Castelnau Group Regulatory News (CGL)

11 Mar 2005 07:01

Catlin Group Limited11 March 2005 CATLIN GROUP LIMITED ANNOUNCES PRELIMINARY RESULTS FOR YEAR ENDED 31 DECEMBER 2004 HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), theinternational property and casualty insurer and reinsurer, announces recordpremium income and net income for the year ended 31 December 2004. Financial highlights:• Net income increased to record US$154.1 million (2003: US$127.0 million) despite impact of exceptional hurricane losses• Return on average equity was 19.1% (2003: 22.1%)• Book value grew by 21.4% to US$6.30 (£3.28) per share (2003: US$5.19; £2.70)• Gross premiums written rose to US$1.43 billion (2003: US$1.20 billion)• Net premiums earned increased to US$1.16 billion (2003: US$844.9 million)• Combined ratio was 89.4% (2003: 86.0%); exceptional hurricane losses added 6.5 percentage points to combined ratio• Proposed final dividend is 15.6 US cents (8.1 pence) per share; proposed total dividend of 23.5 US cents (12.4 pence) per share represents 23.5% of net income US$000 (except as indicated) 2004 2003 % change----------------------- ---------- ---------- ----------Gross premiums written 1,433,836 1,198,214 20%Net premiums written 1,246,505 1,085,134 15%Net premiums earned 1,161,110 844,947 37%Income before income tax expense 173,942 146,350 19%Net income 154,056 127,013 21%Pro forma net income per share (US$) 1.08 1.03 5%Total dividends per share (cents) 23.5 - --Book value per share (US$) 6.30 5.19 21%Unearned premiums 722,891 612,325 18%Effective tax rate 11.4% 13.2% --Combined ratio 89.4% 86.0% --Return on average equity 19.1% 22.1% -- Operational highlights: • Initial public offering of common shares raised $182.6 million, net of expenses• Strong growth of Corporate Direct and Corporate Reinsurance business segments; 31% of gross premiums written by these segments (2003: 22%)• Positive contribution to profits from all business segments• Successful establishment of Catlin UK, the Group's third operating platform; US$200 million in gross premiums written in first year• 1% increase in year on year weighted average rates reflects Group's commitment to disciplined underwriting Outlook:• Unearned premiums of US$722.9 million written at favourable historic rates• Rate reductions in January 2005 renewal season limited to 1%• Investment income to benefit from cash and investments of almost US$2 billion at 1 January 2005 (1 January 2004: US$1.2 billion)• Existing book of business expected to be relatively stable• Continued focus on generating superior return on equity through: • Emphasis on underwriting profitability • Value enhancing opportunities • Active management of capital Commenting on the Group's preliminary results, Sir Graham Hearne, chairman ofCatlin Group Limited, said: "I am proud to announce that Catlin has produced record profits during its firstyear as a publicly listed company, despite the exceptional hurricane lossesduring the second half of 2004. The Group's excellent results reflect Catlin'sfocus on serving clients, its commitment to underwriting profitability and theadvantages of its multi-platform structure. The total dividend of 23.5 centsamounts to 23.5 per cent of net income for 2004 and reflects our confidence inthe current performance of the business and in its future prospects." Chief Executive Stephen Catlin said: "I am very pleased with the Group's 2004 performance. Our 19.1 per cent returnon average equity is an outstanding achievement, considering that the impact ofthe exceptional level of hurricane losses reduced our RoE by 7.2 percentagepoints. "The 2005 renewal season has been satisfactory with only a marginal fall inaverage premium rates. The Group will maintain underwriting discipline and itsfocus on opportunities which enhance value. I believe we are well-positioned todeliver superior returns for shareholders in 2005." This summary should be read in conjunction with the detailed announcement whichfollows. - ends - For more information contact:Media Relations:James Burcke, Head of Communications Tel: +44 (0)20 7458 5710Mobile: +44 (0)7958 767 738E-mail: james.burcke@catlin.com Liz Morley, The Maitland Consultancy Tel: +44 (0)20 7379 5151E-mail: emorley@maitland.co.uk Investor Relations:William Spurgin, Head of Investor Relations Tel: +44 (0)20 7458 5726Mobile: +44 (0)7710 314 365E-mail: william.spurgin@catlin.com Notes to editors: 1. The Catlin Group, headquartered in Bermuda, is an internationalspecialist property/casualty insurer and reinsurer writing more than 30 classesof business worldwide. Catlin wrote gross premiums of $1.43 billion in 2004.Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). 2. Catlin management will make a presentation to investment analystsat 9.00am GMT today at its London office. The presentation will be broadcastlive on the Group's website (www.catlin.com). The webcast will be also beavailable on the website following the presentation. 3. Catlin's financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America ('USGAAP'). The Group reports in US dollars. 4. Pro forma net income per share has been calculated based onweighted averagepro forma shares in issue of 142.8 million for 2004 and 122.9 million for 2003. 5. Rate of exchange at 31 December 2004: £1 = US$1.92 (balancesheet); £1 = US$1.83 (income statement); at 9 March 2005 £1 = US$1.93. 6. Detailed information regarding Catlin's financial results for theyear ended 31 December 2004 follow, including statements from the Chairman,Chief Executive and Chief Financial Officer and condensed unaudited financialstatements. 7. Syndicate 2003 at Lloyd's (the Catlin Syndicate) and CatlinInsurance Company Ltd. (Catlin Bermuda and Catlin UK) have been assignedfinancial strength ratings of 'A' (Excellent) by A.M. Best Company. Chairman's Statement This is the first opportunity to report to you as the Chairman since CatlinGroup Limited became a publicly listed company in April 2004. It is especiallypleasing to do so at a time when the Group has achieved such excellent operatingresults. Net income rose by 21.3 per cent in 2004 to US$154.1 million (2003:US$127.0 million), despite the exceptional weather related claims caused by fourhurricanes which struck the Southeastern United States and the Caribbean in thesecond half of the year. Premium growth continued to be strong, as grosspremiums written increased by 19.7 per cent to US$1.43 billion (2003: US$1.20billion). All four of the Group's business segments performed well during the past year.Profits in the Corporate Direct and Corporate Reinsurance segments increased in2004, reflecting the successful start-up of Catlin UK and the continueddevelopment of Catlin Bermuda. Good performance was also reported by the Lloyd'sDirect and Lloyd's Reinsurance segments, especially in the light of thehurricane related losses. Initial public offering Catlin's initial public offering was concluded on 6 April 2004 when theCompany's common shares began unconditional trading on the London StockExchange. Catlin raised US$182.6 million, net of expenses, through the primaryoffering of common shares, while existing shareholders sold US$150 million oftheir shares through a secondary offering. We have received an excellent response from investors both during and followingthe IPO. Dividend policy As a newly listed company, Catlin has established a dividend policy under whichdividend payments will be linked to the current performance of the business andfuture prospects. The Board of Directors proposes a final dividend of 15.6 cents (8.1 pence) pershare, payable on 31 May 2005 to shareholders of record at the close of businesson 29 April 2005. This dividend is in addition to the interim dividend of 7.9cents (4.3 pence) per share that was paid on 15 November 2004. The finaldividend is calculated in US dollars but declared in sterling based on theexchange rate of £1=US$1.93 on 9 March 2005. The proposed final dividend is consistent with that envisaged at the time of ourinterim results, notwithstanding the impact of the hurricane losses sustained inthe second half of the year. Board of Directors The composition of the Board of Directors was changed prior to the IPO. MarkHoplamazian, Jeff Hughes, David Jaffe and Eric Rahe, all of whom wererepresentatives of our private equity investors, stepped down from the Board inMarch 2004. I would like to take this opportunity to thank them for their hardwork during a very important period for Catlin. At the same time, Alan Bossinand John Marion joined the Board, bringing the total number of Directors to 12. The Board faced a heavy workload in 2004, with the challenges created by the IPOadding to the Directors' already substantial duties. I would like to thank allof our Directors for their very hard work during what proved to be a successfulyear for the Group. Outlook Catlin's performance over the past two years, both of which have been recordsetting in terms of profitability, reflects the advantages of the Group'sstructure, its focus on serving clients and the commitment across the Group tounderwriting profitability. Whilst the global insurance and reinsurance marketis growing more competitive, I believe that Catlin's underwriting discipline,efficient use of capital, focus on client service and multi-platform structureprovide a solid base on which the Group can continue to produce excellentresults. Stephen Catlin and his team have done an outstanding job over the past year. Itis a pleasure to work with Stephen and the entire Catlin staff. I thank them fortheir dedication and enthusiasm and look forward to working with them to buildvalue for shareholders in the future. Sir Graham HearneChairman10 March 2005 Chief Executive's Review Our outstanding performance during 2004 is the result of favourable marketconditions, our disciplined underwriting strategy, the Group's innovativestructure, and the skill and commitment of our employees. Net income increased by 21.3 per cent in 2004 to a record US$154.1 million(2003: US$127.0 million) despite hurricane related losses which, after takinginto account planning assumptions, reduced profits on a pre-tax basis byapproximately US$75 million. Return on average equity amounted to 19.1 per cent(2003: 22.1 per cent). The combined ratio stood at 89.4 per cent (2003: 86.0 percent ), even though the hurricane losses increased the combined ratio byapproximately six percentage points. Gross written premiums increased by 19.7per cent, while net earned premiums rose by 37.4 per cent. Market environment Market conditions during 2004 remained strong. Whilst rates and terms for manyclasses of business -- particularly property classes -- came under competitive pressure as the year progressed, the hurricane losses slowed the slide in rates for property catastrophe reinsurance and other classes. Weighted average premium rates across all classes of business increased by 1 per cent during 2004. For the 1 January 2005 renewal period, weighted average premium rates decreased by only 1 per cent, which we consider encouraging and a testimony to our disciplined underwriting capability. Despite the pessimism of some market observers, I believe that very favourable opportunities for profitable underwriting remain. Whilst Hurricanes Charley, Frances, Ivan and Jeanne caused significant lossesfor the Group in 2004, the Indian Ocean tsunami in December did not have amaterial impact on Catlin's financial results. The cost of the tsunami to theglobal insurance industry was slight compared with the great human and economicsuffering. Strategy and structure The cornerstone of Catlin's operating strategy since the Group began business 20years ago has been underwriting profitability. We focus on business thatproduces sustainable underwriting profits across cycles. As markets soften, ourunderwriting discipline will be tested, but it is Catlin's firm policy toemphasise long term profitability over short term gains in market share. The keyto Catlin's performance has been the diversification of its risk portfolioacross carefully selected classes of business, targeting those with the greatestpotential for gross underwriting profit. Catlin during 2004 reaped the benefits of the innovative multi-platformstructure that we have worked extremely hard to develop. Our principalunderwriting platform remains the Catlin Syndicate at Lloyd's, but a growingpercentage of our business -- and our profits -- are produced by Catlin Bermuda,which began underwriting business in 2002, and Catlin UK, which beganunderwriting in 2004. Both of these platforms are progressing according to ourplans and provide access to alternative distribution channels. We also benefitfrom the fact that the Company is incorporated in Bermuda, which gives ussuperior capital and financial flexibility. We actively manage our capital against a forward looking economic model. Thiswill be particularly important in 2005 as we continue to seek value creatingopportunities and develop capital management strategies which I believe willincrease shareholder returns. We are enhancing the way we manage our operations on a Group basis, which Ibelieve will further increase the efficiency of our processes and the quality ofour service to clients and brokers.Other goals for the coming year include strengthening the flow of business fromthe United States, expanding our network of international offices, andcontinuing efforts to work more closely with retail brokers and their clients.Catlin UK is expanding its presence outside London to underwrite more businessplaced outside the London market for UK commercial clients. Catlin Bermuda iscontinuing to broaden the classes of business it offers to its clients. People, process and performance If there is a secret to Catlin's success, it is our people. We have a greatgroup of employees, a mixture of those who have been with us for many years andtalented newcomers, hired as the Group has grown in recent years. I thank themall for their hard work which has resulted in our outstanding performance. Catlin's corporate culture gives underwriters and other key employeessignificant responsibilities for business decisions. We believe thatunderwriters make the best underwriting decisions. However, we insist that thesedecisions are closely monitored and controlled. We are steadfast in ensuringthat our control processes are second to none. We have effective tools in placeto ensure that underwriting decisions are technically sound and based on arigorous analytical approach. Our underwriters can rely on extensive actuarialsupport and detailed pricing models. All Catlin offices share a single datasystem and follow the same procedures to ensure that we make consistentunderwriting decisions across the Group. Stephen CatlinChief Executive10 March 2005 Business Segments and Operating Platforms Business Segments Catlin reports its financial results through four business segments.: • Lloyd's Direct comprises direct insurance business underwritten by the CatlinSyndicate;• Lloyd's Reinsurance comprises reinsurance business underwritten by the CatlinSyndicate;• Corporate Direct encompasses direct insurance business underwritten by CatlinBermuda and Catlin UK; and• Corporate Reinsurance consists of reinsurance business underwritten by CatlinBermuda and Catlin UK. This includes intra-segment reinsurance assumed by CatlinBermuda. By dividing its business into these segments, observers can track the progressof Catlin's long established operations at Lloyd's separately from the morerecently established Catlin Bermuda and Catlin UK.Comparisons of the premiums written by each of the segments in 2004 and 2003 areshown in the following tables: 2004 Premiums Intra-Group PremiumsUS$m written* reinsurance written**-------------------- ----------- ----------- -----------Lloyd's Direct 870.4 (70.6) 799.8Lloyd's Reinsurance 211.2 (19.6) 191.6Corporate Direct 225.2 -- 225.2Corporate Reinsurance 127.0 90.2 217.2-------------------- ----------- ----------- ------------Total 1,433.8 - 1,433.8-------------------- ----------- ----------- ------------ * Prior to intra-Group reinsurance elimination** After intra-Group reinsurance elimination 2003 Premiums Intra-Group PremiumsUS$m Written* reinsurance written**-------------------- ----------- ----------- -----------Lloyd's Direct 906.3 (151.6) 754.7Lloyd's Reinsurance 234.9 (49.5) 185.4Corporate Direct 4.4 -- 4.4Corporate Reinsurance 52.6 201.1 253.7------------------- ----------- ----------- -----------Total 1,198.2 -- 1,198.2------------------- ----------- ----------- ----------- * Prior to intra-Group reinsurance elimination** After intra-Group reinsurance elimination Premiums written in the Lloyd's Direct and Lloyd's Reinsurance segments wererelatively stable in 2004, reflecting the fact that the Catlin Syndicate's stampcapacity was £500 million in both 2004 and 2003. The amount of intra-Groupreinsurance ceded by the Lloyd's Direct and Lloyd's Reinsurance segmentsdecreased by 55 per cent in 2004 due to the decision by Lloyd's to reduce themaximum amount of qualifying quota share ('QQS') reinsurance for all syndicatesto 10 per cent of premiums written (2003: 30 per cent). This also accounts forthe reduction in premiums written after intra-Group reinsurance elimination inthe Corporate Reinsurance segment in 2004. Premiums written in both the Corporate Direct and the Corporate Reinsurancesegments prior to intra-Group reinsurance elimination grew strongly in 2004.This reflects the business that has been developed by Catlin Bermuda and CatlinUK. The growth in premiums written by the Corporate Direct and Corporate Reinsurancesegments is in keeping with Catlin's stated goal that approximately 50 per centof gross premiums will be written by these two segments by the end of 2007. In2004 the Corporate Direct and Corporate Reinsurance segments accounted fornearly 31 per cent of premiums written (2003: 22 per cent) after to intra-Groupreinsurance elimination. Catlin Syndicate The Catlin Syndicate at Lloyd's (Syndicate 2003) is the oldest of Catlin's threeunderwriting platforms. The Syndicate is the eighth largest syndicate atLloyd's, based on £500 million in stamp capacity for 2005 (2004 and 2003: £500million), all of which is supplied by the Catlin Group. The Syndicate's stamp capacity was purposefully held steady in 2004 and again in2005. This strategy has allowed the Syndicate to take advantage of new,profitable underwriting opportunities within Lloyd's from its position as arespected market leader. At the same time, the Syndicate has also refused tounderwrite business whose rates and terms were deemed to be inadequate. The Syndicate continues to expand in classes of business that promisesubstantial returns. During 2004, the amount of satellite and space relatedpremiums underwritten by the Syndicate nearly doubled, taking advantage offavourable market conditions and the expertise the Syndicate has developed inthis specialist class. Also during the year, the Syndicate established a newspecialty in Construction & Engineering insurance after hiring an underwriterwith substantial experience in this class. Gross premiums written by the Syndicate in 2004 amounted to US$1.08 billion on aUS GAAP basis (2003: US$1.14 billion). Under Lloyd's three year syndicate accounting rules, the Catlin Syndicate's 2002year of account was closed at the end of 2004 with a return equal to 9.5 percent of capacity. The 2002 year of account was also the final year ofunderwriting for Syndicate 1003, the original syndicate managed by the CatlinGroup and whose capital was supplied by traditional Lloyd's Names and otherthird party capital providers. The outstanding liabilities of Syndicate 1003have been reinsured to close with the Catlin Syndicate as at 31 December 2004. Catlin Bermuda During its second full year of operations, Catlin Bermuda (Catlin InsuranceCompany Ltd.) consolidated its position as a leading underwriter in the vibrantBermuda market. Catlin Bermuda writes a diversified portfolio of both property and casualtytreaty reinsurance as a lead or quoting market. Property treaty reinsurance isweighted towards worldwide catastrophe business, including workers compensationcatastrophe excess of loss, but also includes a substantial risk excess and prorata account. Casualty reinsurance is focused on providing protection to mutualinsurers, captives and other risk financing mechanisms formed principally in theUnited States by homogeneous groups such as physicians, hospitals, nursing homesand lawyers. In addition, Catlin Bermuda underwrites a number of specialist classes ofinsurance, including medical malpractice, political risk and terrorism,benefiting from its status as an approved surplus lines insurer in numerous USstates and jurisdictions. The Company also offers multi-year structured riskcontracts to large corporate clients. Excluding intra-Group reinsurance, gross premiums written by Catlin Bermuda grewby 168 per cent to US$152.6 million (2003: US$57.0 million). Stockholder'sequity in Catlin Insurance Company Ltd. rose by 51.1 per cent to US$892.8million at 31 December 2004 (31 December 2003:US$590.9 million). Catlin Bermuda over the past two years has assembled a multi-disciplinary teamof underwriters, actuaries, finance professionals, lawyers and support staff.The company is committed to the recruitment of Bermudians, taking advantage ofthe Catlin Group's professional development programme that allows for extendedperiods of training in London and in other Catlin offices. Catlin UK Catlin UK is the newest of Catlin's three underwriting platforms, having begununderwriting with effect from 1 January 2004. In its first year of operations,Catlin UK wrote US$199.7 million in gross premiums. This business came from two sources: •specialty insurance that was written in parallel with the Catlin Syndicate at Lloyd's; and •professional indemnity, property, general liability, directors' and officers' liability, and commercial crime insurance underwritten in the UK market. These classes have previously been underwritten by the Catlin Syndicate. Most of the UK business written by Catlin UK in 2004 was produced by Londonbased brokers which the Catlin Syndicate has served for many years. However, in2005 Catlin UK is expanding its focus to include major UK regional brokers tobroaden its distribution channels. As part of the strategy to serve a more diverse distribution network, Catlin UKin 2004 developed an online quotation engine that allows selected brokers toreceive premium quotations rapidly over the internet. The implementation of thequotation engine will allow Catlin UK to service business for smaller to mediumsize UK clients more efficiently and provide decisions to brokers more quickly. During 2004 Catlin UK recruited a team of experienced underwriters to managebusiness written for UK commercial clients. It continues to share resources withthe Catlin Syndicate to underwrite global specialty business. Catlin UK was originally established as the UK Branch of Catlin InsuranceCompany Ltd. of Bermuda. In March 2005 the UK Financial Services Authority saidthat it was 'minded to authorise' the Group's proposal to convert Catlin UK intoa subsidiary of the Bermuda company (Catlin Insurance Company (UK) Ltd.).Gaining subsidiary status will give Catlin UK the ability to underwrite businessin all nations within the European Economic Area, which will allow it to expandthe service it provides to the Group's core brokers and clients. Financial review 2004 has been a year of excellent performance, particularly given the incidenceof large losses. The following contains commentary on Catlin's financialstatements for the year ended 31 December 2004, which are prepared in accordancewith US GAAP. Consolidated results of operations US$m 2004 2003 % change------------------------ ---------- ---------- ----------Gross premiums written 1,433.8 1,198.2 19.7%Reinsurance premiums ceded (187.3) (113.1) 65.6%------------------------ ---------- ---------- ----------Net premiums written 1,246.5 1,085.1 14.9%Change in unearned premiums (85.4) (240.2) (64.4%)------------------------ ---------- ---------- ----------Net premiums earned 1,161.1 844.9 37.4%------------------------ ---------- ---------- ---------- Losses and loss expenses (660.4) (424.6) 55.5%Policy acquisition costs (302.8) (250.1) 21.1%Administrative expenses (57.3) (43.7) 31.1%Other expenses (26.6) (15.2) 75.0%------------------------ ---------- ---------- ----------Net underwriting result 114.0 111.3 2.4%------------------------ ---------- ---------- ---------- Net investment income 47.0 23.8 97.5%Net realised gains on investments 3.4 1.2 183.3%Net realised gains on foreign currency 8.9 10.0 (11.0%)Other income 0.7 - ------------------------- ---------- ---------- ----------Net income before income taxes 174.0 146.3 18.9%------------------------ ---------- ---------- ---------- Income tax expense (19.9) (19.3) 3.1%------------------------ ---------- ---------- ----------Net income 154.1 127.0 21.3%------------------------ ---------- ---------- ---------- Loss ratio 56.9% 50.3%Expense ratio 32.5% 35.7%Combined ratio 89.4% 86.0%Effective tax rate 11.4% 13.2%Return on average equity 19.1% 22.1% Gross premiums written Gross premiums written in 2004 increased 19.7 per cent to US$1.43 billion (2003:US$1.20 billion). This growth, as expected, came from the Corporate Direct andCorporate Reinsurance business segments. Thirty-one per cent of the Group's 2004consolidated gross premiums were written in these segments (2003: 22 per cent).Excluding intra-Group reinsurance, gross premiums written in the CorporateDirect and Corporate Reinsurance segments increased by more than 500 per cent toUS$352.2 million in 2004 (2003: US$57.0 million). The gross premiums written by each of the Group's business segments are shown inthe table below: US$m 2004 2003-------------------------- ------------- ------------Lloyd's Direct 870.4 906.3Lloyd's Reinsurance 211.2 234.9Corporate Direct 225.2 4.4Corporate Reinsurance 217.2 253.7Intra-Group reinsurance elimination (90.2) (201.1)-------------------------- ------------- ------------ Total 1,433.8 1,198.2-------------------------- ------------- ------------ Net premiums earned Net premiums earned in 2004 increased by 37.4 per cent to US$1.16 billion (2003:US$844.9 million). The start-up of Catlin UK during 2004 contributedsignificantly to the increase in net premiums earned, as did Catlin Bermuda,which wrote significantly more business during 2004. Net premiums earnedincreased in both the Lloyd's Direct and the Lloyd's Reinsurance segments due tothe increased level of gross premiums underwritten by the Catlin Syndicate in2003. At the end of 2002 the Group purchased the entire capacity of Syndicate1003 that had been supplied by traditional Lloyd's Names and other third partycapital providers; that capacity was allocated to the Catlin Syndicate during2003. A significant portion of the increased premium volume underwritten by theCatlin Syndicate in 2003 was earned in 2004. Losses and loss expenses The loss ratio rose by 6.6 percentage points to 56.9 per cent in 2004 (2003:50.3 per cent). The 55.5 per cent increase in loss and loss expenses was drivenby the growth in net premiums earned and the exceptional loss activity in 2004. The increase in the loss ratio was chiefly a result of claims stemming from thefour hurricanes (Charley, Frances, Ivan and Jeanne) that caused extensive damagein the Caribbean and the Southeastern United States in August and September2004. The gross loss to the Group from the four hurricanes amounted to US$212.4million; the loss net of reinsurance amounted to US$114.6 million. We expect alevel of catastrophe loss activity during the year and after allowing forexpected catastrophe losses and reinsurance reinstatement costs, the net effectof the four hurricanes on the Group's net income before income taxes amounted toapproximately US$75 million, or 6.5 percentage points on the loss ratio. Expense ratio The expense ratio in 2004 improved by 3.2 percentage points to 32.5 per cent(2003: 35.7 per cent). The absolute level of policy acquisition costs increasedby 21.1 per cent to US$302.8 million in 2004 (2003: US$250.1 million). Thisincrease was fuelled by the 37.4 per cent increase in net premiums earned. Thepolicy acquisition cost ratio improved by 3.5 percentage points after allowingfor the one-off effect that boosted the ratio in 2003.During 2004 the Group changed its method of calculating its expense ratio tofollow market practice more closely. Previously, all expenses were included inthe calculation, whereas now financing costs and amortisation expense areexcluded. Comparative figures are presented on this revised basis. The absolute level of administrative and other expenses increased by 42.4 percent to US$83.9 million in 2004 (2003: US$58.9 million). This increase wasslightly ahead of the growth in net earned premiums. Staff numbers increasedthroughout 2004 to manage the growing volume of business. Additional costs wereincurred related to the listing of the Company's common shares, includingdirectors' and officers' liability insurance premiums, internal audit costs andshare registrar expenses. Lloyd's related costs, which cannot be controlled bythe Group, increased during 2004 largely due to a new charge levied by Lloyd'son the qualifying quota share reinsurance ceded by the Catlin Syndicate toCatlin Bermuda. Net investment income and net realised gains on investments (US$m) 2004 2003----------------------- ----------------- -----------Total investments at 31 December 1,982.7 1,237.2 Net investment income 47.0 23.8Net realised gains on investments 3.4 1.2Change in net unrealised gains on investments 5.3 3.7----------------------- ----------------- ----------- 55.7 28.7----------------------- ----------------- -----------Return on average funds held 3.4% 2.8%----------------------- ----------------- ----------- Net investment income and net realised gains on investments increased by 101.6per cent to US$50.4 million (2003: US$25.0 million). The increase was primarilydue to the higher investment base during 2004 as a result of strong cash flowsfrom operations, the successful initial public offering ('IPO') of the Company'scommon shares in April 2004 and a higher proportion of the investment portfolioinvested in bonds rather than cash and short term instruments. Total return on average investments increased to 3.4 per cent in 2004 (2003: 2.8per cent). This is due to the fact that the average duration of fixed incomesecurities (excluding cash) rose to 2.9 years at year end 2004 (31 December2003: 2.4 years). In addition, yields on cash and short term instruments rose in2004. Net realised gain on foreign currency exchange The Group reports its financial results in US dollars. The US$8.9 million netrealised gain on foreign currency exchange (2003: US$10.0 million) was primarilythe result of the strengthening of sterling against the US dollar impacting thevaluation of our sterling denominated assets. Income tax expense The Group's effective tax rate for 2004 reduced by 1.8 percentage points to 11.4per cent (2003: 13.2 per cent). Income tax expense in 2004 amounted to US$19.9million (2003: US$19.3 million). Balance sheet The Group's balance sheet at 31 December 2004 was strong and liquid as follows: US$m (except per share amounts) 2004 2003 % change----------------------- ---------- ---------- ----------Investments and cash 1,982.7 1,237.2 60.3%Premiums receivable 629.5 472.6 33.2%Amount due from reinsurers 448.7 381.7 17.6%Deferred acquisition costs 142.5 130.2 9.4%Intangible assets 71.2 70.5 1.0%Other assets 98.5 100.3 (1.8%) Gross loss reserves (1,472.8) (962.5) 53.0%Unearned premiums (722.9) (612.3) 18.1%Notes payable (50.2) (50.1) 0.2%Other liabilities (156.0) (129.0) 20.9%----------------------- ---------- ---------- ----------Stockholders' equity 971.2 638.6 52.1%----------------------- ---------- ---------- --------------------------------- ---------- ---------- ----------Stockholders' equity per share* US$6.30 US$5.19----------------------- ---------- ---------- ---------- * Based on 154.1 million shares in issue on 31 December 2004; pro forma 122.9million shares in issue on 31 December 2003 The chart below shows the principal components of the growth in stockholders'equity during the year. (US$m)---------------------------------- ----------------Stockholders' equity at 31 December 2003 638.6IPO net proceeds 182.62004 interim dividend (11.9)2004 net income 154.1Other 7.8---------------------------------- ----------------Stockholders' equity at 31 December 2004 971.2---------------------------------- ---------------- Investments and cashTotal investments and cash grew by 60.3 per cent to US$1.98 billion at 31December 2004 (31 December 2003: US$1.24 billion). The Group has continued tomaintain a conservative investment philosophy, with assets invested in aportfolio of fixed maturities, short term investments and cash. The fixedmaturities are all high quality, primarily with ratings of AA or higher. Reinsurance recoverablesAmounts due from reinsurers decreased to 30.5 per cent of gross loss reserves at31 December 2004 (31 December 2003: 39.7 per cent). The absolute amount due fromreinsurers increased during 2004, primarily reflecting recoveries due andanticipated in respect of losses relating to the four hurricanes. More than 90per cent of the amounts due are from reinsurers rated 'A-' or better by A M Best(or equivalent), and $169.4 million of the amount recoverable is secured throughsegregated trust funds held for the account of Catlin. ReservesGross loss reserves increased by 53.0 per cent during 2004. Net loss reserves asa proportion of shareholders' equity increased to 114.7 per cent at 31 December2004 (31 December 2003: 112.8 per cent), primarily reflecting increased lossactivity during 2004, particularly due to the hurricane losses in the secondhalf of the year which resulted in a relatively higher level of unsettled claimamounts at the balance sheet date. The Group continues to adopt a reserving policy whereby loss reserves are setconservatively relative to the range of estimates of both internal actuaries andindependent actuarial advisors. Financial results for 2004 benefited from arelease of $38.3 million in respect of prior years' reserves. Unearned premiumsThe provision for unearned premiums increased by 18.1 per cent to US$722.9million (31 December 2003: US$612.3 million). Substantially all of the unearnedpremium provision will be earned to income during 2005 at the high levels ofrate adequacy experienced during 2004, the year during which most of thisbusiness was underwritten. Cash and capital management Intra-Group reinsuranceThe use of intra-Group reinsurance is central to the management of the Group'scapital. The Group seeks to maintain economic capital within Catlin Bermuda tothe maximum extent possible and to manage the insurance risk portfolio on aGroup basis, regardless of the underwriting platform from which the risks areoriginally underwritten. Cash and liquidityA summary of the growth in cash and invested assets is shown in the table below: (US$m)---------------------------------- ----------------1 January 2004 1,237.2Operating cash 550.7Non-operating cash 23.8IPO proceeds 183.1Dividends paid (12.1)---------------------------------- ----------------31 December 2004 1,982.7---------------------------------- ---------------- Under the terms of banking arrangements, the Group is required to comply withcovenants relating to minimum levels of cash, net assets and net tangibleassets. The Group has complied with these covenants throughout the year andremains in compliance at the date of this report. Gearing and banking facilityThe two main elements of the Group's gearing at 31 December 2004 are a US$50.0million unsecured revolving credit facility which is fully drawn and used by theGroup to subscribe capital to Catlin Bermuda, and a £117.1 million (US$224.7million) unsecured letter of credit which is used to provide part of the Fundsat Lloyd's (FAL) supporting the Catlin Syndicate. A third element of gearing isthe use of a small amount of further unsecured letters of credit to supportcertain liabilities of Catlin Bermuda and Catlin UK. Overall gearing at 31December 2004 was as follows: (US$m)---------------------------------- ----------------Notes payable (revolving credit) 50.2Unsecured letters of credit for FAL 224.7Unsecured letters of credit for Catlin UK/Catlin Bermuda 15.7---------------------------------- ----------------Total 290.6---------------------------------- ----------------Financing as a proportion of stockholders' equity 29.9%---------------------------------- ---------------- Foreign currency managementUS dollars account for the majority of the Group's cash flow. A significant partof the remaining cash flow is in sterling; the Group also maintains euro andCanadian dollar funds. Management of foreign currency exposures is primarilyfocused on analysis and matching of expected cash flows; derivatives or otherfinancial instruments have not been utilised. Forward purchases and sales ofcurrency are used when known currency needs are identified. Information on International Financial Reporting Standards ('IFRS') The consolidated financial statements of EU companies with securities listed ona regulated market in any EU nation will be required to be prepared inaccordance with IFRS, issued by the International Accounting Standards Board,for accounting periods commencing on or after 1 January 2005. As the Group is incorporated in Bermuda, it has the choice of preparing itsfinancial statements in accordance with UK GAAP, US GAAP or IFRS under thecurrent rules of the UK Listing Authority. It has selected US GAAP. In order tofacilitate comparison to its UK incorporated peers, the Group presents areconciliation of net income and stockholders' equity to UK GAAP in itsconsolidated financial statements. The Group will reconcile to IFRS beginning in2005. Christopher StookeChief Financial Officer10 March 2005 The accompanying notes are an integral part of the consolidated condensedfinancial statements. Consolidated Condensed Balance SheetsAs at 31 December 2004 and 2003 (US Dollars in thousands, except share amounts) 2004 2003---------------------------------- -------- ----------AssetsInvestmentsFixed maturities, available-for-sale (amortisedcost 2004:$1,441,014; 2003: $750,051) $1,452,198 $755,905Short-term investments 173,037 153,101Cash and cash equivalents 354,608 325,667Investment in associate 2,869 2,542---------------------------------- -------- ----------Total investments 1,982,712 1,237,215---------------------------------- -------- ---------- Accrued investment income 15,925 9,281Premiums and other receivables 629,544 472,706Reinsurance recoverable (net of allowance of 2004:$18,864;2003: $14,157) 390,945 287,165Deposit with reinsurer 57,830 94,470Reinsurers' share of unearned premiums 51,748 38,287Deferred acquisition costs 142,511 130,185Intangible assets and goodwill (accumulatedamortisation2004: $29,163 ; 2003: $23,257) 71,238 70,531Deferred taxes - 7,082Other assets 30,673 45,542---------------------------------- -------- ----------Total assets $3,373,126 $2,392,464---------------------------------- -------- ---------- Liabilities and stockholders' equityLiabilitiesUnpaid losses and loss expenses $1,472,819 $962,535Unearned premiums 722,891 612,325Deferred gain 19,548 29,089Reinsurance payable 59,137 43,520Notes payable 50,187 50,107Accounts payable and other liabilities 70,138 56,251Deferred taxes 7,219 ----------------------------------- -------- ----------Total liabilities $2,401,939 $1,753,827---------------------------------- -------- -------------------------------------------- -------- --------- 2004 2003---------------------------------- -------- ---------Stockholders' equityPreference sharesClass A cumulative convertible preference shares,par value $0.0001(2004: nil; 2003: Authorised 110,000,000; Issuedand outstanding 15,000,000) $- $2Class B-1 cumulative convertible preference shares,par value $0.0001(2004: nil; 2003: Authorised 470,000,000; Issuedand outstanding 457,000,000) - 46Class B-2 cumulative convertible preference shares,par value $0.0001(2004: nil; 2003: Authorised, issued andoutstanding 25,000,000) - 2 Common sharesOrdinary common shares, par value $0.0001(2004: nil; 2003: issued and outstanding75,109,082) - 8Ordinary common shares, par value $0.01Authorised 250,000,000; 2004: issued andoutstanding 154,097,989;2003: nil) 1,541 - Additional paid-in capital 716,649 533,276Accumulated other comprehensive income/(loss) 4,156 (1,406)Retained earnings 248,841 106,709---------------------------------- -------- ---------Total stockholders' equity 971,187 638,637---------------------------------- -------- ---------Total liabilities and stockholders' equity $3,373,126 $2,392,464---------------------------------- -------- --------- The financial statements were approved by the Board of Directors on 10 March2005 and signed on its behalf by: Stephen Catlin, Chief ExecutiveChristopher Stooke, Chief Financial Officer Consolidated Condensed Statements of OperationsFor the Years Ended 31 December 2004 and 2003 (US Dollars in thousands, exceptshare amounts) 2004 2003---------------------------------- -------- --------RevenuesGross premiums written $1,433,836 $1,198,214Reinsurance premiums ceded (187,331) (113,080)---------------------------------- -------- --------Net premiums written 1,246,505 1,085,134Change in unearned premiums (85,395) (240,187)---------------------------------- -------- --------Net premiums earned 1,161,110 844,947---------------------------------- -------- -------- Net investment income 46,974 23,796Net realised gains on investments 3,358 1,151Net realised gains on foreign currency exchange 8,865 10,024Other income 759 52---------------------------------- -------- --------Total revenues 1,221,066 879,970---------------------------------- -------- -------- ExpensesLosses and loss expenses 660,437 424,625Policy acquisition costs 302,791 250,111Administrative expenses 57,294 43,674Other expenses 26,602 15,210---------------------------------- -------- --------Total expenses 1,047,124 733,620---------------------------------- -------- --------Income before income tax expense 173,942 146,350Income tax expense (19,886) (19,337)---------------------------------- -------- --------Net income $154,056 $127,013---------------------------------- -------- -------- Earnings per common shareBasic $1.31 $6.54Diluted $1.00 $0.92 Consolidated Condensed Statements of Changes in Stockholders' Equityand Accumulated Other Comprehensive IncomeFor the Years Ended 31 December 2004 and 2003 (US Dollars in thousands, exceptshare amounts) Accumulated Additional Retained other Total Common Preference paid-in earnings comprehensivestockholders' stock shares capital (deficit) income(loss) equity------------- ------ ------- -------- --------- -------- -------Balance1 January 2003 $7 $55 $530,304 ($20,304) ($1,075) $508,987 Comprehensiveincome:Net income - - - 127,013 - 127,013OthercomprehensiveLoss - - - - (331) (331)------------- ------ ------- -------- ------- --------- --------TotalcomprehensiveIncome - - - 127,013 (331) 126,682------------- ------ ------- -------- ------- --------- -------- Stock optionschemeExpense - - 1,859 - - 1,859Stock optionsexercised 1 - 1,108 - - 1,109Change inshareholdings - (5) 5 - - -------------- ------ ------- -------- ------- --------- --------Balance31 December2003 $8 $50 $533,276 $106,709 $(1,406) $638,637------------- ------ ------- -------- ------- --------- -------- Comprehensiveincome:Net income - - - 154,056 - 154,056OthercomprehensiveIncome - - - - 5,562 5,562------------- ------ ------- -------- ------- --------- --------TotalcomprehensiveIncome - - - 154,056 5,562 159,618------------- ------ ------- -------- ------- --------- -------- Payment of PIKdividend 4 - (4) - - -Redesignationof preferenceshares 50 (50) - - - -19-1 bonusissue 1,167 - (1,167) - - -Global Offer 312 - 182,315 - - 182,627Stock optionschemeexpense - - 2,099 - - 2,099Stock optionsexercised - - 130 - - 130Dividends paid - - - (11,924) - (11,924)------------- ------ ------- -------- ------- --------- --------Balance31 December2004 $1,541 $- $716,649 $248,841 $4,156 $971,187------------- ------ ------- -------- ------- --------- -------- Consolidated Condensed Statements of Cash FlowsFor the Years Ended 31 December 2004 and 2003 (US Dollars in thousands, exceptshare amounts) 2004 2003---------------------------------- --------- ---------Cash flows provided by operating activitiesNet income $154,056 $127,013Adjustments to reconcile net income to net cashprovided by operations:Amortisation and depreciation 10,742 7,297Amortisation of discounts of fixed maturities (2,317) (2,324)Net realised (gains) on investments (3,358) (1,151)Unpaid losses and loss expenses 423,817 175,637Unearned premiums 67,485 181,247Premiums and other receivables (187,251) (112,787)Deferred acquisition costs (3,518) (54,362)Reinsurance payable 42,358 (21,081)Reinsurance recoverable (63,542) 19,999Reinsurers' share of unearned premiums 2,211 25,251Deposit with reinsurer 36,640 24,681Deferred gain (3,893) (8,506)Accounts payable and other liabilities 7,869 1,048Deferred tax 3,035 22,973Other 66,396 (45,918)---------------------------------- --------- ---------Net cash flows provided by operating activities 550,730 339,017---------------------------------- --------- --------- Cash flows used in investing activitiesPurchases of fixed maturities (1,370,658) (2,870,999)Purchases of short-term investments (738,956) (152,715)Proceeds from sales of fixed maturities 672,950 2,220,879Proceeds from maturities of fixed maturities 11,670 75,466Proceeds from sales of short-term investments 727,563 74,561Purchase of intangible assets (161) (546)Purchases of property and equipment (12,233) (10,810)Proceeds from sales of property and equipment 85 185---------------------------------- --------- ---------Net cash flows used in investing activities (709,740) (663,979)---------------------------------- --------- --------- 2004 2003----------------------------------- -------- ---------Cash flows provided by financing activitiesProceeds from issue of common shares 183,127 -Dividends paid on common shares (12,085) -Proceeds from notes payable 200,000 100,000Repayment of notes payable (200,000) (50,000)Repayment of long term debt - (30)Proceeds from exercise of stock options 130 1,079----------------------------------- -------- ---------Net cash flows provided by financing activities 171,172 51,049----------------------------------- -------- ---------Net increase/(decrease) in cash and cash equivalents 12,162 (273,913)Cash and cash equivalents - beginning of year 325,667 523,536Effect of exchange rate changes 16,779 76,044----------------------------------- -------- ---------Cash and cash equivalents - end of year $354,608 $325,667----------------------------------- -------- --------- Supplemental cash flow informationTaxes paid $306 $676----------------------------------- -------- ---------Interest paid $1,176 $592----------------------------------- -------- --------- Cash and cash equivalents comprise the following:Cash at bank and in hand $349,815 $242,542----------------------------------- -------- ---------Cash equivalents $4,793 $83,125----------------------------------- -------- --------- Notes to the Consolidated Condensed Financial StatementsFor the Years Ended 31 December 2004 and 2003 (US Dollars in thousands, exceptshare amounts 1 Significant accounting policies Basis of presentationThe accompanying consolidated condensed financial statements have been extractedfrom the audited consolidated financial statements of Catlin Group Limited,which are prepared in accordance with accounting principles generally accepted