Castelnau Group Regulatory News (CGL)

28 Nov 2007 14:45

Catlin Group Limited28 November 2007 Catlin Group Limited28 November 2007 Catlin Group Limited 2007 Investor Day Catlin Group Limited ('CGL': London Stock Exchange), the international specialtyinsurer and reinsurer, will hold a presentation for investors and investmentanalysts at 3pm today at its London office. The topics to be discussed at the presentation will focus on the tradingstatement released by the Group earlier today as well as three other subjects: • the impact of third-party capital on future net premium earnings patterns; • the Group's risk appetite, including disclosure of catastrophe threat scenarios; and • the disclosure of data relating to accident year loss development. Impact of third-party capital and future net premium earnings patterns---------------------------------------------------------------------- For the 2006 underwriting year approximately 33 per cent of the capacity ofLloyd's Syndicate 2020, managed by a subsidiary of Wellington Underwriting plc('Wellington'), was provided by third-party capital providers ('Lloyd's Names').Wellington was acquired by Catlin in December 2006, and all Lloyd's underwritingwithin the Group was undertaken through Catlin Syndicate 2003 for the 2007 andsubsequent underwriting years. Concurrent with the Group's acquisition of Wellington, Catlin in effect acquiredfrom the Names their share of Wellington Syndicate 2020's capacity in exchangefor financial considerations. As part of that transaction, certain Names weregiven the right to participate in quota share reinsurance of Catlin Syndicate2003 for the 2007 and 2008 underwriting years. The quota share will beequivalent to approximately 12.5 per cent of the capacity of Syndicate 2003 forboth years. Therefore, the Names' interest in Syndicate 2020 and Syndicate 2003 from 2006 to2009 and thereafter can be summarised as follows: UnderwritingYear 2006 Names contributed 33% of capacity of Wellington Syndicate 2020 (equivalent to 20.8% of combined Catlin-Wellington Syndicate capacity)2007 Names participate through 12.5% quota share reinsurance of Catlin Syndicate 20032008 Names participate through 12.5% quota share reinsurance of Catlin Syndicate 20032009 No Names' interest in Catlin Syndicate 2003 Although the Names' interest in Catlin Syndicate 2003 ends at the end of the2008 underwriting year, the effect on the Group's net premiums earned willcontinue through 2010. This is because approximately 50 per cent of net premiumsearned in a calendar year arise from premiums written during previous years. Forexample, of the premiums written by the Group during the 2007 underwriting year,approximately 48 per cent of those premiums will earn in 2007, whileapproximately 46 per cent will earn in 2008 and approximately 6 per cent willearn in 2009. As a result of this premium earning pattern, the net premiums earned by Catlinwill increase through 2011 as the Names' participation in Syndicate 2020 and thequota share reinsurance of Syndicate 2003 unwinds, even if the underlyingpremium volume underwritten does not increase. This effect is illustrated inTable 1 below: TABLE 1 US$m 2007 2008 2009 2010 2011Underlying premiums (1) 2,856 2,856 2,856 2,856 2,856Names' share of Syndicate 2020 for 2005-06 (265) (16) -- -- --Names' quota share of Syndicate 2003 for (91) (100) (8) -- --2007Names' quota share of Syndicate 2003 for -- (91) (100) (8) --2008 (2) Illustrated net premiums earned 2,500 2,649 2,748 2,848 2,856 Cumulative growth in illustrated net 12% 19% 23% 28% 28%premiums earned compared with 2006 (1) Illustration of underlying premiums assumes no growth from 2008-2011; underlying premiums adjusted for Names' share of Wellington Syndicate 2020 in 2006 and prior years and the quota share of Catlin Syndicate 2003 in 2007 and 2008 (2) 2008 quota share assumed to be the same as in 2007 Risk Appetite / Catastrophe Threat Scenarios-------------------------------------------- The greatest likelihood of significant loss to the Group arises from natural orman-made catastrophe events, including terrorism. The Group's tolerance for catastrophe risk is a function of expected profit andavailable capital. Accumulation of risk is monitored and controlled within adefined underwriting risk appetite strategy in compliance with Board policy andprocedures. The Group's defined underwriting risk appetite is intended to limitexposure from a single event via a diversified portfolio of risk to a maximum ofone year's profit plus 10 per cent of capital if a 1-in-100-year event occurs,taking into account reinstatement premiums both payable and receivable after anevent. Catlin defines certain Catastrophe Threat Scenarios which reflect selected areasof significant catastrophe exposure. A detailed analysis of these catastropheevents is carried out each quarter using statistical models together with inputfrom both actuarial and underwriting functions. Within the statistical modelsboth secondary perils and loss amplification are included. A selection of modelled outcomes for the Group's most significant CatastropheThreat Scenarios is detailed below. The modelled outcomes below represent theCatlin Group's modelled net loss after allowing for all reinsurances, includingthe external quota share with regard to Catlin Syndicate 2003. The modelledoutcomes are quoted prior to any tax effect. Modelled Gross and Net Losses----------------------------- Table 2 below shows the outcomes derived from the internal and external modelsusing data as supplied by our clients. The modelled outcomes in Table 2 reflectour current interpretation of how external models and methods should be appliedand are used internally for market consistent comparisons and for regulatoryreturns, following the instructions as per regulators' guidelines. TABLE 2 Examples of Catastrophe Threat ScenariosData Model Output - Not a Prediction of Actual Loss(Outcomes derived as at 1 October 2007) US$m Florida California Gulf of European Japanese (Miami) Earthquake Mexico Windstorm Earthquake Windstorm WindstormEstimated industry 100,000 70,000 100,000 30,000 50,000loss Catlin GroupGross loss 627 826 930 545 570Reinsurance (394) (548) (589) (320) (384)effect (1)Modelled net loss 233 278 341 225 186 Modelled net loss 12% 14% 18% 12% 10%as % of nettangible assets (2) (1) Reinsurance effect includes the impact of both inwards and outwards reinstatements. (2) Net tangible assets ('NTA') amounted to US$1.94 billion at 30 June 2007; NTA defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax However, uncertainties exist in the data and the modelling and estimationtechniques and include but are not limited to: • Economic value of market loss; • Insured values and other data items as provided by clients; • Non modelled perils; • Modelling and parameter uncertainty; • Damage factor estimation; and • Limited historic validation of model assumptions. Due to the uncertainties and the range of potential outcomes, Management adds afurther prudential margin to the modelled output above to reflect the degree ofuncertainty in any peril or scenario. These adjusted outcomes are detailed inTable 3 below. These adjusted numbers are then used to monitor against theGroup's Risk Appetite to add a level of conservatism above the data modeloutcomes. These adjusted outcomes are also used to price inwards business, toinfluence outwards reinsurance purchasing strategy and to measure requiredcapital. TABLE 3 Adjusted Data Model Output - Not a Prediction of Actual Loss(Outcomes derived as at 1 October 2007) US$m Florida California Gulf of European Japanese (Miami) Earthquake Mexico Windstorm Earthquake Windstorm WindstormEstimated industry 100,000 70,000 100,000 30,000 50,000loss Catlin GroupGross loss 848 930 1,220 575 578Reinsurance (525) (621) (749) (324) (384)effect (1)Modelled net loss 323 309 471 251 194 Modelled net loss 17% 16% 24% 13% 10%as % of NTA (2) (1) Reinsurance effect includes the impact of both inwards and outwards reinstatements. (2) Net tangible assets amounted to US$1.94 billion at 30 June 2007; NTA defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax Multiple Events--------------- Multiple event risk appetite is monitored as part of the Group's capital model.The capital model, which was developed in 2003, aims to: • quantify capital for any given risk tolerance; and • determine the capital to support the Group's business plan. The output from the capital model is used to allocate Group capital toindividual lines of business to: • set gross underwriting profit requirements; • assist reinsurance purchasing strategy; and • evaluate capital needs for new initiatives. Periodically, the Group engages external consultants to review our processes andmethods. During 2006, English Matthews Brockman ('EMB'), one of the world'sleading actuarial and business consultancy firms specialising in non-lifeinsurance, were engaged to review our capital model methods and its use withinthe Group. EMB concluded that Catlin had "one of the more sophisticated capitalquantification approaches seen in the market". Limitations----------- Modelling Catastrophe Threat Scenarios is a complex exercise involving numerousvariables and material uncertainty. The modelled output therefore does notconstitute a prediction of what losses the Group would incur in the event of amodelled loss occurring. The modelled outcomes above are mean losses from a range of potential outcomes.At the mean value, the size of one loss would be contained or nearly containedwithin the normal expected profits for a year with limited utilisation ofcapital. Significant variance around the mean is possible. For a given industryloss, there is a wide range of potential outcomes for the Group. The selected Catastrophe Threat Scenarios are extreme and therefore highlyuncertain. Should an event occur, the modelled outcomes may prove inadequate,possibly materially so. This may be for a number of reasons (e.g. legalrequirements, model deficiency, non-modelled risks or data inaccuracies). Dataas supplied by our insureds and ceding companies may prove to be inaccurate orcould develop during the policy period. Furthermore, the assumptions made duringany analysis will evolve following any actual event. A modelled outcome of net loss from a single event relies in significant part onthe reinsurance arrangements in place, or expected to be in place at the time ofthe analysis, and may change during the year. The modelled outcomes assume thatthe reinsurance in place responds as expected with minimal reinsurance failureor dispute. Reinsurance is purchased to match the inwards exposure as far aspossible, but it is possible for there to be a mismatch or gap in cover whichcould result in higher than modelled losses to the Group. Many parts of the reinsurance programme are purchased with limitedreinstatements, and therefore the number of claims or events which may berecovered from second or subsequent events is limited. It should also be notedthat renewal dates of the reinsurance programme do not necessarily coincide withthose of the inwards business written. Where inwards business is not protectedby risks attaching reinsurance programmes, the programmes could expire resultingin an increase in the possible net loss retained. Development of Loss Reserves---------------------------- Reserves for losses and loss expenses------------------------------------- Catlin adopts a conservative reserving philosophy. The Group sets loss reservesconservatively relative to the independent actuarial advisors' best estimate,reflecting the inherent uncertainties in estimating insurance liabilities. A liability is established for unpaid losses and loss expenses when insuredevents occur. The liability is based on the expected ultimate cost of settlingthe claims. The reserve for losses and loss expenses includes: • case reserves for known but unpaid claims as at the balance sheet date; • incurred but not reported ('IBNR') reserves for claims where the insured event has occurred but has not been reported to the Group as at the balance sheet date; and • loss adjustment expense reserves for the expected handling costs of settling the claims. The process of establishing reserves is both complex and imprecise, requiringthe use of informed estimates and judgments. Reserves for losses and lossexpenses are established based on amounts reported from insureds or cedingcompanies and according to generally accepted actuarial principles. Reserves arebased on a number of factors, including experience derived from historical claimpayments and actuarial assumptions. Such assumptions and other factors include,but are not limited to: • the effects of inflation; • estimation of underlying exposures; • changes in the mix of business; • amendments to wordings and coverage; • the impact of large losses; • movements in industry benchmarks; • the incidence of incurred claims; • the extent to which all claims have been reported; • changes in the legal environment; • damage awards; • changes in both internal and external processes which might accelerate or slow down both reporting and settlement of claims. The Group's estimates and judgments may be revised as additional experience andother data become available and are reviewed, as new or improved methodologiesare developed or as current laws change. Any such revisions could result infuture changes in estimates of losses or reinsurance recoverable, and would bereflected in earnings in the period in which the estimates are changed. The Group receives independent external actuarial analysis of its reservingrequirements annually. These independent actuaries also opine on the reservesfor individual Catlin Group platforms as required by local regulation. The loss reserves are not discounted for the time value of money. Estimate of reinsurance recoveries---------------------------------- The Group's estimate of reinsurance recoveries is based on the relevantreinsurance programme in place for the calendar year in which the related losseshave been incurred. Amounts recoverable from reinsurers are estimated in amanner consistent with the claim reserves associated with the reinsured policy.An estimate for potential reinsurance failure and possible disputes is providedto reduce the carrying value of reinsurance assets to their net recoverableamount. Development of reserves for losses and loss expenses---------------------------------------------------- Catlin believes that presentation of the development of net loss provisions byaccident period provides greater transparency than presenting on an underwritingyear basis that will include estimates of future losses on unearned exposures.However, due to certain data restrictions, some assumptions and allocations arenecessary. These adjustments are consistent with the underlying premium earningprofiles. The loss reserve triangles below show how the estimate of Legacy Catlin ultimatenet losses have developed over time. The development is attributable to actualpayments made and to the re-estimate of the outstanding claims, including IBNR.The development is shown both including and excluding certain large losses asdetailed below. Development over time of net paid claims is also shown bothincluding and excluding these large claims. All historic premium and claim amounts have been restated using exchange ratesas at 31 December 2006 for the Group's four functional currencies to remove thedistorting effect of changing rates of exchange as far as possible. In 2002 the Group purchased the remaining Lloyd's capacity relating to thebusiness originally underwritten by members of Syndicate 1003. Catlin managedboth Syndicate 1003 and Syndicate 2003 which underwrote business in parallel.The Group was the sole capital provider for Syndicate 2003. All ongoing businesswritten in Lloyd's is written by Syndicate 2003. All the prior years'liabilities of both Syndicate 1003 and Syndicate 2003 are now the responsibilityof the Catlin Group. Accordingly all figures shown below have been restated asif the Catlin Group had 100% ownership of the capacity of both Syndicates 1003and Syndicate 2003 to remove the distortion of the Group's changing share overtime. It is our intention to publish annual updates of the development as part of theGroup's Annual Reports and Accounts. Wellington---------- During 2006 the Group acquired Wellington. As described in Note 3 of the CatlinGroup Limited Annual Report and Accounts at 31 December 2006, the businesscombination was deemed effective 31 December 2006 for accounting purposes;accordingly the net assets acquired are valued as at that date and the operatingresults of Wellington will be included in the Group's consolidated financialstatements in periods following 31 December 2006. In Table 4 below the Wellington reserves arising from the transaction are shownat fair value at the date of the business combination. Legacy Wellingtonreserves are not included in Tables 5 and 6 below. Wellington has historicallypublished accident year loss reserve triangles; the disclosure as at 31 December2006 is attached as an appendix. For the 2007 underwriting year Catlin Group in effect purchased the remainingLloyd's capacity relating to the business previously underwritten by members ofWellington Syndicate 2020. When the 2006 underwriting year closes, by way ofReinsurance to Close, the Catlin Group will then be responsible for 100% of theliabilities of Syndicate 2020. This is expected to take place as at 31 December2008. Until then the Catlin Group will only be responsible for a share ofSyndicate 2020's reserves in line with the Wellington Underwriting plc's shareof each underwriting year prior to 2007. The Wellington disclosure note belowshows the development of the 100% liabilities and is shown in sterling. At 31December 2006 the Catlin Group share of the net reserves was $1.41 billion. At 31 December 2006 the Wellington reserves were consistent with the Catlinreserving philosophy, and Wellington was included within the scope of workundertaken by the Group's external actuarial advisors. Management considers thereserves were set conservatively relative to the best estimate of both Catlin'sand Wellington's independent actuarial advisors. In future disclosures the run-off of the 100% Wellington reserves will beincluded within the 2007 accident year. The reduction due to the Group onlybeing responsible for a share of the total Wellington reserves will be shown asa reconciling item to ensure any distortions that would appear in thedevelopment triangulations are removed as the Catlin share increases in the nextfew years. Highlights---------- Overall since 31 December 2003 there has been a reduction in Legacy Catlin netloss estimates resulting in an overall surplus from prior periods. Although the2002 and prior accident years have deteriorated, this deterioration has beenmore than offset by releases from more recent accident years. The Wellington disclosure in the appendix shows a surplus emerging in aggregatefor the past two calendar years. The 2002 and prior accident periods also show asurplus during the past two calendar years. The reserves from the accident years 2002 and prior now represent only 19% ofthe net reserves at 31 December 2006. A summary of the Legacy Catlin and Wellington net reserves is shown in the tablebelow: TABLE 4 US$m Legacy Catlin Legacy Total net Percent of totalAccident Year net reserves Wellington net reserves net reserves reserves(1)2002 and prior 275 285 560 19%2003 129 92 221 7%2004 188 136 324 11%2005 466 468 934 31%2006 508 432 940 31% 1,566 1,413 2,979 99% Other Legacy Catlin net 29 -- 29 1%reserves (2)Total net reserves 1,595 1,413 3,008 100% (1) Catlin share of Legacy Wellington accident year net reserves estimated in line with corporate share of relevant underwriting period (2) Other legacy Catlin reserves include unallocated claims handling expenses, potential reinsurance failure and dispute, other outwards reinsurance and foreign exchange adjustments Development Tables------------------ TABLE 5: LEGACY CATLIN ESTIMATED NET ULTIMATE LOSSES Accident YearUS$ millions 2002 & Prior 2003 2004 2005 2006 TotalNet premiums earned 969 1,224 1,250 1,352 Net Ultimate Excluding Large LossesInitial estimate (1) 1,642 441 580 635 672One year later 1,656 426 510 566Two years later 1,672 397 483Three years later 1,719 396 Net Ultimate Loss Ratio Excluding Large LossesInitial estimate N/A 45.5% 47.4% 50.7% 49.7%One year later N/A 44.0% 41.6% 45.3%Two years later N/A 40.9% 39.5%Three years later N/A 40.8% Net Ultimate Large LossesInitial estimate (1) 20 -- 115 334 --One year later 20 -- 116 386Two years later 19 -- 118Three years later 20 -- Net Ultimate Including Large LossesInitial estimate (1) 1,662 441 695 968 672One year later 1,676 426 626 952Two years later 1,691 397 600Three years later 1,739 396 Net Ultimate Loss Ratio Including Large LossesInitial estimate N/A 45.5% 56.8% 77.4% 49.7%One year later N/A 44.0% 51.1% 76.2%Two years later N/A 40.9% 49.1%Three years later N/A 40.8% Cumulative Net Paid 1,464 267 412 486 164 2,794Estimated Net Ultimate 1,739 396 600 952 672 4,359ClaimsEstimated Net Claim 275 129 188 466 508 1,566Reserves% of Net Reserves 17.6% 8.2% 12.0% 29.8% 32.4% 100.0% 1. Initial estimates for 2002 and prior shown as at 31 December 2003 TABLE 6: LEGACY CATLIN NET PAID LOSSES Accident YearUS$ millions 2002 & Prior 2003 2004 2005 2006Net premiums earned 969 1,224 1,250 1,352 Net Paid Excluding Large LossesInitial estimate (1) 1,149 100 134 127 164One year later 1,286 178 235 238Two years later 1,383 237 297Three years later 1,445 267 Net Paid Loss Ratio Excluding Large LossesInitial estimate N/A 10.3% 10.9% 10.1% 12.2%One year later N/A 18.4% 19.2% 19.0%Two years later N/A 24.4% 24.2%Three years later N/A 27.5% Net Paid Large LossesInitial estimate (1) 9 -- 72 94 --One year later 13 -- 113 248Two years later 16 -- 116Three years later 19 -- Net Paid Including Large LossesInitial estimate (1) 1,158 100 206 221 164One year later 1,300 178 348 486Two years later 1,399 237 412Three years later 1,464 267 Net Paid Loss Ratio Including Large LossesInitial estimate N/A 10.3% 16.8% 17.6% 12.2%One year later N/A 18.4% 28.5% 38.9%Two years later N/A 24.4% 33.7%Three years later N/A 27.5% (1) Initial estimates for 2002 and prior shown as at 31 December 2003 Large Losses------------ The following events are included in the large loss sections of the tablesabove: Accident Year Event 2002 & Prior World Trade Center/US Terrorism 9/112004 Hurricane Charley2004 Hurricane Frances2004 Hurricane Ivan2004 Hurricane Jeanne2005 Hurricane Katrina2005 Hurricane Rita2005 Hurricane Wilma Commentary on Development Tables-------------------------------- Accident Year 2006 The Legacy Catlin loss ratio is generally in line with prior years excludinglarge losses at similar development periods. Accident Year 2005 In aggregate this accident year for Legacy Catlin has seen a surplus in reservesemerge over the previous year. However, this includes a deterioration on thereserves for Hurricanes Katrina, Rita and Wilma offset with releases elsewherewithin the accident year. Although there remains uncertainty in the final outcome of the three Hurricanesduring 2005 the uncertainty has reduced during the year which is evidenced bythe increase in the paid element of the estimated net ultimate loss from theseevents increasing from 28% at the end of 2005 to 64% at the end of 2006. Legacy Wellington shows a similar surplus emerging from the 2005 accident year. Accident Years 2003 and 2004 Both Legacy Catlin accident years continue to run off at a surplus to bookedreserves with few issues emerging. Similarly, the Legacy Wellington 2003 and 2004 accident years continue to runoff at a surplus. Accident Years 2002 and prior These accident years deteriorated during 2004 for Legacy Catlin. The main areaof deterioration was a reassessment of reserves from the Group exposure to UScasualty business. These areas have remained broadly stable since thisreassessment. During 2005 these Legacy Catlin accident years also deteriorated. This arosemainly from two sources. •In the late 1990's through to 2002 the Catlin Syndicate entered into an arrangement with The Accident Group ('TAG') which wrote 'after the fact' legal expense coverage in the UK. The Group ceased this arrangement during 2002. The Group had been in dispute over certain elements of the underlying claims and the funding arrangements with certain banks. TAG reserves were increased by approximately $10 million primarily due to a settlement between the Group and one of the funding banks. As detailed below the main uncertainties in this account have now been finalised. •The Group underwrites UK motor excess of loss reinsurance. During 2005 due to the potential increase in the use of structured settlements within the UK, the Group reassessed the basis of the bodily injury reserves it holds. This resulted in an increase of approximately $6 million. This change was immediately reflected in the pricing of ongoing business. During 2006 there was additional deterioration from 2002 and prior Legacy Catlinaccident years. This came from two main sources. •During 2006 the Group came to an arrangement with the final TAG funding bank resulting in an increase in the net provision to the Group of approximately $10 million. However, this removed the final significant uncertainty in this area for the Group. •A large motor bodily injury loss in the 2002 accident year of approximately $29 million. Details of this loss emerged much later than usual for this type of claim. This loss is now reserved within the outwards reinsurance programme. The 2002 and prior Legacy Wellington accident years have shown a surplus overthe last two calendar years. Limitations----------- Establishing insurance reserves requires the estimation of future liabilities,which depend on numerous variables. As a result, whilst reserves represent agood faith estimate of those liabilities, they are no more than an estimate andare subject to material uncertainty. It is possible that actual losses couldmaterially exceed reserves. While the information in the tables above provides a historical perspective onthe changes in the estimates of the claims liabilities established in previousyears and the estimated profitability of recent years, users are cautionedagainst extrapolating future surplus or deficit on the current reserveestimates. The information may not be a reliable guide to future profitabilityas the nature of the business written might change, reserves may prove to beinadequate, the reinsurance programme may be insufficient, and/or reinsurers mayfail or be unwilling to pay claims due. Management considers that the loss reserves and related reinsurance recoveriescontinue to be held at levels which are conservative relative to the independentactuarial advisors' best estimates based on the information currently available.However, the ultimate liability will vary as a result of inherent uncertaintiesand may result in significant adjustments to the amounts provided. There is arisk that, due to unforeseen circumstances, the reserves carried are notsufficient to meet ultimate liabilities. The accident year triangles were constructed using several assumptions andallocation procedures which are consistent with underlying premium earningprofiles. Although we believe that these allocation techniques are reasonable,to the extent that the incidence of claims does not follow the underlyingassumptions, our allocation of losses to accident year is subject to estimationerror. This is primarily due to the fact that for certain types of business wedo not necessarily receive sufficient information to allocate claims exactly tospecific accident years. In many markets the convention is that loss amounts fora treaty or a delegated authority are advised on what is known as a 'bordereau'or an aggregate basis. In such presentations details on individual losses, otherthan perhaps large event losses, are not available. APPENDIX: Wellington Underwriting plc Disclosure at 31 December 2006 Year ended 31 December 2006: (£m) Gross Reinsurance NetNotified claims 824.4 (455.0) 369.4IBNR 528.0 (150.0) 378.0Total at beginning of year 1,352.4 (605.0) 747.4 Cash paid for claims settled in the year (431.7) 242.6 (189.1) Increase in liabilities:- arising from current accident year claims 268.8 (27.7) 241.1- arising from prior accident year claims (30.4) 22.8 (7.6)- arising from increase in Group's participation 1.7 (0.6) 1.1Net exchange differences (127.0) 55.0 (72.0)Total at end of year 1,033.8 (312.9) 720.9 Notified claims 613.5 (230.0) 383.5IBNR 420.3 (82.9) 337.4Total at end of year 1,033.8 (312.9) 720.9 The current portion of the loss provision is £432.6m (2005: £467.8m) on a netbasis. Year ended 31 December 2005 (£m) Gross Reinsurance NetNotified claims 368.7 (142.2) 226.5IBNR 304.4 (61.7) 242.7Total at beginning of year 673.1 (203.9) 469.2 Cash paid for claims settled in the year (299.3) 96.3 (203.0) Increase in liabilities:- arising from current accident year claims 791.4 (402.3) 389.1- arising from prior accident year claims (2.8) (7.6) (10.4)- cession of reserves under reinsurance arrangement - (6.7) (6.7)- arising from increase in Group's participation 105.4 (42.5) 62.9Net exchange differences 84.6 (38.3) 46.3Total at end of year 1,352.4 (605.0) 747.4 Notified claims 824.4 (455.0) 369.4IBNR 528.0 (150.0) 378.0Total at end of year 1,352.4 (605.0) 747.4 The table below shows how the estimate of the respective balance sheet provisionhas developed over time. The development is attributable to payments made and tothe re-estimate of the outstanding claims. The run-off result reflects thedifference between the current estimate for the accident year ultimate lossprovision and the estimate that existed at the previous calendar year-end. 100% Syndicate 2020 Gross development £m 999 & 2000 2001 2002 2003 2004 2005 2006 Total priorInitial estimate of 366.0 894.0 460.3 349.5 435.7 1,266.2 384.9ultimate lossprovisionOne year later 388.3 908.5 446.0 321.8 443.2 1,232.8Two years later 401.4 917.2 439.1 323.8 410.9Three years later 408.9 956.8 434.9 328.2Four years later 406.2 960.7 433.4Five years later 1,768.7 398.2 930.4Six years later 1,760.8 391.1Seven years later 1,727.7Current estimate of 1,727.7 391.1 930.4 433.4 328.2 410.9 1,232.8 384.9 5,839.4ultimate lossprovision - grossCumulative payments (1,616.1) (339.7) (745.6) (315.3) (209.8) (282.3) (549.4) (37.4) (4,095.6)to dateRemaining provision 111.6 51.4 184.8 118.1 118.4 128.6 683.4 347.5 1,743.8Exchange movements (66.9)Other 12.1Members' share (655.2)Group share of provision 1,033.8 100% Syndicate 2020 Net development £m 999 & 2000 2001 2002 2003 2004 2005 2006 Total priorInitial estimate of 192.8 305.5 264.4 252.0 343.7 623.3 358.5ultimate lossprovisionOne year later 162.7 327.1 278.5 240.5 326.9 618.7Two years later 172.8 338.3 284.8 234.8 308.4Three years later 179.1 334.0 286.2 234.5Four years later 204.2 342.0 284.1Five years later 1,042.2 188.4 328.9Six years later 1,040.3 191.1Seven years later 994.8Current estimate of 994.8 191.1 328.9 284.1 234.5 308.4 618.7 358.5 3,319.0ultimate lossprovision - netCumulative payments (951.1) (137.1) (276.2) (174.1) (150.9) (193.0) (252.8) (23.4) (2,158.6)to dateRemaining provision 43.7 54.0 52.7 110.0 83.6 115.4 365.9 335.1 1,160.4Exchange movements (33.1)Other (a) 47.5Members' share (453.9)Group share of provision 720.9 (a) Other primarily comprises £25.2m of additional reserves resulting from commutation agreements with reinsurers, £12.3m of bad debt provisions and £10.0m net reserves for CSIC. In 2006 the total net reserves showed positive development of £17.0 million(2005: £18.8 million) at the 100% level with a Group share of £7.6 million(2005: £10.4 million). This information is provided by RNS The company news service from the London Stock Exchange