.2
if the Recapture Amount is not agreed within the Recapture Agreement Period, the Recapture Amount as calculated by the Retrocedant's Actuary shall be paid

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by or on behalf of the Retrocessionaire within 5 Business Days after the expiry of the Recapture Agreement Period;
5.6
If the calculation of the Recapture Amount has been referred for resolution pursuant to Clause 30, then the relevant Party will make a payment within 5 Business Days of agreement or settlement of the Recapture Amount pursuant to Clause 30 (or Clause 31) as follows:
5.6.1
if the Difference is positive, the Retrocessionaire shall make or cause to be made a payment of such amount to the Retrocedant; or
5.6.2
if the Difference is negative, the Retrocedant shall reimburse the Retrocessionaire such amount.
5.7
For the purposes of calculating the Recapture Amount, the Parties agree that any assets and associated investment income deposited by the Retrocedant or a member of the XL Group in a Relevant Account to remedy any failure by the Retrocessionaire to pay a Call Amount, shall not be treated as an asset of a Relevant Account;
5.8
Without prejudice to the Retrocessionaire's obligation to pay the full Recapture Amount, in the event that:
5.8.1
a Cross-Agreement Recapture Event occurs; and
5.8.2
there are not sufficient Reserves (as defined in each XL Retrocession Agreement under which a Recapture Amount becomes payable) as a result of the Cross-Agreement Recapture Event (each, a "Relevant Agreement") to fund all such Recapture Amounts,
5.8.3
the Retrocessionaire shall pay to each XL Retrocedant a pro rata amount of such Reserves as are available to meet its obligations to pay Recapture Amounts, in the proportion that the Recapture Amount owed to an XL Retrocedant under a Relevant Agreement represents when compared to the aggregate of the Recapture Amounts owed under all the Relevant Agreements.
5.9
In the event of a breach of the undertaking given in Clause 10.1.5 (provided always that in any case the breach is a Retrocessionaire Uncured Breach) or if the Retrocedant’s right to provide a Change of Authority Notice under Paragraph 2.4.1 of Part A of Schedule 4 is triggered, then in addition to any other remedies provided in such paragraph 2.4.1 or otherwise available (whether by operation of law, equity, contract or otherwise), the Retrocedant may not terminate this Agreement but may require that the assets of the Retrocessionaire are managed by an investment manager nominated by XL GIL in its sole discretion (acting reasonably), including the existing investment manager, with such investment manager thereafter acting on instructions only from XL GIL (a "Retrocessionaire Change of Authority") and the Parties agree that the associated Investment Management Costs will be payable in accordance with the provisions of Clause 7.10.
5.10
In the event of termination the Retrocessionaire and the Company will comply with the obligations in the Administration Services Agreement in relation to the retention, disposal

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and/or return of information received by the Retrocessionaire and/or the Company pursuant to or in connection with the Transaction Documents.
5.11
Subject to Clauses 5.12 and 5.13 below, upon termination of this Agreement each Party shall be released from any further obligations pursuant to this Agreement but such termination shall not terminate any accrued rights under this Agreement.
5.12
The provisions of this Agreement shall survive termination of this Agreement until all amounts due and payable hereunder have been paid.
5.13
Clauses 1, 5, 9, 16, 17 and 19 to 33 shall survive termination of this Agreement.
6.
REPORTING INFORMATION
6.1
On each Reporting Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with a Client Account Report in the agreed form, setting out in respect of each Currency Block the Client Account Report Information in respect of the immediately preceding Client Account Reporting Period.
6.2
Within 10 Business Days of the Account Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with the Relevant Account Report in the agreed form, setting out in respect of each Relevant Account, the Relevant Account Information in respect of the immediately preceding Relevant Account Period.
7.
RELEVANT ACCOUNTS
7.1
The Retrocedant will maintain segregated portfolios of assets in connection with the SPA Business, in accordance with the provisions of the Security Agreements throughout the term of this Agreement.
7.2
The Retrocedant shall maintain assets in the Funds-Withheld Accounts in connection with the Non-SPA Business, in accordance with the terms of this Agreement.
7.3
Subject to the terms of this Agreement and in the case of the SPA Business, the Security Agreements, all the assets and any investment income arising out of the assets in a Relevant Account will be credited to the Relevant Account and all losses (including investment losses), liabilities (including taxes), costs, charges and expenses attributable to the assets in a Relevant Account will be debited from the Relevant Account except for Investment Management Costs which shall be dealt with pursuant to Clause 7.10.
7.4
All premiums received by the Retrocedant from the Underlying Cedants in respect of the Non-SPA Business shall be paid into the relevant Funds-Withheld Account.
7.5
Losses incurred by the Retrocedant will be managed by the Retrocedant and shall be paid or reimbursed to the Retrocedant from:
7.5.1
in the case of the SPA Business, out of the Security Account Assets selected by the Retrocessionaire or its designated investment managers prior to the delivery

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of a Change of Authority Notice (as defined in Schedule 4) or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice to the extent such Losses are permitted to be paid from a Security Account by a Security Agreement; and
7.5.2
in the case of all Losses not falling within Clause 7.5.1 and all other Losses, out of the Funds-Withheld Assets selected by the Retrocessionaire or its designated investment managers prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice;
7.6
The assets in the Relevant Accounts will be managed by the Retrocedant pursuant to and in accordance with the SIMA(s) and the Guidelines, together with the provisions set out in Clause 10.6 and Schedule 4;
7.7
A Relevant Account will be credited with all Call Amounts paid by the Retrocessionaire and debited with all Return Amounts paid by the Retrocedant in connection with that Relevant Account.
7.8
Any assets deposited by the Retrocedant or on its behalf by a member of the XL Group in a Relevant Account to remedy a failure by the Retrocessionaire to pay all or part of a Call Amount shall not be treated as assets of the Relevant Account for any purpose (including for the purpose of calculating the Recapture Amount as described in Clause 5.7) and all benefits and losses, including investment gains and losses and taxes shall remain with the Retrocedant or the relevant member of the XL Group.
7.9
For the avoidance of doubt, all legal and beneficial interest in the Funds-Withheld Assets, the Security Account Assets, the Fund-Withheld Accounts and the Security Accounts belongs to the Retrocedant and the Retrocessionaire has no proprietary interest in such accounts nor in any such assets.
7.10
No later than 30 Business Days after each Account Date, the Retrocedant will submit an invoice to the Retrocessionaire for all Investment Management Costs that have been paid or are due and payable by the Retrocedant and/or XL GIL or its Affiliates. The Retrocedant and/or XL GIL or its Affiliates may specify in an invoice that all or part of the applicable Investment Management Costs are to be paid by the Retrocessionaire to an Affiliate of the Retrocedant and/or XL GIL, instead of to the Retrocedant and/or XL GIL or its Affiliates themselves. The Retrocessionaire will settle all invoices submitted by the Retrocedant and/or XL GIL or its Affiliates in cash within 30 days of receipt by the Retrocessionaire. Without prejudice to the Retrocedant's right to terminate this Agreement under Clause 5.2.6 for the non-payment of Investment Management Costs, if the Retrocessionaire fails to settle an invoice in respect of Investment Management Costs relating to:
7.10.1
the Funds-Withheld Accounts and/or the Funds-Withheld Assets; or
7.10.2
the management of the assets of the Retrocessionaire (following a Retrocessionaire Change of Authority pursuant to Clause 5.9),

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within the 30 day time period (or within the 10 Business Day cure period permitted under Clause 5.2.6 if the Retrocedant has given written notice pursuant to Clause 5.2.6), the Retrocedant may reimburse itself (or XL GIL or its Affiliates as applicable) out of the Funds-Withheld Account.
8.
COLLATERAL OBLIGATIONS
8.1
The Retrocessionaire will maintain assets in the Relevant Accounts in an amount equal to the applicable Collateral Amount. The Retrocessionaire shall fulfil this obligation by paying all Call Amounts in accordance with this Clause 8 and any other relevant provisions of this Agreement.
8.2
Subject to Clause 8.11, the Retrocedant shall pay to the Retrocessionaire all Return Amounts subject to and in accordance with this Clause 8.
8.3
After each relevant Valuation Date, the Retrocedant will procure that the relevant Valuation Agent determines as soon as practicable whether or not a Call Amount or a Return Amount exists in respect of a Relevant Account as at each relevant Valuation Date (the "Determination").
8.4
If a Call Amount or a Return Amount is payable in respect of a Relevant Account, the Retrocedant will notify the Retrocessionaire in writing within 5 Business Days of the relevant Determination (a "Call Notice", or a "Return Notice" as applicable).
8.5
A Call Notice or Return Notice delivered by the Retrocedant shall specify:
8.5.1
the Balance of the Relevant Account as at the close of business on the relevant Valuation Date;
8.5.2
the Call Amount or Return Amount (as applicable);
8.5.3
the type of Permitted Assets the Retrocedant intends to transfer in the case of a Return Amount;
8.5.4
the type of Permitted Assets the Retrocedant requires to have transferred in the case of a Call Amount;
8.5.5
if a Call Amount is payable, the Relevant Account into which the Retrocessionaire must pay the Call Amount;
8.5.6
subject to any confidentiality obligations by which the Retrocedant is bound, such information which is available to the relevant Valuation Agent as may be relevant to the calculation of the Call Amount or Return Amount (as applicable).
8.6
If a Call Amount is payable, the Retrocessionaire shall, at its own cost, transfer to the Retrocedant Permitted Assets of the type specified in the Call Notice, with a Value as at the Valuation Date at least equal to the Call Amount, within 2 Business Days of receipt of a Call Notice from the Retrocedant provided that the Retrocessionaire shall not be required to settle a Call Amount if doing so would reduce the Working Capital Assets below $10m.

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8.7
If a Return Amount is payable, the Retrocedant shall, subject to Clauses 8.8 and 8.11, and at the cost of the Retrocessionaire, transfer to the Retrocessionaire, Permitted Assets selected by the Retrocessionaire or its designated investment manager prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice with a Value as at the Valuation Date at least equal to the Return Amount, within 5 Business Days of the later of: (i) the date of a Return Notice; or (ii) the date on which the Retrocedant received assets of a Value as least equal to the Return Amount from the relevant Custodian.
8.8
If the value of the Retrocessionaire Capital Account Assets at the date of the Return Notice is less than the Maximum Investor Capital Call Amount at that date, the Retrocedant shall transfer cash to the value of the Return Amount to the Retrocessionaire Capital Account within 5 Business Days of the date determined in accordance with Clause 8.7.
8.9
If the Retrocessionaire fails to pay a Call Amount in accordance with Clause 8.6, the Retrocedant shall make such payment to the Relevant Account on behalf of the Retrocessionaire. Such payment will not discharge the Retrocessionaire from its obligation to pay the Call Amount, save that such Call Amount shall be due and payable directly to the Retrocedant together with interest accrued in accordance with Clause 8.10.
8.10
In the event the Retrocessionaire fails to pay all or a part of a Call Amount in accordance with Clause 8.6, interest will accrue on the unpaid Call Amount (or part thereof) together with any positive Collateral Fee PIK Amount in an amount equal to the Collateral Fee for the period from the date the Call Amount became due and payable (the "Due Date"), or, as applicable, the Collateral Fee Payment Date that any Collateral Fee PIK Amount accrues, up to and including the date such Call Amount or Collateral Fee Amount is actually paid to the Retrocedant. Any accrued Collateral Fee will be payable quarterly on each January 1, April 1, July 1 and October 1, or if such date is not a Business Day, the immediately following Business Day, (each, a “Collateral Fee Payment Date”) in cash or, at the sole option of the Retrocessionaire added quarterly (on each Collateral Fee Payment Date) to the Collateral Fee PIK Amount. The Retrocessionaire may, in its sole discretion, repay any positive Collateral Fee PIK Amount in cash, on any Business Day.
8.11
The Retrocedant's obligation to pay a Return Amount is subject to the Retrocedant having actually received assets of a Value at least equal to the Return Amount from the relevant Custodian pursuant to the terms of the relevant Retroceded Policy or associated Security Agreement (if applicable), prior to paying the Return Amount due under this Agreement.
8.12
The payment of a Return Amount by the Retrocedant to the Retrocessionaire will be treated by the Parties as satisfaction of the relevant outstanding premium receivable by the Retrocessionaire pursuant to Clause 3.
8.13
The Retrocessionaire may notify the Retrocedant that it wishes to challenge the calculation of a Call Amount or Return Amount in respect of the Non-SPA Business ("Notice of Challenge") no later than 5 Business Days from receipt of a Call Notice or Return Notice (as applicable). If the Retrocessionaire delivers a Notice of Challenge

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within the permitted timeframe, the payment of the affected Return Amount and Call Amount that was made in accordance with Clauses 8.6 and 8.7 (as applicable) will be deemed to have been made on a provisional basis and be subject to the following:
8.13.1
if the Actuaries cannot agree on the disputed Call Amount or Return Amount (as applicable) within 15 Business Days of a Notice of Challenge, either the Retrocedant or the Retrocessionaire may refer the matter to the Expert for resolution pursuant to Clause 30; and
8.13.2
upon determination by the Expert, the Retrocedant or the Retrocessionaire (or such person on behalf of the Retrocessionaire) will make such payments to the other as necessary to put the Retrocedant and Retrocessionaire in the position they would have been in had the affected payment been made on the basis of the calculation by the Expert.
8.14
If at any time the Secured Account Assets credited to any Security Account cease to comply with the requirements of the related Security Agreement (including the investment restrictions set forth therein), the Retrocedant shall be entitled to notify the Retrocessionaire in writing (a "Substitution Notice").
8.15
A Substitution Notice delivered by the Retrocedant shall specify:
8.15.1
the Secured Account Asset(s) to be substituted or replaced in order to bring the Security Account into compliance with the requirements of the Security Agreement relating to the applicable Secured Account (the "Replaced Assets"); and
8.15.2
the type of Permitted Assets the Retrocedant requires to have credited to the Secured Account in substitution or replacement of such Replaced Asset.
8.16
Within 5 Business Days of the delivery of a Substitution Notice, the Retrocessionaire shall, at its own cost, transfer to the Retrocedant, Permitted Assets with a Value at least equal to the Value of the Replaced Assets and of a type that, when credited to the Security Account in substitution or replacement of the Replaced Assets, the Secured Account Assets credited to any Security Account shall comply with the requirements of the related Security Agreement (including the investment restrictions set forth therein). As promptly as practicable following its receipt of such assets from the Retrocessionaire, the Retrocedant may direct such assets to be credited to the applicable Security Account and, at the cost of the Retrocessionaire, transfer to the Retrocessionaire, the Replaced Assets released by the Custodian to the Retrocedant therefrom.
9.
AUDIT RIGHTS
9.1
The Retrocedant shall submit to the Retrocessionaire and the Retrocessionaire shall submit to the Retrocedant as and when asked by the other on reasonable notice and in any event immediately following the termination of this Agreement for any reason, information in sufficient detail to allow the Retrocessionaire or the Retrocedant (as the case may be) to satisfy all Applicable Law and Regulations to which they are subject in relation to the Retroceded Policies, this Agreement or any other Transaction Document or the arrangements contemplated by it and such additional information as it may

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reasonably require in relation to the Retroceded Policies, this Agreement, any other Transaction Document or the arrangements contemplated by any Transaction Document, including to monitor compliance with the Retrocessionaire Guidelines and the Guidelines, provided always that such information is reasonably in the relevant Party's power, possession or control or may be obtained by it taking reasonable steps and subject to any Applicable Law and Regulations and any obligations of confidentiality owed to third parties.
9.2
Subject to any Applicable Law and Regulations and any confidentiality obligations owed to third parties, during the term of this Agreement, the Retrocedant and the Retrocessionaire shall be entitled on reasonable notice from time to time during normal business hours at its own cost to inspect and audit at the offices of the Retrocessionaire and the Retrocedant, respectively, and take copies of all documents and records relevant to the performance by the Parties of this Agreement.
9.3
The Parties agree to permit any regulatory authority in any jurisdiction that has responsibility for the regulation or governance of another Party and its representatives, to have such reasonable access to its premises and all records kept in relation to this Agreement as may be required by such regulatory authority.
10.
UNDERTAKINGS
10.1
The Retrocessionaire and the Company each give the following undertakings, which shall apply throughout the Period of Risk:
10.1.1
if and to the extent permitted by Applicable Law and Regulation, it shall promptly notify the Retrocedant of the occurrence of any Event of Default or Potential Event of Default;
10.1.2
it shall use its reasonable endeavours to ensure that at all times its exercise of its rights and performance of its obligations under this Agreement will not:
(a)
contravene its constitutive documents and, in addition, in the case of the Retrocessionaire, its Constitutional Documents; or
(b)
contravene any Regulatory Requirement;
10.1.3
it will not transfer (whether by means of a scheme of arrangement or otherwise), novate or, in the case of the Retrocessionaire, cede its obligations under this Agreement with respect to the Retroceded Policies to another person without the prior written consent of the Retrocedant, unless, in the case of the Retrocessionaire ceding its obligations, the cession is in the ordinary course of business and on terms which would not adversely affect the amount of regulatory capital to be held by the Retrocedant or any other member of the XL Group, or otherwise adversely affect the collateral position or counterparty credit exposure of the Retrocedant or any member of the XL Group;
10.1.4
subject to Clause 10.5, it will seek the prior written consent of the Retrocedant to a Change of Control;

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10.1.5
it will procure that the investment assets of the Retrocessionaire are managed in accordance with the Retrocessionaire Guidelines and the Retrocessionaire IMA(s) together with the provisions set forth in Clause 10.6 and Schedule 4;
10.1.6
in the case of the Company, it will maintain its Centre of Main Interest in Bermuda;
10.1.7
subject to Clause 10.3, in the case of the Company, it will not amalgamate, merge, or consolidate with any other person nor issue or allot any securities or any instruments convertible or exchangeable for securities in itself (including any securities or instruments which grant rights in respect of the Retrocessionaire) to any person, except with the prior written consent of the Retrocedant; and
10.1.8
it shall provide prior written notice to the Retrocedant at least 5 Business Days before making a Distribution.
10.2
The Retrocessionaire gives the following undertakings, which shall apply throughout the Period of Risk:
10.2.1
it will notify the Retrocedant in writing prior to any proposed material outsourcing taking effect in respect of the Retroceded Policies;
10.2.2
subject to any Distributions permitted by this Agreement, it will retain assets (as may change from time to time) of any Return Amount paid to the Retrocessionaire by the Retrocedant in the segregated account comprising the Retrocessionaire and use the assets in that segregated account only for the purposes of this Agreement and any other XL Retrocession Agreement;
10.2.3
it will hold regulatory capital in respect of the business reinsured under this Agreement in an amount at least equal to the Agreed Capital Level;
10.3
If the Company wishes to seek the consent of the Retrocedant pursuant to Clause 10.1.7, it shall promptly notify the Retrocedant in writing. After the tenth anniversary of the date of this Agreement, the Retrocedant may only withhold its consent to a request from the Company pursuant to Clause 10.1.7, when the Retrocedant reasonably determines that such change could materially and adversely affect:
10.3.1
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, Holdco or the Investors or any of their respective Affiliates;
10.3.2
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
10.3.3
the regulatory capital position of any member of the XL Group.
10.4
The Parties agree that the ceding of the Retrocessionaire's obligations to a person by way of retrocession permitted pursuant to Clause 10.1.3 shall not be regarded as a Change of Control and shall not require the prior written consent of the Retrocedant.

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10.5
The Parties agree that a Non-Lead Investor may trigger a Change of Control to which the Retrocedant will not need to give its prior consent if:
10.5.1
the new controller has assumed all of that Non-Lead Investor's Interests;
10.5.2
the Retrocedant has the benefit of contractual rights which provide adequate remedies if the new controller breaches its obligations in connection with the Interests; and
10.5.3
the Retrocedant reasonably determines that such Change of Control would not materially and adversely affect:
(a)
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, the Investors or any of their respective Affiliates;
(b)
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
(c)
the regulatory capital position of any member of the XL Group.
10.6
The Parties will comply with the provisions in Schedule 4 with respect to the management of the Security Account Assets and the Funds-Withheld Assets and the assets of the Retrocessionaire.
11.
AGREED CAPITAL AND DIVIDENDS
11.1
The Retrocessionaire shall assess whether or not it holds BMA regulatory capital in an amount at least equal to the Agreed Capital Level, at the end of each Quarter.
11.2
The Retrocessionaire shall submit the results of its calculation performed pursuant to Clause 11.1, together with all reasonable supporting information, to the Retrocedant within 15 Business Days following the end of each Quarter ("Capital Notice").
11.3
The Retrocedant may notify the Retrocessionaire that it wishes to challenge a Capital Notice no later than 10 Business Days from receipt of a Capital Notice (a "Capital Notice Challenge"). The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree such Capital Notice Challenge but if they do not do so within 15 Business Days of the date of the Capital Notice Challenge the dispute shall be referred by either Actuary to the Expert for resolution pursuant to Clause 30.
11.4
The Retrocessionaire undertakes:
11.4.1
not to declare or make a Distribution in any Quarter before the expiry of the 15 Business Day time period in Clause 11.2;
11.4.2
not to declare or make a Distribution at any time when the value of the Retrocessionaire Capital Account Assets is less than the Maximum Investor Capital Call Amount; and

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11.4.3
to only declare or make a Distribution thereafter if, after such Distribution has been made, the Retrocessionaire would still hold regulatory capital at least equal to the Agreed Capital Level and the Retrocessionaire shall provide prior written notice to the Retrocedant if it intends to make a Distribution under this Clause 11.4.3.
11.5
If a challenge is made by the Retrocedant pursuant to Clause 11.3 the Retrocessionaire agrees that no Distribution may be declared or made by it until such dispute has been settled in accordance with Clauses 11.3, 30 or 31, as applicable.
11.6
For as long as a Call Amount remains due and payable by the Retrocessionaire, the Retrocessionaire undertakes to the Retrocedant not to:
11.6.1
declare or make a Distribution;
11.6.2
incur any expenditure outside the ordinary course of business or in excess of $500,000;
11.6.3
enter into any transactions or transactions with an Affiliate or related person other than an Investor Capital Call;
11.6.4
write any new business,
in each case without the prior written consent of the Retrocedant.
11.7
In determining the amount of the Retrocessionaire's BMA regulatory capital for the purposes of Clause 11, only the assets of the Retrocessionaire or amounts receivable by the Retrocessionaire from the XL Retrocedants under the XL Retrocession Agreements shall be included and in no event shall any Retrocessionaire Capital Account Assets or any Closing Excess Assets be treated as regulatory capital of the Retrocessionaire for the purposes of the calculation.
12.
NEGATIVE PLEDGE
12.1
The Retrocedant confirms that as at the date of this Agreement there is not any Security subsisting over any Security Account (except for the Security in favour of the underlying cedants in respect of the Retroceded Polices, the Security granted by the Retrocessionaire in favour of the cedants of the Retroceded Policies and except for any Security arising from time to time in the ordinary course of carrying out any of the Retroceded Policies, including as part of treasury management, or relating to the investment of the assets in such Security Account including liens in respect of unpaid fees or other similar rights or entry into credit support, collateral, margining or other similar arrangements).
12.2
The Retrocedant shall not:
12.2.1
create or permit to subsist any Security over the Funds-Withheld Accounts or the Security Accounts (except for any Security over the Funds-Withheld Accounts or the Security Accounts in existence as at the date hereof or arising from time to time in the ordinary course of carrying out any of the Retroceded Policies, including as part of treasury management, or relating to the investment of the

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assets in the Relevant Accounts including liens in respect of unpaid fees or other similar rights or entry into credit support collateral, margining or other similar arrangements); or
12.2.2
enter into any arrangement under which the money held in or benefit of the Funds-Withheld Accounts or the Security Accounts may be applied, retained or set-off except in the ordinary course of carrying out any of the Retroceded Policies or relating to the investment of the assets in the Relevant Accounts or as contemplated by this Agreement.
13.
SEGREGATED ACCOUNTS
13.1
The Company and the Retrocessionaire shall cause all of the funds and assets of the Retrocessionaire to be held and kept separate and distinct from all other funds and assets in the general account of the Company and any other segregated account established by the Company, including by causing separate bank accounts to be established and maintained by the Retrocessionaire and causing the funds of the Retrocessionaire not to be commingled with any funds of the general account of the Company or any other segregated account established by the Company.
13.2
Unless otherwise agreed to in writing by the Retrocedant, the Company shall continue to be registered as a segregated accounts company pursuant to the SAC Act during the entire term of this Agreement;
13.3
Unless otherwise agreed in writing by the Retrocedant, the Company and the Retrocessionaire (as applicable) shall abstain from amending or modifying: (i) any provision of the Company's bye-laws in a manner that could reasonably be expected to adversely affect the interests of the Retrocedant; or (ii) any agreement comprising part of the Constitutional Documents of the Retrocessionaire.
13.4
Except as otherwise consented to in writing by the Retrocedant, the Retrocessionaire shall not, and the Company shall cause the Retrocessionaire not to:
13.4.1
incur any liabilities or obligations (including borrowing or indebtedness) other than liabilities and obligations arising under this Agreement and any Transaction Documents to which it is a party or which are necessary in connection with the Retrocessionaire’s performance of its obligations and liabilities under such agreements;
13.4.2
subject to Clause 10.1.3, enter into any agreements of insurance or reinsurance other than this Agreement and any other XL Retrocession Agreement;
13.4.3
conduct any business other than services necessary for the Retrocessionaire’s performance of its obligations and liabilities under this Agreement and any Transaction Document to which it is a party; or
13.4.4
enter into any transaction or agreement with any of the Company's Affiliates, the general account of the Company or any other segregated account of the Company.


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14.
RETROCESSIONAIRE CAPITAL ACCOUNT
The Retrocessionaire shall establish a separate account to which shall be credited cash and/or assets contributed to the Retrocessionaire pursuant to any Investor Capital Call. Such cash and/or assets shall be invested only in direct obligations of, or obligations fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof (provided such obligations are backed by the full faith and credit of the United States). All the assets and any investment income arising out of the assets in the Retrocessionaire Capital Account will be credited to such account and all losses and liabilities attributable to the assets in the Retrocessionaire Capital Account will be debited from such account. Notwithstanding anything to the contrary in this Agreement, the Retrocessionaire shall have no obligation to apply amounts in the Retrocessionaire Capital Account to satisfy obligations hereunder or otherwise pay amounts to any XL Retrocedant or any of their Affiliates unless a Trigger Event Date has occurred and only in the amount of the corresponding Total Required Investor Call Amount (as defined in the Investor and Support Undertakings Agreement). For the avoidance of doubt, all determinations relating to the Retrocessionaire Guidelines, including without limitation any determination of compliance with the Retrocessionaire Guidelines shall be determined by reference to all of the assets of the Retrocessionaire other than the assets in the Retrocessionaire Capital Account.
15.
SET-OFF
Without prejudice to the provisions of Clause 7.10 and 8 providing for payment of Call and Return Amounts, Investment Management Costs and Collateral Fees, the Premium payable under Clause 3 shall be offset against all amounts Due from the Retrocessionaire to the Retrocedent hereunder.
16.
CONFIDENTIALITY
16.1
In this Clause 16, "Confidential Information" means all confidential information disclosed (whether in writing, orally or by another means and whether directly or indirectly) by (or on behalf of) either the Retrocedant or the Retrocessionaire or the Company (the "Disclosing Party") or any of its or their Affiliates to another Party (the "Receiving Party") whether before or after the date of this Agreement including information relating to the Disclosing Party's or its customers' products, operations, processes, plans or intentions, product information, know how, design rights, trade secrets, market opportunities and business affairs.
16.2
The Receiving Party:
16.2.1
may not use Confidential Information for a purpose other than the performance of its obligations or enforcement of its rights (including for the purposes of the dispute resolution mechanisms in this Agreement) under this Agreement or another Transaction Document to which it is a party;
16.2.2
may not disclose Confidential Information to a person except with the prior written consent of the Disclosing Party or in accordance with Clauses 16.3 and 16.4; and

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16.2.3
shall make every effort to prevent the use or disclosure of Confidential Information.
16.3
The Receiving Party may disclose Confidential Information to any of its Affiliates, directors, other officers, employees, professional advisers and sub contractors (a "Recipient") to the extent that disclosure is reasonably necessary for the purposes of this Agreement or any other Transaction Document to which it is a party.
16.4
The Receiving Party shall ensure that a Recipient is made aware of and complies with the Receiving Party's obligations of confidentiality under this Agreement as if the Recipient was a party to this Agreement.
16.5
Clauses 16.2 to 16.4 do not apply to Confidential Information which:
16.5.1
is at the date of this Agreement, or at any time after that date, becomes publicly known other than by the Receiving Party's or Recipient's breach of this Agreement;
16.5.2
can be shown by the Receiving Party to the Disclosing Party's reasonable satisfaction to have been known by the Receiving Party before disclosure by the Disclosing Party to the Receiving Party;
16.5.3
is required to be disclosed by law, by a rule of a listing authority or stock exchange to which any Receiving Party is subject or submits or by a governmental authority or other authority with relevant powers to which any Receiving Party is subject or submits, whether or not the requirement has the force of law; or
16.5.4
is disclosed to auditors of a Receiving Party, or (as applicable) a member of the XL Group, or a Buyer's Group Undertaking, or rating agencies provided that such auditors or rating agencies are made aware of the provisions of this Clause 16.
16.6
The Retrocessionaire and the Retrocedant shall comply with any confidentiality provisions contained in any of the Retroceded Policies.
17.
DATA PROTECTION
17.1
The parties acknowledge that, in connection with this Agreement, the Retrocedant may disclose to the Retrocessionaire information relating to policyholders and other individuals which is protected by the Data Protection Laws (the "Protected Information").
17.2
The Retrocessionaire shall, and shall ensure that its contractors shall, comply with the Data Protection Laws in relation to its and its contractors' processing of the Protected Information disclosed to it by the Retrocedant.
17.3
Where this Agreement requires the Retrocedant to disclose Protected Information to the Retrocessionaire, and that disclosure is regulated by a Data Protection Law of a member state of the European Economic Area, the Retrocedant may meet that requirement by disclosing that information to an establishment or agent of the Retrocessionaire within

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the European Economic Area, as nominated by the Retrocessionaire in writing from time to time. If, from time to time, the Retrocessionaire has not nominated such an establishment or agent, the Retrocedant is relieved from its obligation to disclose that information until such an establishment or agent has been nominated and the Retrocedant has had a reasonable opportunity to make the disclosure.
18.
CURRENCY
18.1
All payments and calculations under this Agreement shall be made in the currency in which the underlying business or liability is denominated.
18.2
Any amount to be converted from one currency into a second currency for the purpose of this Agreement shall be converted into an equivalent amount at the Relevant Date at the Conversion Rate prevailing at the Relevant Date.
19.
ANNOUNCEMENTS
19.1
Subject to Clauses 19.2 and 19.3, no Party shall, without the prior written consent of the other Parties, make any announcement of this Agreement, the transaction which is given effect by this Agreement, or any matter ancillary thereto.
19.2
The Parties shall act reasonably in response to a request from any other Party for permission to make any announcement of the transactions given effect by or referred to in this Agreement or any matter ancillary thereto.
19.3
The restrictions in Clause 19.1 shall not apply:
19.3.1
to an announcement, communication or disclosure that is required to be made by Applicable Law and Regulation (provided that, to the extent permitted by Applicable Law and Regulation, the Party required to make the announcement, communication or disclosure shall consult with the other Parties prior to such disclosure and use reasonable endeavours to minimise the disclosure to such information as is required by the Applicable Law and Regulation);
19.3.2
to any reference to the transaction given effect by this Agreement in a Party's financial statements or regulatory returns or in disclosures to rating agencies;
19.3.3
to disclosures reasonably required in order to enforce a Party's rights under this Agreement or another Transaction Document to which it is a party; and
19.3.4
to any reference to the transaction given effect by this Agreement (whether alone or together with, or aggregated with, other transactions) by a Party in any financial or other reports or presentations to investors provided that the identity of the Parties is not disclosed in connection with such reference without that other Party's prior written consent (not to be unreasonably withheld or delayed).

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20.
COSTS
Except where this Agreement provides otherwise, each Party shall pay its own costs relating to the negotiation, preparation, execution and implementation by it of this Agreement and of each document referred to herein.
21.
FURTHER ASSURANCE
Each Party agrees to perform (or procure the performance of) such further acts and things, and execute and deliver (or procure the execution and delivery of) such further documents, as may be required by Applicable Law and Regulation or as the other Party may reasonably require to implement and/or give effect to this Agreement and the transactions contemplated by it and for the purpose of vesting in the other Party the full benefit of this Agreement.
22.
ENTIRE AGREEMENT
22.1
This Agreement, the Transaction Documents and the Constitutional Documents of the Retrocessionaire constitute the entire agreement and understanding, and supersede any previous agreements between the Parties relating to the subject matter of this Agreement.
22.2
In the event of any conflict between the provisions of this Agreement and the provisions of any other document referred to in it, the provisions of this Agreement will prevail.
22.3
Each Party acknowledges and represents that it has not relied on or been induced to enter into this Agreement by a representation, warranty or undertaking (whether contractual or otherwise) which is not expressly set out in this Agreement.
22.4
A Party is not liable to another Party and will not have any remedy (in equity, contract or tort (including negligence) under the Misrepresentation Act 1967 or in any other way) for a representation, warranty or undertaking that is not expressly set out in this Agreement.
22.5
The Retrocedant has no duty or obligation to make, whether in anticipation of entering into this Agreement or otherwise, any disclosure, representation or warranty.
22.6
The Retrocessionaire hereby waives any remedy it might otherwise have to avoid this agreement by reason of any breach by the Retrocedant or any other person, including an agent of the Retrocedant, of the duty of utmost good faith (which does not apply to or in respect of this Agreement) or any duty or obligation to make, whether in anticipation of this Agreement or otherwise, any disclosure or representation.
22.7
The Parties agree that where the Retrocessionaire or the Company breaches any provision of this Agreement, then damages may not be a sufficient remedy and the Retrocedant shall be entitled to seek such legal or equitable remedies or relief as are available to it, including injunctive relief (whether interim or final) and specific performance. Further, the Retrocessionaire and the Company agree that if the Retrocedant brings an action seeking an equitable remedy to enforce the provisions of Clauses 12 of this Agreement, neither of them will oppose the granting of such remedy, whether on the ground that there is or are suitable alternative remedy(ies) or otherwise.

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22.8
This Clause 22 shall not exclude any liability for, or remedy in respect of, fraud.
23.
WAIVERS
23.1
Except where this Agreement provides otherwise, no failure or delay by any Party in exercising any right or remedy provided by Applicable Law and Regulation under or pursuant to this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of any such right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.
23.2
Except where this Agreement provides otherwise the rights and remedies contained in this Agreement are cumulative and not exclusive of rights or remedies provided by law.
24.
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Save for the persons referred to in Part E of Schedule 4, a person who is not a Party to this Agreement shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms.
25.
SEVERABILITY
If any provision of this Agreement is held to be invalid or unenforceable, then such provision shall (so far as it is invalid or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The Parties shall then use their reasonable endeavours to replace the invalid or unenforceable provision by a valid and enforceable provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision thereby replaced.
26.
VARIATION
26.1
No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Parties. The expression "variation" shall include any variation, supplement, deletion or replacement however effected.
26.2
Unless expressly agreed in writing by the Parties, no variation shall constitute a general waiver of any provisions of this Agreement, nor shall it affect any rights, obligations or liabilities under or pursuant to this Agreement which have already accrued up to the date of variation, and the rights and obligations of the Parties under or pursuant to this Agreement shall remain in full force and effect, except and only to the extent that they are so varied.
27.
ASSIGNMENT AND SUBCONTRACTING
Other than in accordance with Clause 10.1.3, a Party may not novate, assign, transfer or create any trust in respect of, or purport to novate, assign, transfer or create any trust in respect of a right or obligation under this Agreement without having first obtained the other Party's written consent or in the case of the Retrocedant, without having first obtained the written consent of the Company only.

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28.
NOTICES
28.1
Save in relation to Schedule 4, in relation to which the provisions of Part D of Schedule 4 shall apply, a notice or other communication under or in connection with this Agreement (a "Notice") shall be:
28.1.1
in writing;
28.1.2
in the English language; and
28.1.3
delivered personally or sent by first class post prepaid recorded delivery (and air mail if overseas) to the Party due to receive the Notice to the address set out in Clause 28.3 or to an alternative address or person specified by that Party by not less than seven days' written notice to the other party received before the Notice was despatched.
28.2
Unless there is evidence that it was received earlier, a Notice is deemed given if:
28.2.1
delivered personally, when left at the address referred to in Clause 28.3;
28.2.2
sent by mail, except air mail, 2 Business Days after posting it; and
28.2.3
sent by air mail, 6 Business Days after posting it.
28.3
The address referred to in Clause 28.1 is:
Name of Party
Address
Marked for the attention of
Retrocedant
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

General Counsel
Retrocessionaire
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

Company Secretary
Company
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

Company Secretary
29.
GOVERNING LAW
This Agreement and any dispute, controversy or claim arising out of or relating to this Agreement shall be governed by English law save only in respect to Segregated Account Matters which shall be governed by Bermuda law.

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30.
EXPERT RESOLUTION
30.1
Where, pursuant to Clauses 5.4, 8.13.1, 11.3 or Part C of Schedule 4 of this Agreement a dispute is referred for Expert determination, the provisions of this Clause 30 shall apply. The Expert shall be an independent actuary appointed in accordance with this Clause 30 (the "Expert"). The Expert shall be jointly appointed by the Actuaries or, failing agreement on such appointment, the President for the time being of the UK Institute and Faculty of Actuaries) for resolution.
30.2
In performing his obligations under Clause 30.1, the Expert shall act in good faith and give due weight to the objects of this Agreement. The Expert shall act as an expert and not an arbitrator and his decision shall (in the absence of manifest error) be final and binding on the Parties.
30.3
Each Party shall upon request provide the Expert with such information as is within its possession or control and reasonably required by the Expert save if to do so would breach any Applicable Law and Regulation.
30.4
The Expert shall deliver a final and binding award within 40 Business Days of the date of his appointment.
30.5
The Parties expressly waive, to the extent permitted by law, any rights of recourse to the courts they may otherwise have to challenge the Expert's determination, other than in the case of manifest error.
30.6
The cost of the Expert shall be borne between the Retrocedant and the Retrocessionaire in such proportions as shall be determined by the Expert.
30.7
If a dispute arises under this Agreement in relation to an issue which has been raised but not yet determined under either of the other XL Retrocession Agreements, the Parties agree that such dispute hereunder will be joined to and conducted together with the dispute under such other XL Retrocession Agreement and any agreement or determination so made shall be binding on all Parties to this Agreement. A Party shall not be obliged to comply with this Clause 30.7 where such Party determines, acting reasonably, that due to differences in the Applicable Law and Regulation under this Agreement and the “Applicable Law and Regulation” under another XL Retrocession Agreement, complying with this Clause 30.7 would be illegal, invalid or unlawful. This Clause 30.7 shall cease to apply in respect of any XL Retrocession Agreement on termination of that XL Retrocession Agreement.
31.
JURISDICTION
31.1
Subject to Clause 30, the courts of England have exclusive jurisdiction to settle any dispute arising from or connected with this Agreement (a "Dispute") including a dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity.
31.2
The Parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary.

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31.3
Subject to Clause 32, the Parties agree that the documents which start any proceedings relating to a Dispute ("Proceedings") and any other documents required to be served in relation to those Proceedings may be served on a Party in accordance with Clause 28. These documents may, however, be served in any other manner allowed by law. This Clause 31.3 applies to all Proceedings wherever started.
32.
PROCESS AGENT
32.1
Each party which is not a company incorporated in England and Wales shall at all times maintain an agent for service of process in England. The Retrocessionaire and the Company irrevocably appoint GreyCastle Services Limited whose registered office is at 20-22 Bedford Row, London WC1R 4JS, England and the Retrocedant irrevocably appoint XL Services UK Limited at its registered office from time to time (the "Process Agent") as their agent for such purpose.
32.2
Without prejudice to any other permitted mode of service, each Party agrees that service of any claim form, notice or other document for the purpose of any Proceedings begun in England shall be duly served upon it if served on the Process Agent appointed by it in any manner permitted by the Civil Procedure Rules, whether or not it is forwarded to the Party.
32.3
If for any reason the Process Agent appointed by any Party at any time ceases to act as such, the Party shall promptly appoint another such agent and promptly notify the other parties of the appointment and the new Process Agent's name and address. If the Party concerned does not make such an appointment within 7 Business Days of such cessation, then any other Party may do so on its behalf and shall notify the other Parties if it does so.
33.
DELAYS, ERRORS AND OMISSIONS
Any inadvertent delay or error, in complying or omission to comply with the terms and conditions of this Agreement by one Party will not relieve any other party hereto from any obligation which would attach to it hereunder if such error, omission or delay had not been made, except to the extent that the obligation cannot be performed by reason of the delay error or omission, provided such error, omission or delay is rectified promptly upon discovery (and at the expense of the Party that delays, errs or omits to act) . Nothing contained in this Clause shall be held to impose obligations on any Party greater than would have attached hereunder had such error or omission not occurred.
34.
COUNTERPARTS
This Agreement may be executed in any number of counterparts and by the Parties to it on separate counterparts, each of which is an original and all of which together evidence the same agreement.

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RETROCESSION AGREEMENT BETWEEN
XL RE LTD AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE


Executed by the Parties

 
 
 
 
/s/ Mark Twite
Signed by
)
XL Re Ltd
)
 
 
 Signature




 

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RETROCESSION AGREEMENT BETWEEN
XL RE LTD AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE





 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
(in respect of its segregated account XL-1)
)
 
 
 Signature



- 42 -

 





RETROCESSION AGREEMENT BETWEEN
XL RE LTD AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE






 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
 
 
 Signature
 
 
 





- 43 -

Exhibit 10.3 Retrocession Agreement - XL Re Europe SE
Exhibit 10.3


 
EXECUTION VERSION
 
 
 
 
XL RE EUROPE SE
AND
XL LIFE REINSURANCE (SAC) LTD. (FOR ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
 
RETROCESSION AGREEMENT
 








CONTENTS
Clause
Page
1.    Interpretation
1
2.    Insuring Clause
14
3.    Retrocession Premium
15
4.    Time on Risk Adjustment
15
5.    Effective Date and Termination
16
6.    Reporting Information
19
7.    Funds-Withheld Accounts
19
8.    Collateral Obligations
20
9.    Audit Rights
22
10.    Undertakings
22
11.    Agreed Capital and Dividends
24
12.    Negative Pledge
25
13.    Segregated Accounts
25
14.    Retrocessionaire Capital Account
26
15.    Set-Off
27
16.    Confidentiality
27
17.    Data Protection
28
18.    Currency
28
19.    Announcements
29
20.    Costs
29
21.    Further Assurance
29
22.    Entire Agreement
29
23.    Waivers
30
24.    Contracts (Rights of Third Parties) Act 1999
31
25.    Severability
31




26.    Variation
31
27.    Assignment and Subcontracting
31
28.    Notices
31
29.    Governing Law
32
30.    Expert Resolution
32
31.    Jurisdiction
33
32.    Process Agent
33
33.    Delays, Errors and Omissions
33
34.    Counterparts
33
 
 
Schedule 1 Retroceded Policies
 
Part A
 
Part B non SPA business
 
Schedule 2 Client Account Reporting Information
 
Part A Client Account Report Information
 
Part B Relevant Account Report Information
 
Part C Client Account Report Format
 
Schedule 3 Agreed Capital Level
 
Schedule 4 Investment Management Arrangements
 
Part A Management of Retrocedant Assets
 
Part B Management of Retrocessionaire’s assets
 
Part C Disputes
 
Part D Delivery of Reports and Notices
 
Part E Liability of XL GIL and the XL Retrocedants
 
Schedule 5 Initial Funds-Withheld Portfolio
 
 
 
 
 




 
 
Agreed Form Documents
 
1.          Intentionally left blank
 
2.    Intentionally left blank
 
3.    SIMA(s)
 
4.    Retrocedant Guidelines
 
5.    Participation Agreement
 
6.    Retrocessionaire Guidelines
 
7.    Deed of Charge
 
8.    Investment Management Governance and Operating Framework
 















THIS AGREEMENT is made on 30 May 2014
BETWEEN:
(1)
XL Re Europe SE, formerly known as, inter alia, XL Re Europe Limited, a European company formed under Council Regulation (EC) No. 2157/2001 of 8 October 2001 (registered no. 423311) whose registered office is at 8 St Stephen's Green, Dublin 2, Ireland (the "Retrocedant");
(2)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda (the "Company"); and
(3)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda acting in respect of its segregated account XL‑1 (the "Retrocessionaire"),
each a "Party" and together "the Parties".
INTRODUCTION:
(A)
The Company is incorporated in Bermuda as a segregated accounts company pursuant to the SAC Act (as defined below), licensed as a Class C insurer pursuant to the Insurance Act (as defined below) and has established the Retrocessionaire for the purpose of reinsuring the Retroceded Policies.
(B)
The Retrocedant has agreed that the Retrocessionaire will reassure it in respect of the Retroceded Policies.
(C)
The Parties wish to record the terms of the above agreement in this Agreement.
The Parties agree as follows:
1.
INTERPRETATION
"Account Date" means 1 January 2014 and thereafter each 1 April, 1 July, 1 October and 1 January in each year and the last "Account Date" shall be the first such date falling after the last Reporting Date;
"Actuary" means the Retrocedant's Actuary and/or the Retrocessionaire's Actuary (as the context requires);
"Administration Services Agreement" means the services agreement to be entered into between the Service Provider and XL Services UK Limited, the Retrocedant (acting through its UK branch) and XL Re Ltd (acting through its UK branch) providing for the transfer of certain resources from the XL Group to the Service Provider and the provision of certain administration services for the benefit of the XL Retrocedants;
"Affiliate" means with respect to any person, at the time in question, any other person controlling, controlled by or under direct or indirect common control with such person. For this purpose "control" means the power to direct or cause the direction of the management or policies of a person through the ownership of securities, by contract or otherwise and the terms "controlling" and "controlled" shall be construed accordingly;

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"Agreed Capital Level" means as at a Relevant Date, the amount determined in accordance with the provisions of Schedule 3;
"Applicable Law and Regulation" means, at any time, and in respect of a Party, any and all of the following as applicable to that Party and in force at that time:
(a)
legislation (including enactments, statutes, statutory instruments, treaties, regulations, orders, directives, by-laws and decrees) and common law, in each case applicable to the relevant Party from time to time in the context of the performance of its obligations under the Agreement or enjoyment of its rights under this Agreement;
(b)
binding regulatory rules and binding codes of conduct, directions, rules and guidance issued by, in the case of the Retrocedant, the Irish Regulator and the UK Regulators and, in the case of the Retrocessionaire and the Company, the BMA (or any rules from time to time in force which replace such rules), such rules and guidance as reasonably interpreted by a Party in accordance with any specific advice or individual guidance provided to that Party by the relevant regulator in respect of that rule (a "Regulatory Requirement"); and
(c)
judgments, resolutions, decisions, orders, directions, notices, demands or other requirements of a competent court, tribunal or the Irish Regulator or the UK Regulators in the case of the Retrocedant and the BMA in the case of the Company and the Retrocessionaire;
"Balance" means for the purposes of calculating a Call Amount or Return Amount the balance standing to the credit of the Funds-Withheld Account valued in accordance with the Valuation Basis, which shall be deemed to be increased by the amount of $5.0m, but only until such time as any amount due to the Retrocedant or the Retrocessionaire pursuant to Clause 4.2.1 or 4.2.2, as applicable, is paid; provided, however, that in no event shall the Balance take into account any assets deposited in or credited to such Funds-Withheld Account by the Retrocedant or on its behalf by a member of the XL Group as contemplated by Clause 7.7;
"BMA" means the Bermuda Monetary Authority;
"Board Resolution" means the resolution approved by the Board on 25 April 2014 pursuant to which the Retrocessionaire was created;
"Buffer Percentage" means 1%;
"Business" means the Retroceded Policies identified in Part A of Schedule 1;
"Business Day" means any day other than a Saturday or Sunday or public or bank holiday in England and Bermuda;
"Buyer's Group Undertaking" means Holdco or a company which is, at any time on or after the date of this Agreement, a subsidiary or holding company of Holdco or a subsidiary of a holding company of Holdco and includes the Company after the date of completion of the sale of the Company to Holdco pursuant to the Sale and Purchase Agreement;
"Call Amount" means the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is less than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;

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"Call Amount Default" means, with respect to any Funds-Withheld Account, the failure by the Retrocessionaire to pay any Call Amount with respect to such Funds-Withheld Account on or prior to the Due Date therefor in accordance with the terms of this Agreement and such Call Amount Default shall be deemed to continue until such time as the Call Amount due in respect of such Funds-Withheld Account (as adjusted as of any Valuation Date), together with all interest accrued thereon in accordance with Clause 8.10, is paid by the Retrocessionaire to the Retrocedant;
"Call Amount Default Period" means the period commencing as of the Business Day immediately following the occurrence of either a Call Amount Default as defined in this Agreement or a "Call Amount Default" as defined in either of the other XL Retrocession Agreements and shall continue until such time as no Call Amount Default under this Agreement nor any "Call Amount Default" as defined in either of the other XL Retrocession Agreements is continuing;
"Call Notice" has the meaning given to it in Clause 8.4;
"Capital Notice" has the meaning given to it in Clause 11.2;
"Capital Notice Challenge" has the meaning given to it in Clause 11.3;
"Capital Requirements" means the regulatory capital requirements of the Company and/or the Retrocessionaire calculated in accordance with the Insurance Act;
"Centre of Main Interest" has the meaning given to it in the EC Council Regulation of 29 May 2000 on insolvency proceedings (1346/2000/EC);
"Change of Control" means the occurrence of an event following the completion of the sale of the Company and the Retrocessionaire to Holdco pursuant to the Sale and Purchase Agreement whereby:
(a)
Holdco or the Investors, in aggregate, ceases to legally and beneficially own 100% of the issued and outstanding ordinary shares of capital stock of the Company or any such shares become subject to any encumbrance that is not removed within 30 days;
(b)
Holdco ceases to be the sole beneficial owner of the Retrocessionaire or any such beneficial interest become subject to any encumbrance;
(c)
the Company or the Retrocessionaire amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person any right to acquire any securities of the Company or the Retrocessionaire;
(d)
the Retrocessionaire transfers, including by way of reinsurance, all or substantially all of its business, liabilities or assets;
(e)
Holdco amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person other than the Investors any right to acquire any securities of Holdco; or
(f)
any Investor sells, disposes of or transfers any of its interest in Holdco other than pursuant to a transfer permitted by the Investor Support and Undertakings Agreement;
"Client Account Report" means the report in the form set out in Schedule 2 Part C to be delivered pursuant to Clause 6.1, reflecting the Client Account Report Information in respect of each Retroceded Policy;

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"Client Account Report Information" means the information specified in Part A of Schedule 2, to be provided by the Retrocedant in respect of each Retroceded Policy and reflected in the Client Account Report;
"Client Account Reporting Period" means a period of one Quarter;
"Closing Excess Assets" means $35m at the date of this Agreement, reducing by $7m on each of the first five anniversaries of this Agreement;
"Collateral Amount" means the sum of: (i) the aggregate Value of the Funds-Withheld Reserves as at the Relevant Date; and (ii) an amount as at the Relevant Date equal to the Funds-Withheld Reserves multiplied by the Buffer Percentage;
"Collateral Fee" means an interest rate equal to the 5-year U.S. treasury bond rate plus 700 basis points;
"Collateral Fee Payment Date" has the meaning given to it in Clause 8.9;
"Collateral Fee PIK Amount" means, as of any date, the amount of any Collateral Fees added to the Collateral Fee PIK Amount pursuant to Clause 8.9, less the amount of any Collateral Fee PIK Amounts repaid by the Retrocessionaire pursuant to Clause 8.9;
"Constitutional Documents" means the following documents:
(a)
the memorandum of association of the Company;
(b)
the bye-laws of the Company; and
(c)
the Participation Agreement;
"Conversion Rate" means, in respect of any amount to be converted from one currency into a second currency, the relevant rate used by the Retrocedant in the preparation of its accounts will be treated as the prevailing rate as at the Relevant Date;
"Costs" means all losses, liabilities, costs (including legal costs and experts' and consultants' fees), charges, expenses, actions, proceedings, claims and demands;
"Cross-Agreement Recapture Event" means an event which gives rise to the obligation to pay a Recapture Amount (as defined in each of the XL Retrocession Agreements respectively) under more than one of the XL Retrocession Agreements;
"Currency Block" means, in respect of the Retrocedant, all Retroceded Policies ceded to this Agreement by the Retrocedant that are denominated in a particular currency;
"Custodian" means such authorised person serving from time to time as the custodian of the Funds-Withheld Accounts;
"Data Protection Laws" means, in relation to a Party, the laws and regulations applicable to that Party regulating data protection, data privacy and/or the protection of personal and/or sensitive information, including, where applicable: the relevant principles of the Insurance Code of Conduct issued by the Bermuda Monetary Authority in February 2010 relating to the safeguard of sensitive information and the requirements for appropriate risk management procedures relating to the same; and laws implementing EU Directive 95/46/EC (including for example the UK Data Protection 1998);

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"Deed of Charge" means the Bermuda law governed fixed and floating charge entered into on the same date as this Agreement between (1) the Retrocessionaire; (2) the Retrocedant; (3) XL Re and (4) XL Re (UK);
"Difference" means the amount (whether positive or negative) determined by the sum of: (i) the Recapture Amount determined by the Retrocedant's Actuary; less (ii) the Recapture Amount determined by the Expert pursuant to Clause 30;
"Dispute" has the meaning given to it in Clause 31.1;
"Distribution" means every description of dividend or distribution of the Retrocessionaire's assets to its beneficial owner(s) whether in cash or otherwise;
"Due" has the meaning given under section 4.90(4) of the Insolvency Rules 1986;
"Due Date" has the meaning given to it in Clause 8.10;
"Effective Date" means 1 January 2014;
"Event of Default" means any event or circumstance referred to in Clause 5.2;
"Expert" has the meaning given to it in Clause 30.1;
"External Retrocession Agreements" means the following agreements:
(a)
a retrocession agreement between the Retrocedant and La Reassurance InterContinentale "Emeraude" dated 20 March 1981 with reference number 129639; and
(b)
a retrocession agreement between the Retrocedant and Rhin Re dated 1 September 1994 with reference number 129653,
"Funds-Withheld Accounts" means the cash and securities accounts established by the Retrocedant in relation to the Business, for the purposes of this Agreement;
"Funds-Withheld Assets" means the assets from time to time deposited in or otherwise standing to the credit of the Funds-Withheld Accounts;
"Funds-Withheld Reserves" means in respect of the Retroceded Policies relating to the Business identified:
(a)
with a reserve basis "B" in Schedule 1, an amount as at the Relevant Date, equal to 110% of the amount of the reserves calculated in accordance with the methodology the Retrocedant reflects in the XL Group financial reports in accordance with US GAAP (or such other accounting principles, practices or standards as may succeed US GAAP); or
(b)
with a reserve basis "C" in Schedule 1, an amount as at the Relevant Date, equal to 100% of the reserves calculated in accordance with the methodology the Retrocedant reflects in its annual return to the Irish Regulator;
"Guidance Notes" means the guidance notes issued by the Insurance Department of the BMA, as amended or supplemented from time to time;

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"Holdco" means GreyCastle Holdings Ltd, a company incorporated under the laws of Bermuda whose registered office is at Clarendon House, 2 Church Street, Hamilton, Bermuda;
"In-Force" means, in respect of any reassurance or retrocession treaty or agreement, such treaty or agreement if, and only if, the Retrocedant has any liability or potential liability under it;
"Initial Funds-Withheld Portfolio" means the cash and investment assets set out in Schedule 5.
"Insolvency Event" means, in respect of the Company, the Retrocessionaire or Holdco (unless otherwise specified below):
(a)
that person is or becomes insolvent, it is, or becomes, unable, or admits its inability to pay, its debts as they fall due, suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors (or any class of them) with a view to rescheduling any of its indebtedness;
(b)
the value of the assets of that person is or becomes less than its liabilities (taking into account contingent and prospective liabilities), in each case calculated and determined on the basis of, and by reference to either the relevant regulatory returns or the relevant accounts;
(c)
a moratorium is declared in respect of that person’s indebtedness;
(d)
any corporate action, regulatory action, legal proceedings, or other procedure or step is taken for:
(i)
the suspension of payments by, or a moratorium of any indebtedness, winding-up (including a petition for winding up presented against the Company by the BMA pursuant to Section 35 of the Insurance Act), dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise, but in each case other than a voluntary and solvent liquidation, or a reorganisation, for the purposes of reconstruction or amalgamation) of, that person;
(ii)
a composition, compromise, assignment or arrangement with one or more of that person’s creditors or any class of them;
(iii)
the appointment of a liquidator, receiver, administrative receiver, administrator, examiner, trustee in bankruptcy, compulsory manager or other similar officer in respect of all or substantially all of that person’s assets (including, in the case of the Retrocessionaire, the appointment of a receiver over its business and assets in accordance with the provisions of the SAC Act); or
(iv)
enforcement of any security over all or a substantial part of that person’s assets, and
where such corporate action, legal proceedings or other procedure or step is taken by any third party other than that person and its directors, the action, proceedings, procedure or step (as the case may be) is not discharged, stayed or dismissed within fifteen (15) days;
(e)
an encumbrancer takes possession of the whole or any substantial part of the assets of that person or distress or execution is levied or enforced upon or sued out against

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the whole or any substantial part of that person's assets and, in the case of any of the foregoing events, the matter is not discharged, stayed or dismissed within fifteen (15) days;
(f)
any matter, or the occurrence of any event, in any jurisdiction which corresponds with, or has an effect equivalent to, or is otherwise analogous to, any of the matters or events referred to at any of (a) to (e) (in each case inclusive) above; or
(g)
the Retrocessionaire or the Company ceases or suspends or threatens to cease or suspend all or a material part of its operations or business for a period of more than 20 Business Days;
"Insurance Act" means the Insurance Act 1978 (as amended) of Bermuda and its related regulations;
"Interests" means all rights and obligations of a Non-Lead Investor in connection with its direct or indirect investment in the Retrocessionaire and its obligations in respect of Investor Capital Calls, including its obligations set out in the Investor Support and Undertakings Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement);
"Investment Management Costs" means any Costs consisting of: (i) investment management fees and other costs or expenses of any XL External Managers, (ii) costs or expenses of any Custodians, and (iii) costs and expenses of third-party accountants, in each case that are suffered or incurred by the Retrocedant or XLGIL in connection with the operation of the Funds-Withheld Accounts, in the case of clause (iii) not to exceed three basis points of the assets under management in the Funds-Withheld Accounts per annum and, in each such case, including, without limitation, (x) any costs and expenses incurred in terminating or appointing any XL External Managers or Custodians, and (y) any withholding payments, taxes, fees, duties, levies and contributions or charges in the nature of a tax (whether supranational, domestic or foreign) on or associated with any of the foregoing amounts (including, without limitation, VAT and any E.U. "financial transactions tax" or similar taxes), and any penalty or interest connected therewith. In addition, following a Retrocessionaire Change of Authority, Investment Management Costs shall also include all of the foregoing types of Costs suffered or incurred by the Retrocedant or XLGIL in managing the assets of the Retrocessionaire, as well as any: (i) investment management fees and other costs or expenses of any Retrocessionaire Managers (including any costs and expenses incurred in terminating or appointing any Retrocessionaire Managers), (ii) third party costs and expenses incurred by XLGIL in connection with the management of the assets of the Retrocessionaire, and (iii) XLGIL’s internal costs and expenses incurred in connection therewith (including the cost of the time expended by personnel of XLGIL with respect to any such activities).
"Investment Management Governance and Operating Framework" means the governance framework in the agreed form in relation to investment management to be adopted by the Retrocessionaire;
"Investor Capital Calls" means the mandatory commitments imposed on the Investors under the Sale and Purchase Agreement, the Investor Support and Undertaking Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement), requiring them to contribute cash to the Retrocessionaire upon the terms and conditions set forth therein;
"Investor Contingent Capital Commitment Letter" has the meaning given in the Sale and Purchase Agreement;

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"Investor Support and Undertakings Agreement" means the agreement between the XL Retrocedants, the Retrocessionaire, the Company, Holdco and the Investors dated on or about 30 May 2014;
"Investors" means all holders of share capital from time to time in Holdco;
"Irish Regulator" means the Central Bank of Ireland and any successor(s) thereto which has responsibility for regulating the business of insurers;
"Lead Investors" means the Investors so identified in the Investor Support and Undertakings Agreement and such other person who from time to time acquires the rights and/or obligations of such persons, whether by assignment, novation, operation of law or otherwise;
"Losses" means, without limiting in any way the provisions of Clause 2.4, the gross amount of any:
(a)
liability for losses, claims, payments, other Costs made and/or incurred and settlements under or in respect of the Retroceded Policies and risks ceded and attaching to the Retroceded Policies, including ex-gratia payments, "without prejudice" payments, extra contractual payments arising under a Retroceded Policy, punitive settlements and interest payments;
(b)
liability for payments to Underlying Cedants in consequence of recapture, novation or termination of Retroceded Policies, premium rebates, returns (including in respect of errors in calculations performed by an Underlying Cedant prior to the Effective Date), refunds, surrender payments, commissions, brokerage, and profit share payments in respect of the Retroceded Policies;
(c)
regulatory levies (including to the extent applicable levies under the United Kingdom Financial Services Compensation Scheme), but not fines, penalties or other financial sanctions, to the extent referable to the Retroceded Policies;
(d)
any Costs relating to any disputes with Underlying Cedants in respect of a Retroceded Policy;
(e)
any Costs associated with complying with a periodic payment order relating to a Retroceded Policy;
(f)
any Costs, including interest payable, in respect of the late payment of amounts owed under a Retroceded Policy;
(g)
allocated external loss adjustment expenses in respect of the Retroceded Policies;
(h)
liability for premiums payable under any External Retrocession Agreements; and
(i)
any other Costs relating to the Retrocedant's obligations as reinsurer under the Retroceded Policies which is suffered or incurred by the Retrocedant and which is not otherwise excluded under this Agreement,
and includes, for the avoidance of doubt, any irrecoverable VAT component of the losses in (d) above;
"Maximum Investor Capital Call Amount" means as of any date the aggregate maximum amounts under all Investor Contingent Capital Commitment Letters;
"Net Retained Losses" means the Losses of the Retrocedant net of any amounts actually recovered by the Retrocedant in respect of those Losses under any External Retrocession Agreement;

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"Non-Lead Investor" means any Investor other than a Lead Investor;
"Notice of Challenge" has the meaning given to it in Clause 8.13;
"Participation Agreement" means the agreement between the Company, the Retrocessionaire and the XL Retrocedants establishing a participation interest in the Retrocessionaire in favour of the XL Retrocedants, dated on or about the date of this Agreement;
"Period of Risk" means the period commencing on the Effective Date and ending on the earlier of: (a) the date on which the last of the Retroceded Policies ceases to be In-Force; or (b) the date on which the Retroceded Policies are recaptured in accordance with Clause 5;
"Permitted Assets" means assets permitted to be held under the Retrocedant Guidelines;
"Potential Event of Default" means any event or circumstance which might reasonably be expected to become an Event of Default;
"Premium" has the meaning given to it in Clause 3.1;
"Proceedings" has the meaning given to it in Clause 31.3;
"Process Agent" has the meaning given to it in Clause 32.1;
"Quarter" means a calendar quarter ending on one of 31 March, 30 June, 30 September or 31 December in any relevant year;
"Recapture Agreement Period" has the meaning given to it in Clause 5.4;
"Recapture Amount" means the sum of:
(a)
an amount equal to the Reserves in respect of the recaptured Retroceded Policies, calculated as at the relevant Valuation Date; less
(b)
an amount equal to the aggregate Value as at the relevant Valuation Date, of the assets deposited in or otherwise standing to the credit of all of the Funds-Withheld Accounts, subject to Clause 5.7;
"Reinsured Event" means any and all risks reinsured by the Retrocedant pursuant to the Retroceded Policies;
"Relevant Account Information" means the information in Part B of Schedule 2 to be provided by the Retrocedant in respect of each Funds-Withheld Account and to be reflected in the Relevant Account Report;
"Relevant Account Period" means each period from and including an Account Date to, but excluding, the next following Account Date, save that on termination of this Agreement the last Relevant Account Period shall be from and including the Account Date falling in the immediately preceding Relevant Account Period to, but excluding, the date of termination;
"Relevant Account Report" means the report in the form to be agreed to be delivered pursuant to Clause 6.2, reflecting the Relevant Account Information in respect of each Funds-Withheld Account;
"Relevant Agreement" has the meaning given to it in Clause 5.8.2;

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"Relevant Date" means for the purpose of any calculation or the determination of any right or liability, the date as at which such calculation is to be carried out or as at which such right or liability is to be determined as specified in this Agreement or, if such day is not a Business Day, the Business Day immediately preceding such day;
"Reporting Date" means the 10th Business Day of each Quarter and the last "Reporting Date" shall be the first such date falling after termination of this Agreement;
"Reserves" means the provisions the Retrocedant is or would be required to make to cover its reinsurance liabilities arising under or in connection with its obligations in respect of the Retroceded Policies following recapture pursuant to Clause 5.3 of the business ceded to the Retrocessionaire, calculated in accordance with Applicable Law and Regulation applying to reinsurers in Ireland;
"Retrocedant Guidelines" means the investment guidelines in the agreed form in relation to the management of the Funds‑Withheld Assets, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Retrocedant's Actuary" means the person appointed by the Retrocedant from time to time to perform the function referred to in 4.3.13R of the Supervision Manual of the Relevant Regulator Handbook of Rules and Guidance;
"Retroceded Policies" means, at any time, such of the reassurance and retrocession treaties and agreements listed in Part A of Schedule 1 as are In-Force at that time;
"Retrocessionaire Capital Account" means the account established pursuant to Clause 14;
"Retrocessionaire Capital Account Assets" means the assets from time to time credited to the Retrocessionaire Capital Account;
“Retrocessionaire Change of Authority” has the meaning given to it in Clause 5.9;
"Retrocessionaire Guidelines" means the investment guidelines in relation to the management of the assets of the Retrocessionaire, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Retrocessionaire IMA(s)" means the investment management agreement(s) entered into from time to time between the Retrocessionaire and one or more Retrocessionaire Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the assets of the Retrocessionaire may be managed on behalf of the Retrocessionaire in accordance with the Retrocessionaire Guidelines, in a form meeting the requirements of the provisions of Schedule 4;
"Retrocessionaire Manager" means any investment manager appointed by the Retrocessionaire in accordance with the provisions of Schedule 4 to manage its assets;
"Retrocessionaire Uncured Breach" has the meaning given to it in paragraph 2.1.1 of Part B of Schedule 4;
"Retrocessionaire's Actuary" means the person appointed from time to time by the Retrocessionaire to perform the function referred to in section 26 of the Bermuda Insurance Act 1978 and the Guidance Note #9;
"Return Amount" means the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is more than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;

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"Return Notice" has the meaning given to it in Clause 8.4;
"SAC Act" means the Segregated Accounts Companies Act 2000 (as amended) of Bermuda;
"Sale and Purchase Agreement" means the agreement between Holdco as "Purchaser" and XL Insurance (Bermuda) Limited as "Seller", dated 1 May 2014;
"Security" means any mortgage, charge (whether fixed or floating, legal or equitable) pledge, lien, assigned by way of security or other security interest securing any obligation of any person.
"Security Agreements" has the meaning given to it in the other XL Retrocession Agreements;
"Segregated Account Matters" means any dispute, controversy or claim arising out of or relating to (i) the validity and effectiveness of the establishment and operation of the Company and/or the Retrocessionaire under the SAC Act (ii) the application or interpretation of the SAC Act, or (iii) compliance with or the interpretation or effect of Clause 13 (Segregated Accounts) of this Agreement.
"Service Provider" means GreyCastle Services Limited, a company incorporated under the laws of England and Wales (registered no. 09019536), whose registered office is at 20‑22 Bedford Row, London, WC1R 4JS;
"SIMA" means one or more sub-investment management agreements entered into from time to time between XL GIL acting on behalf of the Retrocedant, the Retrocessionaire and one or more XL External Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the Funds-Withheld Assets may be managed on behalf of the Retrocedant in accordance with the Retrocedant Guidelines, in the agreed form, as revised from time to time in accordance with the provisions of Schedule 4;
"SPA Retrocedant Guidelines" has the meaning given to it in the other XL Retrocession Agreements;
"Transaction Documents" means together this Agreement, the Administration Services Agreement, the SIMA(s), the Security Agreements, the Floating Charge, the Retrocedant Guidelines, the SPA Retrocedant Guidelines, the Retrocessionaire IMA(s), the other XL Retrocession Agreements, the Investor Support and Undertakings Agreement, the Constitutional Documents, the Transitional Services Agreement and the Retrocessionaire Guidelines;
"Transitional Services Agreement" has the meaning given in the Sale and Purchase Agreement;
"Trigger Event Date" has the meaning given in the Investor Support and Undertakings Agreement;
"UK Regulators" means the Prudential Regulation Authority and the Financial Conduct Authority and any successors thereto;
"Uncured Breach" has the meaning given to it in paragraph 2.3.1 of Part A of Schedule 4;
"Underlying Cedants" means the persons identified in the column headed "Underlying Cedant" in the table in Schedule 1;
"USD" or "$" means the lawful currency of the United States of America;
"Valuation Basis" means the actuarial principles disclosed from time to time to the Retrocessionaire and the Retrocessionaire's Actuary and used by the Retrocedant as at the Relevant Date to value the assets backing the Funds-Withheld Reserves which the Retrocedant is required to maintain for regulatory purposes;

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"Valuation Date" means:
(a)
Left intentionally blank
(b)
for the purpose of Clause 4.2, the date of this Agreement; or
(c)
in respect of the calculation of the Recapture Amount the date of termination of this Agreement; or
(d)
when determining if a Call Amount or a Return Amount exists in respect of a Funds-Withheld Account, the last Business Day of June and December in each year;
"Value" means the value of any assets deposited in or otherwise standing to the credit of a Funds-Withheld Account as at the Relevant Date calculated on the relevant Valuation Basis;
"Working Capital Assets" means all cash or other liquid assets of the Retrocessionaire (excluding amounts due to it from the Retrocedant pursuant to Clause 3);
"XL External Manager" means any investment manager appointed by the Retrocedant to manage the Funds-Withheld Assets in accordance with the provisions of Schedule 4;
"XL GIL" means XL Group Investments Ltd, a company incorporated in Bermuda (registered no. EC29781) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, or an Affiliate or successor entity thereof;
"XL Group" means the Retrocedant and any company which is, on or at any time after the date of this Agreement, a subsidiary or holding company of the Retrocedant, or a subsidiary of a holding company of the Retrocedant;
"XL Life" means XL Life Ltd, a company incorporated under the laws of Bermuda (registered no. EC24082) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda;
"XL Re" means XL Re Ltd, a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda;
"XL Re (UK)" means a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered office is at One Bermudiana Road, Hamilton HM 11, Bermuda, acting through its UK branch registered in England and Wales whose registered branch address is at XL House, 70 Gracechurch Street, London EC3V 0XL, England;
"XL Retrocedants" means the Retrocedant, XL Re and XL Re (UK);
"XL Retrocession Agreements" means together, this Agreement, the XL Re Retrocession Agreement and the XL Re (UK) Retrocession Agreement;
"XL Re Retrocession Agreement" means the retrocession agreement between XL Re, the Company and the Retrocessionaire dated the same date as this Agreement;
"XL Re (UK) Retrocession Agreement" means the retrocession agreement between XL Re (UK), the Company and the Retrocessionaire dated the same date as this Agreement; and

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"XL Services UK Limited" a company incorporated under the laws of England and Wales (registered no. 02816304), whose registered office is at XL House, 70 Gracechurch Street, London EC3V 0XL, England.
1.1
In this Agreement, a reference to:
1.1.1
a "holding company" or "subsidiary" shall have the meaning given in Section 86 of the Bermuda Companies Act 1981 as enacted and amended from time to time. A subsidiary and a subsidiary undertaking shall include any person the shares or ownership interests in which are subject to security and where the legal title to the shares or ownership interests so secured are registered in the name of the secured party or its nominee pursuant to such security;
1.1.2
liability under, pursuant to or arising out of (or any analogous expression) any agreement, contract, deed or other instrument includes a reference to contingent liability under, pursuant to or arising out of (or any analogous expression) that agreement, contract, deed or other instrument;
1.1.3
a document in the "agreed form" is a reference to a document in a form approved by the Parties and for the purposes of identification initialled by or on behalf of each Party and annexed hereto;
1.1.4
a statutory provision (except where stated otherwise) includes a reference to the statutory provision as modified or re enacted or both from time to time whether before or after the date of this Agreement and any subordinate legislation made under the statutory provision (as so modified or re enacted) whether before or after the date of this Agreement except to the extent that any modification or re-enactment made after the date of this Agreement would create, increase or alter the liability of any party under this Agreement;
1.1.5
a "person" includes a reference to any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any joint venture, association or partnership, works council or employee representative body (whether or not having separate legal personality);
1.1.6
a person includes a reference to that person's successors and permitted assigns;
1.1.7
a "party" or "Party" includes a reference to that party's or Party's personal representatives, successors and permitted assigns (including any person resulting from or continuing after any amalgamation, merger, consolidation or similar transaction in which a party or Party participates);
1.1.8
a clause, paragraph or schedule, unless the context otherwise requires, is a reference to a clause or paragraph of, or schedule to, this Agreement;
1.1.9
any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall, in respect of any jurisdiction other than England, be deemed to include what most nearly approximates in that jurisdiction to the English legal term and to any English statute shall be construed so as to include equivalent or analogous laws of any other jurisdiction;
1.1.10
a "company" shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;
1.1.11
writing shall include any modes of reproducing words in a legible and non-transitory form;

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1.1.12
the word "agreement," means this agreement as amended or supplemented, together with all recitals and all Schedules attached hereto or incorporated by reference, and the words "hereof," "herein," "hereto," "hereunder" and other words of similar import shall refer to this agreement in its entirety and not to any particular clause, paragraph or Schedule of this agreement;
1.1.13
times of the day is to London time; and
1.1.14
reference to "regulatory capital" means a reference to assets which are admissible under Applicable Law and Regulation for the purpose of determining a person's regulatory capital resources.
1.2
The ejusdem generis principle of construction shall not apply to this Agreement. Accordingly, general words shall not be given a restrictive meaning by reason of their being preceded or followed by words indicating a particular class of acts, matters or things or by examples falling within the general words. Any phrase introduced by the terms "other", "including", "include" and "in particular" or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms.
1.3
References to the Relevant Regulator Handbook of Rules and Guidance, or any other regulations or rules relating to the conduct of (re)insurance business, or to any part thereof, are to be construed as references to such handbook, rules or regulations, or to such part thereof, as amended and in force from time to time or as the same may be replaced from time to time and any reference to any provision of such handbook, rules or regulations, or to any part thereof, is to be construed as a reference to the corresponding provision thereof from time to time as adjusted by the effect of any transitional rules which may be applicable in place thereof or in supplement thereto from time to time.
1.4
The headings in this Agreement do not affect its interpretation.
1.5
The Schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement, and any reference to this Agreement shall include the Schedules.
1.6
Words importing the singular include the plural and vice versa, and words importing a gender include every gender.
2.
INSURING CLAUSE
2.1
Subject to the terms and conditions of this Agreement, with effect on and from the Effective Date the Retrocedant shall cede to the Retrocessionaire and the Retrocessionaire agrees to accept in return for the payment of the Premium in accordance with Clause 3 the cession by way of 100 per cent. quota share reinsurance of the Retrocedant's risks under and attaching to, relating to or arising out of the Retroceded Policies, such that the Retrocessionaire will reinsure and indemnify the Retrocedant in the amount of 100 per cent. of its Net Retained Losses in respect of such Retroceded Policies.
2.2
Notwithstanding any other provision of this Agreement, it is agreed that the Net Retained Losses of the Retrocedant shall include any Loss to the extent that it relates to a liability or payment incurred in respect of a Reinsured Event (whether death, the diagnosis of a critical illness or otherwise) which occurred prior to, on, or after the Effective Date.
2.3
The Retrocessionaire shall discharge its obligations to the Retrocedant under Clause 2.1 by making payments in accordance with Clause 8.6.
2.4
The Retrocessionaire shall pay, as may be paid thereon and unconditionally follow the settlements (including ex gratia, "without prejudice" and any extra contractual settlements) against the

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Retrocedant and the Retrocessionaire shall be bound by settlements, or payments made by the Retrocedant irrespective of the legal liability of the Retrocedant and shall not be entitled to argue in defence or otherwise allege that the Retrocedant has failed to take all proper and businesslike steps in making the relevant settlement and/or payment.
2.5
The Retrocedant agrees to consult in good faith with the Retrocessionaire in respect of any claim arising under any Retroceded Policy where the claim exceeds GBP500,000.
2.6
The Retrocedant will inform the Retrocessionaire of any such claim within 14 days of receiving notification from the underlying cedant, and, in the event of any disputes, will consult the Retrocessionaire with respect to the appointment of lawyers and experts. The Retrocedant will take into account any comments of the Retrocessionaire, but will not be bound to follow any request or suggestion of the Retrocessionaire. The Retrocedant will handle all claims in a proper and businesslike manner.
2.7
The sole remedy for any breach of Clauses 2.5 and 2.6 will be damages for any loss proved; provided that any such claim would not operate as a defence (including by way of setoff) against a claim in respect of the Retrocessionaire’s obligations under Clause 2.1.
3.
RETROCESSION PREMIUM
3.1
The premium payable under this Agreement in respect of the Business is the aggregate of:
3.1.1
$123.2m; and
3.1.2
$1.6m, representing face value (expressed in USD) for the technical payable balances on the agreed 31st December 2013 balance sheet, reduced by a payment by the Retrocessionaire to the Retrocedant at face value (expressed in USD) for the technical receivable balances on the agreed 31st December 2013 balance sheet (the "Premium").
3.2
The aggregate amount due in respect of the Premium pursuant to Clause 3.1 shall be paid on a funds withheld basis. The Retrocedant shall establish a payable and the Retrocessionaire shall establish a receivable in respect of the Premium.
3.3
The Premium shall be settled by the Retrocedant (i) offsetting against such premium payable amounts due to the Retrocedant pursuant to Clause 2 of this Agreement and (ii) paying to the Retrocessionaire any Return Amounts arising in respect of the Funds-Withheld Accounts as determined pursuant to Clause 8.
3.4
On the date hereof, in respect of both the payment to be made on a funds withheld basis pursuant to Clause 3.2 and the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement, the Retrocedant shall transfer the Initial Funds-Withheld Portfolio to the Funds-Withheld Accounts.
4.
TIME ON RISK ADJUSTMENT
4.1
To put the Parties in the position, as between themselves, that they would each have been in if this Agreement had been entered into on the Effective Date, an adjustment payment will be made in accordance with the provisions of Clause 4.2 below.
4.2
Within 5 Business Days of the determination of the Final Reconciliation Amount Calculation Report pursuant to Clause 8.2 of the Sale and Purchase Agreement:
4.2.1
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii)

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the Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement exceeds (b) the "XL Europe Completion Amount" (as defined in the letter agreement, dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocedant shall pay an amount equal to such excess to the Retrocessionaire, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment; and
4.2.2
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii) the Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement is less than (b)  the " XL Europe Completion Amount" (as defined in the letter agreement, dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocessionaire shall pay an amount equal to such shortfall to the Retrocedant, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment.
5.
EFFECTIVE DATE AND TERMINATION
5.1
The obligations to reinsure the Retrocedant under this Agreement shall have effect during the Period of Risk only.
5.2
The Retrocedant shall be entitled to terminate this Agreement with immediate effect, (such termination to take effect in accordance with Clause 5.3) by notice in writing to the Retrocessionaire on or at any time after the occurrence of any of the following (each an "Event of Default"):
5.2.1
an Insolvency Event occurring in respect of the Retrocessionaire, the Company or Holdco;
5.2.2
the Company and/or the Retrocessionaire cease to be authorised by the BMA to reinsure the business retroceded to the Retrocessionaire under this Agreement;
5.2.3
the regulatory capital of the Company and/or the Retrocessionaire is less than 100 per cent. of the Company or Retrocessionaire's Capital Requirements;
5.2.4
any steps are taken in respect of the Company which would reasonably be expected to result in the Company's Centre of Main Interest changing from Bermuda;
5.2.5
the claims of the Retrocedant against the Retrocessionaire cease to rank at least pari passu with the claims of the Retrocessionaire's unsecured or unsubordinated reinsurance creditors, except for obligations mandatorily preferred by Applicable Law and Regulations applying to the Retrocessionaire;
5.2.6
other than the non-payment of a Call Amount, the Retrocessionaire is in breach of any payment obligation under this Agreement which is not remedied within 10 Business Days of it receiving written notice from the Retrocedant specifying the breach and requiring it to be remedied;
5.2.7
any Call Amount Default Period continuing for three or more years;
5.2.8
a Change of Control occurs;

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5.2.9
a material breach by the Retrocessionaire or the Company of any provision of the SAC Act, the Insurance Act or of the Company's insurance licence which results in the BMA indicating it will exercise its powers of intervention under Section 32 of the Insurance Act;
5.2.10
a breach by the Retrocessionaire of its obligations pursuant to Clause 11 which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire specifying the breach and requiring it to be remedied;
5.2.11
a breach by the Retrocessionaire or the Company of the Constitutional Documents of the Retrocessionaire, which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire or the Company (as applicable) specifying the breach and requiring it to be remedied; and
5.2.12
the Retrocession Agreement between XL Re and the Retrocessionaire, or the Retrocession Agreement between XL Re (UK) and the Retrocessionaire, each entered into on or around the date hereof is terminated for any reason other than the natural run-off or expiry of the policies retroceded thereunder.
5.3
If written notice to terminate this Agreement is given in accordance with the provisions of Clause 5.2:
5.3.1
upon receipt by the Retrocedant of assets of an aggregate Value equal to the Recapture Amount payable pursuant to Clause 5.5, the Retrocedant shall automatically recapture the reinsurance of all Retroceded Policies ceded by it under this Agreement on the basis that: (i) the Premium has been fully settled; and (ii) the Retrocessionaire's liability to reassure the Retrocedant in respect of those Retroceded Policies shall cease irrevocably and no further payments shall be payable by the Retrocessionaire as a result of the reassurance pursuant to this Agreement (other than payments accrued as at the date of such payment); and
5.3.2
the Retrocessionaire shall pay the Retrocedant the Recapture Amount in accordance with Clause 5.5.
5.4
The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree the Recapture Amount but if they do not do so within 15 Business Days of a notice being served to terminate this Agreement (the "Recapture Agreement Period"), the basis of recapture or any dispute in relation to it or the calculation of the Recapture Amount may be referred by the Retrocedant or the Retrocessionaire to the Expert for resolution pursuant to Clause 30 no later than 10 Business Days after the expiry of Recapture Agreement Period. If the determination of the Recapture Amount is referred for resolution pursuant to Clause 30, pending final agreement or determination the Recapture Amount shall be paid on a provisional basis in accordance with Clause 5.5.2 on the basis of a calculation performed by the Retrocedant's Actuary.
5.5
The Recapture Amount shall be paid as follows:
5.5.1
if the Recapture Amount is agreed within the Recapture Agreement Period, the agreed Recapture Amount shall be paid by or on behalf of the Retrocessionaire within 5 Business Days of agreement; or
5.5.2
if the Recapture Amount is not agreed within the Recapture Agreement Period, the Recapture Amount as calculated by the Retrocedant's Actuary shall be paid by or on behalf of the Retrocessionaire within 5 Business Days after the expiry of the Recapture Agreement Period;

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5.6
If the calculation of the Recapture Amount has been referred for resolution pursuant to Clause 30, then the relevant Party will make a payment within 5 Business Days of agreement or settlement of the Recapture Amount pursuant to Clause 30 (or Clause 31) as follows:
5.6.1
if the Difference is positive, the Retrocessionaire shall make or cause to be made a payment of such amount to the Retrocedant; or
5.6.2
if the Difference is negative, the Retrocedant shall reimburse the Retrocessionaire such amount.
5.7
For the purposes of calculating the Recapture Amount, the Parties agree that any assets and associated investment income deposited by the Retrocedant or a member of the XL Group in a Funds-Withheld Account to remedy any failure by the Retrocessionaire to pay a Call Amount, shall not be treated as an asset of a Funds-Withheld Account;
5.8
Without prejudice to the Retrocessionaire's obligation to pay the full Recapture Amount, in the event that:
5.8.1
a Cross-Agreement Recapture Event occurs; and
5.8.2
there are not sufficient Reserves (as defined in each XL Retrocession Agreement under which a Recapture Amount becomes payable) as a result of the Cross-Agreement Recapture Event (each, a "Relevant Agreement") to fund all such Recapture Amounts,
the Retrocessionaire shall pay to each XL Retrocedant a pro rata amount of such Reserves as are available to meet its obligations to pay Recapture Amounts, in the proportion that the Recapture Amount owed to an XL Retrocedant under a Relevant Agreement represents when compared to the aggregate of the Recapture Amounts owed under all the Relevant Agreements.
5.9
In the event of a breach of the undertaking given in Clause 10.1.5 (provided always that in any case the breach is a Retrocessionaire Uncured Breach) or if the Retrocedant’s right to provide a Change of Authority Notice under Paragraph 2.4.1 of Part A of Schedule 4 is triggered, then in addition to any other remedies provided in such Paragraph 2.4.1 or otherwise available (whether by operation of law, equity, contract or otherwise), the Retrocedant may not terminate this Agreement but may require that the assets of the Retrocessionaire are managed by an investment manager nominated by XL GIL in its sole discretion (acting reasonably), including the existing investment manager, with such investment manager thereafter acting on instructions only from XL GIL (a “Retrocessionaire Change of Authority”) and the Parties agree that the associated Investment Management Costs will be payable in accordance with the provisions of Clause 7.9.
5.10
In the event of termination the Retrocessionaire and the Company will comply with the obligations in the Administration Services Agreement in relation to the retention, disposal and/or return of information received by the Retrocessionaire and/or the Company pursuant to or in connection with the Transaction Documents.
5.11
Subject to Clauses 5.12 and 5.13 below, upon termination of this Agreement each Party shall be released from any further obligations pursuant to this Agreement but such termination shall not terminate any accrued rights under this Agreement.
5.12
The provisions of this Agreement shall survive termination of this Agreement, until all amounts due and payable hereunder have been paid;
5.13
Clauses 1, 5, 9, 16, 17 and 19 to 33 shall survive termination of this Agreement.

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6.
REPORTING INFORMATION
6.1
On each Reporting Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with a Client Account Report in the agreed form, setting out in respect of each Currency Block the Client Account Report Information in respect of the immediately preceding Client Account Reporting Period.
6.2
Within 10 Business Days of the Account Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with the Relevant Account Report in the agreed form, setting out in respect of each Funds-Withheld Account, the Relevant Account Information in respect of the immediately preceding Relevant Account Period.
7.
FUNDS-WITHHELD ACCOUNTS
7.1
The Retrocedant shall maintain assets in the Funds-Withheld Accounts in connection with the Business, in accordance with the terms of this Agreement.
7.2
Subject to the terms of this Agreement, all the assets and any investment income arising out of the assets in a Funds-Withheld Account will be credited to the Funds-Withheld Account and all losses (including investment losses), liabilities (including taxes), costs, charges and expenses attributable to the assets in a Funds-Withheld Account will be debited from the Funds-Withheld Account except for Investment Management Costs which shall be dealt with pursuant to Clause 7.9.
7.3
All premiums received by the Retrocedant from the Underlying Cedants in respect of the Business shall be paid into the relevant Funds-Withheld Account.
7.4
Losses incurred by the Retrocedant will be managed by the Retrocedant and shall be paid or reimbursed to the Retrocedant out of the Funds-Withheld Assets selected by the Retrocessionaire or its designated investment managers prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice;
7.5
The assets in the Funds-Withheld Accounts will be managed by the Retrocedant pursuant to and in accordance with the SIMA(s) and the Retrocedant Guidelines, together with the provisions set out in Clause 10.6 and Schedule 4;
7.6
A Funds-Withheld Account will be credited with all Call Amounts paid by the Retrocessionaire and debited with all Return Amounts paid by the Retrocedant in connection with that Funds-Withheld Account.
7.7
Any assets deposited by the Retrocedant or on its behalf by a member of the XL Group in a Funds-Withheld Account to remedy a failure by the Retrocessionaire to pay all or part of a Call Amount shall not be treated as assets of the Funds-Withheld Account for any purpose (including for the purpose of calculating the Recapture Amount as described in Clause 5.7) and all benefits and losses, including investment gains and losses and taxes shall remain with the Retrocedant or the relevant member of the XL Group.
7.8
For the avoidance of doubt, all legal and beneficial interest in the Funds-Withheld Assets and the Funds-Withheld Accounts belongs to the Retrocedant and the Retrocessionaire has no proprietary interest in such accounts nor in any such assets.
7.9
No later than 30 Business Days after each Account Date, the Retrocedant will submit an invoice to the Retrocessionaire for all Investment Management Costs that have been paid or are due and payable by the Retrocedant and/or XL GIL or its Affiliates. The Retrocedant and/or XL GIL or its Affiliates

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may specify in an invoice that all or part of the applicable Investment Management Costs are to be paid by the Retrocessionaire to an Affiliate of the Retrocedant and/or XL GIL, instead of to the Retrocedant and/or XL GIL or its Affiliates themselves. The Retrocessionaire will settle all invoices submitted by the Retrocedant and/or XL GIL or its Affiliates in cash within 30 days of receipt by the Retrocessionaire. Without prejudice to the Retrocedant's right to terminate this Agreement under Clause 5.2.6 for the non-payment of Investment Management Costs, if the Retrocessionaire fails to settle an invoice in respect of Investment Management Costs relating to:
7.9.1
the Funds-Withheld Accounts and/or the Funds-Withheld Assets; or
7.9.2
the management of the assets of the Retrocessionaire (following a Retrocessionaire Change of Authority pursuant to Clause 5.9),
within the 30 day time period (or within the 10 Business Day cure period permitted under Clause 5.2.6 if the Retrocedant has given written notice pursuant to Clause 5.2.6), the Retrocedant may reimburse itself (or XL GIL or its Affiliates as applicable) out of the Funds-Withheld Account.
8.
COLLATERAL OBLIGATIONS
8.1
The Retrocessionaire will maintain assets in the Funds-Withheld Account in an amount equal to the applicable Collateral Amount. The Retrocessionaire shall fulfil this obligation by paying all Call Amounts in accordance with this Clause 8 and any other relevant provisions of this Agreement.
8.2
Subject to Clause 8.11, the Retrocedant shall pay to the Retrocessionaire all Return Amounts subject to and in accordance with this Clause 8.
8.3
After each relevant Valuation Date, the Retrocedant will procure that the Retrocedant's Actuary determines as soon as practicable whether or not a Call Amount or a Return Amount exists in respect of a Funds-Withheld Account as at each relevant Valuation Date (the "Determination").
8.4
If a Call Amount or a Return Amount is payable in respect of a Funds-Withheld Account, the Retrocedant will notify the Retrocessionaire in writing within 5 Business Days of the relevant Determination (a "Call Notice", or a "Return Notice" as applicable).
8.5
A Call Notice or Return Notice delivered by the Retrocedant shall specify:
8.5.1
the Balance of the Funds-Withheld Account as at the close of business on the relevant Valuation Date;
8.5.2
the Call Amount or Return Amount (as applicable);
8.5.3
the type of Permitted Assets the Retrocedant intends to transfer in the case of a Return Amount;
8.5.4
the type of Permitted Assets the Retrocedant requires to have transferred in the case of a Call Amount;
8.5.5
if a Call Amount is payable, the Funds-Withheld Account into which the Retrocessionaire must pay the Call Amount;
8.5.6
subject to any confidentiality obligations by which the Retrocedant is bound, such information which is available to the Retrocedant's Actuary as may be relevant to the calculation of the Call Amount or Return Amount (as applicable).
8.6
If a Call Amount is payable, the Retrocessionaire shall, at its own cost, transfer to the Retrocedant Permitted Assets of the type specified in the Call Notice, with a Value as at the Valuation Date at

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least equal to the Call Amount, within 2 Business Days of receipt of a Call Notice from the Retrocedant provided that the Retrocessionaire shall not be required to settle a Call Amount if doing so would reduce the Working Capital Assets below $10m.
8.7
If a Return Amount is payable, the Retrocedant shall, subject to Clauses 8.8 and 8.12, and at the cost of the Retrocessionaire, transfer to the Retrocessionaire, Permitted Assets selected by the Retrocessionaire or its designated investment manager prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice with a Value as at the Valuation Date at least equal to the Return Amount, within 5 Business Days of the later of: (i) the date of a Return Notice; or (ii) the date on which the Retrocedant received assets of a Value as least equal to the Return Amount from the relevant Custodian.
8.8
If the value of the Retrocessionaire Capital Account Assets at the date of the Return Notice is less than the Maximum Investor Capital Call Amount at that date, the Retrocedant shall transfer cash to the value of the Return Amount to the Retrocessionaire Capital Account within 5 Business Days of the date determined in accordance with Clause 8.7.
8.9
If the Retrocessionaire fails to pay a Call Amount in accordance with Clause 8.6, the Retrocedant shall make such payment to the Funds-Withheld Account on behalf of the Retrocessionaire. Such payment will not discharge the Retrocessionaire from its obligation to pay the Call Amount, save that such Call Amount shall be due and payable directly to the Retrocedant together with interest accrued in accordance with Clause 8.10.
8.10
In the event the Retrocessionaire fails to pay all or a part of a Call Amount in accordance with Clause 8.6, interest will accrue on the unpaid Call Amount (or part thereof) in an amount together with any positive Collateral Fee PIK Amount equal to the Collateral Fee for the period from the date the Call Amount became due and payable (the "Due Date"), or, as applicable, the Collateral Fee Payment Date that any Collateral Fee PIK Amount accrues, up to and including the date such Call Amount or Collateral Fee Amount is actually paid to the Retrocedant.  Any accrued Collateral Fee will be payable quarterly on each January 1, April 1, July 1 and October 1, or if such date is not a Business Day, the immediately following Business Day, (each , a “Collateral Fee Payment Date”) in cash or, at the sole option of the Retrocessionaire added quarterly (on each Collateral Fee Payment Date) to the Collateral Fee PIK Amount.  The Retrocessionaire may, in its sole discretion, repay any positive Collateral Fee PIK Amount in cash, on any Business Day.
8.11
The Retrocedant's obligation to pay a Return Amount is subject to the Retrocedant having actually received assets of a Value at least equal to the Return Amount from the relevant Custodian pursuant to the terms of the relevant Retroceded Policy prior to paying the Return Amount due under this Agreement.
8.12
The payment of a Return Amount by the Retrocedant to the Retrocessionaire will be treated by the Parties as satisfaction of the relevant outstanding premium receivable by the Retrocessionaire pursuant to Clause 3.
8.13
The Retrocessionaire may notify the Retrocedant that it wishes to challenge the calculation of a Call Amount or Return Amount in respect of the Business ("Notice of Challenge") no later than 5 Business Days from receipt of a Call Notice or Return Notice (as applicable). If the Retrocessionaire delivers a Notice of Challenge within the permitted timeframe, the payment of the affected Return Amount and Call Amount that was made in accordance with Clauses 8.6 and 8.7 (as applicable) will be deemed to have been made on a provisional basis and be subject to the following:
8.13.1
if the Actuaries cannot agree on the disputed Call Amount or Return Amount (as applicable) within 15 Business Days of a Notice of Challenge, either the Retrocedant or the Retrocessionaire may refer the matter to the Expert for resolution pursuant to Clause 30; and

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8.13.2
upon determination by the Expert, the Retrocedant or the Retrocessionaire (or such person on behalf of the Retrocessionaire) will make such payments to the other as necessary to put the Retrocedant and Retrocessionaire in the position they would have been in had the affected payment been made on the basis of the calculation by the Expert.
9.
AUDIT RIGHTS
9.1
The Retrocedant shall submit to the Retrocessionaire and the Retrocessionaire shall submit to the Retrocedant as and when asked by the other on reasonable notice and in any event immediately following the termination of this Agreement for any reason, information in sufficient detail to allow the Retrocessionaire or the Retrocedant (as the case may be) to satisfy all Applicable Law and Regulations to which they are subject in relation to the Retroceded Policies, this Agreement or any other Transaction Document or the arrangements contemplated by it and such additional information as it may reasonably require in relation to the Retroceded Policies, this Agreement, any other Transaction Document or the arrangements contemplated by any Transaction Document, including to monitor compliance with the Retrocessionaire Guidelines and the Retrocedant Guidelines, provided always that such information is reasonably in the relevant Party's power, possession or control or may be obtained by it taking reasonable steps and subject to any Applicable Law and Regulations and any obligations of confidentiality owed to third parties.
9.2
Subject to any Applicable Law and Regulations and any confidentiality obligations owed to third parties, during the term of this Agreement, the Retrocedant and the Retrocessionaire shall be entitled on reasonable notice from time to time during normal business hours at its own cost to inspect and audit at the offices of the Retrocessionaire and the Retrocedant, respectively, and take copies of all documents and records relevant to the performance by the Parties of this Agreement.
9.3
The Parties agree to permit any regulatory authority in any jurisdiction that has responsibility for the regulation or governance of another Party and its representatives, to have such reasonable access to its premises and all records kept in relation to this Agreement as may be required by such regulatory authority.
10.
UNDERTAKINGS
10.1
The Retrocessionaire and the Company each give the following undertakings, which shall apply throughout the Period of Risk:
10.1.1
if and to the extent permitted by Applicable Law and Regulation, it shall promptly notify the Retrocedant of the occurrence of any Event of Default or Potential Event of Default;
10.1.2
it shall use its reasonable endeavours to ensure that at all times its exercise of its rights and performance of its obligations under this Agreement will not:
(a)
contravene its constitutive documents and, in addition, in the case of the Retrocessionaire, its Constitutional Documents; or
(b)
contravene any Regulatory Requirement;
10.1.3
it will not transfer (whether by means of a scheme of arrangement or otherwise), novate or, in the case of the Retrocessionaire, cede its obligations under this Agreement with respect to the Retroceded Policies to another person without the prior written consent of the Retrocedant, unless, in the case of the Retrocessionaire ceding its obligations, the cession is in the ordinary course of business and on terms which would not adversely affect the amount of regulatory capital to be held by the Retrocedant or any other member of the XL Group, or otherwise adversely affect the collateral position or counterparty credit exposure of the Retrocedant or any member of the XL Group;

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10.1.4
subject to Clause 10.5, it will seek the prior written consent of the Retrocedant to a Change of Control;
10.1.5
it will procure that the investment assets of the Retrocessionaire are managed in accordance with the Retrocessionaire Guidelines and the Retrocessionaire IMA(s) together with the provisions set forth in Clause 10.6 and Schedule 4;
10.1.6
in the case of the Company, it will maintain its Centre of Main Interest in Bermuda;
10.1.7
subject to Clause 10.3, in the case of the Company, it will not amalgamate, merge, or consolidate with any other person nor issue or allot any securities or any instruments convertible or exchangeable for securities in itself (including any securities or instruments which grant rights in respect of the Retrocessionaire) to any person, except with the prior written consent of the Retrocedant; and
10.1.8
it shall provide prior written notice to the Retrocedant at least 5 Business Days before making a Distribution.
10.2
The Retrocessionaire gives the following undertakings, which shall apply throughout the Period of Risk:
10.2.1
it will notify the Retrocedant in writing prior to any proposed material outsourcing taking effect in respect of the Retroceded Policies;
10.2.2
subject to any Distributions permitted by this Agreement, it will retain assets (as may change from time to time) of any Return Amount paid to the Retrocessionaire by the Retrocedant in the segregated account comprising the Retrocessionaire and use the assets in that segregated account only for the purposes of this Agreement and any other XL Retrocession Agreement;
10.2.3
it will hold regulatory capital in respect of the business reinsured under this Agreement in an amount at least equal to the Agreed Capital Level;
10.3
If the Company wishes to seek the consent of the Retrocedant pursuant to Clause 10.1.7, it shall promptly notify the Retrocedant in writing. After the tenth anniversary of the date of this Agreement, the Retrocedant may only withhold its consent to a request from the Company pursuant to Clause 10.1.7, when the Retrocedant reasonably determines that such change could materially and adversely affect:
10.3.1
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, Holdco or the Investors or any of their respective Affiliates;
10.3.2
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
10.3.3
the regulatory capital position of any member of the XL Group.
10.4
The Parties agree that the ceding of the Retrocessionaire's obligations to a person by way of retrocession permitted pursuant to Clause 10.1.3 shall not be regarded as a Change of Control and shall not require the prior written consent of the Retrocedant.
10.5
The Parties agree that a Non-Lead Investor may trigger a Change of Control to which the Retrocedant will not need to give its prior consent if:
10.5.1
the new controller has assumed all of that Non-Lead Investor's Interests;
10.5.2
the Retrocedant has the benefit of contractual rights which provide adequate remedies if the new controller breaches its obligations in connection with the Interests; and

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10.5.3
the Retrocedant reasonably determines that such Change of Control would not materially and adversely affect:
(a)
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, the Investors or any of their respective Affiliates;
(b)
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
(c)
the regulatory capital position of any member of the XL Group.
10.6
The Parties will comply with the provisions in Schedule 4 with respect to the management of the Funds-Withheld Assets and the assets of the Retrocessionaire.
11.
AGREED CAPITAL AND DIVIDENDS
11.1
The Retrocessionaire shall assess whether or not it holds BMA regulatory capital in an amount at least equal to the Agreed Capital Level, at the end of each Quarter.
11.2
The Retrocessionaire shall submit the results of its calculation performed pursuant to Clause 11.1, together with all reasonable supporting information, to the Retrocedant within 15 Business Days following the end of each Quarter ("Capital Notice").
11.3
The Retrocedant may notify the Retrocessionaire that it wishes to challenge a Capital Notice no later than 10 Business Days from receipt of a Capital Notice (a "Capital Notice Challenge"). The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree such Capital Notice Challenge but if they do not do so within 15 Business Days of the date of the Capital Notice Challenge the dispute shall be referred by either Actuary to the Expert for resolution pursuant to Clause 30.
11.4
The Retrocessionaire undertakes:
11.4.1
not to declare or make a Distribution in any Quarter before the expiry of the 15 Business Day time period in Clause 11.2;
11.4.2
not to declare or make a Distribution at any time when the value of the Retrocessionaire Capital Account Assets is less than the Maximum Investor Capital Call Amount; and
11.4.3
to only declare or make a Distribution thereafter if, after such Distribution has been made, the Retrocessionaire would still hold regulatory capital at least equal to the Agreed Capital Level and the Retrocessionaire shall provide prior written notice to the Retrocedant if it intends to make a Distribution under this Clause 11.4.3.
11.5
If a challenge is made by the Retrocedant pursuant to Clause 11.3 the Retrocessionaire agrees that no Distribution may be declared or made by it until such dispute has been settled in accordance with Clauses 11.3, 30 or 31, as applicable.
11.6
For as long as a Call Amount remains due and payable by the Retrocessionaire, the Retrocessionaire undertakes to the Retrocedant not to:
11.6.1
declare or make a Distribution;
11.6.2
incur any expenditure outside the ordinary course of business or in excess of $500,000;
11.6.3
enter into any transactions or transactions with an Affiliate or related person other than an Investor Capital Call;
11.6.4
write any new business,

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in each case without the prior written consent of the Retrocedant.
11.7
In determining the amount of the Retrocessionaire's BMA regulatory capital for the purposes of Clause 11, only the assets of the Retrocessionaire or amounts receivable by the Retrocessionaire from the XL Retrocedants under the XL Retrocession Agreements shall be included and in no event shall any Retrocessionaire Capital Account Assets or any Closing Excess Assets be treated as regulatory capital of the Retrocessionaire for the purposes of the calculation.
12.
NEGATIVE PLEDGE
12.1
The Retrocedant shall not:
12.1.1
create or permit to subsist any Security over the Funds-Withheld Accounts (except for any Security over the Funds-Withheld Accounts in existence as at the date hereof or arising from time to time in the ordinary course of carrying out any of the Retroceded Policies, including as part of treasury management, or relating to the investment of the assets in the Funds-Withheld Accounts including liens in respect of unpaid fees or other similar rights or entry into credit support, collateral, margining or other similar arrangements); or
12.1.2
enter into any arrangement under which the money held in or benefit of the Funds-Withheld Accounts may be applied, retained or set-off except in the ordinary course of carrying out any of the Retroceded Policies or relating to the investment of the assets in the Funds-Withheld Accounts or as contemplated by this Agreement;
13.
SEGREGATED ACCOUNTS
13.1
The Company and the Retrocessionaire shall cause all of the funds and assets of the Retrocessionaire to be held and kept separate and distinct from all other funds and assets in the general account of the Company and any other segregated account established by the Company, including by causing separate bank accounts to be established and maintained by the Retrocessionaire and causing the funds of the Retrocessionaire not to be commingled with any funds of the general account of the Company or any other segregated account established by the Company.
13.2
Unless otherwise agreed to in writing by the Retrocedant, the Company shall continue to be registered as a segregated accounts company pursuant to the SAC Act during the entire term of this Agreement;
13.3
Unless otherwise agreed in writing by the Retrocedant, the Company and the Retrocessionaire (as applicable) shall abstain from amending or modifying: (i) any provision of the Company's bye-laws in a manner that could reasonably be expected to adversely affect the interests of the Retrocedant; or (ii) any agreement comprising part of the Constitutional Documents of the Retrocessionaire.
13.4
Except as otherwise consented to in writing by the Retrocedant, the Retrocessionaire shall not, and the Company shall cause the Retrocessionaire not to:
13.4.1
incur any liabilities or obligations (including borrowing or indebtedness) other than liabilities and obligations arising under this Agreement and any Transaction Documents to which it is a party or which are necessary in connection with the Retrocessionaire’s performance of its obligations and liabilities under such agreements;
13.4.2
subject to Clause 10.1.3, enter into any agreements of insurance or reinsurance other than this Agreement and any other XL Retrocession Agreement;
13.4.3
conduct any business other than services necessary for the Retrocessionaire’s performance of its obligations and liabilities under this Agreement and any Transaction Document to which it is a party; or

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13.4.4
enter into any transaction or agreement with any of the Company's Affiliates, the general account of the Company or any other segregated account of the Company.
14.
RETROCESSIONAIRE CAPITAL ACCOUNT
The Retrocessionaire shall establish a separate account to which shall be credited cash and/or assets contributed to the Retrocessionaire pursuant to any Investor Capital Call. Such cash and/or assets shall be invested only in direct obligations of, or obligations fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof (provided such obligations are backed by the full faith and credit of the United States). All the assets and any investment income arising out of the assets in the Retrocessionaire Capital Account will be credited to such account and all losses and liabilities attributable to the assets in the Retrocessionaire Capital Account will be debited from such account. Notwithstanding anything to the contrary in this Agreement, the Retrocessionaire shall have no obligation to apply amounts in the Retrocessionaire Capital Account to satisfy obligations hereunder or otherwise pay amounts to any XL Retrocedant or any of their Affiliates unless a Trigger Event Date has occurred and only in the amount of the corresponding Total Required Investor Call Amount (as defined in the Investor and Support Undertakings Agreement). For the avoidance of doubt, all determinations relating to the Retrocessionaire Guidelines, including without limitation any determination of compliance with the Retrocessionaire Guidelines shall be determined by reference to all of the assets of the Retrocessionaire other than the assets in the Retrocessionaire Capital Account.

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15.
SET-OFF
Without prejudice to the provisions of Clause 7.9 and 8 providing for payment of Call and Return Amounts, Investment Management Costs and Collateral Fees, the Premium payable under Clause 3 shall be offset against all amounts Due from the Retrocessionaire to the Retrocedent hereunder.
16.
CONFIDENTIALITY
16.1
In this Clause 16, "Confidential Information" means all confidential information disclosed (whether in writing, orally or by another means and whether directly or indirectly) by (or on behalf of) either the Retrocedant or the Retrocessionaire or the Company (the "Disclosing Party") or any of its or their Affiliates to another Party (the "Receiving Party") whether before or after the date of this Agreement including information relating to the Disclosing Party's or its customers' products, operations, processes, plans or intentions, product information, know how, design rights, trade secrets, market opportunities and business affairs.
16.2
The Receiving Party:
16.2.1
may not use Confidential Information for a purpose other than the performance of its obligations or enforcement of its rights (including for the purposes of the dispute resolution mechanisms in this Agreement) under this Agreement or another Transaction Document to which it is a party;
16.2.2
may not disclose Confidential Information to a person except with the prior written consent of the Disclosing Party or in accordance with Clauses 16.3 and 16.4; and
16.2.3
shall make every effort to prevent the use or disclosure of Confidential Information.
16.3
The Receiving Party may disclose Confidential Information to any of its Affiliates, directors, other officers, employees, professional advisers and sub contractors (a "Recipient") to the extent that disclosure is reasonably necessary for the purposes of this Agreement or any other Transaction Document to which it is a party.
16.4
The Receiving Party shall ensure that a Recipient is made aware of and complies with the Receiving Party's obligations of confidentiality under this Agreement as if the Recipient was a party to this Agreement.
16.5
Clauses 16.2 to 16.4 do not apply to Confidential Information which:
16.5.1
is at the date of this Agreement, or at any time after that date, becomes publicly known other than by the Receiving Party's or Recipient's breach of this Agreement;
16.5.2
can be shown by the Receiving Party to the Disclosing Party's reasonable satisfaction to have been known by the Receiving Party before disclosure by the Disclosing Party to the Receiving Party;
16.5.3
is required to be disclosed by law, by a rule of a listing authority or stock exchange to which any Receiving Party is subject or submits or by a governmental authority or other authority with relevant powers to which any Receiving Party is subject or submits, whether or not the requirement has the force of law; or
16.5.4
is disclosed to auditors of a Receiving Party, or (as applicable) a member of the XL Group, or a Buyer's Group Undertaking, or rating agencies provided that such auditors or rating agencies are made aware of the provisions of this Clause 16.

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16.6
The Retrocessionaire and the Retrocedant shall comply with any confidentiality provisions contained in any of the Retroceded Policies.
17.
DATA PROTECTION
17.1
The parties acknowledge that, in connection with this Agreement, the Retrocedant may disclose to the Retrocessionaire information relating to policyholders and other individuals which is protected by the Data Protection Laws (the "Protected Information").
17.2
The Retrocessionaire shall, and shall ensure that its contractors shall, comply with the Data Protection Laws in relation to its and its contractors' processing of the Protected Information disclosed to it by the Retrocedant.
17.3
Where this Agreement requires the Retrocedant to disclose Protected Information to the Retrocessionaire, and that disclosure is regulated by a Data Protection Law of a member state of the European Economic Area, the Retrocedant may meet that requirement by disclosing that information to an establishment or agent of the Retrocessionaire within the European Economic Area, as nominated by the Retrocessionaire in writing from time to time. If, from time to time, the Retrocessionaire has not nominated such an establishment or agent, the Retrocedant is relieved from its obligation to disclose that information until such an establishment or agent has been nominated and the Retrocedant has had a reasonable opportunity to make the disclosure.
18.
CURRENCY
18.1
All payments and calculations under this Agreement shall be made in the currency in which the underlying business or liability is denominated.
18.2
Any amount to be converted from one currency into a second currency for the purpose of this Agreement shall be converted into an equivalent amount at the Relevant Date at the Conversion Rate prevailing at the Relevant Date.

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19.
ANNOUNCEMENTS
19.1
Subject to Clauses 19.2 and 19.3, no Party shall, without the prior written consent of the other Parties, make any announcement of this Agreement, the transaction which is given effect by this Agreement, or any matter ancillary thereto.
19.2
The Parties shall act reasonably in response to a request from any other Party for permission to make any announcement of the transactions given effect by or referred to in this Agreement or any matter ancillary thereto.
19.3
The restrictions in Clause 19.1 shall not apply:
19.3.1
to an announcement, communication or disclosure that is required to be made by Applicable Law and Regulation (provided that, to the extent permitted by Applicable Law and Regulation, the Party required to make the announcement, communication or disclosure shall consult with the other Parties prior to such disclosure and use reasonable endeavours to minimise the disclosure to such information as is required by the Applicable Law and Regulation);
19.3.2
to any reference to the transaction given effect by this Agreement in a Party's financial statements or regulatory returns or in disclosures to rating agencies;
19.3.3
to disclosures reasonably required in order to enforce a Party's rights under this Agreement or another Transaction Document to which it is a party; and
19.3.4
to any reference to the transaction given effect by this Agreement (whether alone or together with, or aggregated with, other transactions) by a Party in any financial or other reports or presentations to investors provided that the identity of the Parties is not disclosed in connection with such reference without that other Party's prior written consent (not to be unreasonably withheld or delayed).
20.
COSTS
Except where this Agreement provides otherwise, each Party shall pay its own costs relating to the negotiation, preparation, execution and implementation by it of this Agreement and of each document referred to herein.
21.
FURTHER ASSURANCE
Each Party agrees to perform (or procure the performance of) such further acts and things, and execute and deliver (or procure the execution and delivery of) such further documents, as may be required by Applicable Law and Regulation or as the other Party may reasonably require to implement and/or give effect to this Agreement and the transactions contemplated by it and for the purpose of vesting in the other Party the full benefit of this Agreement.
22.
ENTIRE AGREEMENT
22.1
This Agreement, the Transaction Documents and the Constitutional Documents of the Retrocessionaire constitute the entire agreement and understanding, and supersede any previous agreements between the Parties relating to the subject matter of this Agreement.
22.2
In the event of any conflict between the provisions of this Agreement and the provisions of any other document referred to in it, the provisions of this Agreement will prevail.

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22.3
Each Party acknowledges and represents that it has not relied on or been induced to enter into this Agreement by a representation, warranty or undertaking (whether contractual or otherwise) which is not expressly set out in this Agreement.
22.4
A Party is not liable to another Party and will not have any remedy (in equity, contract or tort (including negligence) under the Misrepresentation Act 1967 or in any other way) for a representation, warranty or undertaking that is not expressly set out in this Agreement.
22.5
The Retrocedant has no duty or obligation to make, whether in anticipation of entering into this Agreement or otherwise, any disclosure, representation or warranty.
22.6
The Retrocessionaire hereby waives any remedy it might otherwise have to avoid this agreement by reason of any breach by the Retrocedant or any other person, including an agent of the Retrocedant, of the duty of utmost good faith (which does not apply to or in respect of this Agreement) or any duty or obligation to make, whether in anticipation of this Agreement or otherwise, any disclosure or representation.
22.7
The Parties agree that where the Retrocessionaire or the Company breaches any provision of this Agreement, then damages may not be a sufficient remedy and the Retrocedant shall be entitled to seek such legal or equitable remedies or relief as are available to it, including injunctive relief (whether interim or final) and specific performance. Further, the Retrocessionaire and the Company agree that if the Retrocedant brings an action seeking an equitable remedy to enforce the provisions of Clauses 12 of this Agreement, neither of them will oppose the granting of such remedy, whether on the ground that there is or are suitable alternative remedy(ies) or otherwise.
22.8
This Clause 22 shall not exclude any liability for, or remedy in respect of, fraud.
23.
WAIVERS
23.1
Except where this Agreement provides otherwise, no failure or delay by any Party in exercising any right or remedy provided by Applicable Law and Regulation under or pursuant to this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of any such right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.
23.2
Except where this Agreement provides otherwise the rights and remedies contained in this Agreement are cumulative and not exclusive of rights or remedies provided by law.

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24.
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Save for the person referred to in Part E of Schedule 4, a person who is not a Party to this Agreement shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms.
25.
SEVERABILITY
If any provision of this Agreement is held to be invalid or unenforceable, then such provision shall (so far as it is invalid or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The Parties shall then use their reasonable endeavours to replace the invalid or unenforceable provision by a valid and enforceable provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision thereby replaced.
26.
VARIATION
26.1
No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Parties. The expression "variation" shall include any variation, supplement, deletion or replacement however effected.
26.2
Unless expressly agreed in writing by the Parties, no variation shall constitute a general waiver of any provisions of this Agreement, nor shall it affect any rights, obligations or liabilities under or pursuant to this Agreement which have already accrued up to the date of variation, and the rights and obligations of the Parties under or pursuant to this Agreement shall remain in full force and effect, except and only to the extent that they are so varied.
27.
ASSIGNMENT AND SUBCONTRACTING
Other than in accordance with Clause 10.1.3, a Party may not novate, assign, transfer or create any trust in respect of, or purport to novate, assign, transfer or create any trust in respect of a right or obligation under this Agreement without having first obtained the other Party's written consent or in the case of the Retrocedant, without having first obtained the written consent of the Company only.
28.
NOTICES
28.1
Save in relation to Schedule 4, in relation to which the provisions of Part D of Schedule 4 shall apply, a notice or other communication under or in connection with this Agreement (a "Notice") shall be:
28.1.1
in writing;
28.1.2
in the English language; and
28.1.3
delivered personally or sent by first class post prepaid recorded delivery (and air mail if overseas) to the Party due to receive the Notice to the address set out in Clause 28.3 or to an alternative address or person specified by that Party by not less than seven days' written notice to the other party received before the Notice was despatched.
28.2
Unless there is evidence that it was received earlier, a Notice is deemed given if:
28.2.1
delivered personally, when left at the address referred to in Clause 28.3;
28.2.2
sent by mail, except air mail, 2 Business Days after posting it; and
28.2.3
sent by air mail, 6 Business Days after posting it.

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28.3
The address referred to in Clause 28.1 is:
Name of Party
Address
Marked for the attention of
Retrocedant
8 St Stephen's Green, Dublin 2, Ireland
General Counsel
Retrocessionaire
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda
Company Secretary
Company
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

Company Secretary
29.
GOVERNING LAW
This Agreement and any dispute, controversy or claim arising out of or relating to this Agreement shall be governed by English law save only in respect to Segregated Account Matters which shall be governed by Bermuda law.
30.
EXPERT RESOLUTION
30.1
Where, pursuant to Clauses 5.4, 8.13.1, 11.3 or Part C of Schedule 4 of this Agreement a dispute is referred for Expert determination, the provisions of this Clause 30 shall apply. The Expert shall be an independent actuary appointed in accordance with this Clause 30 (the "Expert"). The Expert shall be jointly appointed by the Actuaries or, failing agreement on such appointment, the President for the time being of the UK Institute and Faculty of Actuaries) for resolution.
30.2
In performing his obligations under Clause 30.1, the Expert shall act in good faith and give due weight to the objects of this Agreement. The Expert shall act as an expert and not an arbitrator and his decision shall (in the absence of manifest error) be final and binding on the Parties.
30.3
Each Party shall upon request provide the Expert with such information as is within its possession or control and reasonably required by the Expert save if to do so would breach any Applicable Law and Regulation.
30.4
The Expert shall deliver a final and binding award within 40 Business Days of the date of his appointment.
30.5
The Parties expressly waive, to the extent permitted by law, any rights of recourse to the courts they may otherwise have to challenge the Expert's determination, other than in the case of manifest error.
30.6
The cost of the Expert shall be borne between the Retrocedant and the Retrocessionaire in such proportions as shall be determined by the Expert.
30.7
If a dispute arises under this Agreement in relation to an issue which has been raised but not yet determined under either of the other XL Retrocession Agreements, the Parties agree that such dispute hereunder will be joined to and conducted together with the dispute under such other XL Retrocession Agreement and any agreement or determination so made shall be binding on all Parties to this Agreement. A Party shall not be obliged to comply with this Clause 30.7 where such Party determines, acting reasonably, that due to differences in the Applicable Law and Regulation under this Agreement and the "Applicable Law and Regulation" under another XL Retrocession Agreement, complying

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with this Clause 30.7 would be illegal, invalid or unlawful. This Clause 30.7 shall cease to apply in respect of any XL Retrocession Agreement on termination of that XL Retrocession Agreement.
31.
JURISDICTION
31.1
Subject to Clause 30, the courts of England have exclusive jurisdiction to settle any dispute arising from or connected with this Agreement (a "Dispute") including a dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity.
31.2
The Parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary.
31.3
Subject to Clause 32, the Parties agree that the documents which start any proceedings relating to a Dispute ("Proceedings") and any other documents required to be served in relation to those Proceedings may be served on a Party in accordance with Clause 28. These documents may, however, be served in any other manner allowed by law. This Clause 31.3 applies to all Proceedings wherever started.
32.
PROCESS AGENT
32.1
Each party which is not a company incorporated in England and Wales shall at all times maintain an agent for service of process in England. The Retrocessionaire and the Company irrevocably appoint GreyCastle Services Limited whose registered office is at 20-22 Bedford Row, London WC1R 4JS, England and the Retrocedant irrevocably appoint XL Services UK Limited at its registered office from time to time (the "Process Agent") as their agent for such purpose.
32.2
Without prejudice to any other permitted mode of service, each Party agrees that service of any claim form, notice or other document for the purpose of any Proceedings begun in England shall be duly served upon it if served on the Process Agent appointed by it in any manner permitted by the Civil Procedure Rules, whether or not it is forwarded to the Party.
32.3
If for any reason the Process Agent appointed by any Party at any time ceases to act as such, the Party shall promptly appoint another such agent and promptly notify the other parties of the appointment and the new Process Agent's name and address. If the Party concerned does not make such an appointment within 7 Business Days of such cessation, then any other Party may do so on its behalf and shall notify the other Parties if it does so.
33.
DELAYS, ERRORS AND OMISSIONS
Any inadvertent delay or error, in complying or omission to comply with the terms and conditions of this Agreement by one Party will not relieve any other party hereto from any obligation which would attach to it hereunder if such error, omission or delay had not been made, except to the extent that the obligation cannot be performed by reason of the delay error or omission, provided such error, omission or delay is rectified promptly upon discovery (and at the expense of the Party that delays, errs or omits to act) . Nothing contained in this Clause shall be held to impose obligations on any Party greater than would have attached hereunder had such error or omission not occurred.
34.
COUNTERPARTS
This Agreement may be executed in any number of counterparts and by the Parties to it on separate counterparts, each of which is an original and all of which together evidence the same agreement.

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RETROCESSION AGREEMENT BETWEEN
XL RE EUROPE SE AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE




Executed by the Parties

 
 
 
 
 
Signed by
)
/s/ David Watson
XL Re Europe SE
)
 
 
 Signature


- 34 -




    
RETROCESSION AGREEMENT BETWEEN
XL RE EUROPE SE AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE



 


 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
(in respect of its segregated account XL-1)
)
 
 
 Signature
    

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RETROCESSION AGREEMENT BETWEEN
XL RE EUROPE SE AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE






 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
 
 
 Signature
 
 
 


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Exhibit 10.4 Retrocession Agreement - XL Re Ltd (UK Branch)
Exhibit 10.4

 
EXECUTION VERSION
 
 
 
 

   
XL RE LTD (UK BRANCH)

AND

XL LIFE REINSURANCE (SAC) LTD. (FOR ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)

 
RETROCESSION AGREEMENT
 







CONTENTS
Clause
Page
1.    Interpretation
1
2.    Insuring Clause
18
3.    Retrocession Premium
19
4.    Time on Risk Adjustment
20
5.    Effective Date and Termination
20
6.    Reporting Information
24
7.    Relevant Accounts
24
8.    Collateral Obligations
25
9.    Audit Rights
28
10.    Undertakings
29
11.    Agreed Capital and Dividends
31
12.    Negative Pledge
32
13.    Segregated Accounts
32
14.    Retrocessionaire Capital Account
33
15.    Set-Off
34
16.    Confidentiality
34
17.    Data Protection
35
18.    Currency
35
19.    Announcements
36
20.    Costs
36
21.    Further Assurance
36
22.    Entire Agreement
37
23.    Waivers
37
24.    Contracts (Rights of Third Parties) Act 1999
38
25.    Severability
38




26.    Variation
38
27.    Assignment and Subcontracting
38
28.    Notices
38
29.    Governing Law
39
30.    Expert Resolution
39
31.    Jurisdiction
40
32.    Process Agent
40
33.    Delays, Errors and Omissions
41
34.    Counterparts
41
 
 
Schedule 1 Retroceded Policies
 
Part A SPA Business
 
Part B Non-SPA Business
 
Part C Security Agreements
 
Part D Ancillary Documents
 
Schedule 2 Client Account Reporting Information
 
Part A Client Account Report Information
 
Part B Relevant Account Report Information
 
Part C Client Account Report Format
 
Schedule 3 Agreed Capital Level
 
Schedule 4 Investment Management Arrangements
 
Part A Management of Retrocedant Assets
 
Part B Management of Retrocessionaire’s Assets
 
Part C Disputes
 
Part D Delivery of Reports and Notices
 
Part E Liability of XL GIL and the XL Retrocedants
 
Schedule 5 Initial Funds-Withheld Portfolio
 




Agreed Form Documents
 
1. Client Account Report
 
2.    Relevant Account Report
 
3.    SIMA(s)
 
4.    Non-SPA Retrocedant Guidelines
 
5.    SPA Retrocedant Guidelines
 
6.    Participation Agreement
 
7.    Retrocessionaire Guidelines
 
8.    Deed of Charge
 
9.    Investment Management Governance and Operating Framework
 
 
 






THIS AGREEMENT is made on 30 May 2014
BETWEEN:
(1)
XL Re Ltd, (UK Branch) a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered branch address is at XL House, 70 Gracechurch Street, London EC3V 0XL, England (the "Retrocedant");
(2)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda (the "Company"); and
(3)
XL Life Reinsurance (SAC) Ltd., an exempted company incorporated in Bermuda with registration No. 49002 and registered as a segregated accounts company under the SAC Act (as defined below), whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda acting in respect of its segregated account XL‑1 (the "Retrocessionaire"),
each a "Party" and together "the Parties".
INTRODUCTION:
(A)
The Company is incorporated in Bermuda as a segregated accounts company pursuant to the SAC Act (as defined below), licensed as a Class C insurer pursuant to the Insurance Act (as defined below) and has established the Retrocessionaire for the purpose of reinsuring the Retroceded Policies.
(B)
The Retrocedant has agreed that the Retrocessionaire will reassure it in respect of the Retroceded Policies.
(C)
The Parties wish to record the terms of the above agreement in this Agreement.
The Parties agree as follows:
1.
INTERPRETATION
"Account Date" means 1 January 2014 and thereafter each 1 April, 1 July, 1 October and 1 January in each year and the last "Account Date" shall be the first such date falling after the last Reporting Date;
"Actuary" means the Retrocedant's Actuary and/or the Retrocessionaire's Actuary (as the context requires);
"Administration Services Agreement" means the services agreement to be entered into between the Service Provider and XL Services UK Limited, the Retrocedant and XL Re Europe (acting through its UK branch) providing for the transfer of certain resources from the XL Group to the Service Provider and the provision of certain administration services for the benefit of the XL Retrocedants;

- 1 -



"Affiliate" means with respect to any person, at the time in question, any other person controlling, controlled by or under direct or indirect common control with such person. For this purpose "control" means the power to direct or cause the direction of the management or policies of a person through the ownership of securities, by contract or otherwise and the terms "controlling" and "controlled" shall be construed accordingly;
"Agreed Capital Level" means as at a Relevant Date, the amount determined in accordance with the provisions of Schedule 3;
"Applicable Law and Regulation" means, at any time, and in respect of a Party, any and all of the following as applicable to that Party and in force at that time:
(a)
legislation (including enactments, statutes, statutory instruments, treaties, regulations, orders, directives, by-laws and decrees) and common law, in each case applicable to the relevant Party from time to time in the context of the performance of its obligations under the Agreement or enjoyment of its rights under this Agreement;
(b)
binding regulatory rules and binding codes of conduct, directions, rules and guidance issued by, in the case of the Retrocedant, the BMA and the UK Regulators and, in the case of the Retrocessionaire and the Company, the BMA (or any rules from time to time in force which replace such rules), such rules and guidance as reasonably interpreted by a Party in accordance with any specific advice or individual guidance provided to that Party by the relevant regulator in respect of that rule (a "Regulatory Requirement"); and
(c)
judgments, resolutions, decisions, orders, directions, notices, demands or other requirements of a competent court, tribunal or the BMA or the UK Regulators in the case of the Retrocedant and the BMA in the case of the Company and the Retrocessionaire;
"Balance" means for the purposes of calculating a Call Amount or Return Amount the balance standing to the credit of a Relevant Account valued in accordance with the Valuation Basis, which shall be deemed to be increased by the amount of $16.4m in the case of the Funds-Withheld Accounts, but only until such time as any amount due to the Retrocedant or the Retrocessionaire pursuant to Clause 4.2.1 or 4.2.2 as applicable, is paid; provided, however, that in no event shall the Balance take into account any assets deposited in or credited to such Relevant Account by the Retrocedant or on its behalf by a member of the XL Group as contemplated by Clause 7.8;
"Base Amount" means in respect of a Security Account, the amount the Retrocedant is required to maintain in that Security Account pursuant to the Security Agreement applicable to such Security Account or as operated by the Retrocedant as at the date of this Agreement;
"BMA" means the Bermuda Monetary Authority;
"Board Resolution" means the resolution approved by the Board on 25 April 2014 pursuant to which the Retrocessionaire was created;

- 2 -



“Buffer Percentage” means 1%;
"Business Day" means any day other than a Saturday or Sunday or public or bank holiday in England and Bermuda;
"Buyer's Group Undertaking" means Holdco or a company which is, at any time on or after the date of this Agreement, a subsidiary or holding company of Holdco or a subsidiary of a holding company of Holdco and includes the Company after the date of completion of the sale of the Company to Holdco pursuant to the Sale and Purchase Agreement;
"Call Amount" means in respect of:
(a)
a Security Account, the amount (if any) by which the Balance of that Security Account as of any Valuation Date is less than the Collateral Amount for that Security Account as of such Valuation Date; or
(b)
the Funds-Withheld Accounts, the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is less than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;
“Call Amount Default” means, with respect to any Relevant Account, the failure by the Retrocessionaire to pay any Call Amount with respect to such Relevant Account on or prior to the Due Date therefor in accordance with the terms of this Agreement and such Call Amount Default shall be deemed to continue until such time as the Call Amount due in respect of such Relevant Account (as adjusted as of any Valuation Date), together with all interest accrued thereon in accordance with Clause 8.10, is paid by the Retrocessionaire to the Retrocedant;
"Call Amount Default Period" means the period commencing as of the Business Day immediately following the occurrence of either a Call Amount Default as defined in this Agreement or a "Call Amount Default" as defined in either of the other XL Retrocession Agreements and shall continue until such time as no Call Amount Default under this Agreement nor any "Call Amount Default" as defined in either of the other XL Retrocession Agreements is continuing;
"Call Notice" has the meaning given to it in Clause 8.4;
"Capital Notice" has the meaning given to it in Clause 11.2;
"Capital Notice Challenge" has the meaning given to it in Clause 11.3;
"Capital Requirements" means the regulatory capital requirements of the Company and/or the Retrocessionaire calculated in accordance with the Insurance Act;
"Centre of Main Interest" has the meaning given to it in the EC Council Regulation of 29 May 2000 on insolvency proceedings (1346/2000/EC);

- 3 -



"Change of Control" means the occurrence of an event following the completion of the sale of the Company and the Retrocessionaire to Holdco pursuant to the Sale and Purchase Agreement whereby:
(a)
Holdco or the Investors, in aggregate, ceases to legally and beneficially own 100% of the issued and outstanding ordinary shares of capital stock of the Company or any such shares become subject to any encumbrance that is not removed within 30 days;
(b)
Holdco ceases to be the sole beneficial owner of the Retrocessionaire or any such beneficial interest become subject to any encumbrance;
(c)
the Company or the Retrocessionaire amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person any right to acquire any securities of the Company or the Retrocessionaire;
(d)
the Retrocessionaire transfers, including by way of reinsurance, all or substantially all of its business, liabilities or assets;
(e)
Holdco amalgamates, merges or consolidates with or into any other person or issues any securities, or any instruments convertible or exchangeable into securities, or otherwise conveys to any person other than the Investors any right to acquire any securities of Holdco; or
(f)
any Investor sells, disposes of or transfers any of its interest in Holdco other than, pursuant to a transfer permitted by the Investor Support and Undertakings Agreement;
"Client Account Report " means the report in the agreed form to be delivered pursuant to Clause 6.1, reflecting the Client Account Report Information in respect of each Retroceded Policy;
"Client Account Report Information" means the information specified in Part A of Schedule 2, to be provided by the Retrocedant in respect of each Retroceded Policy and reflected in the Client Account Report;
"Client Account Reporting Period" means a period of one Quarter;
"Closing Excess Assets" means $35m at the date of this Agreement, reducing by $7m on each of the first five anniversaries of this Agreement;
"Collateral Amount" means:
(a)
in the case of a Security Account, the sum of: (i) the Base Amount as at the Relevant Date; and (ii) an amount as at the Relevant Date, equal to the Base Amount multiplied by the Buffer Percentage; or
(b)
in the case of the Funds-Withheld Accounts, the sum of: (i) the aggregate

- 4 -



Value of the Funds-Withheld Reserves as at the Relevant Date; and (ii) an amount as at the Relevant Date equal to the Funds-Withheld Reserves multiplied by the Buffer Percentage;
"Collateral Fee" means an interest rate equal to the 5-year U.S. treasury bond rate plus 700 basis points;
“Collateral Fee Payment Date” has the meaning given to it in Clause 8.9;
“Collateral Fee PIK Amount” means, as of any date, the amount of any Collateral Fees added to the Collateral Fee PIK Amount pursuant to Clause 8.9, less the amount of any Collateral Fee PIK Amounts repaid by the Retrocessionaire pursuant to Clause 8.9;
"Constitutional Documents" means the following documents:
(a)
the memorandum of association of the Company;
(b)
the bye-laws of the Company; and
(c)
the Participation Agreement;
"Conversion Rate" means, in respect of any amount to be converted from one currency into a second currency, the relevant rate used by the Retrocedant in the preparation of its accounts will be treated as the prevailing rate as at the Relevant Date;
"Costs" means all losses, liabilities, costs (including legal costs and experts' and consultants' fees), charges, expenses, actions, proceedings, claims and demands;
"Cross-Agreement Recapture Event" means an event which gives rise to the obligation to pay a Recapture Amount (as defined in each of the XL Retrocession Agreements respectively) under more than one of the XL Retrocession Agreements;
"Currency Block" means, in respect of the Retrocedant, all Retroceded Policies ceded to this Agreement by the Retrocedant that are denominated in a particular currency;
"Custodian" means such authorised person serving from time to time as the custodian of a Security Account and/or the Funds-Withheld Accounts;
"Data Protection Laws" means, in relation to a Party, the laws and regulations applicable to that Party regulating data protection, data privacy and/or the protection of personal and/or sensitive information, including, where applicable: the relevant principles of the Insurance Code of Conduct issued by the Bermuda Monetary Authority in February 2010 relating to the safeguard of sensitive information and the requirements for appropriate risk management procedures relating to the same; and laws implementing EU Directive 95/46/EC (including for example the UK Data Protection 1998);
"Deed of Charge" means the Bermuda law governed fixed and floating charge entered into on the same date as this Agreement between (1) the Retrocessionaire; (2) the Retrocedant; (3) XL Re and (4) XL Re Europe SE;

- 5 -



"Difference" means the amount (whether positive or negative) determined by the sum of: (i) the Recapture Amount determined by the Retrocedant's Actuary; less (ii) the Recapture Amount determined by the Expert pursuant to Clause 30;
"Dispute" has the meaning given to it in Clause 31.1;
"Distribution" means every description of dividend or distribution of the Retrocessionaire's assets to its beneficial owner(s) whether in cash or otherwise;
"Due" has the meaning given under section 4.90(4) of the Insolvency Rules 1986;
"Due Date" has the meaning given to it in Clause 8.10;
"Effective Date" means 1 January 2014;
"Event of Default" means any event or circumstance referred to in Clause 5.2;
"Expert" has the meaning given to it in Clause 30.1;
"External Retrocession Agreements" means the following agreements:
(a)
a retrocession agreement between the Retrocedant and the Irish Branch of Sun Life Assurance Company of Canada dated 30 August 2004 with reference number XLRE001; and
(b)
a retrocession agreement between the Retrocedant and the Irish Branch of Sun Life Assurance Company of Canada dated 30 November 2005 with reference number XLRE002;
"Funds-Withheld Accounts" means the cash and securities accounts established by the Retrocedant in relation to the Non-SPA Business, for the purposes of this Agreement;
"Funds-Withheld Assets" means the assets from time to time deposited in or otherwise standing to the credit of the Funds-Withheld Accounts;
"Funds-Withheld Reserves" means in respect of the Retroceded Policies relating to the Non-SPA Business identified:
(a)
with a reserve basis "B" in Schedule 1, an amount as at the Relevant Date, equal to 110% of the amount of the reserves calculated in accordance with the methodology the Retrocedant reflects in the XL Group financial reports in accordance with US GAAP (or such other accounting principles, practices or standards as may succeed US GAAP); or
(b)
with a reserve basis "C" in Schedule 1, an amount as at the Relevant Date, equal to 100% of the reserves calculated in accordance with the methodology the Retrocedant reflects in its annual return to the UK Regulators;
"Guidance Notes" means the guidance notes issued by the Insurance Department of the BMA, as amended or supplemented from time to time;

- 6 -



"Guidelines" means the Non-SPA Retrocedant Guidelines and/or the SPA Retrocedant Guidelines as the context requires;
"Holdco" means GreyCastle Holdings Ltd, a company incorporated under the laws of Bermuda whose registered office is at Clarendon House, 2 Church Street, Hamilton, Bermuda;
"In-Force" means, in respect of any reassurance or retrocession treaty or agreement, such treaty or agreement if, and only if, the Retrocedant has any liability or potential liability under it;
"Initial Funds-Withheld Portfolio means the cash and investment assets set out in Schedule 5.
"Insolvency Event" means, in respect of the Company, the Retrocessionaire or Holdco (unless otherwise specified below):
(a)
that person is or becomes insolvent, it is, or becomes, unable, or admits its inability to pay, its debts as they fall due, suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors (or any class of them) with a view to rescheduling any of its indebtedness;
(b)
the value of the assets of that person is or becomes less than its liabilities (taking into account contingent and prospective liabilities), in each case calculated and determined on the basis of, and by reference to either the relevant regulatory returns or the relevant accounts;
(c)
a moratorium is declared in respect of that person’s indebtedness;
(d)
any corporate action, regulatory action, legal proceedings, or other procedure or step is taken for:
(i)
the suspension of payments by, or a moratorium of any indebtedness, winding-up (including a petition for winding up presented against the Company by the BMA pursuant to Section 35 of the Insurance Act), dissolution, administration or reorganisation (by way of voluntary arrangement, scheme of arrangement or otherwise, but in each case other than a voluntary and solvent liquidation, or a reorganisation, for the purposes of reconstruction or amalgamation) of, that person;
(ii)
a composition, compromise, assignment or arrangement with one or more of that person’s creditors or any class of them;
(iii)
the appointment of a liquidator, receiver, administrative receiver, administrator, examiner, trustee in bankruptcy, compulsory manager or other similar officer in respect of all or substantially all of that person’s assets (including, in the case of the

- 7 -



Retrocessionaire, the appointment of a receiver over its business and assets in accordance with the provisions of the SAC Act); or
(iv)
enforcement of any security over all or a substantial part of that person’s assets, and
where such corporate action, legal proceedings or other procedure or step is taken by any third party other than that person and its directors, the action, proceedings, procedure or step (as the case may be) is not discharged, stayed or dismissed within fifteen (15) days;
(e)
an encumbrancer takes possession of the whole or any substantial part of the assets of that person or distress or execution is levied or enforced upon or sued out against the whole or any substantial part of that person's assets and, in the case of any of the foregoing events, the matter is not discharged, stayed or dismissed within fifteen (15) days;
(f)
any matter, or the occurrence of any event, in any jurisdiction which corresponds with, or has an effect equivalent to, or is otherwise analogous to, any of the matters or events referred to at any of (a) to (e) (in each case inclusive) above; or
(g)
the Retrocessionaire or the Company ceases or suspends or threatens to cease or suspend all or a material part of its operations or business for a period of more than 20 Business Days;
"Insurance Act" means the Insurance Act 1978 (as amended) of Bermuda and its related regulations;
"Interests" means all rights and obligations of a Non-Lead Investor in connection with its direct or indirect investment in the Retrocessionaire and its obligations in respect of Investor Capital Calls, including its obligations set out in the Investor Support and Undertakings Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement);
"Investment Management Costs" means any Costs consisting of: (i) investment management fees and other costs or expenses of any XL External Managers, (ii) costs or expenses of any Custodians, and (iii) costs and expenses of third-party accountants, in each case that are suffered or incurred by the Retrocedant or XLGIL in connection with the operation of the Security Accounts and/or the Funds-Withheld Accounts, in the case of clause (iii) not to exceed three basis points of the assets under management in the Security Accounts and the Funds-Withheld Accounts per annum and, in each such case, including, without limitation, (x) any costs and expenses incurred in terminating or appointing any XL External Managers or Custodians, and (y) any withholding payments, taxes, fees, duties, levies and contributions or charges in the nature of a tax (whether supranational, domestic or foreign) on or associated with any of the foregoing amounts (including, without limitation, VAT and any E.U. “financial transactions tax” or similar taxes), and any penalty or interest connected therewith. In addition, following a Retrocessionaire Change of Authority, Investment Management Costs shall also include all of the foregoing types of Costs suffered or incurred by the Retrocedant or

- 8 -



XLGIL in managing the assets of the Retrocessionaire, as well as any: (i) investment management fees and other costs or expenses of any Retrocessionaire Managers (including any costs and expenses incurred in terminating or appointing any Retrocessionaire Managers), (ii) third party costs and expenses incurred by XLGIL in connection with the management of the assets of the Retrocessionaire, and (iii) XLGIL’s internal costs and expenses incurred in connection therewith (including the cost of the time expended by personnel of XLGIL with respect to any such activities).
"Investment Management Governance and Operating Framework" means the governance framework in the agreed form in relation to investment management to be adopted by the Retrocessionaire;
"Investor Capital Calls" means the mandatory commitments imposed on the Investors under the Sale and Purchase Agreement, the Investor Support and Undertaking Agreement and the Investor Contingent Capital Commitments (as such term is defined in the Investor Support and Undertakings Agreement), requiring them to contribute cash to the Retrocessionaire upon the terms and conditions set forth therein;
"Investor Contingent Capital Commitment Letter" has the meaning given in the Sale and Purchase Agreement;
"Investor Support and Undertakings Agreement" means the agreement between the XL Retrocedants, the Retrocessionaire, the Company, Holdco and the Investors dated on or about 30 May 2014;
"Investors" means all holders of share capital from time to time in Holdco;
"Lead Investors" means the Investors so identified in the Investor Support and Undertakings Agreement and such other person who from time to time acquires the rights and/or obligations of such persons, whether by assignment, novation, operation of law or otherwise;
"Losses" means, without limiting in any way the provisions of Clause 2.4, the gross amount of any:
(a)
liability for losses, claims, payments, other Costs made and/or incurred and settlements under or in respect of the Retroceded Policies and risks ceded and attaching to the Retroceded Policies, including ex-gratia payments, "without prejudice" payments, extra contractual payments arising under a Retroceded Policy, punitive settlements and interest payments;
(b)
liability for payments to Underlying Cedants in consequence of recapture, novation or termination of Retroceded Policies, premium rebates, returns (including in respect of errors in calculations performed by an Underlying Cedant prior to the Effective Date), refunds, surrender payments, commissions, brokerage, and profit share payments in respect of the Retroceded Policies;

- 9 -



(c)
regulatory levies (including to the extent applicable levies under the United Kingdom Financial Services Compensation Scheme), but not fines, penalties or other financial sanctions, to the extent referable to the Retroceded Policies;
(d)
any Costs relating to any disputes with Underlying Cedants in respect of a Retroceded Policy;
(e)
any Costs associated with complying with a periodic payment order relating to a Retroceded Policy;
(f)
any Costs, including interest payable, in respect of the late payment of amounts owed under a Retroceded Policy;
(g)
allocated external loss adjustment expenses in respect of the Retroceded Policies;
(h)
liability for premiums payable under any External Retrocession Agreements; and
(i)
any other Costs relating to the Retrocedant's obligations as reinsurer under the Retroceded Policies which is suffered or incurred by the Retrocedant and which is not otherwise excluded under this Agreement,
and includes, for the avoidance of doubt, any irrecoverable VAT component of the losses in (d) above;
"Maximum Investor Capital Call Amount" means as of any date the aggregate maximum amounts under all Investor Contingent Capital Commitment Letters;
"Net Retained Losses" means the Losses of the Retrocedant net of any amounts actually recovered by the Retrocedant in respect of those Losses under any External Retrocession Agreement;
"Non-Lead Investor" means any Investor other than a Lead Investor;
"Non-SPA Business" means the Retroceded Policies identified in Part B of Schedule 1;
"Non-SPA Premium" has the meaning given to it in Clause 3.1.2;
"Non-SPA Retrocedant Guidelines" means the investment guidelines in the agreed form in relation to the management of the Funds-Withheld Assets, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Notice of Challenge" has the meaning given to it in Clause 8.13;
"Participation Agreement" means the agreement between the Company, the Retrocessionaire and the XL Retrocedants establishing a participation interest in the Retrocessionaire in favour of the XL Retrocedants, dated on or about the date of this Agreement;

- 10 -



"Period of Risk" means the period commencing on the Effective Date and ending on the earlier of: (a) the date on which the last of the Retroceded Policies ceases to be In-Force; or (b) the date on which the Retroceded Policies are recaptured in accordance with Clause 5;
"Permitted Assets" means:
(a)
in respect of the SPA Business, assets permitted to be held in the Security Accounts under both the relevant Security Agreement and the SPA Retrocedant Guidelines; or
(b)
in respect of the Non-SPA Business, assets permitted to be held under the Non-SPA Retrocedant Guidelines;
"Potential Event of Default" means any event or circumstance which might reasonably be expected to become an Event of Default;
"Premium" means together the SPA Premium and the Non-SPA Premium;
"Proceedings" has the meaning given to it in Clause 31.3;
"Process Agent" has the meaning given to it in Clause 32.1;
"Quarter" means a calendar quarter ending on one of 31 March, 30 June, 30 September or 31 December in any relevant year;
"Recapture Agreement Period" has the meaning given to it in Clause 5.4;
"Recapture Amount" means the sum of:
(a)
an amount equal to the Reserves in respect of the recaptured Retroceded Policies, calculated as at the relevant Valuation Date; less
(b)
an amount equal to the aggregate Value as at the relevant Valuation Date, of the assets deposited in or otherwise standing to the credit of all of the Relevant Accounts, subject to Clause 5.7;
"Reinsured Event" means any and all risks reinsured by the Retrocedant pursuant to the Retroceded Policies;
"Relevant Accounts" means the Security Accounts and/or the Funds-Withheld Accounts as the context requires;
"Relevant Account Information" means the information in Part B of Schedule 2 to be provided by the Retrocedant in respect of each Relevant Account and to be reflected in the Relevant Account Report;
"Relevant Account Period" means each period from and including an Account Date to, but excluding, the next following Account Date, save that on termination of this Agreement the last Relevant Account Period shall be from and including the Account

- 11 -



Date falling in the immediately preceding Relevant Account Period to, but excluding, the date of termination;
"Relevant Account Report" means the report in the form to be agreed to be delivered pursuant to Clause 6.2, reflecting the Relevant Account Information in respect of each Relevant Account;
"Relevant Agreement" has the meaning given to it in Clause 5.8.2;
"Relevant Date" means for the purpose of any calculation or the determination of any right or liability, the date as at which such calculation is to be carried out or as at which such right or liability is to be determined as specified in this Agreement or, if such day is not a Business Day, the Business Day immediately preceding such day;
"Replaced Assets" has the meaning given to it in Clause 8.15.1;
"Reporting Date" means the 10th Business Day of each Quarter and the last "Reporting Date" shall be the first such date falling after termination of this Agreement;
"Reserves" means the provisions the Retrocedant is or would be required to make to cover its reinsurance liabilities arising under or in connection with its obligations in respect of the Retroceded Policies following recapture pursuant to Clause 5.3 of the business ceded to the Retrocessionaire, calculated in accordance with Applicable Law and Regulation applying to reinsurers in the United Kingdom or, if greater, such provisions calculated on the basis on which the Retrocedant operates the SPA Business;
"Retroceded Policies" means, at any time, such of the reassurance and retrocession treaties and agreements listed in Parts A and B of Schedule 1 as are In-Force at that time;
"Retrocedant's Actuary" means the person appointed by the Retrocedant from time to time to perform the function referred to in 4.3.13R of the Supervision Manual of the Relevant Regulator Handbook of Rules and Guidance;
"Retrocessionaire Capital Account" means the account established pursuant to Clause 14;
"Retrocessionaire Capital Account Assets" means the assets from time to time credited to the Retrocessionaire Capital Account;
“Retrocessionaire Change of Authority” has the meaning given to it in Clause 5.9;
"Retrocessionaire Guidelines" means the investment guidelines in relation to the management of the assets of the Retrocessionaire, as may be amended or modified from time to time in accordance with Clause 10.6 and Schedule 4;
"Retrocessionaire IMA(s)" means the investment management agreement(s) entered into from time to time between the Retrocessionaire and one or more Retrocessionaire Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the assets of the Retrocessionaire may be managed on behalf of the Retrocessionaire in

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accordance with the Retrocessionaire Guidelines, in a form meeting the requirements of the provisions of Schedule 4;
"Retrocessionaire Manager" means any investment manager appointed by the Retrocessionaire in accordance with the provisions of Schedule 4 to manage its assets;
"Retrocessionaire Uncured Breach" has the meaning given to it in paragraph 2.1.1 of Part B of Schedule 4;
"Retrocessionaire's Actuary" means the person appointed from time to time by the Retrocessionaire to perform the function referred to in section 26 of the Bermuda Insurance Act 1978 and the Guidance Note #9;
"Return Amount" means in respect of:
(a)
a Security Account, the amount (if any) by which the Balance of that Security Account as of any Valuation Date is more than the Collateral Amount for that Security Account as of such Valuation Date; or
(b)
the Funds-Withheld Accounts, the amount (if any) by which the aggregate Balance of the Funds-Withheld Accounts as of any Valuation Date is more than the Collateral Amount for the Funds-Withheld Accounts as of such Valuation Date;
"Return Notice" has the meaning given to it in Clause 8.4;
"SAC Act" means the Segregated Accounts Companies Act 2000 (as amended) of Bermuda;
"Sale and Purchase Agreement" means the agreement between Holdco as "Purchaser" and XL Insurance (Bermuda) Limited as "Seller", dated 1 May 2014;
"Security" means any mortgage, charge (whether fixed or floating, legal or equitable) pledge, lien, assigned by way of security or other security interest securing any obligation of any person.
"Security Accounts" means the accounts secured in favour of the Underlying Cedants, established pursuant to the Security Agreements by the Retrocedant to support the Retrocedant's obligations under the Retroceded Policies relating to the SPA Business;
"Security Account Assets" means the assets from time to time deposited in or otherwise standing to the credit of a Security Account;
"Security Agreements" means the security agreements which relate to the SPA Business as listed in Part C of Schedule 1 and the ancillary documents relating thereto as listed in Part D of Schedule 1;
"Segregated Account Matters" means any dispute, controversy or claim arising out of or relating to (i) the validity and effectiveness of the establishment and operation of the Company and/or the Retrocessionaire under the SAC Act (ii) the application or

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interpretation of the SAC Act, or (iii) compliance with or the interpretation or effect of Clause 13 (Segregated Accounts) of this Agreement.
"Service Provider" means GreyCastle Services Limited, a company incorporated under the laws of England and Wales (registered no. 09019536), whose registered office is at 20‑22 Bedford Row, London, WC1R 4JS;
"SIMA" means one or more sub-investment management agreement entered into from time to time between XL GIL acting on behalf of the Retrocedant, the Retrocessionaire and one or more XL External Managers pursuant to Clause 10.6 and Schedule 4, setting out the terms on which the Funds-Withheld Assets and the Security Account Assets may be managed on behalf of the Retrocedant in accordance with the Guidelines, in the agreed form, as revised from time to time in accordance with the provisions of Schedule 4;
"SPA Business" means the Retroceded Policies identified in Part A of Schedule 1;
"SPA Premium" has the meaning given to it in Clause 3.1;
"SPA Retrocedant Guidelines" means the investment guidelines in the agreed form in relation to the management of the Security Account Assets, as may be amended from time to time in accordance with Clause 10.6 and Schedule 4;
"Substitution Notice" has the meaning given to it in Clause 8.14;
"Total Premium" has the meaning given to it in Clause 3.2.2;
"Transaction Documents" means together this Agreement, the Administration Services Agreement, the SIMA(s), the Security Agreements, the Floating Charge, the Guidelines, the Retrocessionaire IMA(s), the other XL Retrocession Agreements, the Investor Support and Undertakings Agreement, the Constitutional Documents, the Transitional Services Agreement and the Retrocessionaire Guidelines;
"Transitional Services Agreement" has the meaning given in the Sale and Purchase Agreement;
"Trigger Event Date" has the meaning given in the Investor Support and Undertakings Agreement;
"UK Regulators" means the Prudential Regulation Authority and the Financial Conduct Authority and any successors thereto;
"Uncured Breach" has the meaning given to it in paragraph 2.3.1 of Part A of Schedule 4;
"Underlying Cedants" means the persons identified in the column headed "Underlying Cedant" in the table in Schedule 1;
"USD" or "$" means the lawful currency of the United States of America;


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"Valuation Agent" means:
(a)
with respect to a Security Account, the "Valuation Agent" as defined in a Security Agreement; and
(b)
for the purpose of Clause 4.2, the date of this Agreement;
(c)
with respect to the Funds-Withheld Accounts, the Retrocedant's Actuary;
"Valuation Basis" means:
(a)
in the case of a Security Account, the valuation methodology set out in the Security Agreement applicable to such Security Account as applied by the Retrocedant as at the date of this Agreement; and
(b)
in the case of the Funds-Withheld Accounts, the actuarial principles disclosed from time to time to the Retrocessionaire and the Retrocessionaire's Actuary and used by the Retrocedant as at the Relevant Date to value the assets backing the Funds-Withheld Reserves which the Retrocedant is required to maintain for regulatory purposes;
"Valuation Date" means:
(a)    Left intentionally blank
(a)
in respect of the calculation of the Recapture Amount the date of termination of this Agreement; or
(b)
when determining if a Call Amount or Return Amount exists in respect of a Security Account, a "Valuation Date" as defined in the relevant Security Agreement; or
(c)
when determining if a Call Amount or a Return Amount exists in respect of a Funds-Withheld Account, the last Business Day of June and December in each year;
"Value" means the value of any assets deposited in or otherwise standing to the credit of a Relevant Account as at the Relevant Date calculated on the relevant Valuation Basis;
"Working Capital Assets" means all cash or other liquid assets of the Retrocessionaire (excluding amounts due to it from the Retrocedant pursuant to Clause 3);
"XL External Manager" means any investment manager appointed by the Retrocedant to manage the Funds-Withheld Assets and/or the Security Account Assets (as applicable) in accordance with the provisions of Schedule 4;
"XL GIL" means XL Group Investments Ltd, a company incorporated in Bermuda (registered no. EC29781) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda or an Affiliate or successor entity thereof;

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"XL Group" means the Retrocedant and any company which is, on or at any time after the date of this Agreement, a subsidiary or holding company of the Retrocedant, or a subsidiary of a holding company of the Retrocedant;
"XL Life" means XL Life Ltd, a company incorporated under the laws of Bermuda (registered no. EC24082) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton HM08, Bermuda;
"XL Re" means XL Re Ltd, a company incorporated under the laws of Bermuda (registered no. EC21291) whose registered office is at O'Hara House, One Bermudiana Road, Hamilton, HM08, Bermuda;
"XL Re Europe" means XL Re Europe SE (formerly known as, inter alia, XL Re Europe Limited), a European company formed under Council Regulation (EC) No. 2157/2001 of 8 October 2001 (registered no. 423311) whose registered office is at 8 St Stephen's Green, Dublin 2, Ireland;
"XL Retrocedants" means the Retrocedant, XL Re and XL Re Europe;
"XL Retrocession Agreements" means together, this Agreement, the XL Re Retrocession Agreement and the XL Re Europe Retrocession Agreement;
"XL Re Europe Retrocession Agreement" means the retrocession agreement between XL Re Europe, the Company and the Retrocessionaire dated the same date as this Agreement;
"XL Re Retrocession Agreement" means the retrocession agreement between XL Re, the Company and the Retrocessionaire dated the same date as this Agreement; and
"XL Services UK Limited" a company incorporated under the laws of England and Wales (registered no. 02816304), whose registered office is at XL House, 70 Gracechurch Street, London EC3V 0XL, England.
1.1
In this Agreement, a reference to:
1.1.1
a "holding company" or "subsidiary" shall have the meaning given in Section 86 of the Bermuda Companies Act 1981 as enacted and amended from time to time. A subsidiary and a subsidiary undertaking shall include any person the shares or ownership interests in which are subject to security and where the legal title to the shares or ownership interests so secured are registered in the name of the secured party or its nominee pursuant to such security;
1.1.2
liability under, pursuant to or arising out of (or any analogous expression) any agreement, contract, deed or other instrument includes a reference to contingent liability under, pursuant to or arising out of (or any analogous expression) that agreement, contract, deed or other instrument;
1.1.3
a document in the "agreed form" is a reference to a document in a form approved by the Parties and for the purposes of identification initialled by or on behalf of each Party and annexed hereto;

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1.1.4
a statutory provision (except where stated otherwise) includes a reference to the statutory provision as modified or re enacted or both from time to time whether before or after the date of this Agreement and any subordinate legislation made under the statutory provision (as so modified or re enacted) whether before or after the date of this Agreement except to the extent that any modification or re-enactment made after the date of this Agreement would create, increase or alter the liability of any party under this Agreement;
1.1.5
a "person" includes a reference to any individual, firm, company, corporation or other body corporate, government, state or agency of a state or any joint venture, association or partnership, works council or employee representative body (whether or not having separate legal personality);
1.1.6
a person includes a reference to that person's successors and permitted assigns;
1.1.7
a "party" or "Party" includes a reference to that party's or Party's personal representatives, successors and permitted assigns (including any person resulting from or continuing after any amalgamation, merger, consolidation or similar transaction in which a party or Party participates);
1.1.8
a clause, paragraph or schedule, unless the context otherwise requires, is a reference to a clause or paragraph of, or schedule to, this Agreement;
1.1.9
any English legal term for any action, remedy, method of judicial proceeding, legal document, legal status, court, official or any legal concept or thing shall, in respect of any jurisdiction other than England, be deemed to include what most nearly approximates in that jurisdiction to the English legal term and to any English statute shall be construed so as to include equivalent or analogous laws of any other jurisdiction;
1.1.10
a "company" shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established;
1.1.11
writing shall include any modes of reproducing words in a legible and non-transitory form;
1.1.12
the word "agreement," means this agreement as amended or supplemented, together with all recitals and all Schedules attached hereto or incorporated by reference, and the words "hereof," "herein," "hereto," "hereunder" and other words of similar import shall refer to this agreement in its entirety and not to any particular clause, paragraph or Schedule of this agreement;
1.1.13
times of the day is to London time; and
1.1.14
reference to "regulatory capital" means a reference to assets which are admissible under Applicable Law and Regulation for the purpose of determining a person's regulatory capital resources.
1.2
The ejusdem generis principle of construction shall not apply to this Agreement. Accordingly, general words shall not be given a restrictive meaning by reason of their

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being preceded or followed by words indicating a particular class of acts, matters or things or by examples falling within the general words. Any phrase introduced by the terms "other", "including", "include" and "in particular" or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms.
1.3
References to the Relevant Regulator Handbook of Rules and Guidance, or any other regulations or rules relating to the conduct of (re)insurance business, or to any part thereof, are to be construed as references to such handbook, rules or regulations, or to such part thereof, as amended and in force from time to time or as the same may be replaced from time to time and any reference to any provision of such handbook, rules or regulations, or to any part thereof, is to be construed as a reference to the corresponding provision thereof from time to time as adjusted by the effect of any transitional rules which may be applicable in place thereof or in supplement thereto from time to time.
1.4
The headings in this Agreement do not affect its interpretation.
1.5
The Schedules form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement, and any reference to this Agreement shall include the Schedules.
1.6
Words importing the singular include the plural and vice versa, and words importing a gender include every gender.
2.
INSURING CLAUSE
2.1
Subject to the terms and conditions of this Agreement, with effect on and from the Effective Date the Retrocedant shall cede to the Retrocessionaire and the Retrocessionaire agrees to accept in return for the payment of the Premium in accordance with Clause 3 the cession by way of 100 per cent. quota share reinsurance of the Retrocedant's risks under and attaching to, relating to or arising out of the Retroceded Policies, such that the Retrocessionaire will reinsure and indemnify the Retrocedant in the amount of 100 per cent. of its Net Retained Losses in respect of such Retroceded Policies.
2.2
Notwithstanding any other provision of this Agreement, it is agreed that the Net Retained Losses of the Retrocedant shall include any Loss to the extent that it relates to a liability or payment incurred in respect of a Reinsured Event (whether death, the diagnosis of a critical illness or otherwise) which occurred prior to, on, or after the Effective Date.
2.3
The Retrocessionaire shall discharge its obligations to the Retrocedant under Clause 2.1 by making payments in accordance with Clause 8.6.
2.4
The Retrocessionaire shall pay, as may be paid thereon and unconditionally follow the settlements (including ex gratia, "without prejudice" and any extra contractual settlements) against the Retrocedant and the Retrocessionaire shall be bound by settlements, or payments made by the Retrocedant irrespective of the legal liability of the Retrocedant and shall not be entitled to argue in defence or otherwise allege that the Retrocedant has failed to take all proper and businesslike steps in making the relevant settlement and/or payment.

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2.5
The Retrocedant agrees to consult in good faith with the Retrocessionaire in respect of any claim arising under any Retroceded Policy where the claim exceeds GBP500,000.
2.6
The Retrocedant will inform the Retrocessionaire of any such claim within 14 days of receiving notification from the underlying cedant, and, in the event of any disputes, will consult the Retrocessionaire with respect to the appointment of lawyers and experts. The Retrocedant will take into account any comments of the Retrocessionaire, but will not be bound to follow any request or suggestion of the Retrocessionaire. The Retrocedant will handle all claims in a proper and businesslike manner.
2.7
The sole remedy for any breach of Clauses 2.5 and 2.6 will be damages for any loss proved; provided that any such claim would not operate as a defence (including by way of setoff) against a claim in respect of the Retrocessionaire’s obligations under Clause 2.1.
3.
RETROCESSION PREMIUM
3.1
The premium payable under this Agreement in respect of the SPA Business (the "SPA Premium") is the aggregate of :
3.1.1
$2,869m; and
3.1.2
$4.7m, representing face value (expressed in USD) for the technical payable balances on the agreed 31st December 2013 balance sheet, reduced by a payment by the Retrocessionaire to the Retrocedant at face value (expressed in USD) for the technical receivable balances on the agreed 31st December 2013 balance sheet.
3.2
The premium payable under this Agreement in respect of the Non-SPA Business (the "Non-SPA Premium") is the aggregate of:
3.2.1
$179.4m; and
3.2.2
$4.2m, representing face value (expressed in USD) for the technical payable balances on the agreed 31st December 2013 balance sheet, reduced by a payment by the Retrocessionaire to the Retrocedant at face value (expressed in USD) for the technical receivable balances on the agreed 31st December 2013 balance sheet.
3.3
The aggregate amount due in respect of the SPA Premium pursuant to Clause 3.1 and the Non-SPA Premium pursuant to Clause 3.2 (such aggregate, the “Total Premium”) shall be paid on a funds withheld basis. The Retrocedant shall establish a payable and the Retrocessionaire shall establish a receivable in respect of the Total Premium.
3.4
The Total Premium shall be settled by the Retrocedant (i) offsetting against such premium payable amounts due to the Retrocedant pursuant to Clause 2 of this Agreement and (ii) paying to the Retrocessionaire any Return Amounts arising in respect of the Relevant Accounts as determined pursuant to Clause 8.

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3.5
On the date hereof, in respect of both the payment to be made on a funds withheld basis pursuant to Clause 3.2 and the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement, the Retrocedant shall transfer the Initial Funds-Withheld Portfolio to the Funds-Withheld Accounts.
4.
TIME ON RISK ADJUSTMENT
4.1
To put the Parties in the position, as between themselves, that they would each have been in if this Agreement had been entered into on the Effective Date, an adjustment payment will be made in accordance with the provisions of Clause 4.2 below.
4.2
Within 5 Business Days of the determination of the Final Reconciliation Amount Calculation Report pursuant to Clause 8.2 of the Sale and Purchase Agreement:
4.2.1
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii) the Total Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement exceeds (b) the " XL Re (UK Branch) Completion Amount" (as defined in the letter agreement, dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocedant shall pay an amount equal to such excess to the Retrocessionaire, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment; and
4.2.2
if (a) the sum of (i) the amount set out for the Retrocedant in "Line B – Total Reconciliation Amount by Ceding Company" of the Final Reconciliation Amount Calculation Report, (ii) the Total Premium and (iii) the Retrocedant's proportionate share of the deemed contribution to the Funds Withheld Account as set out at Item E of Schedule 12 to the Sale and Purchase Agreement is less than (b)  the " XL Re (UK Branch) Completion Amount" (as defined in the letter agreement, dated May 30, 2014, between XL Insurance (Bermuda) Ltd and GreyCastle Holdings Ltd) as set out on the Final Reconciliation Amount Calculation Report, the Retrocessionaire shall pay an amount equal to such shortfall to the Retrocedant, together with simple interest on such amounts at a rate of LIBOR plus two per cent (2%) per annum computed based on a 365-day year, from and including the date of this Agreement, to, but excluding, the date of payment.
5.
EFFECTIVE DATE AND TERMINATION
5.1
The obligations to reinsure the Retrocedant under this Agreement shall have effect during the Period of Risk only.
5.2
The Retrocedant shall be entitled to terminate this Agreement with immediate effect, (such termination to take effect in accordance with Clause 5.3) by notice in writing to

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the Retrocessionaire on or at any time after the occurrence of any of the following (each an "Event of Default"):
5.2.1
an Insolvency Event occurring in respect of the Retrocessionaire, the Company or Holdco;
5.2.2
the Company and/or the Retrocessionaire cease to be authorised by the BMA to reinsure the business retroceded to the Retrocessionaire under this Agreement;
5.2.3
the regulatory capital of the Company and/or the Retrocessionaire is less than 100 per cent. of the Company or Retrocessionaire's Capital Requirements;
5.2.4
any steps are taken in respect of the Company which would reasonably be expected to result in the Company's Centre of Main Interest changing from Bermuda;
5.2.5
the claims of the Retrocedant against the Retrocessionaire cease to rank at least pari passu with the claims of the Retrocessionaire's unsecured or unsubordinated reinsurance creditors, except for obligations mandatorily preferred by Applicable Law and Regulations applying to the Retrocessionaire;
5.2.6
other than the non-payment of a Call Amount, the Retrocessionaire is in breach of any payment obligation under this Agreement which is not remedied within 10 Business Days of it receiving written notice from the Retrocedant specifying the breach and requiring it to be remedied;
5.2.7
any Call Amount Default Period continuing for three or more years;
5.2.8
a Change of Control occurs;
5.2.9
a material breach by the Retrocessionaire or the Company of any provision of the SAC Act, the Insurance Act or of the Company's insurance licence which results in the BMA indicating it will exercise its powers of intervention under Section 32 of the Insurance Act;
5.2.10
a breach by the Retrocessionaire of its obligations pursuant to Clause 11 which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire specifying the breach and requiring it to be remedied;
5.2.11
a breach by the Retrocessionaire or the Company of the Constitutional Documents of the Retrocessionaire, which is not remedied to the reasonable satisfaction of the Retrocedant within 10 Business Days of the Retrocedant giving written notice to the Retrocessionaire or the Company (as applicable) specifying the breach and requiring it to be remedied; and
5.2.12
the Retrocession Agreement between XL Re and the Retrocessionaire, or the Retrocession Agreement between XL Re Europe SE and the Retrocessionaire, each entered into on or around the date hereof is terminated for any reason other than the natural run-off or expiry of the policies retroceded thereunder.

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5.3
If written notice to terminate this Agreement is given in accordance with the provisions of Clause 5.2:
5.3.1
upon receipt by the Retrocedant of assets of an aggregate Value equal to the Recapture Amount payable pursuant to Clause 5.5, the Retrocedant shall automatically recapture the reinsurance of all Retroceded Policies ceded by it under this Agreement on the basis that: (i) the Premium has been fully settled; and (ii) the Retrocessionaire's liability to reassure the Retrocedant in respect of those Retroceded Policies shall cease irrevocably and no further payments shall be payable by the Retrocessionaire as a result of the reassurance pursuant to this Agreement (other than payments accrued as at the date of such payment); and
5.3.2
the Retrocessionaire shall pay the Retrocedant the Recapture Amount in accordance with Clause 5.5.
5.4
The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree the Recapture Amount but if they do not do so within 15 Business Days of a notice being served to terminate this Agreement (the "Recapture Agreement Period"), the basis of recapture or any dispute in relation to it or the calculation of the Recapture Amount may be referred by the Retrocedant or the Retrocessionaire to the Expert for resolution pursuant to Clause 30 no later than 10 Business Days after the expiry of Recapture Agreement Period. If the determination of the Recapture Amount is referred for resolution pursuant to Clause 30, pending final agreement or determination the Recapture Amount shall be paid on a provisional basis in accordance with Clause 5.5.2 on the basis of a calculation performed by the Retrocedant's Actuary.
5.5
The Recapture Amount shall be paid as follows:
5.5.1
if the Recapture Amount is agreed within the Recapture Agreement Period, the agreed Recapture Amount shall be paid by or on behalf of the Retrocessionaire within 5 Business Days of agreement; or
5.5.2
if the Recapture Amount is not agreed within the Recapture Agreement Period, the Recapture Amount as calculated by the Retrocedant's Actuary shall be paid by or on behalf of the Retrocessionaire within 5 Business Days after the expiry of the Recapture Agreement Period;
5.6
If the calculation of the Recapture Amount has been referred for resolution pursuant to Clause 30, then the relevant Party will make a payment within 5 Business Days of agreement or settlement of the Recapture Amount pursuant to Clause 30 (or Clause 31) as follows:
5.6.1
if the Difference is positive, the Retrocessionaire shall make or cause to be made a payment of such amount to the Retrocedant; or
5.6.2
if the Difference is negative, the Retrocedant shall reimburse the Retrocessionaire such amount.
5.7
For the purposes of calculating the Recapture Amount, the Parties agree that any assets and associated investment income deposited by the Retrocedant or a member of the XL

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Group in a Relevant Account to remedy any failure by the Retrocessionaire to pay a Call Amount, shall not be treated as an asset of a Relevant Account;
5.8
Without prejudice to the Retrocessionaire's obligation to pay the full Recapture Amount, in the event that:
5.8.1
a Cross-Agreement Recapture Event occurs; and
5.8.2
there are not sufficient Reserves (as defined in each XL Retrocession Agreement under which a Recapture Amount becomes payable) as a result of the Cross-Agreement Recapture Event (each, a "Relevant Agreement") to fund all such Recapture Amounts,
the Retrocessionaire shall pay to each XL Retrocedant a pro rata amount of such Reserves as are available to meet its obligations to pay Recapture Amounts, in the proportion that the Recapture Amount owed to an XL Retrocedant under a Relevant Agreement represents when compared to the aggregate of the Recapture Amounts owed under all the Relevant Agreements.
5.9
In the event of a breach of the undertaking given in Clause 10.1.5 (provided always that in any case the breach is a Retrocessionaire Uncured Breach) or if the Retrocedant’s right to provide a Change of Authority Notice under Paragraph 2.4.1 of Part A of Schedule 4 is triggered, then in addition to any other remedies provided in such Paragraph 2.4.1 or otherwise available (whether by operation of law, equity, contract or otherwise), the Retrocedant may not terminate this Agreement but may require that the assets of the Retrocessionaire are managed by an investment manager nominated by XL GIL in its sole discretion (acting reasonably), including the existing investment manager, with such investment manager thereafter acting on instructions only from XL GIL (a “Retrocessionaire Change of Authority”) and the Parties agree that the associated Investment Management Costs will be payable in accordance with the provisions of Clause 7.10.
5.10
In the event of termination the Retrocessionaire and the Company will comply with the obligations in the Administration Services Agreement in relation to the retention, disposal and/or return of information received by the Retrocessionaire and/or the Company pursuant to or in connection with the Transaction Documents.
5.11
Subject to Clauses 5.12 and 5.13 below, upon termination of this Agreement each Party shall be released from any further obligations pursuant to this Agreement but such termination shall not terminate any accrued rights under this Agreement.
5.12
The provisions of this Agreement shall survive termination of this Agreement until all amounts due and payable hereunder have been paid.
5.13
Clauses 1, 5, 9, 16, 17 and 19 to 33 shall survive termination of this Agreement.

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6.
REPORTING INFORMATION
6.1
On each Reporting Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with a Client Account Report in the agreed form, setting out in respect of each Currency Block the Client Account Report Information in respect of the immediately preceding Client Account Reporting Period.
6.2
Within 10 Business Days of the Account Date (or if such day is not a Business Day then on the immediately following Business Day) the Retrocedant shall provide the Retrocessionaire with the Relevant Account Report in the agreed form, setting out in respect of each Relevant Account, the Relevant Account Information in respect of the immediately preceding Relevant Account Period.
7.
RELEVANT ACCOUNTS
7.1
The Retrocedant will maintain segregated portfolios of assets in connection with the SPA Business, in accordance with the provisions of the Security Agreements throughout the term of this Agreement.
7.2
The Retrocedant shall maintain assets in the Funds-Withheld Accounts in connection with the Non-SPA Business, in accordance with the terms of this Agreement.
7.3
Subject to the terms of this Agreement and in the case of the SPA Business, the Security Agreements, all the assets and any investment income arising out of the assets in a Relevant Account will be credited to the Relevant Account and all losses (including investment losses), liabilities (including taxes), costs, charges and expenses attributable to the assets in a Relevant Account will be debited from the Relevant Account except for Investment Management Costs which shall be dealt with pursuant to Clause 7.10.
7.4
All premiums received by the Retrocedant from the Underlying Cedants in respect of the Non-SPA Business shall be paid into the relevant Funds-Withheld Account.
7.5
Losses incurred by the Retrocedant will be managed by the Retrocedant and shall be paid or reimbursed to the Retrocedant from:
7.5.1
in the case of the SPA Business, out of the Security Account Assets selected by the Retrocessionaire or its designated investment managers prior to the delivery of a Change of Authority Notice (as defined in Schedule 4) or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice to the extent such Losses are permitted to be paid from a Security Account by a Security Agreement; and
7.5.2
in the case of all Losses not falling within Clause 7.5.1 and all other Losses, out of the Funds-Withheld Assets selected by the Retrocessionaire or its designated investment managers prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice;

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7.6
The assets in the Relevant Accounts will be managed by the Retrocedant pursuant to and in accordance with the SIMA(s) and the Guidelines, together with the provisions set out in Clause 10.6 and Schedule 4;
7.7
A Relevant Account will be credited with all Call Amounts paid by the Retrocessionaire and debited with all Return Amounts paid by the Retrocedant in connection with that Relevant Account.
7.8
Any assets deposited by the Retrocedant or on its behalf by a member of the XL Group in a Relevant Account to remedy a failure by the Retrocessionaire to pay all or part of a Call Amount shall not be treated as assets of the Relevant Account for any purpose (including for the purpose of calculating the Recapture Amount as described in Clause 5.7) and all benefits and losses, including investment gains and losses and taxes shall remain with the Retrocedant or the relevant member of the XL Group.
7.9
For the avoidance of doubt, all legal and beneficial interest in the Funds-Withheld Assets, the Security Account Assets, the Fund-Withheld Accounts and the Security Accounts belongs to the Retrocedant and the Retrocessionaire has no proprietary interest in such accounts nor in any such assets.
7.10
No later than 30 Business Days after each Account Date, the Retrocedant will submit an invoice to the Retrocessionaire for all Investment Management Costs that have been paid or are due and payable by the Retrocedant and/or XL GIL or its Affiliates. The Retrocedant and/or XL GIL or its Affiliates may specify in an invoice that all or part of the applicable Investment Management Costs are to be paid by the Retrocessionaire to an Affiliate of the Retrocedant and/or XL GIL, instead of to the Retrocedant and/or XL GIL or its Affiliates themselves. The Retrocessionaire will settle all invoices submitted by the Retrocedant and/or XL GIL or its Affiliates in cash within 30 days of receipt by the Retrocessionaire. Without prejudice to the Retrocedant's right to terminate this Agreement under Clause 5.2.6 for the non-payment of Investment Management Costs, if the Retrocessionaire fails to settle an invoice in respect of Investment Management Costs relating to:
7.10.1
the Funds-Withheld Accounts and/or the Funds-Withheld Assets; or
7.10.2
the management of the assets of the Retrocessionaire (following a Retrocessionaire Change of Authority pursuant to Clause 5.9),
within the 30 day time period (or within the 10 Business Day cure period permitted under Clause 5.2.6 if the Retrocedant has given written notice pursuant to Clause 5.2.6), the Retrocedant may reimburse itself (or XL GIL or its Affiliates as applicable) out of the Funds-Withheld Account.
8.
COLLATERAL OBLIGATIONS
8.1
The Retrocessionaire will maintain assets in the Relevant Accounts in an amount equal to the applicable Collateral Amount. The Retrocessionaire shall fulfil this obligation by paying all Call Amounts in accordance with this Clause 8 and any other relevant provisions of this Agreement.

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8.2
Subject to Clause 8.11, the Retrocedant shall pay to the Retrocessionaire all Return Amounts subject to and in accordance with this Clause 8.
8.3
After each relevant Valuation Date, the Retrocedant will procure that the relevant Valuation Agent determines as soon as practicable whether or not a Call Amount or a Return Amount exists in respect of a Relevant Account as at each relevant Valuation Date (the "Determination").
8.4
If a Call Amount or a Return Amount is payable in respect of a Relevant Account, the Retrocedant will notify the Retrocessionaire in writing within 5 Business Days of the relevant Determination (a "Call Notice", or a "Return Notice" as applicable).
8.5
A Call Notice or Return Notice delivered by the Retrocedant shall specify:
8.5.1
the Balance of the Relevant Account as at the close of business on the relevant Valuation Date;
8.5.2
the Call Amount or Return Amount (as applicable);
8.5.3
the type of Permitted Assets the Retrocedant intends to transfer in the case of a Return Amount;
8.5.4
the type of Permitted Assets the Retrocedant requires to have transferred in the case of a Call Amount;
8.5.5
if a Call Amount is payable, the Relevant Account into which the Retrocessionaire must pay the Call Amount;
8.5.6
subject to any confidentiality obligations by which the Retrocedant is bound, such information which is available to the relevant Valuation Agent as may be relevant to the calculation of the Call Amount or Return Amount (as applicable).
8.6
If a Call Amount is payable, the Retrocessionaire shall, at its own cost, transfer to the Retrocedant Permitted Assets of the type specified in the Call Notice, with a Value as at the Valuation Date at least equal to the Call Amount, within 2 Business Days of receipt of a Call Notice from the Retrocedant provided that the Retrocessionaire shall not be required to settle a Call Amount if doing so would reduce the Working Capital Assets below $10m.
8.7
If a Return Amount is payable, the Retrocedant shall, subject to Clauses 8.8 and 8.11, and at the cost of the Retrocessionaire, transfer to the Retrocessionaire, Permitted Assets selected by the Retrocessionaire or its designated investment manager prior to the delivery of a Change of Authority Notice or the Retrocedant or its designated investment manager following the delivery of a Change of Authority Notice with a Value as at the Valuation Date at least equal to the Return Amount, within 5 Business Days of the later of: (i) the date of a Return Notice; or (ii) the date on which the Retrocedant received assets of a Value as least equal to the Return Amount from the relevant Custodian.
8.8
If the value of the Retrocessionaire Capital Account Assets at the date of the Return Notice is less than the Maximum Investor Capital Call Amount at that date, the

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Retrocedant shall transfer cash to the value of the Return Amount to the Retrocessionaire Capital Account within 5 Business Days of the date determined in accordance with Clause 8.7.
8.9
If the Retrocessionaire fails to pay a Call Amount in accordance with Clause 8.6, the Retrocedant shall make such payment to the Relevant Account on behalf of the Retrocessionaire. Such payment will not discharge the Retrocessionaire from its obligation to pay the Call Amount, save that such Call Amount shall be due and payable directly to the Retrocedant together with interest accrued in accordance with Clause 8.10.
8.10
In the event the Retrocessionaire fails to pay all or a part of a Call Amount in accordance with Clause 8.6, interest will accrue on the unpaid Call Amount (or part thereof) together with any positive Collateral Fee PIK Amount in an amount equal to the Collateral Fee for the period from the date the Call Amount became due and payable (the "Due Date"), or, as applicable, the Collateral Fee Payment Date that any Collateral Fee PIK Amount accrues, up to and including the date such Call Amount or Collateral Fee Amount is actually paid to the Retrocedant.  Any accrued Collateral Fee will be payable quarterly on each January 1, April 1, July 1 and  October 1, or if such date is not a Business Day, the immediately following Business Day, (each , a “Collateral Fee Payment Date”) in cash or, at the sole option of the Retrocessionaire added quarterly (on each Collateral Fee Payment Date) to the Collateral Fee PIK Amount.  The Retrocessionaire may, in its sole discretion, repay any positive Collateral Fee PIK Amount in cash, on any Business Day.
8.11
The Retrocedant's obligation to pay a Return Amount is subject to the Retrocedant having actually received assets of a Value at least equal to the Return Amount from the relevant Custodian pursuant to the terms of the relevant Retroceded Policy or associated Security Agreement (if applicable), prior to paying the Return Amount due under this Agreement.
8.12
The payment of a Return Amount by the Retrocedant to the Retrocessionaire will be treated by the Parties as satisfaction of the relevant outstanding premium receivable by the Retrocessionaire pursuant to Clause 3.
8.13
The Retrocessionaire may notify the Retrocedant that it wishes to challenge the calculation of a Call Amount or Return Amount in respect of the Non-SPA Business ("Notice of Challenge") no later than 5 Business Days from receipt of a Call Notice or Return Notice (as applicable). If the Retrocessionaire delivers a Notice of Challenge within the permitted timeframe, the payment of the affected Return Amount and Call Amount that was made in accordance with Clauses 8.6 and 8.7 (as applicable) will be deemed to have been made on a provisional basis and be subject to the following:
8.13.1
if the Actuaries cannot agree on the disputed Call Amount or Return Amount (as applicable) within 15 Business Days of a Notice of Challenge, either the Retrocedant or the Retrocessionaire may refer the matter to the Expert for resolution pursuant to Clause 30; and
8.13.2
upon determination by the Expert, the Retrocedant or the Retrocessionaire (or such person on behalf of the Retrocessionaire) will make such payments to the

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other as necessary to put the Retrocedant and Retrocessionaire in the position they would have been in had the affected payment been made on the basis of the calculation by the Expert.
8.14
If at any time the Secured Account Assets credited to any Security Account cease to comply with the requirements of the related Security Agreement (including the investment restrictions set forth therein), the Retrocedant shall be entitled to notify the Retrocessionaire in writing (a "Substitution Notice").
8.15
A Substitution Notice delivered by the Retrocedant shall specify:
8.15.1
the Secured Account Asset(s) to be substituted or replaced in order to bring the Security Account into compliance with the requirements of the Security Agreement relating to the applicable Secured Account (the “Replaced Assets”); and
8.15.2
the type of Permitted Assets the Retrocedant requires to have credited to the Secured Account in substitution or replacement of such Replaced Asset.
8.16
Within 5 Business Days of the delivery of a Substitution Notice, the Retrocessionaire shall, at its own cost, transfer to the Retrocedant, Permitted Assets with a Value at least equal to the Value of the Replaced Assets and of a type that, when credited to the Security Account in substitution or replacement of the Replaced Assets, the Secured Account Assets credited to any Security Account shall comply with the requirements of the related Security Agreement (including the investment restrictions set forth therein). As promptly as practicable following its receipt of such assets from the Retrocessionaire, the Retrocedant may direct such assets to be credited to the applicable Security Account and, at the cost of the Retrocessionaire, transfer to the Retrocessionaire, the Replaced Assets released by the Custodian to the Retrocedant therefrom.
9.
AUDIT RIGHTS
9.1
The Retrocedant shall submit to the Retrocessionaire and the Retrocessionaire shall submit to the Retrocedant as and when asked by the other on reasonable notice and in any event immediately following the termination of this Agreement for any reason, information in sufficient detail to allow the Retrocessionaire or the Retrocedant (as the case may be) to satisfy all Applicable Law and Regulations to which they are subject in relation to the Retroceded Policies, this Agreement or any other Transaction Document or the arrangements contemplated by it and such additional information as it may reasonably require in relation to the Retroceded Policies, this Agreement, any other Transaction Document or the arrangements contemplated by any Transaction Document, including to monitor compliance with the Retrocessionaire Guidelines and the Guidelines, provided always that such information is reasonably in the relevant Party's power, possession or control or may be obtained by it taking reasonable steps and subject to any Applicable Law and Regulations and any obligations of confidentiality owed to third parties.
9.2
Subject to any Applicable Law and Regulations and any confidentiality obligations owed to third parties, during the term of this Agreement, the Retrocedant and the Retrocessionaire shall be entitled on reasonable notice from time to time during normal

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business hours at its own cost to inspect and audit at the offices of the Retrocessionaire and the Retrocedant, respectively, and take copies of all documents and records relevant to the performance by the Parties of this Agreement.
9.3
The Parties agree to permit any regulatory authority in any jurisdiction that has responsibility for the regulation or governance of another Party and its representatives, to have such reasonable access to its premises and all records kept in relation to this Agreement as may be required by such regulatory authority.
10.
UNDERTAKINGS
10.1
The Retrocessionaire and the Company each give the following undertakings, which shall apply throughout the Period of Risk:
10.1.1
if and to the extent permitted by Applicable Law and Regulation, it shall promptly notify the Retrocedant of the occurrence of any Event of Default or Potential Event of Default;
10.1.2
it shall use its reasonable endeavours to ensure that at all times its exercise of its rights and performance of its obligations under this Agreement will not:
(a)
contravene its constitutive documents and, in addition, in the case of the Retrocessionaire, its Constitutional Documents; or
(b)
contravene any Regulatory Requirement;
10.1.3
it will not transfer (whether by means of a scheme of arrangement or otherwise), novate or, in the case of the Retrocessionaire, cede its obligations under this Agreement with respect to the Retroceded Policies to another person without the prior written consent of the Retrocedant, unless, in the case of the Retrocessionaire ceding its obligations, the cession is in the ordinary course of business and on terms which would not adversely affect the amount of regulatory capital to be held by the Retrocedant or any other member of the XL Group, or otherwise adversely affect the collateral position or counterparty credit exposure of the Retrocedant or any member of the XL Group;
10.1.4
subject to Clause 10.5, it will seek the prior written consent of the Retrocedant to a Change of Control;
10.1.5
it will procure that the investment assets of the Retrocessionaire are managed in accordance with the Retrocessionaire Guidelines and the Retrocessionaire IMA(s) together with the provisions set forth in Clause 10.6 and Schedule 4;
10.1.6
in the case of the Company, it will maintain its Centre of Main Interest in Bermuda;
10.1.7
subject to Clause 10.3, in the case of the Company, it will not amalgamate, merge, or consolidate with any other person nor issue or allot any securities or any instruments convertible or exchangeable for securities in itself (including any

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securities or instruments which grant rights in respect of the Retrocessionaire) to any person, except with the prior written consent of the Retrocedant; and
10.1.8
it shall provide prior written notice to the Retrocedant at least 5 Business Days before making a Distribution.
10.2
The Retrocessionaire gives the following undertakings, which shall apply throughout the Period of Risk:
10.2.1
it will notify the Retrocedant in writing prior to any proposed material outsourcing taking effect in respect of the Retroceded Policies;
10.2.2
subject to any Distributions permitted by this Agreement, it will retain assets (as may change from time to time) of any Return Amount paid to the Retrocessionaire by the Retrocedant in the segregated account comprising the Retrocessionaire and use the assets in that segregated account only for the purposes of this Agreement and any other XL Retrocession Agreement;
10.2.3
it will hold regulatory capital in respect of the business reinsured under this Agreement in an amount at least equal to the Agreed Capital Level;
10.3
If the Company wishes to seek the consent of the Retrocedant pursuant to Clause 10.1.7, it shall promptly notify the Retrocedant in writing. After the tenth anniversary of the date of this Agreement, the Retrocedant may only withhold its consent to a request from the Company pursuant to Clause 10.1.7, when the Retrocedant reasonably determines that such change could materially and adversely affect:
10.3.1
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, Holdco or the Investors or any of their respective Affiliates;
10.3.2
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
10.3.3
the regulatory capital position of any member of the XL Group.
10.4
The Parties agree that the ceding of the Retrocessionaire's obligations to a person by way of retrocession permitted pursuant to Clause 10.1.3 shall not be regarded as a Change of Control and shall not require the prior written consent of the Retrocedant.
10.5
The Parties agree that a Non-Lead Investor may trigger a Change of Control to which the Retrocedant will not need to give its prior consent if:
10.5.1
the new controller has assumed all of that Non-Lead Investor's Interests;
10.5.2
the Retrocedant has the benefit of contractual rights which provide adequate remedies if the new controller breaches its obligations in connection with the Interests; and
10.5.3
the Retrocedant reasonably determines that such Change of Control would not materially and adversely affect:

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(a)
the rights and obligations of any member of the XL Group under any contracts or commitments between such person and the Retrocessionaire, the Company, the Investors or any of their respective Affiliates;
(b)
the credit risk of a member of the XL Group (including as a result of any changes to the availability or the enforceability of the Investor Capital Calls); or
(c)
the regulatory capital position of any member of the XL Group.
10.6
The Parties will comply with the provisions in Schedule 4 with respect to the management of the Security Account Assets and the Funds-Withheld Assets and the assets of the Retrocessionaire.
11.
AGREED CAPITAL AND DIVIDENDS
11.1
The Retrocessionaire shall assess whether or not it holds BMA regulatory capital in an amount at least equal to the Agreed Capital Level, at the end of each Quarter.
11.2
The Retrocessionaire shall submit the results of its calculation performed pursuant to Clause 11.1, together with all reasonable supporting information, to the Retrocedant within 15 Business Days following the end of each Quarter ("Capital Notice").
11.3
The Retrocedant may notify the Retrocessionaire that it wishes to challenge a Capital Notice no later than 10 Business Days from receipt of a Capital Notice (a "Capital Notice Challenge"). The Retrocedant's Actuary and the Retrocessionaire's Actuary shall seek to agree such Capital Notice Challenge but if they do not do so within 15 Business Days of the date of the Capital Notice Challenge the dispute shall be referred by either Actuary to the Expert for resolution pursuant to Clause 30.
11.4
The Retrocessionaire undertakes:
11.4.1
not to declare or make a Distribution in any Quarter before the expiry of the 15 Business Day time period in Clause 11.2;
11.4.2
not to declare or make a Distribution at any time when the value of the Retrocessionaire Capital Account Assets is less than the Maximum Investor Capital Call Amount; and
11.4.3
to only declare or make a Distribution thereafter if, after such Distribution has been made, the Retrocessionaire would still hold regulatory capital at least equal to the Agreed Capital Level and the Retrocessionaire shall provide prior written notice to the Retrocedant if it intends to make a Distribution under this Clause 11.4.2.
11.5
If a challenge is made by the Retrocedant pursuant to Clause 11.3 the Retrocessionaire agrees that no Distribution may be declared or made by it until such dispute has been settled in accordance with Clauses 11.3, 30 or 31, as applicable.

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11.6
For as long as a Call Amount remains due and payable by the Retrocessionaire, the Retrocessionaire undertakes to the Retrocedant not to:
11.6.1
declare or make a Distribution;
11.6.2
incur any expenditure outside the ordinary course of business or in excess of $500,000;
11.6.3
enter into any transactions or transactions with an Affiliate or related person other than an Investor Capital Call;
11.6.4
write any new business,
in each case without the prior written consent of the Retrocedant.
11.7
In determining the amount of the Retrocessionaire's BMA regulatory capital for the purposes of Clause 11, only the assets of the Retrocessionaire or amounts receivable by the Retrocessionaire from the XL Retrocedants under the XL Retrocession Agreements shall be included and in no event shall any Retrocessionaire Capital Account Assets or any Closing Excess Assets be treated as regulatory capital of the Retrocessionaire for the purposes of the calculation.
12.
NEGATIVE PLEDGE
12.1
The Retrocedant confirms that as at the date of this Agreement there is not any Security subsisting over any Security Account (except for the Security in favour of the underlying cedants in respect of the Retroceded Polices, the Security granted by the Retrocessionaire in favour of the cedants of the Retroceded Policies and except for any Security arising from time to time in the ordinary course of carrying out any of the Retroceded Policies, including as part of treasury management, or relating to the investment of the assets in such Security Account including liens in respect of unpaid fees or other similar rights or entry into credit support, collateral, margining or other similar arrangements).
12.2
The Retrocedant shall not:
12.2.1
create or permit to subsist any Security over the Funds-Withheld Accounts or any Security Account (except for any Security over the Funds-Withheld Accounts or the Security Accounts in existence as at the date hereof or arising from time to time in the ordinary course of carrying out any of the Retroceded Policies, including as part of treasury management, or relating to the investment of the assets in the Relevant Accounts including liens in respect of unpaid fees or other similar rights or entry into credit support, collateral, margining or other similar arrangements); or
12.2.2
enter into any arrangement under which the money held in or benefit of the Funds-Withheld Accounts or the Security Accounts may be applied, retained or set-off except in the ordinary course of carrying out any of the Retroceded Policies or relating to the investment of the assets in the Relevant Accounts or as contemplated by this Agreement.
13.
SEGREGATED ACCOUNTS
13.1
The Company and the Retrocessionaire shall cause all of the funds and assets of the

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Retrocessionaire to be held and kept separate and distinct from all other funds and assets in the general account of the Company and any other segregated account established by the Company, including by causing separate bank accounts to be established and maintained by the Retrocessionaire and causing the funds of the Retrocessionaire not to be commingled with any funds of the general account of the Company or any other segregated account established by the Company.
13.2
Unless otherwise agreed to in writing by the Retrocedant, the Company shall continue to be registered as a segregated accounts company pursuant to the SAC Act during the entire term of this Agreement;
13.3
Unless otherwise agreed in writing by the Retrocedant, the Company and the Retrocessionaire (as applicable) shall abstain from amending or modifying: (i) any provision of the Company's bye-laws in a manner that could reasonably be expected to adversely affect the interests of the Retrocedant; or (ii) any agreement comprising part of the Constitutional Documents of the Retrocessionaire.
13.4
Except as otherwise consented to in writing by the Retrocedant, the Retrocessionaire shall not, and the Company shall cause the Retrocessionaire not to:
13.4.1
incur any liabilities or obligations (including borrowing or indebtedness) other than liabilities and obligations arising under this Agreement and any Transaction Documents to which it is a party or which are necessary in connection with the Retrocessionaire’s performance of its obligations and liabilities under such agreements;
13.4.2
subject to Clause 10.1.3, enter into any agreements of insurance or reinsurance other than this Agreement and any other XL Retrocession Agreement;
13.4.3
conduct any business other than services necessary for the Retrocessionaire’s performance of its obligations and liabilities under this Agreement and any Transaction Document to which it is a party; or
13.4.4
enter into any transaction or agreement with any of the Company's Affiliates, the general account of the Company or any other segregated account of the Company.
14.
RETROCESSIONAIRE CAPITAL ACCOUNT
The Retrocessionaire shall establish a separate account to which shall be credited cash and/or assets contributed to the Retrocessionaire pursuant to any Investor Capital Call. Such cash and/or assets shall be invested only in direct obligations of, or obligations fully guaranteed as to principal and interest by, the United States or any agency or instrumentality thereof (provided such obligations are backed by the full faith and credit of the United States). All the assets and any investment income arising out of the assets in the Retrocessionaire Capital Account will be credited to such account and all losses and liabilities attributable to the assets in the Retrocessionaire Capital Account will be debited from such account. Notwithstanding anything to the contrary in this Agreement, the Retrocessionaire shall have no obligation to apply amounts in the Retrocessionaire Capital Account to satisfy obligations hereunder or otherwise pay amounts to any XL Retrocedant or any of their Affiliates unless a Trigger Event Date has occurred and only

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in the amount of the corresponding Total Required Investor Call Amount (as defined in the Investor and Support Undertakings Agreement). For the avoidance of doubt, all determinations relating to the Retrocessionaire Guidelines, including without limitation any determination of compliance with the Retrocessionaire Guidelines shall be determined by reference to all of the assets of the Retrocessionaire other than the assets in the Retrocessionaire Capital Account.
15.
SET-OFF
Without prejudice to the provisions of Clause 7.10 and 8 providing for payment of Call and Return Amounts, Investment Management Costs and Collateral Fees, the Premium payable under Clause 3 shall be offset against all amounts Due from the Retrocessionaire to the Retrocedent hereunder.
16.
CONFIDENTIALITY
16.1
In this Clause 16, "Confidential Information" means all confidential information disclosed (whether in writing, orally or by another means and whether directly or indirectly) by (or on behalf of) either the Retrocedant or the Retrocessionaire or the Company (the "Disclosing Party") or any of its or their Affiliates to another Party (the "Receiving Party") whether before or after the date of this Agreement including information relating to the Disclosing Party's or its customers' products, operations, processes, plans or intentions, product information, know how, design rights, trade secrets, market opportunities and business affairs.
16.2
The Receiving Party:
16.2.1
may not use Confidential Information for a purpose other than the performance of its obligations or enforcement of its rights (including for the purposes of the dispute resolution mechanisms in this Agreement) under this Agreement or another Transaction Document to which it is a party;
16.2.2
may not disclose Confidential Information to a person except with the prior written consent of the Disclosing Party or in accordance with Clauses 16.3 and 16.4; and
16.2.3
shall make every effort to prevent the use or disclosure of Confidential Information.
16.3
The Receiving Party may disclose Confidential Information to any of its Affiliates, directors, other officers, employees, professional advisers and sub contractors (a "Recipient") to the extent that disclosure is reasonably necessary for the purposes of this Agreement or any other Transaction Document to which it is a party.
16.4
The Receiving Party shall ensure that a Recipient is made aware of and complies with the Receiving Party's obligations of confidentiality under this Agreement as if the Recipient was a party to this Agreement.


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16.5
Clauses 16.2 to 16.4 do not apply to Confidential Information which:
16.5.1
is at the date of this Agreement, or at any time after that date, becomes publicly known other than by the Receiving Party's or Recipient's breach of this Agreement;
16.5.2
can be shown by the Receiving Party to the Disclosing Party's reasonable satisfaction to have been known by the Receiving Party before disclosure by the Disclosing Party to the Receiving Party;
16.5.3
is required to be disclosed by law, by a rule of a listing authority or stock exchange to which any Receiving Party is subject or submits or by a governmental authority or other authority with relevant powers to which any Receiving Party is subject or submits, whether or not the requirement has the force of law; or
16.5.4
is disclosed to auditors of a Receiving Party, or (as applicable) a member of the XL Group, or a Buyer's Group Undertaking, or rating agencies provided that such auditors or rating agencies are made aware of the provisions of this Clause 16.
16.6
The Retrocessionaire and the Retrocedant shall comply with any confidentiality provisions contained in any of the Retroceded Policies.
17.
DATA PROTECTION
17.1
The parties acknowledge that, in connection with this Agreement, the Retrocedant may disclose to the Retrocessionaire information relating to policyholders and other individuals which is protected by the Data Protection Laws (the "Protected Information").
17.2
The Retrocessionaire shall, and shall ensure that its contractors shall, comply with the Data Protection Laws in relation to its and its contractors' processing of the Protected Information disclosed to it by the Retrocedant.
17.3
Where this Agreement requires the Retrocedant to disclose Protected Information to the Retrocessionaire, and that disclosure is regulated by a Data Protection Law of a member state of the European Economic Area, the Retrocedant may meet that requirement by disclosing that information to an establishment or agent of the Retrocessionaire within the European Economic Area, as nominated by the Retrocessionaire in writing from time to time. If, from time to time, the Retrocessionaire has not nominated such an establishment or agent, the Retrocedant is relieved from its obligation to disclose that information until such an establishment or agent has been nominated and the Retrocedant has had a reasonable opportunity to make the disclosure.
18.
CURRENCY
18.1
All payments and calculations under this Agreement shall be made in the currency in which the underlying business or liability is denominated.

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18.2
Any amount to be converted from one currency into a second currency for the purpose of this Agreement shall be converted into an equivalent amount at the Relevant Date at the Conversion Rate prevailing at the Relevant Date.
19.
ANNOUNCEMENTS
19.1
Subject to Clauses 19.2 and 19.3, no Party shall, without the prior written consent of the other Parties, make any announcement of this Agreement, the transaction which is given effect by this Agreement, or any matter ancillary thereto.
19.2
The Parties shall act reasonably in response to a request from any other Party for permission to make any announcement of the transactions given effect by or referred to in this Agreement or any matter ancillary thereto.
19.3
The restrictions in Clause 19.1 shall not apply:
19.3.1
to an announcement, communication or disclosure that is required to be made by Applicable Law and Regulation (provided that, to the extent permitted by Applicable Law and Regulation, the Party required to make the announcement, communication or disclosure shall consult with the other Parties prior to such disclosure and use reasonable endeavours to minimise the disclosure to such information as is required by the Applicable Law and Regulation);
19.3.2
to any reference to the transaction given effect by this Agreement in a Party's financial statements or regulatory returns or in disclosures to rating agencies;
19.3.3
to disclosures reasonably required in order to enforce a Party's rights under this Agreement or another Transaction Document to which it is a party; and
19.3.4
to any reference to the transaction given effect by this Agreement (whether alone or together with, or aggregated with, other transactions) by a Party in any financial or other reports or presentations to investors provided that the identity of the Parties is not disclosed in connection with such reference without that other Party's prior written consent (not to be unreasonably withheld or delayed).
20.
COSTS
Except where this Agreement provides otherwise, each Party shall pay its own costs relating to the negotiation, preparation, execution and implementation by it of this Agreement and of each document referred to herein.
21.
FURTHER ASSURANCE
Each Party agrees to perform (or procure the performance of) such further acts and things, and execute and deliver (or procure the execution and delivery of) such further documents, as may be required by Applicable Law and Regulation or as the other Party may reasonably require to implement and/or give effect to this Agreement and the transactions contemplated by it and for the purpose of vesting in the other Party the full benefit of this Agreement.

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22.
ENTIRE AGREEMENT
22.1
This Agreement, the Transaction Documents and the Constitutional Documents of the Retrocessionaire constitute the entire agreement and understanding, and supersede any previous agreements between the Parties relating to the subject matter of this Agreement.
22.2
In the event of any conflict between the provisions of this Agreement and the provisions of any other document referred to in it, the provisions of this Agreement will prevail.
22.3
Each Party acknowledges and represents that it has not relied on or been induced to enter into this Agreement by a representation, warranty or undertaking (whether contractual or otherwise) which is not expressly set out in this Agreement.
22.4
A Party is not liable to another Party and will not have any remedy (in equity, contract or tort (including negligence) under the Misrepresentation Act 1967 or in any other way) for a representation, warranty or undertaking that is not expressly set out in this Agreement.
22.5
The Retrocedant has no duty or obligation to make, whether in anticipation of entering into this Agreement or otherwise, any disclosure, representation or warranty.
22.6
The Retrocessionaire hereby waives any remedy it might otherwise have to avoid this agreement by reason of any breach by the Retrocedant or any other person, including an agent of the Retrocedant, of the duty of utmost good faith (which does not apply to or in respect of this Agreement) or any duty or obligation to make, whether in anticipation of this Agreement or otherwise, any disclosure or representation.
22.7
The Parties agree that where the Retrocessionaire or the Company breaches any provision of this Agreement, then damages may not be a sufficient remedy and the Retrocedant shall be entitled to seek such legal or equitable remedies or relief as are available to it, including injunctive relief (whether interim or final) and specific performance. Further, the Retrocessionaire and the Company agree that if the Retrocedant brings an action seeking an equitable remedy to enforce the provisions of Clauses 12 of this Agreement, neither of them will oppose the granting of such remedy, whether on the ground that there is or are suitable alternative remedy(ies) or otherwise.
22.8
This Clause 22 shall not exclude any liability for, or remedy in respect of, fraud.
23.
WAIVERS
23.1
Except where this Agreement provides otherwise, no failure or delay by any Party in exercising any right or remedy provided by Applicable Law and Regulation under or pursuant to this Agreement shall impair such right or remedy or operate or be construed as a waiver or variation of it or preclude its exercise at any subsequent time and no single or partial exercise of any such right or remedy shall preclude any other or further exercise of it or the exercise of any other right or remedy.
23.2
Except where this Agreement provides otherwise the rights and remedies contained in this Agreement are cumulative and not exclusive of rights or remedies provided by law.

- 37 -



24.
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
Save for the persons referred to in Part E of Schedule 4, a person who is not a Party to this Agreement shall have no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any of its terms.
25.
SEVERABILITY
If any provision of this Agreement is held to be invalid or unenforceable, then such provision shall (so far as it is invalid or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The Parties shall then use their reasonable endeavours to replace the invalid or unenforceable provision by a valid and enforceable provision the effect of which is as close as possible to the intended effect of the invalid or unenforceable provision thereby replaced.
26.
VARIATION
26.1
No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Parties. The expression "variation" shall include any variation, supplement, deletion or replacement however effected.
26.2
Unless expressly agreed in writing by the Parties, no variation shall constitute a general waiver of any provisions of this Agreement, nor shall it affect any rights, obligations or liabilities under or pursuant to this Agreement which have already accrued up to the date of variation, and the rights and obligations of the Parties under or pursuant to this Agreement shall remain in full force and effect, except and only to the extent that they are so varied.
27.
ASSIGNMENT AND SUBCONTRACTING
27.1
Other than in accordance with Clause 10.1.3, a Party may not novate, assign, transfer or create any trust in respect of, or purport to novate, assign, transfer or create any trust in respect of a right or obligation under this Agreement without having first obtained the other Party's written consent or in the case of the Retrocedant, without having first obtained the written consent of the Company only.
28.
NOTICES
28.1
A notice or other communication under or in connection with this Agreement (a "Notice") shall be:
28.1.1
in writing;
28.1.2
in the English language; and
28.1.3
delivered personally or sent by first class post prepaid recorded delivery (and air mail if overseas) to the Party due to receive the Notice to the address set out in Clause 28.3 or to an alternative address or person specified by that Party by not

- 38 -



less than seven days' written notice to the other party received before the Notice was despatched.
28.2
Unless there is evidence that it was received earlier, a Notice is deemed given if:
28.2.1
delivered personally, when left at the address referred to in Clause 28.3;
28.2.2
sent by mail, except air mail, 2 Business Days after posting it; and
28.2.3
sent by air mail, 6 Business Days after posting it.
28.3
The address referred to in Clause 28.1 is:
Name of Party
Address
Marked for the attention of
Retrocedant
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

General Counsel
Retrocessionaire
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

Company Secretary
Company
O'Hara House,
One Bermudiana Road, Hamilton HM08, Bermuda

Company Secretary
29.
GOVERNING LAW
This Agreement and any dispute, controversy or claim arising out of or relating to this Agreement shall be governed by English law save only in respect to Segregated Account Matters which shall be governed by Bermuda law.
30.
EXPERT RESOLUTION
30.1
Where, pursuant to Clauses 5.4, 8.13.1, 11.3 or Part C of Schedule 4 of this Agreement a dispute is referred for Expert determination, the provisions of this Clause 30 shall apply. The Expert shall be an independent actuary appointed in accordance with this Clause 30 (the "Expert"). The Expert shall be jointly appointed by the Actuaries or, failing agreement on such appointment, the President for the time being of the UK Institute and Faculty of Actuaries) for resolution.
30.2
In performing his obligations under Clause 30.1, the Expert shall act in good faith and give due weight to the objects of this Agreement. The Expert shall act as an expert and not an arbitrator and his decision shall (in the absence of manifest error) be final and binding on the Parties.

- 39 -



30.3
Each Party shall upon request provide the Expert with such information as is within its possession or control and reasonably required by the Expert save if to do so would breach any Applicable Law and Regulation.
30.4
The Expert shall deliver a final and binding award within 40 Business Days of the date of his appointment.
30.5
The Parties expressly waive, to the extent permitted by law, any rights of recourse to the courts they may otherwise have to challenge the Expert's determination, other than in the case of manifest error.
30.6
The cost of the Expert shall be borne between the Retrocedant and the Retrocessionaire in such proportions as shall be determined by the Expert.
30.7
If a dispute arises under this Agreement in relation to an issue which has been raised but not yet determined under either of the other XL Retrocession Agreements, the Parties agree that such dispute hereunder will be joined to and conducted together with the dispute under such other XL Retrocession Agreement and any agreement or determination so made shall be binding on all Parties to this Agreement. A Party shall not be obliged to comply with this Clause 30.7 where such Party determines, acting reasonably, that due to differences in the Applicable Law and Regulation under this Agreement and the “Applicable Law and Regulation” under another XL Retrocession Agreement, complying with this Clause 30.7 would be illegal, invalid or unlawful. This Clause 30.7 shall cease to apply in respect of any XL Retrocession Agreement on termination of that XL Retrocession Agreement.
31.
JURISDICTION
31.1
Subject to Clause 30, the courts of England have exclusive jurisdiction to settle any dispute arising from or connected with this Agreement (a "Dispute") including a dispute regarding the existence, validity or termination of this Agreement or the consequences of its nullity.
31.2
The Parties agree that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that they will not argue to the contrary.
31.3
Subject to Clause 32, the Parties agree that the documents which start any proceedings relating to a Dispute ("Proceedings") and any other documents required to be served in relation to those Proceedings may be served on a Party in accordance with Clause 28. These documents may, however, be served in any other manner allowed by law. This Clause 31.3 applies to all Proceedings wherever started.
32.
PROCESS AGENT
32.1
Each party which is not a company incorporated in England and Wales shall at all times maintain an agent for service of process in England. The Retrocessionaire and the Company irrevocably appoint GreyCastle Services Limited whose registered office is at 20-22 Bedford Row, London WC1R 4JS, England and the Retrocedant irrevocably appoint XL Services UK Limited at its registered office from time to time (the "Process Agent") as their agent for such purpose.

- 40 -



32.2
Without prejudice to any other permitted mode of service, each Party agrees that service of any claim form, notice or other document for the purpose of any Proceedings begun in England shall be duly served upon it if served on the Process Agent appointed by it in any manner permitted by the Civil Procedure Rules, whether or not it is forwarded to the Party.
32.3
If for any reason the Process Agent appointed by any Party at any time ceases to act as such, the Party shall promptly appoint another such agent and promptly notify the other parties of the appointment and the new Process Agent's name and address. If the Party concerned does not make such an appointment within 7 Business Days of such cessation, then any other Party may do so on its behalf and shall notify the other Parties if it does so.
33.
DELAYS, ERRORS AND OMISSIONS
Any inadvertent delay or error, in complying or omission to comply with the terms and conditions of this Agreement by one Party will not relieve any other party hereto from any obligation which would attach to it hereunder if such error, omission or delay had not been made, except to the extent that the obligation cannot be performed by reason of the delay error or omission, provided such error, omission or delay is rectified promptly upon discovery (and at the expense of the Party that delays, errs or omits to act) . Nothing contained in this Clause shall be held to impose obligations on any Party greater than would have attached hereunder had such error or omission not occurred.
34.
COUNTERPARTS
This Agreement may be executed in any number of counterparts and by the Parties to it on separate counterparts, each of which is an original and all of which together evidence the same agreement.

- 41 -




RETROCESSION AGREEMENT BETWEEN
XL RE LTD (UK BRANCH) AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE




Executed by the Parties

 
 
 
 
 
Signed by
)
/s/ Mark Twite
XL Re Ltd (UK Branch)
)
 
 
 Signature




- 42 -





RETROCESSION AGREEMENT BETWEEN
XL RE LTD (UK BRANCH) AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE



 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
(in respect of its segregated account XL-1)
)
 
 
 Signature


- 43 -





RETROCESSION AGREEMENT BETWEEN
XL RE LTD (UK BRANCH) AND XL LIFE REINSURANCE (SAC) LTD. (FOR
ITSELF AND ACTING IN RESPECT OF ITS SEGREGATED ACCOUNT XL-1)
EXECUTION PAGE




 
 
 
 
 
Signed by
)
/s/ Mary A. Hayward
XL Life Reinsurance (SAC) Ltd
)
 
 
 Signature
 
 
 






- 44 -

xlgroup-06.30.2014-EX_12


Exhibit 12
XL GROUP PLC
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS

 
Six Months Ended June 30,
(U.S. dollars in thousands, except ratios)
2014
 
2013
Earnings:
 
 
 
Pre-tax income (loss) from continuing operations
$
(80,445
)
 
$
592,174

Fixed charges
100,571

 
121,302

Distributed income of equity investees
112,490

 
86,606

Subtotal
$
132,616

 
$
800,082

Less: Non-controlling interests
1,129

 
82

Preference share dividends
38,312

 
38,840

Total earnings (loss)
$
93,175

 
$
761,160

 
 
 
 
Fixed charges:
 
 
 
Interest costs
$
64,444

 
$
52,257

Accretion of deposit liabilities
(7,418
)
 
24,647

Rental expense at 30% (1)
5,233

 
5,558

Total fixed charges
$
62,259

 
$
82,462

Preference share dividends
38,312

 
38,840

Total fixed charges and preference dividends
$
100,571

 
$
121,302

 
 
 
 
Ratio of earnings to fixed charges
1.5

 
9.2

 
 
 
 
Ratio of earnings to combined fixed charges and preference dividends
0.9

 
6.3

 
 
 
 
Deficiency - fixed charges only
 N/A

 
N/A

 
 
 
 
Deficiency - fixed charges and preference dividends
$
7,396

 
N/A

_______________
(1)
30% represents a reasonable approximation of the interest factor.



xlgroup-06.30.2014-EX_31


Exhibit 31
Certification of Chief Executive Officer
XL Group plc
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 98, Title 15 U.S.C. 7241)
I, Michael S. McGavick, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of XL Group plc;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated:
August 7, 2014
 
 
 
 
 
 
/s/ MICHAEL S. MCGAVICK
 
 
 
 
 
 
 
 
Michael S. McGavick
 
 
Chief Executive Officer




Certification of Chief Financial Officer
XL Group plc
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 98, Title 15 U.S.C. 7241)
I, Peter R. Porrino, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of XL Group plc;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated:
August 7, 2014
 
 
 
 
 
 
/s/ PETER R. PORRINO
 
 
 
 
 
 
 
 
Peter R. Porrino
 
 
Executive Vice President and
 
 
Chief Financial Officer


xlgroup-06.30.2014-EX_32


Exhibit 32
Certification Accompanying Form 10-Q of XL Group plc
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 U.S.C. 1350(a) and (b))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. 1350(a) and (b)), each of the undersigned hereby certifies that, to his knowledge, the Quarterly Report on Form 10-Q for the period ended June 30, 2014 of XL Group plc (the “Company”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated:
August 7, 2014
 
 
 
 
/s/ MICHAEL S. MCGAVICK
 
 
 
 
 
 
 
Michael S. McGavick
 
Chief Executive Officer
 
XL Group plc
 
 
 
 
Dated:
August 7, 2014
 
 
 
 
/s/ PETER R. PORRINO
 
 
 
 
 
 
 
Peter R. Porrino
 
Executive Vice President and
 
Chief Financial Officer
 
XL Group plc
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to XL Group plc and will be retained by XL Group plc and furnished to the Securities and Exchange Commission or its staff upon request.


xlgroup-20140630.xml
Attachment: XBRL INSTANCE DOCUMENT

xlgroup-20140630.xsd
Attachment: XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT

xlgroup-20140630_cal.xml
Attachment: XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT

xlgroup-20140630_def.xml
Attachment: XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT

xlgroup-20140630_lab.xml
Attachment: XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT

xlgroup-20140630_pre.xml
Attachment: XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT