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Catlin Group Limited06 March 2008 CATLIN GROUP LIMITED ANNOUNCES FINANCIAL RESULTS FOR YEAR ENDED 31 DECEMBER 2007 HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), theinternational specialty property/casualty insurer and reinsurer, announcesrecord financial results for the year ended 31 December 2007. Record Financial Performance: • 4 per cent increase in income before tax to US$543 million(1) • 8 per cent increase in net income available to common shareholders to US$462 million(1) • 21 per cent return on average equity; • 33 per cent return on net tangible assets • 24 per cent increase in gross premiums written to US$3.4 billion(1) • Combined ratio of 84 per cent (2006: 87 per cent)(1) • Total investment return of 4.5 per cent including subprime provision Strong Balance Sheet: • 49 per cent increase in stockholders' equity to US$3.0 billion(2) • 20 per cent increase in cash and investments to US$6.0 billion(2) • 19 per cent increase in book value per share to US$9.59(2) • 29 per cent increase in net tangible assets per share to US$6.57(2) • 17 per cent increase in unearned premiums to US$1.5 billion • 9 per cent increase in total dividend to 25.1 pence (50.2 US cents) per share Operational Highlights: • Successful integration of Catlin-Wellington operations • Excellent business retention • Growth in US and international offices 2008 Outlook: • Further rate softening, but margins to remain good • Stable premium volume (decrease in London; growth from Catlin US, international offices) • Embedded growth in earned premiums from Wellington acquisition • Anticipated acquisition-related synergies increased to more than US$125 million annually _____________(1) 2006 comparatives presented on an unaudited combined basis: Catlin results and Wellington results aggregated, both prepared under US GAAP for period ended 31 December 2006(2) Comparison to 2006 results as reported by Catlin Group ----------------------- -------- --------- --------- --------- Change(2) 2006 2006 from 2006US$000 2007 combined(1) as reported combined----------------------- -------- --------- --------- ---------Gross premiums written 3,360,626 2,721,800 1,605,019 24%Net premiums written 2,573,518 2,323,261 1,410,123 11%Net premiums earned 2,489,534 2,228,162 1,325,861 12%Income before income tax 543,368 520,514 275,417 4%expenseNet income available tocommonshareholders 461,718 428,481 258,789 8%Earnings per share (US $1.84 $1.73 $1.59 6%dollars)Total dividend per share 25.1 - 23.0 9%(pence)Total dividend per share (US 50.2 - 44.1 14%cents)Loss ratio 46.4% 50.0% 51.4%Expense ratio 37.7% 37.3% 36.8%Combined ratio 84.1% 87.3% 88.2%Annualised investment return 4.5% 4.1% 3.5%Effective tax rate 11.0% 17.7% 6.0%Return on average equity 20.8% 23.8% 24.2%Return on net tangible assets 32.9% 31.7% 24.1%----------------------- -------- --------- --------- --------- 31 December 31 December Change(2) 2007 2006----------------------- -------- --------- --------- ---------Total assets 9,813,135 8,806,318 8,806,318 11%Investments and cash 6,001,144 5,013,709 5,013,709 20%Stockholders' equity 3,017,004 2,018,280 2,018,280 49%Unearned premiums 1,506,899 1,290,379 1,290,379 17%Book value per share (US $9.59 $8.07 $8.07 19%dollars)Net tangible assets per share(US dollars) $6.57 $5.11 $5.11 29%----------------------- -------- --------- --------- ---------_____________(1) Catlin results and Wellington results aggregated, both prepared under US GAAP for period ended 31 December 2006(2) Calculated as the movement between Catlin's 2007 results and 2006 combined, except for dividends and balance sheet items which are calculated as the movement between Catlin's 2007 results and 2006 as reported Sir Graham Hearne, Chairman of Catlin Group Limited, said: "Catlin is reporting record financial results today, including an 8 per centincrease in net income available to common shareholders, a return on averageequity of 21 per cent and an increase in net tangible assets per share of 29 percent. We have entered 2008 in a strong position and are confident of ourprospects. This confidence is reflected in the proposed total dividend of 25.1pence per share, an increase of 9 per cent." Stephen Catlin, Chief Executive of Catlin Group Limited, said: "2007 was a landmark year for Catlin. All parts of our business performed well,and we successfully integrated Wellington's operations with our own. We advancedour strategy of further diversifying our risk portfolio and expanding ourdistribution capabilities through the development of Catlin US and ourinternational offices. "The progress in our operations outside London and the embedded growth emergingfrom the Wellington acquisition should enable us to maintain business volumeseven in the challenging underwriting conditions anticipated during 2008. Thosefactors, combined with more than US$125 million in annual cost synergies,provide the Group with a strong foundation for ongoing success." For more information contact: Media Relations:James Burcke, Tel: +44 (0)20 7458 5710Head of Communications, London Mobile: +44 (0)7958 767 738 E-mail: james.burcke@catlin.com Liz Morley, Maitland Tel: +44 (0)20 7379 5151 E-mail: emorley@maitland.co.ukInvestor Relations:William Spurgin,Head of Investor Relations, London Tel: +44 (0)20 7458 5726 Mobile: +44 (0)7710 314 365 E-mail: william.spurgin@catlin.com Notes to editors: 1. Catlin Group Limited, headquartered in Bermuda, is an international specialist property/casualty insurer and reinsurer writing more than 30 classes of business worldwide through four underwriting platforms - the Catlin Syndicate at Lloyd's, Catlin Bermuda, Catlin UK and Catlin US - and an international network of offices. Gross premiums written in 2007 amounted to US$3.4 billion. Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). More information about Catlin can be found at www.catlin.com. 2. Catlin's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ('US GAAP'). The Group reports in US dollars. 3. Catlin's results for the year ended 31 December 2006, as shown in the attached financial statements, included the acquisition of Wellington on 18December 2006. Because of its timing, the acquisition had no impact on thestatement of operations, including net income, but the acquisition is reflectedin the balance sheet at 31 December 2006. 4. Income statement figures presented on a Catlin-Wellington combined basis for the year ended 31 December 2006 represents the aggregation of audited Catlin results and Wellington results, both presented under US GAAP; the Wellington US GAAP income statement has not been audited. 5. Earnings per share are based on weighted average shares in issue of 250.3 million during 2007. Book value per share is based on shares in issue of 253.1 million at 31 December 2007. 6. Catlin management will make a presentation to investment analysts at 9.00am GMT today at its London office. The presentation will be broadcast live on the Group's website (www.catlin.com). The webcast will also be available following the presentation. 7. Rate of exchange at 31 December 2007: £1 = US$1.99 (balance sheet); £1 = US$2.00 (income statement); at 4 March 2008: £1 = US$1.99 8. Detailed information regarding Catlin's operations and financial results for the year ended 31 December 2007 follow, including statements from the Chairman and Chief Executive, and underwriting, financial and investment information. Chairman's Statement I am pleased to report Catlin's strong operating results during the past year.Net income increased to a record US$461.7 million, and the Group produced areturn on average equity of 20.8 per cent. This is a particularly goodperformance during the year following Catlin's acquisition of WellingtonUnderwriting plc. The Wellington acquisition increased Catlin's size and stature significantly,but it also provided the entire Catlin team with the challenge of integratingtwo companies without losing business. I am happy to say that the Groupsucceeded on both fronts: Wellington's operations were integrated quickly andbusiness retention following the acquisition exceeded our expectations. All parts of the business performed well during 2007. Our expanded team ofunderwriters produced a solid underwriting result despite increasing competitionin many classes of business. The Group continued to build Catlin US and itsinternational office network, both of which contributed to the 2007 performanceand will become increasingly important in future years. Catlin now employs more than 1,000 people in more than 15 countries around theworld. The Group's success during 2007 is a result of their skill, teamwork andeffort led by Stephen Catlin and his management team. I express my sincerethanks to Stephen and all Catlin employees for their hard work during the pastyear. DividendThe Board of Directors proposes a final dividend of 17 pence (33.8 US cents) pershare, payable on 23 May 2008 to shareholders of record at the close of businesson 25 April 2008. Including the interim dividend of 8.1 pence (16.4 US cents)per share paid on 9 November 2007, the proposed total 2007 dividend of 25.1pence (50.2 US cents) per share represents a 9 per cent increase over the 2006dividend. Catlin is committed to providing an attractive return to shareholders throughthe dividend. The Group has established a policy under which the dividend islinked to Catlin's recent performance as well as to future prospects. Board of DirectorsDuring 2007 three Directors - Richard Haverland, Jonathan Kelly and Gene Lee -retired from the Board. They were succeeded by Kenneth Goldstein and Alton Irby,who bring a broad range of experience to the Board. I would like to thank all Directors, not least those who have retired from theBoard, for their hard work in assisting the Group in achieving such a successfuloutcome for the year. Preferred sharesIn January 2007 Catlin Bermuda issued US$600 million in non-cumulative perpetualpreferred shares at a dividend rate of 7.249 per cent. The proceeds from thisissue were primarily used to repay the US$500 million short-term debt facilityCatlin had established as part of the financing for the Wellington acquisition.These preferred shares represent regulatory capital for Catlin Bermuda. OutlookCatlin enters 2008 in a strong position. We have successfully integratedWellington's operations with our own and have retained both books of business.Whilst competition in the marketplace is increasing, margins for most classes ofbusiness are good. We look to the future with optimism. Sir Graham HearneChairman Chief Executive's Review 2007 was a landmark year for Catlin. The Group produced record financial resultswhilst successfully integrating Wellington's operations with our own. We havestrengthened our capital position and improved our operational capabilities.Investment in Catlin US and our international offices is expanding ourdistribution capabilities and provides future sources of growth. We enter 2008with a firm foundation for future success. 2007 resultsNet income in 2007 amounted to US$461.7 million, an increase of 8 per centcompared with Catlin's and Wellington's combined operations in 2006 ('combined')and a 78 per cent increase compared with Catlin's stand-alone operations ('asreported'). Book value per share increased by 19 per cent to US$9.59 (2006:US$8.07). The Group produced excellent underwriting results during 2007. Gross premiumswritten amounted to US$3.36 billion, a 24 per cent increase on a combined basisand a 109 per cent increase on an as reported basis. Net premiums earned totalledUS$2.49 billion, a 12 per cent increase on a combined basis (2006: US$2.23billion) and an 88 per cent rise on an as reported basis (2006: US$1.33billion). The Group produced a combined ratio of 84.1 per cent in 2007 (2006: 87.3 percent combined; 88.2 per cent as reported). The loss ratio was 46.4 per cent(2006: 50.0 per cent combined; 51.4 per cent as reported), reflecting the goodrating environment of the past year, a relatively low incidence of loss andfavourable development of prior year loss reserves. Whilst average weightedpremium rates decreased by 4 per cent across our portfolio for businessincepting during 2007, margins in nearly all classes remained high. IntegrationDuring 2007 Wellington was fully integrated with Catlin, starting withestablishment of a combined underwriting floor for all of our London-basedunderwriters immediately upon the offer being declared unconditional. The onlyremaining milestone is the full migration of Wellington's historical data toCatlin's systems, which will be completed this year. Integration of the twobusinesses was achieved with a level of business retention that exceeded ourexpectations. SynergiesWe originally projected that the synergies produced by the acquisition ofWellington would amount to US$70 million post-tax in 2008 and subsequent years.During 2007 we increased that estimate to at least US$100 million and we nowbelieve that we are on track to deliver synergies of more than US$125 millionpost-tax in 2008 and subsequent years: • Operating synergies are expected to amount to approximately US$22 million. • Reinsurance synergies for 2008 are expected to amount to approximately US$50 million. • Investment synergies, resulting from the combination of investment portfolios and changes to the Group's investment strategy, are expected to amount to an annualised amount of US$26 million. • Tax synergies will depend on the Group's operating performance and other factors, but are expected to amount to approximately $28 million. Catlin US and international officesA major focus of the Group during the past year has been the development ofCatlin US and the Group's network of international offices. This development isaimed at sourcing good quality, uncorrelated business outside of the Londonwholesale market. Catlin US gives the Group an important foothold in the United States, theworld's largest insurance market. Building on Catlin's existing small operationin the US and Wellington's US operations, Catlin US is now a diversifiedinsurance and reinsurance platform that includes two insurance companies, morethan 15 offices and more than 200 employees, writing more than US$300 million ingross premiums. Catlin US allows the Group to underwrite US business that would not typically beplaced in the London or Bermuda markets. The business classes written by CatlinUS are those with which the Group already is experienced. Over the past year, wehave significantly strengthened our US staff, attracting experiencedprofessionals who share the Catlin commitment to disciplined underwriting. Catlin US is an important part of the Group's ongoing strategy, and we see it asproviding an important source of growth in the future. Our international office network has both matured and expanded during the pastyear. New offices were established in Paris, Barcelona, Zurich, Innsbruck,Shanghai and Sao Paulo, whilst our existing offices increased the amount ofbusiness underwritten. Overall, the international offices wrote US$184 millionin gross premiums during 2007, a 73 per cent increase (2006: US$106 million). Weanticipate more growth in 2008 as the development of these offices continues. Besides offering a source of growth, both Catlin US and the internationaloffices diversify Catlin's book of business. In addition, the offices allowCatlin to build closer relationships with local clients and their brokers, whichwe believe will further promote business retention. Embedded growthThe Wellington acquisition will provide Catlin with embedded growth for severalyears. The embedded growth is linked to the third-party Lloyd's Names who had providedapproximately 33 per cent of the capacity of Wellington Syndicate 2020 during2006. Catlin acquired this capacity in December 2006 and, as part of thattransaction, the Names were given the opportunity to participate in a 12.5 percent quota share reinsurance of the enlarged Catlin Syndicate for 2007 and 2008. Whilst the Names did not participate on Catlin Syndicate during 2007, they werestill entitled to their share of profits from premiums which earned during 2007but were written by Syndicate 2020 in 2006 and prior years. The proportion ofSyndicate premiums and resulting profits attributable to Names will decreaseduring 2008 and reduce to nil during 2009. The Names' quota share reinsurance will have a similar impact. This reinsurancearrangement will terminate at the end of 2008, and the Names' residual interestwill cease by the end of 2010. This embedded growth means that the net premiums earned by Catlin will increasethrough 2011 as the Names' participation unwinds, even if the underlying grosspremium volume holds steady. InvestmentsCatlin produced a solid investment performance last year. Overall, the Group'scash and investments increased by 19.7 per cent during the year to US$6.0billion (2006: US$5.0 billion). Our total investment return was 4.5 per cent, upfrom 4.1 per cent in 2006. Our total investment return was impacted by a US$75 million charge related tofixed income investments that were exposed to the subprime mortgage market. Thatcharge amounted to approximately 85 per cent of the book value of the affectedsecurities. During 2007 Catlin reviewed its investment strategy, which had been to investalmost solely in cash and fixed-income instruments. We concluded that theincreased size of the portfolio allows us to adopt a more diversified strategy,and the Group will now invest up to 20 per cent of the portfolio in a range ofalternative investment funds. Investment markets continued to be volatile during January 2008. Our diversifiedportfolio was conservatively positioned and losses in our equity and fund offunds portfolios were offset by strong returns on our fixed income and cashportfolios. The total return for January was 0.6 per cent. OutlookCatlin's ambition is to build a business for the future, and we have made goodprogress during 2007 and the beginning of 2008. For business incepting inJanuary 2008, gross premiums written increased by 3 per cent whilst averageweighted premium rates decreased by 4 per cent. Margins remain robust for thevast majority of business classes, and absent a major event, we believe that2008 will be another good underwriting year. We expect that the gross premiums written by the Catlin Syndicate and Catlin UKmay decrease slightly during 2008. However, with continued growth from Catlin USand the international offices, we expect that gross premiums written by theGroup will remain stable. Net earned premiums will see embedded growth arisingfrom the Wellington acquisition, and the Group will benefit from more than $125million in annual synergies. These factors leave Catlin in a strong position toface the challenging market conditions during 2008 and beyond. The true strength of Catlin rests with our excellent group of employees. During2007, the Group experienced higher than normal turnover, which we fullyanticipated following the Wellington acquisition. We filled these vacancies withprofessionals of the highest calibre, and we believe that our team has beensignificantly strengthened in the past year. I would like to thank all ofCatlin's employees, old and new, for their hard work which made 2007 such asuccess. Stephen CatlinChief Executive The following sections up to the Consolidated Balance Sheets do not form part of the consolidated financial statements. Underwriting Report 2007 market overviewFollowing the record-setting catastrophe losses that dominated 2004 and 2005,pricing for catastrophe-exposed business stood at a high water mark during 2006. Catastrophe pricing levels remained high during 2007. However, due to therelatively benign loss experience of the previous year combined with theincreasing capacity available in the marketplace, average weighted premium ratesfor the Group's catastrophe-exposed business incepting during 2007 decreased by2 per cent. Following the trend set during 2005 and 2006, average weighted premium rates fornon-catastrophe-exposed classes of business continued to come under pressure,with rates for business incepting during 2007 decreasing by 5 per cent. Despite the decrease in average weighted premium rates during 2007, marginsduring the period remained strong for both catastrophe and non-catastropheexposed business as shown in the table below. Rating indexes for catastrophe and non-catastrophe business classes---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ 1999 2000 2001 2002 2003 2004 2005 2006 2007---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------Catastrophe businessclasses aggregate 100% 107% 135% 189% 208% 203% 201% 245% 239%Non-catastrophe business classes aggregate 100% 103% 136% 177% 203% 211% 208% 201% 191%---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Within both the catastrophe and non-catastrophe sectors, average weightedpremium rates for individual classes of business have shown different dynamics,but generally rates for most classes of business remained robust in 2007. Thetables below show the rate indexes for various categories of business since1999: Rating indexes for catastrophe business classes---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ 1999 2000 2001 2002 2003 2004 2005 2006 2007--------------- ------ ------ ------ ------ ------ ------ ------ ------ ------Energy 100% 111% 147% 240% 301% 276% 281% 388% 367%Property Direct 100% 107% 137% 186% 201% 196% 192% 217% 204%Property Reinsurance 100% 104% 120% 161% 169% 166% 165% 207% 212%--------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Rating indexes for non-catastrophe business classes---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ 1999 2000 2001 2002 2003 2004 2005 2006 2007---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------Specialty 100% 106% 119% 142% 155% 159% 159% 159% 158%Casualty 100% 103% 138% 177% 229% 245% 240% 230% 218%Aerospace 100% 107% 116% 135% 135% 135% 131% 122% 110%War & Political Risk 100% 102% 131% 230% 240% 228% 215% 211% 200%Marine & Property 100% 102% 143% 181% 201% 210% 213% 217% 214%---------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Within the non-catastrophe impacted element of the portfolio, reductions wereparticularly noticeable on the Casualty, Aerospace and War & Political Riskaccounts. During 2007 the Casualty accounts saw weighted rate reductions of 5 per cent. UKand international accounts continued to follow the downward trend that has beenseen in some sectors since 2004, whilst US business started to show widerreductions for the first time. The continuing reductions in Aerospace pricing have been predominantly driven bythe decreases seen on aviation business, and more specifically on airlinebusiness that is traditionally renewed during the fourth quarter. Following anumber of relatively benign loss years and a perception of increased airlinesafety, rates are, and continue to be, under pressure, which is reflected in the10 per cent reduction in average weighted premium rates during 2007. The War & Political Risk account saw average weighted rate reductions of 5 percent during the year. This was a result of softening rates for terrorisminsurance, a sector which has seen an increase in capacity coupled with benignloss experience over the past several years. Group underwriting performanceFollowing the acquisition of Wellington in December 2006, the Group'sunderwriting focus consisted of two major components: • Retain pre-existing business volumes following the acquisition, so long as the business continued to offer sufficient margins; and • Continue to pursue Catlin's ongoing strategy of diversification and expanded distribution. Business retentionThe overall gross premiums written by the Group in 2007 increased by 3 per centcompared with the combined 2006 business underwritten by Catlin and Wellingtonwhen measured on a basis that assumed that Wellington owned 100 per cent of thecapacity of Wellington Syndicate 2020 during 2006 and prior years ('100 per centbasis'). In reality, Wellington owned approximately 67 per cent of theSyndicate's capacity in 2006, with the remainder provided by third-party Lloyd'sNames. Volumes of 'UK-originating' business were down marginally by 3 per cent.(UK-originating business is defined as business underwritten by the CatlinSyndicate or Catlin UK that is not produced by Catlin US or one of theinternational offices.) This is a good performance when measured against theoverall 4 per cent reduction in average weighted premiums rates for businessincepting during 2007. Diversification and distributionCatlin continued to diversify its risk portfolio in 2007. The development ofCatlin US broadens the risk portfolio to include US business that would nototherwise be placed in London or Bermuda. The Group also expanded itsinternational office network, thus diversifying global sources of business, byopening new underwriting offices during 2007 in Paris, Barcelona, Zurich,Innsbruck and Shanghai. In addition, a representative office was established inSao Paulo, whilst Catlin acquired a representative office in Genoa that had beenoperated by Wellington. The Group also expanded its lines of business in 2007. Apart from the portfoliodiversification generated by the acquisition of Wellington, Catlin established anew specialty line product within the Accident and Health class called 'Loss ofLicence', which provides coverage to air crews who are disqualified from flyingon medical grounds. During 2007, the Group recruited a London-based underwritingteam that specialises in writing Motor/Fleet business; this team wrote its firstpolicies at 1 January 2008. The development of Catlin US and the international office network is explainedbelow. Catlin USCatlin US underwrites property/casualty coverages on both a direct andreinsurance basis. The development of Catlin US gives the Group an importantfootprint in the world's largest insurance market and provides an engine forfuture profitable growth. During 2007, Catlin US was developed into a diversified insurance andreinsurance platform that includes two insurance carriers writing admitted andnon-admitted business, 17 offices and more than 200 employees. Catlin USprovides the Group with a US operation that shares the same values and focus ondisciplined underwriting to which Catlin subscribes. The classes of business written by Catlin US include: • Business that had been written in the United States by Wellington subsidiaries. These classes include accident and health reinsurance; treaty and facultative property insurance, written on both a brokerage and direct basis; marine reinsurance; specialty casualty insurance coverages; and commercial property, casualty and inland marine insurance written on a binding authority basis by general agents; • The book of medical malpractice insurance that had been written by US-based underwriters on behalf of the Catlin Syndicate and Catlin UK since 2002; and • Additional classes that have been developed by Catlin US since its establishment. These classes include professional liability insurance; equine insurance; primary and excess casualty insurance; and crisis management and terrorism insurance. Catlin US during 2007 devoted substantial resources to building aninfrastructure to support the platform's business. Underwriters were recruitedto manage Catlin US's new specialties and to strengthen existing businessclasses. During the past 18 months, Catlin US has established its own finance,actuarial, IT, operations, claims, human resources, legal and regulatoryfunctions. New offices were established during 2007 in Philadelphia, Clevelandand Lexington, Kentucky. Coverage is written by Catlin US on behalf of other Catlin underwritingplatforms and on behalf of its two US-domiciled insurers: Catlin InsuranceCompany Inc. and Catlin Specialty Insurance Company Inc. Catlin InsuranceCompany, which began operations during 2007, underwrites coverage on an admittedbasis. Catlin Specialty, which was acquired with Wellington and subsequentlyrenamed, underwrites on a non-admitted basis. Catlin US underwrote $314 million in gross premiums during 2007, both on behalfof the two US insurers and on behalf of other Catlin Group underwritingplatforms, a 3 per cent increase (2006: US$305 million combined). Of thisamount, US$71 million was underwritten by the two US insurers; this is thepremium volume included in the 'Catlin US' segment. Catlin US's premium volumeduring 2007 was impacted by competitive market conditions, the delayedestablishment of some of the new business classes and the decision to terminatea large programme due to inadequate margins. If the gross premiums writtenassociated with this programme are excluded, Catlin US's volume during 2007amounted to US$286 million (2006: US$272 million). The specialties launched by Catlin US will become more established during 2008.Competitive market conditions are expected in nearly all facets of the USmarketplace, but the direct segments written by Catlin US are expected to grow,largely due to the significant increase in experienced underwriting talentrecruited during 2007. The reinsurance classes underwritten will likely showsmaller but substantial increases in volume. In total, target gross premiumswritten for Catlin US is $425 million during 2008. International officesCatlin's network of international offices expands the Group's distributionwhilst diversifying its risk portfolio. The international offices give Catlin alocal presence in a targeted market, allowing it to develop local insuranceproducts written by locally based underwriters. The table below shows the international offices and the coverages written byeach. YearOffice established Classes underwritten------------ --------- --------------------------------- Singapore 1999 Property, Marine Hull, Cargo, Construction, Aviation, Property Reinsurance, Specie (including Fine Art and Jewellers' Block), Energy and TerrorismKuala Lumpur 1999 Energy, Aviation, Casualty (also includes Group shared service centre)Cologne 2003 Specie (including Cash in Transit and Fine Art), Marine Hull, Cargo, Aviation, Contingency, Terrorism, Treaty ReinsuranceSydney 2004 Aviation, Casualty, Specie (including Fine Art), Terrorism, Property Reinsurance, Construction & Engineering, Crisis ManagementAntwerp 2005 Contingency, Marine Hull, Cargo, Casualty, ConstructionGuernsey 2005 AviationToronto 2005 Property, General Liability, Marine Hull, Cargo, Construction & Engineering, Aviation, Professional LiabilityGenoa 2006 Representative officeHong Kong 2006 Property, Marine Hull, Cargo, Terrorism, Property Reinsurance, Construction & EngineeringCalgary 2006 Aviation, Property, General Liability, Marine Hull, Cargo, Construction & Engineering, Professional LiabilityBarcelona 2007 Cargo, Casualty, Construction & EngineeringInnsbruck 2007 Cargo, Casualty, Construction & EngineeringParis 2007 Cargo, Contingency, Aviation, Casualty, Construction & EngineeringZurich 2007 Liability, Construction & Engineering, AviationShanghai 2007 Property, Marine Hull, Cargo, Terrorism, Property Reinsurance, Construction & EngineeringSao Paulo 2007 Representative office------------ --------- --------------------------------- The Group added six international offices to its network during 2007: • European offices in Paris, Barcelona, Zurich and Innsbruck, which were opened during the first half of the year. These offices add to the Group's existing European offices in Cologne, Antwerp and Guernsey. • An office in Shanghai, which was established in the spring as part of Lloyd's Reinsurance Company (China) Limited, a licensed reinsurance operation established concurrently by Lloyd's. • A representative office in Sao Paulo, which was established during the second half of the year. This office serves as a liaison for the Catlin Syndicate in the Brazilian market, where the monopoly status of reinsurer IRB-Brasil Resseguros S.A. was eliminated during 2007. The international offices underwrote US$184 million in gross premiums written in2007, an increase of 73 per cent over the previous year (2006: US$106 million).This volume exceeded the target of US$150 million established by the company atthe beginning of 2007, and Catlin expects gross premiums written by theinternational offices will increase to US$250 million during 2008. The table below breaks down the growth of the international offices by region. International office gross premiums written by region (US$000)---------------- ------- ------- -------- ------- -------- --------US $m Europe Canada Pacific Rim Guernsey Brazil Total---------------- ------- ------- -------- ------- -------- --------2005 7,908 4,138 21,240 5,574 - 48,8602006 16,736 22,479 39,707 27,084 - 106,0062007 38,532 40,972 66,506 37,530 - 183,5402008* 73,000 45,000 90,000 27,000 15,000 250,000---------------- ------ ------- -------- ------- -------- --------* Target Classes of businessThe classes of business underwritten by the Group are shown in the tables belowwith the gross premiums written for each class. Property Direct (2007 GPW: US$1.73 billion)------------------------------------------ ---------US$m------------------------------------------ ---------Energy $403Aviation $282Property Direct and Facultative $243Political Risk, Terrorism and War $156Non-Marine Binding Authority $133Marine Hull $118UK Property $89Specie $82Cargo $72Equine & Livestock $53Satellite $39Construction & Engineering $28Trade Credit $24Contingency $9Inland Marine $2Nuclear $1------------------------------------------ --------- Casualty Direct (2007 GPW: US$769.7 million)------------------------------------------ ---------US$m------------------------------------------ ---------General Liability $275US Casualty $97UK Professional Indemnity $89Marine & Energy Liability $89Accident & Health $87Professional Liability $67Medical Malpractice $24Financial Institutions $23Crisis Management $19------------------------------------------ --------- Reinsurance (2007 GPW: US$855.4 million)------------------------------------------ ---------US$m------------------------------------------ ---------Property RI $564Casualty RI $141Marine & Aviation RI $78Accident & Health RI $42Structured Risk $17Motor Excess of Loss $13------------------------------------------ --------- Potential subprime-related claimsEarly in 2008 Catlin carried out a thorough review of potential exposures tosubprime-related claims across the Group. The Group is not a significant insurerin classes such as US directors' and officers' liability and financialinstitutions that are particularly exposed to claims. The Group does not believethat it has significant exposure to these types of claims and any losses areexpected to be within normal expectations for incurred but not reported losses. 2008 outlookPerformance during the January 2008 renewal season was generally in line withthe Group's expectations. Gross premiums written by the Group for businessincepting in January 2008 increased by 3 per cent to US$737 million (2007:US$718 million). Gross premiums for London-originating business, whichrepresents approximately two-thirds of the Group's premium volume, decreased by7 per cent, but this shortfall was offset by an 18 per cent increase in grosspremiums written by Catlin Bermuda, a 49 per cent increase in business writtenby Catlin US (including business written on behalf of the Catlin Syndicate andCatlin UK) and a 144 per cent increase in gross premiums written by theinternational offices. Average weighted premium rates across Catlin's portfolio decreased by 4 per centfor business incepting in January. Absent a major event or a series of catastrophes, the Group expects grosspremiums written to be stable during 2008 as compared with 2007, with decreasesin London-originating business offset by gains in the other areas of the Group. Whilst the Group expects that rates will decrease throughout the year,underwriting conditions should remain favourable. The Group also believes thatits underwriting strategy - including the focus on underwriting discipline, itstechnical approach to underwriting, the diversity of its portfolio, itsmulti-platform structure and the international office network - should serve itwell during the next phase of the market cycle. Reinsurance programmeCatlin's risk transfer programme reduces the Group's earnings volatility andimproves capital efficiency. The programme is designed and executed centrally inorder to maximize purchasing power and facilitate optimal structuring. The key elements of the programme include: • Non-proportional event and aggregate protection to reduce the impact of large and/or frequent catastrophic events;• Capital markets risk transfer to increase the term of protection, diversify and improve greater counterparty financial security and reduce the volatility in risk transfer costs over time; and• Proportional and facultative protection to enhance the Group's gross underwriting capacity. During 2007, Catlin sponsored the formation of Newton Re Limited, a CaymanIsland-domiciled special purpose vehicle ('SPV') designed to facilitate Catlin'songoing, efficient, flexible and regular access to the capital markets. Sinceits formation in December 2007, Newton Re has provided the Group with protectionunder two three-year transactions. The first provides US$225 million ofprotection in a swap format against large US earthquake and US windstorm eventsas triggered by insurance industry losses as reported by Property ClaimsServices. The second provides US$150 million of annual aggregate reinsuranceagainst accumulated losses in the Group's property treaty book from USwindstorm, US earthquake, European windstorm, Japanese typhoon and Japaneseearthquake events. The second transaction is groundbreaking in that it respondsto the Group's actual losses on an annual aggregate basis rather than beingtriggered by an industry-based or parametric index. The Group continues to participate in catastrophe swap agreements with Bay HavenLimited, another Cayman-domiciled SPV, and ABN AMRO which provide US$257 millionin coverages in the event of a series of natural catastrophes. This swapresponds to covered risk events of a defined minimum magnitude including UShurricanes, US earthquakes; UK windstorms, European windstorms, Japanesetyphoons and Japanese earthquakes. No payment will be made for the first twosuch events, but Catlin would recover for up to seven subsequent events. Therewere no catastrophes during 2007 that would have triggered this coverage. The financial strength of the Group's risk transfer counterparties is of highquality as more of the protection is placed with higher rated and collateralisedmarkets. The financial strength quality of Catlin's risk transfer partners ismonitored on a regular basis by the Reinsurance Security Committee, which isindependent from the reinsurance purchasing team. The Catlin Syndicate is reinsured under a quota share contract with two Lloyd'ssyndicates capitalised by Lloyd's Names who were formerly members of WellingtonSyndicate 2020. This contract cedes approximately 12.5 per cent of net premiumsand claims of the Catlin Syndicate for the 2007 and 2008 Lloyd's underwritingyears of account, net of brokerage and certain other acquisition costs. In addition to third-party reinsurance, Catlin Bermuda provides intra-Groupreinsurance for the Catlin Syndicate, Catlin UK and Catlin US. The acquisition of Wellington was not completed until 18 December 2006. Althoughmuch of the reinsurance programme for the 2007 underwriting year was placed on acomposite basis covering the entire Group, the short time available to place theprogramme did not allow significant synergies to be realised in 2007. TheGroup's reinsurance programme for the 2008 underwriting year was adjusted andenhanced; it is estimated to deliver approximately US$50 million of post-taxsynergies in 2008. Catastrophe Threat Scenarios The greatest likelihood of significant loss for the Group arises from natural orman-made catastrophe events, including terrorism. Catlin'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 regularly 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 from the fourth quarter of 2007 is detailed below. The modelledoutcomes below represent the Group's modelled net loss after allowing for allreinsurances, including the quota share contract with two Lloyd's syndicatescapitalised by Names who were formerly members of Wellington Syndicate 2020. Themodelled outcomes are quoted prior to any tax effect. The modelled outcomes aresubject to significant uncertainty as set out below under 'Limitations' and arenot a prediction of actual losses. Modelled gross and net lossesThe table below shows the outcomes derived from the internal and external modelsusing data as supplied by clients. The modelled outcomes in this table reflectthe Group's interpretation of how external models and methods should be appliedand are used internally for market consistent comparisons and for regulatoryreturns. Examples of catastrophe threat scenariosData model output - Outcomes derived as at 1 October 2007 Florida Gulf of (Miami) California Mexico European Japanese Windstorm Earthquake Windstorm Windstorm Earthquake------------- --------- --------- --------- --------- --------- Estimated industry loss 100,000 70,000 100,000 30,000 50,000 Modelled Catlin Group Gross loss 627 826 930 545 570 Reinsurance effect(1) (394) (548) (589) (320) (384)------------- --------- --------- --------- --------- ---------Modelled net loss 233 278 341 225 186------------- --------- --------- --------- --------- ---------------------- --------- --------- --------- --------- ---------Modelled net loss aspercentage of net tangible assets(2) 10% 12% 15% 10% 8%------------- --------- --------- --------- --------- ---------(1) Reinsurance effect includes the impact of both inwards and outwards reinstatements(2) Net tangible assets ('NTA') amounted to US$2.25 billion at 31 December 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, the Group'smanagement adds a further prudential margin to the modelled output above toreflect the degree of uncertainty in any peril or scenario. These adjustedoutcomes are detailed in the table below. These adjusted numbers are then usedto monitor the Group's risk appetite to add a level of conservatism above thedata model outcomes. These adjusted outcomes are also used to price inwardsbusiness, to influence outwards reinsurance purchasing strategy and to measurerequired capital. Examples of catastrophe threat scenariosAdjusted data model output - Outcomes derived as at 1 October 2007 Florida Gulf of (Miami) California Mexico European Japanese Windstorm Earthquake Windstorm Windstorm Earthquake------------- --------- --------- --------- --------- --------- Estimated industry loss 100,000 70,000 100,000 30,000 50,000 Catlin Group Gross loss 848 930 1,220 575 578 Reinsurance effect(1) (525) (621) (749) (324) (384)------------- --------- --------- --------- --------- ---------Modelled net loss 323 309 471 251 194------------- --------- --------- --------- --------- ---------------------- --------- --------- --------- --------- ---------Modelled net loss aspercentage of net tangible assets(2) 14% 14% 21% 11% 9%------------- --------- --------- --------- --------- ---------(1) Reinsurance effect includes the impact of both inwards and outwards reinstatements(2) Net tangible assets amounted to US$2.25 billion at 31 December 2007; NTA defined as total stockholders' equity (including preferred shares), less intangible assets net of associated deferred tax LimitationsCatastrophe threat scenario modelling 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 in the tables are mean losses from a range of potentialoutcomes. At the mean value, the size of one loss would be contained or nearlycontained within the normal expected profits for a year with limited utilisationof capital. Significant variance around the mean is possible. For a givenindustry loss, 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 unexpectedly during the policy period. Furthermore, theassumptions made during any 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 timeof the analysis, and the outcome may change during the year. The modelledoutcomes assume that the reinsurance in place responds as expected with minimalreinsurance failure or dispute. Reinsurance is purchased to match the inwardsexposure as far as possible, but it is possible for there to be a mismatch orgap in cover which could 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. Financial Review The following pages contain commentary on Catlin's consolidated financialstatements for the year ended 31 December 2007, which are prepared in accordancewith US Generally Accepted Accounting Principles ('US GAAP'). The acquisition of Wellington was declared unconditional on 18 December 2006. Asa result, the US GAAP consolidated income statement for the 2006 financial yearreflected the results of operations of Catlin on a stand-alone basis, withoutthe results of Wellington. For comparison purposes in this Financial Review, theincome statement 2006 comparatives are on an unaudited combined basis to showthe consolidated results of operations of Catlin aggregated with theconsolidated results of operations of Wellington. This presentation was shown inthe Financial Review in the 2006 Annual Report and Accounts and represents themost appropriate basis for comparison with the Group's 2007 Consolidated Resultsof Operations. Because the acquisition was completed prior to the end of 2006,the 2006 and 2007 balance sheets can be compared on a like for like basis and nosimilar combined presentation is needed. Consolidated Results of Operations Set out below are the Consolidated Results of Operations for the 2007 year withcomparison to the 2006 results presented on the combined basis described above.----------------------- --------- -------- -------- --------US$000 2006 2006 as % change 2007 (combined) reported(1)----------------------- --------- -------- -------- --------RevenuesGross premiums written 3,360,626 2,721,800 1,605,019 24Reinsurance premiums ceded (787,108) (398,539) (194,896) 97----------------------- --------- -------- -------- --------Net premiums written 2,573,518 2,323,261 1,410,123 11Change in unearned premiums (83,984) (95,099) (84,262) (12)----------------------- --------- -------- -------- --------Net premiums earned 2,489,534 2,228,162 1,325,861 12 Net investment income 290,113 184,846 105,989 57Net realised (losses)/gains oninvestments (78,970) 3,501 (17,041) N/MNet realised loss on (30,088) (1,321) (1,321) N/MderivativesNet realised (losses)/gains onforeign currency exchange (4,035) 31,202 38,746 (113)Other income 23,354 42,061 3,528 (42)----------------------- --------- -------- -------- --------Total revenues 2,689,908 2,488,451 1,455,762 8----------------------- --------- -------- -------- -------- Expenses----------------------- --------- -------- -------- --------Losses and loss expenses 1,154,670 1,113,393 681,549 4Policy acquisition costs 624,195 540,714 341,531 15Administrative expenses 291,694 275,018 130,703 6Other expenses 75,981 38,812 26,562 96----------------------- --------- -------- -------- --------Total expenses 2,146,540 1,967,937 1,180,345 9----------------------- --------- -------- -------- -------- Income before income taxes 543,368 520,514 275,417 4Minority interest 8 (22) (22) (136)Income tax expense (59,790) (92,011) (16,606) (35)----------------------- --------- -------- -------- --------Net income 483,586 428,481 258,789 13----------------------- --------- -------- -------- --------Preferred share dividend (21,868) - - 100----------------------- --------- -------- -------- --------Net income available to commonstockholders 461,718 428,481 258,789 8----------------------- --------- -------- -------- ------------------------------- --------- -------- -------- --------Loss ratio(2) 46.4% 50.0% 51.4% --Expense ratio(3) 37.7% 37.3% 36.8% --Combined ratio(4) 84.1% 87.3% 88.2% --Tax rate(5) 11.0% 17.7% 24.2% --Return on average equity(6) 20.8% 23.8% 6.0% ------------------------- --------- -------- -------- --------(1) Calculated as the movement between Catlin's 2007 results and 2006 combined(2) Calculated as losses and loss expenses divided by net premiums earned(3) Calculated as the total of policy acquisition costs, administrative expenses and other expenses, less financing expenses and restructuring costs, divided by net premiums earned(4) Total of loss ratio plus expense ratio(5) Calculated as income tax expense divided by income before income taxes(6) Calculated as net income available to common shareholders divided by the weighted average of opening and closing stockholders' equity (excluding preferred shares) The following commentary compares Catlin's 2007 results to the unauditedcombined results for 2006. Gross premiums writtenGross premiums written increased by 24 per cent to US$3.36 billion. Asignificant element of this increase was a result of the cessation of the legacyWellington Syndicate 2020, approximately one-third of whose capacity wasprovided by third-party Lloyd's Names. Subject to the reinsurance arrangementsdescribed below, business underwritten at Lloyd's in the 2007 and subsequentunderwriting years is written by Catlin Syndicate 2003, all of whose capacity isprovided by the Group. If the capacity provided by the Lloyd's Names toWellington Syndicate 2020 is taken into account, gross premiums written by theCatlin and Wellington Syndicates in 2006 amounted to US$3.26 billion and theunderlying like for like increase in 2007 was 3 per cent. The Group experienced weighted average rate decreases of approximately 4 percent for business incepting during 2007, but rates remained adequate in nearlyall classes of business. This contrasts with the strong rate increases,particularly in catastrophe exposed classes, during 2006. Retention of businesspreviously written by the Wellington Syndicate significantly exceeded theGroup's expectations. In addition, our developing network of internationaloffices exceeded growth targets, contributing new, diversified business to theGroup's risk portfolio. ReinsuranceReinsurance premiums ceded include both premiums ceded in respect of third-partyprotections purchased by the Group and premiums ceded under a quota sharecontract with two syndicates capitalised by Names who were formerly members ofWellington Syndicate 2020. This quota share contract cedes approximately 12.5per cent of premiums earned by the Catlin Syndicate for the 2007 and 2008Lloyd's underwriting years of account, net of brokerage and certain otheracquisition costs. Reinsurance premiums ceded in 2007 are analysed below;reinsurance premiums ceded in 2006 wholly related to third-party protections. US$000 2007 % of GPW--------------------------------- ---------- ----------Third-party protections 549,652 16%Names' quota share 237,456 7%--------------------------------- ---------- ---------- 787,108 23%--------------------------------- ---------- ---------- Third-party reinsurance costs expressed as a percentage of written premiums areapproximately 1 percentage point higher than the equivalent level on a combinedbasis in 2006. The reinsurance programme for 2007, which protected the enlargedGroup, was purchased very soon after the completion of the Wellingtonacquisition. As a result, it was not possible to develop efficiencies in thestructure which would result in cost savings. Approximately US$50 million inreinsurance cost savings, which represent synergies resulting from theacquisition, are expected to be achieved with the purchase of the 2008reinsurance programme. Net premiums earnedGrowth in premiums earned lags the increase in premiums written when a companyis growing. This is particularly notable for Catlin during 2007 because asignificant element of premiums earned related to premiums written in respect ofthe 2006 and previous Lloyd's underwriting years of account by Syndicate 2020,acquired in the Wellington acquisition and now in run-off. Approximately one-third of these net premiums were earned by the third-partyLloyd's Names who provided capacity to this syndicate. This effect is expectedto be much less significant during 2008 and subsequent years and represents animportant element of the embedded growth resulting from the Wellingtonacquisition. Furthermore, the Names' quota share reinsurance of the CatlinSyndicate described above will cease for the 2009 and subsequent underwritingyears, resulting in additional embedded growth. This effect and other acquisition effects are illustrated in the table below.------------------------- --------- --------- --------- --------- --------- Names Third-party quota share Integration Names' share reinsurance costs and of Syndicate of Syndicate acquisition 2007 as 2020 for 2003 accounting Adjusted US$m reported 2005-06 for 2007 effect(1) total------------------------- --------- --------- --------- --------- --------- Gross premiums written 3,361 53 - - 3,414Net premiums earned 2,490 249 126 - 2,865Investment income &gains/losses 211 40 - - 251Other (loss)/income (11) 4 - - (7)------------------------- --------- --------- --------- --------- ---------Total revenues 2,690 293 126 - 3,109------------------------- --------- --------- --------- --------- --------- Loss & operating expenses (2,147) (147) (109) 38 (2,365)------------------------- --------- --------- --------- --------- ---------Income before tax 543 146 17 38 744------------------------- --------- --------- --------- --------- ---------Income tax expense (59) (41) (5) (10) (115)------------------------- --------- --------- --------- --------- ---------Preferred share dividends (22) - - - (22)------------------------- --------- --------- --------- --------- ---------Net income available tocommon stockholders 462 105 12 28 607------------------------- --------- --------- --------- --------- ---------(1) Includes value of in-force (VIF) amortisation and amortisation of non-cash consideration to Names Assuming no growth in underlying premium volume, the estimated impact on netearned premiums of the third-party Names' share of Syndicate 2020 for 2006 andprior years and the Names' quota share reinsurance of the Catlin Syndicate isshown in the table below:--------------------------------- ---------- ----------US$000 --------------------------------- ---------- ---------- Third-party Names quota share Names' share of reinsurance of Syndicate 2020 Syndicate 2003 for 2005-06 for 2007 ---------- ----------2007 249,470 126,0522008 16,423 228,1442009 - 112,3252010 - 10,233--------------------------------- ---------- ---------- In addition, the reinsurance to close of Syndicate 2020 into the CatlinSyndicate, which is expected at the beginning of 2009, will increase the Group'sinvestment assets by approximately US$500 million. Losses and loss expensesBoth 2006 and 2007 were relatively benign in terms of catastrophe losses, andattritional losses were generally in line with expectations. 2006 was affected by a number of relatively large losses in the satellite andmotor excess loss accounts, together with volatility in respect of reserves forthe 2005 hurricanes (Katrina, Rita and Wilma). This resulted in a need for somespecific reserve strengthening and consequently a relatively small release ofreserves on a combined basis at the end of 2006. Loss activity during 2007 was reasonably benign, and loss activity was in linewith expectations. However, the underlying loss ratio during 2007 was impactedby reduced rates across the Group's portfolio. The prior year reserve lossposition was generally stable during 2007, with the development of both thelegacy Catlin and legacy Wellington reserves in line with expectations.Consistent with the Group's conservative reserving approach, reserveredundancies, in respect of the 2003 to 2006 accident years in particular, ledto a release of US$139 million from prior years' reserves at 31 December 2007. These effects have led to a reduction in the loss ratio to 46.4 per cent in 2007(2006: 50.0 per cent). Policy acquisition costs, administrative and other expensesThe expense ratio amounted to 37.7 per cent (2006: 37.3 per cent). The expenseratio comprises a number of components as illustrated in the table below.--------------------- --------- --------- --------- ----------US $000 --------------------- --------- --------- --------- ---------- Components of 2006 Components of 2007 expense ratio (combined) expense ratio--------------------- --------- --------- --------- ---------- Policy acquisition costs 624,195 25.1% 540,714 24.2%Administrative and other expenses 313,410 12.6% 291,079 13.1%Financing costs 21,508 -- 22,751 --Integration costs 32,757 -- -- ----------------------- --------- --------- --------- ---------- 991,870 37.7% 854,544 37.3%--------------------- --------- --------- --------- ---------- The policy acquisition cost ratio has increased to 25.1 per cent (2006: 24.2 percent). This primarily reflects the mix of business underwritten in 2007. Administrative and other expenses represent 12.6 percentage points of theoverall expense ratio (2006: 13.1 percentage points). The Group has continued toinvest in the development of Catlin US and its network of international offices,both of which are generating growth in written premiums but where growth inadministrative and other expenses exceeded growth in earned premiums during2007. This effect increases the expense ratio, which should unwind as Catlin USand the international offices become more established. The most significant element of administrative and other expenses is staffrelated costs, which represent approximately 55.0 per cent of the total (2006:51.3 per cent). These include management and staff bonuses which depend, inpart, on the return on equity achieved by the Group and the valuation ofentitlements under share option schemes. Financing costs do not affect the expense ratio. The costs comprise interest andother costs in respect of bank financing, including the cost of the bridge loanin connection with the acquisition which was repaid in January 2007 with theproceeds of a US$600 million preferred share issue, together with costs of oursubordinated debt. Also included are the issue and other costs associated withthe catastrophe swap derivative transactions entered into in 2006 and 2007,explained more fully on page . Dividends on the preferred shares are treated asan appropriation of net income and are not included in financing costs. Integration costs associated with the implementation of the acquisition do notrepresent a component of the Group's ongoing expense base and therefore are notreflected in the expense ratio. The costs incurred in 2007 amounted to US$33million and related primarily to personnel, facilities, systems integration andprofessional fees. Integration costs in 2008 are expected to total $15 million. Administrative and other expenses for 2007 incorporate the benefit of operatingcost synergies resulting from the integration of the two businesses. These havearisen in the UK and US and amount to approximately US$16 million on a post-taxbasis; the largest components of the synergies are salaries and related costs,premises costs and professional fees. The ongoing saving resulting fromoperating cost synergies is expected to be US$22 million on a post-tax basis for2008 and subsequent years. Net investment income and net realised gains/(losses) on investmentsThe table below summarises the total return on investments during the year.Unrealised gains and losses on investments are reported in other comprehensiveincome, and not net income, in accordance with US GAAP. For 2008 Catlin will be electing to apply the Fair Value Option under FinancialAccounting Standard 159. This will result in the total return on investmentsbeing reported in net income for 2008 and subsequent years.--------------------------------- ---------- ---------- 2006US $000 2007 (combined)--------------------------------- ---------- ----------Total investments and cash as at 31 December 6,001,144 5,013,709 Net investment income 290,113 184,846Net realised gains/(losses) on investments (78,970) 3,501Net unrealised gains/(losses) on investments 36,423 1,643--------------------------------- ---------- ---------- 247,566 189,990--------------------------------- ---------- ----------Realised return on average investments 3.8% 4.1%--------------------------------- ---------- ----------Total return on average investments 4.5% 4.1%--------------------------------- ---------- ---------- An element of the Group's portfolio of assets exposed to the US sub-primemortgage market during 2007 suffered an impairment which is other thantemporary. As a result unrealised losses amounting to approximately US$75million have been reclassified as realised. Net realised losses on catastrophe swapsAs part of its third-party reinsurance arrangements, the Group has entered intocatastrophe swap arrangements with certain special purpose entities. For 2007the main elements of the change in fair value of derivatives relate to theagreement with Bay Haven Limited as is shown below.--------------------------------- ---------- ---------- 2006US $000 2007 (combined)--------------------------------- ---------- -----------Premiums payable in respect of Bay Haven catastrophe swap 14,464 702Change in value of Bay Haven catastrophe swap 8,480 619 Other, including Aspen options 7,144 ---------------------------------- ---------- ---------- 30,088 1,321--------------------------------- ---------- ---------- The fair value of the swap is based on the value of the bonds issued by BayHaven Limited which are valued by ABN AMRO on a daily basis. The swap hasexperienced valuation losses in 2007 due to the absence of market loss eventsduring the year. The loss on derivatives also includes losses realised on thedisposal of options over shares in Aspen Insurance Holdings Limited, acquired inthe Wellington transaction, amounting to approximately US$6 million. There were no premiums paid during the year with respect to the Newton Recatastrophe swap. Net realised (loss)/gain on foreign currencyDuring 2007 Catlin realised a loss on foreign currency exchange amounting toUS$4.0 million (2006: US$31.2 million gain). The sterling-US dollar exchangerate rose to 1.99 at year-end 2007 (31 December 2006: 1.96). Foreign exchangelosses largely arose as a result of US dollar reporting companies in the Groupholding sterling and other non dollar assets at certain times of the year. Other incomeIn 2007 and 2006 most of the other income reported related to fees charged tothird-party Lloyd's Names by Syndicate 2020. The 2006 year, which will close atthe end of 2008, is the last year that has third-party Name participation andtherefore most of the fees chargeable to the third-party Names have already beenrecognised. Income tax expenseThe effective tax rate for the Group has fallen to a rate for 2007 of 11.0 percent (2006: 17.7 per cent), which is slightly below the expected medium-termrange of 12 to 15 per cent. During the first half of the year, Catlin implemented a corporate reorganisationto structure the Group in a capital- and tax-efficient manner. All Groupcompanies are now directly or indirectly owned by Catlin Bermuda which alsoprovides capital support to the other underwriting platforms through intra-Groupreinsurance. All profits in respect of business written since the acquisition ofWellington have benefited from Catlin's efficient capital structure, asevidenced by the 11.0 per cent tax rate in 2007. The principal driver of the effective tax rate is where among the Group'sunderwriting platforms underwriting profits and losses fall. In 2007 Catlin UKincurred losses due to two satellite claims, but this effect was partiallyoffset by good earned profits from the 2006 and earlier Lloyd's underwritingyears of Syndicate 2020 which related to business written prior to theacquisition and which therefore did not benefit from such an efficient capitalstructure. Balance SheetA summary of the balance sheets at 31 December 2007 and 2006 is set out below.---------------------------- --------- --------- ---------US $000 2007 2006 % change---------------------------- --------- --------- ---------Investments and cash 6,001,144 5,013,709 20Securities lending collateral 44,662 130,854 (66)Intangible assets and goodwill 884,428 868,026 2Premiums and other receivables 1,153,372 987,768 17Reinsurance recoverable 1,119,847 1,238,852 (10)Value of in-force business acquired - 118,384 (100)Deferred acquisition costs 247,171 144,063 90Other assets 362,511 304,662 19 Loss reserves (4,237,525) (4,005,133) 6Unearned premiums (1,506,899) (1,290,379) 17Notes payable - (550,290) (100)Subordinated debt (100,825) (99,936) 1Other liabilities (905,463) (710,697) 27Securities lending payable (44,662) (130,854) (66)Minority interest (757) (749) 1--------------------------- --------- --------- ---------Stockholders' equity 3,017,004 2,018,280 49--------------------------- --------- --------- --------- The chart below shows the principal components of the change in stockholders'equity during the year:------------------------------------------ ---------US $000------------------------------------------ ---------Stockholders' equity, 1 January 2007 2,018,280Net income 461,718Issuance of preferred shares 589,785Stock compensation and other 8,420Net treasury shares acquired 751Dividends declared (126,860)Change in other comprehensive income 64,910------------------------------------------ ---------Stockholders' equity, 31 December 2007 3,017,004------------------------------------------ --------- In January 2007 Catlin Bermuda issued US$600 million of non-cumulative perpetualpreferred shares. Dividends are paid semi-annually at a rate of 7.249 per centup to 2017 when there is a 100 basis point step up in the interest cost based onLIBOR at that time. These shares represent a capital instrument which iseligible as regulatory capital for Catlin Bermuda and innovative 'Tier 1'capital under the rules of the FSA in the UK. The amount attributable to preferred shareholders is US$590 million such thatthe per share amounts attributable to common shareholders are as set out below.--------------------------------- ---------- ----------US$000 2007 2006--------------------------------- ---------- ----------Total stockholders' equity 3,017,004 2,018,280Less: attributable to preferred shares (589,785) ---------------------------------- ---------- ---------- 2,427,219 2,018,280--------------------------------- ---------- ------------------------------------------- ---------- ----------Stockholders' equity per share (US$) US$9.59 US$8.07Stockholders' equity per share (Sterling) £4.82 £4.12--------------------------------- ---------- ---------- Investments and cashInvestments and cash increased by almost US$1 billion or 20 per cent to US$6.0billion (2006: US$5.0 billion). In addition to cash generated by operations, around US$50 million of thepreferred share issue in January was retained after repayment of the US$500million bridge facility and the Group's US$50 million revolving credit facility.Furthermore, the Group has made good progress in managing working capital duringthe year. Reinsurance recoverables decreased by US$118 million, reflectingcollections of $189 million (net of the $71 million balance due from the Namesquota share contract) during 2007. Securities lendingCatlin has continued the securities lending arrangement which was commenced inearly 2006. Under this arrangement certain of the fixed maturity investments areloaned to third parties through a lending agent. The Group maintains controlover the securities it lends, retains the earnings and cash flows associatedwith the loaned securities, and receives a fee from the borrower for thetemporary use of the securities. Collateral in the form of cash, governmentsecurities and letters of credit is required to be established by the borrowerat a minimum rate of 102 per cent of the market value of the loaned securities;this is monitored and maintained by the lending agent. There has been a reduced level of lending during the year reflecting reducedholdings by the Group of the types of government securities which are commonlylent. Intangible assets and goodwillThe movement in intangible assets and goodwill during the year results primarilyfrom foreign exchange effects. A large part of the intangibles and goodwillrepresent assets which arose on the acquisition of Wellington and are held bysterling-denominated Group companies. The following table sets out the principal components of this asset.--------------------------------- ---------- ----------US$000 2007 2006--------------------------------- ---------- ----------Purchased Lloyd's syndicate capacity 779 767Distribution network 4 5Surplus lines licenses 8 9Goodwill on acquisition of Wellington 75 69Other goodwill 18 18--------------------------------- ---------- ---------- 884 868--------------------------------- ---------- ---------- The amounts relating to the distribution network and surplus lines licenses areamortised over their estimated useful lives. However, the larger part of thebalance is not amortised because it is considered to have an indefinite life,but is subject to annual impairment tests. Under US GAAP Catlin is required to establish a liability for deferred taxationin relation to the value of intangible assets and goodwill arising on theWellington acquisition. This liability is included in 'other liabilities' andamounts to US$119 million (2006: US$127 million). Premiums and other receivablesPremiums and other receivables have increased during 2007 by US$166 million or17 per cent. This reflects both an increased level of premiums written duringthe year compared with 2006 and the effect of the cessation of the third-partyNames' participation. Reinsurance recoverableAmounts receivable, and anticipated recoveries from reinsurers, have fallen byUS$118 million or 10 per cent. This reflects a relatively low level of lossactivity during 2007, particularly relating to larger losses which arerecoverable from reinsurers and good progress in making recoveries fromreinsurers in respect of prior years' losses. Value of in-force business acquiredAs part of the Wellington acquisition accounting, the acquisition costs whichwere deferred in the opening balance sheet were written off and replaced by anasset that represented the value of the business acquired. This assetrepresented the value of the profit estimated to be embedded in the unearnedpremiums at acquisition. The asset has been amortised to net income in line withthe earning of the related unearned premium and has been fully amortised by the2007 year end. Deferred acquisition costsDeferred acquisition costs represented 16 per cent of unearned premiums at 31December 2007 (2006: 11 per cent). Loss reservesGross loss reserves have increased by US$232 million or 6 per cent during 2007.The Group has seen steady emergence of surplus from prior accident years. Over80 per cent of net reserves relate to the 2003 and later accident years, all ofwhich have had good attritional experience; developments in respect of thehurricane losses in 2004 and 2005 have been in line with expectations during2007. Catlin continues to set loss reserves conservatively relative to the bestestimates from the Group's independent actuarial advisor, reflecting theinherent uncertainties in estimating insurance liabilities. The Group released US$139 million from prior year loss reserves during 2007, anamount equal to approximately 5 per cent of opening net reserves. Unearned premiumsUnearned premiums have increased by US$217 million or 17 per cent during theyear. The growth in unearned premiums reflects the growth in written premiumsduring 2007. Notes payable and subordinated debtNotes payable at the 2006 year end represented a US$500 million bridge facilitywhich was assumed to finance the cash element of the acquisition of Wellingtonand the related payment to third-party capital providers in accordance with theWellington Syndicate cessation agreement. It also included a US$50 millionrevolving credit facility which was used for general corporate purposes. Both ofthese facilities were repaid in January 2007 with the proceeds of the US$600million preferred share issue described above. The subordinated debt represents a total of US$68 million and €18 millionvariable rate unsecured subordinated notes. The interest payable on the notes isbased on market rates for three-month deposits in US dollars plus a margin of upto 317 basis points. The notes, which are redeemable in 2011 at the earliest,qualify as 'Lower Tier II' capital under the rules of the Financial ServicesAuthority in the UK. There has been no change to the subordinated debt duringthe year, and the balance sheet movement primarily represents foreign exchangerevaluation. Cash and Capital ManagementIntra-Group reinsuranceThe use of intra-Group reinsurance is central to the management of the Group'scapital. The Group seeks to maintain capital within Catlin Bermuda to themaximum extent possible and to manage the insurance risk portfolio on a Groupbasis, regardless of the platform which originally underwrote the risk. It isthe responsibility of platform management to ensure compliance with localregulatory requirements, including capital adequacy, in this context. The intra-Group reinsurance arrangements are designed to ensure that maximumflexibility of capital is available on a Group basis. The intra-Group contractswhich cede risk from Catlin Syndicate (which now also underwrites businessformerly written by the Wellington Syndicate), Catlin UK and Catlin US have allbeen continued throughout 2007. Cash and liquidityA summary of the growth in cash and invested assets is shown in the table below.------------------------------------------ ---------US $000------------------------------------------ ---------Total cash and investments, 1 January 2007 5,013,709Operating cash 1,072,236Dividends paid (124,586)Preferred share issuance 589,785Repayment of facilities (550,000)------------------------------------------ ---------Total cash and investments, 31 December 2007 6,001,144------------------------------------------ --------- Gearing and banking facilityThe Group has a bank facility with a consortium of seven banks. This includesthe following three elements: • A US$50 million revolving credit facility. This is currently undrawn; • A letter of credit ('LOC') facility to provide 'funds at Lloyd's' to support Syndicate underwriting. This is fully utilised at US$497.5 million (£250 million) and collateralised to £40 million; and • A US$350 million standby LOC facility to secure specific unearned premiums and outstanding claims. Gearing is 3 per cent, a significant decrease from 32 per cent at 31 December2006 following the refinancing of the bridge facility. Based on current business plans and known capital needs, Catlin has sufficientcapital as measured against its own model and rating agency requirements forcurrent rating levels, and an excess as measured against regulatoryrequirements. Capital to support the embedded growth resulting from thereduction in Names' interests will be met from retained earnings. Foreign currency managementUS dollars account for the majority of the Group's cash flows. A significantpart of the remaining cash flows are in sterling; the Group also maintains Euroand Canadian dollar funds. Management of foreign currency exposures is primarilyfocused on analysis and matching of expected cash flows; derivatives or otherfinancial instruments have not been used by Catlin during 2007 to manage foreigncurrency exposures. Forward purchases and sales of currencies are made whencurrency needs are identified. Loss Reserve Development Reserves for losses and loss expensesCatlin adopts a conservative reserving philosophy. The Group sets loss reservesconservatively relative to the Group's independent actuarial advisor's bestestimate, reflecting the inherent uncertainties in estimating insuranceliabilities. 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. 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. The loss reserves are not discounted for the time value of money. Estimate of reinsurance recoveriesThe Group's estimate of reinsurance recoveries is based on the reinsuranceprogramme in place for the calendar year in which the losses have been incurred.Amounts recoverable from reinsurers are estimated in a manner consistent withthe claim reserves associated with the reinsured policy. An estimate forpotential reinsurance failure and possible disputes is provided to reduce thecarrying value of reinsurance assets to their net recoverable amount. Development of reserves for losses and loss expensesCatlin 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 ultimate net losseshas developed over time. The development is attributable to actual payments madeand to the re-estimate of the outstanding claims, including IBNR. Thedevelopment is shown including and excluding certain large losses as detailedbelow. Development over time of net paid claims is also shown, including andexcluding these large claims. All historic premium and claim amounts have been restated using exchange ratesas at 31 December 2007 for the Group's four functional currencies to remove thedistorting effect of changing rates of exchange as far as possible. Wellington acquisitionThe business combination resulting from the Wellington acquisition was deemedeffective 31 December 2006 for accounting purposes; accordingly the net assetsacquired are valued as at that date. In the tables below the Wellington reservesarising from the transaction for events occurring prior to 31 December 2006 areshown from the date of the business combination. Premium and reserves relatingto business written by Wellington prior to the business combination but earnedduring calendar year 2007 are included within the 2007 accident year for theGroup. For the 2007 underwriting year the Group in effect purchased the remainingLloyd's capacity relating to the business previously underwritten by third-partyLloyd's Names participating on Wellington Syndicate 2020. When the 2006underwriting year closes, by way of reinsurance to close, the Group will then beresponsible for 100 per cent of the liabilities of Syndicate 2020. This isexpected to take place as in early 2009. Until then the Group will only beresponsible for a share of Syndicate 2020's reserves in line with WellingtonUnderwriting plc's share of each underwriting year prior to 2007. The main bodies of the tables below show premium and reserves at the 100 percent level for any Wellington business, unless otherwise stated. An adjustmentfor any external share of these reserves is then shown separately. Since 31 December 2006 the Wellington reserves have been set consistent withCatlin's reserving philosophy, and Wellington is included within the scope ofwork undertaken by the Group's external actuarial advisor. HighlightsSince 31 December 2003 there has been an overall reduction in net loss estimatesfor the Group, 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 other accident years. The reserves from the2002 and prior accident years represent only 15 per cent of the Group's netreserves at 31 December 2007. A summary of the Group's net reserves is shown in the table below. Summary of Catlin Group net reserves at 31 December 2007 (US$m)--------------- ---------- ---------- ---------- ---------- Legacy % of Legacy Catlin Wellington net Total net total netAccident Year net reserves reserves(1) reserves reserves--------------- ---------- ---------- ---------- ---------- 2002 and prior 230 295 525 15%2003 95 63 158 5%2004 131 107 238 7%2005 271 407 678 20%2006 354 286 640 19%2007 950 131 1,081 32% --------------- ---------- ---------- ---------- ----------Sub-total 2,031 1,289 3,320 98%--------------- ---------- ---------- ---------- ----------Other net reserves(2) 57 2%--------------- ---------- ---------- ---------- ----------Total net reserves 3,377 100%--------------- ---------- ---------- ---------- ----------(1) Catlin share of Legacy Wellington accident year net reserves estimated in line with corporate share of relevant underwriting period(2) Other net reserves include Catlin US, unallocated claims handling expenses, potential reinsurance failure and disputes, other outwards reinsurance and foreign exchange adjustments Development tables Estimated ultimate net losses (US$m) Accident year ------------------------------------- Wellington ------ ------ ------ ------ ------ ------ ------ accident periods 2002 and 2006 and prior prior 2003 2004 2005 2006 2007 Total----------------- ------ ------ ------ ------ ------ ------ ------ ------Net premiums earned 987 1,249 1,278 1,384 2,901 Net ultimate excluding large lossesInitial estimate(1) 6,353 1,666 452 593 651 686 1,395One year later 6,307 1,683 437 522 578 639Two years later 1,698 407 495 533Three years later 1,746 406 468Four years later 1,762 394 Net ultimate loss ratio excluding large lossesInitial estimate 45.8% 47.5% 51.0% 49.6% 48.1%One year later 44.2% 41.8% 45.2% 46.2%Two years later 41.2% 39.6% 41.8%Three years later 41.1% 37.5%Four years later 40.0% Net ultimate large lossesInitial estimate(1) N/A 20 0 115 334 0 0One year later N/A 20 0 116 386 0Two years later 19 0 118 396Three years later 20 0 117Four years later 21 0 Net ultimate including large lossesInitial estimate(1) 6,353 1,686 452 708 985 686 1,395One year later 6,307 1,703 437 638 964 639Two years later 1,717 407 612 929Three years later 1,766 406 585Four years later 1,783 394 Net ultimate loss ratio including large lossesInitial estimate 45.8% 56.7% 77.1% 49.6% 48.1%One year later 44.2% 51.1% 75.4% 46.2%Two years later 41.2% 49.0% 72.8%Three years later 41.1% 46.8%Four years later 40.0% Cumulative net paid 4,565 1,553 299 454 658 285 248 8,062Estimated net ultimate claims 6,307 1,783 394 585 929 639 1,395 12,032Estimated net claim reserves 1,742 230 95 131 271 354 1,147 3,970External share of Wellington netreserves (584) 0 0 0 0 0 (66) (650)Estimated net claim reserves 1,158 230 95 131 271 354 1,081 3,320% of net reserves 34.9% 6.9% 2.9% 3.9% 8.2% 10.7% 32.6% 100.0%----------------- ------ ------ ------ ------ ------ ------ ------ ------ (1) Initial estimates for 2002 and prior shown as at 31 December 2003; initialestimates for Wellington accident periods 2006 and prior are shown as at thedate of business combination Net paid losses (US$m) Accident year ------------------------------------- Wellington ------ ------ ------ ------ ------ ------ accident periods 2002 and 2006 and prior prior 2003 2004 2005 2006 2007 ----------------- ------ ------ ------ ------ ------ ------ ------ Net premiums earned 987 1,249 1,278 1,384 2,901 Net paid excluding large lossesInitial estimate(1) 4,068 1,168 102 137 130 167 248One year later 4,565 1,307 182 241 243 285Two years later 1,405 242 303 310Three years later 1,468 273 337Four years later 1,534 299 Net paid loss ratio excluding large lossesInitial estimate 10.3% 10.9% 10.2% 12.1% 8.5%One year later 18.5% 19.3% 19.0% 20.6% Two years later 24.6% 24.3% 24.3%Three years later 27.6% 27.0%Four years later 30.3% Net paid large lossesInitial estimate(1) N/A 9 0 72 94 0 0One year later N/A 13 0 113 248 0Two years later 16 0 116 348Three years later 19 0 118Four years later 20 0 Net paid including large lossesInitial estimate(1) 4,068 1,177 102 208 224 167 248One year later 4,565 1,320 182 354 491 285Two years later 1,421 242 419 658Three years later 1,487 273 454Four years later 1,553 299 Net paid loss ratio including large lossesInitial estimate 10.3% 16.7% 17.5% 12.1% 8.5%One year later 18.5% 28.3% 38.4% 20.6%Two years later 24.6% 33.5% 51.5%Three years later 27.6% 36.4%Four years later 30.3%----------------- ------ ------ ------ ------ ------ ------ ------(1) Initial estimates for 2002 and prior shown as at 31 December 2003;initial estimates for Wellington accident periods 2006 and prior are shown as atthe date of business combination The loss reserve development tables above exclude other net payments andreserves for Catlin US, unallocated claims handling expenses, potentialreinsurance failure and disputes, other reinsurance and foreign exchangeadjustments Large lossesThe 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------------ --------------------------------------- The large loss component of Wellington for accident periods prior to thebusiness combination are not included in the large loss estimates shown inTables 2 and 3. Commentary on development tablesAccident year 2007The loss ratio is generally in line with prior years excluding large losses atsimilar development periods. Accident years 2003 to 2006The loss ratios continue to develop favourably and consistently with recentaccident periods. There has been a small deterioration in the estimate for the three hurricanesduring 2005. Although there remains uncertainty in the final outcome of thesehurricanes, the uncertainty continues to reduce as evidenced by the increase inthe paid element of the estimated net ultimate loss from these events to 88 percent at 31 December 2007 (2006: 64 per cent). Accident years 2002 and priorThere has been a small deterioration in these accident periods during 2007. Wellington accident periods 2006 and priorThe reserves in these periods have developed favourably in the aggregate duringthe year. LimitationsEstablishing insurance reserves requires the estimation of future liabilitieswhich 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 uncertainty. It is possible that actual losses could materiallyexceed reserves. Whilst 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 Group'sindependent actuarial advisor's best estimate based on the information currentlyavailable. However, the ultimate liability will vary as a result of inherentuncertainties and may result in significant adjustments to the amounts provided.There is a risk that, due to unforeseen circumstances, the reserves carried arenot sufficient 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. Investments Catlin manages its assets with the goal of achieving the highest possibleinvestment return in the light of the Group's risk appetite. The Group's cashand investments amounted to US$6.0 billion at 31 December 2007 (2006: US$5.0billion). Investment strategyPrior to the acquisition of Wellington, Catlin invested the vast majority of itsassets in cash or fixed income instruments. Following the Wellingtonacquisition, the Group conducted a detailed review of long-term investmentstrategy and concluded that the increased size of Catlin's investment portfoliowarranted a more diversified investment strategy. Under the new strategy, aminimum of 80 per cent of the portfolio will continue to be invested in cash andfixed income instruments, but up to 20 per cent of the assets may be invested ina variety of funds, including equity funds. By early January 2008, 9 per cent of total assets had been placed with 24 newmanagers, representing a variety of investment styles. Combined with existinginvestments in funds of funds and equity funds, the new investments increasedthe percentage of diversified assets in the Group's portfolio to 14 per cent asat 2 January 2008 as show in the table below. The Group will consider furtherincreasing the amount of diversified assets as market conditions warrant, up tothe 20 per cent maximum. The target asset allocation is 70 per cent fixed income, 10 per cent cash, and20 per cent diversified investments. Actual allocations are as follows: Investment assets by major category (at 2 January 2008)------------------------------------------ ---------Fixed income 51%Cash 35%Diversified investments 14%------------------------------------------ --------- The new investment strategy aims to increase the Group's total investment returnby at least 50 basis points annually, beginning in 2008. Based on the Group'scash and investments at 31 December 2007, this equates to US$30 million pre-taxin additional investment return. Investment portfolioCatlin attempts when possible to match the currency and duration of itsinvestment assets with those of its outstanding claims liabilities. As the bulkof the Group's claims liabilities are denominated in US dollars, the bulk of theasset portfolio is invested in US dollar-denominated instruments, although theGroup also holds assets denominated in sterling, euros and other currencies. The Group's investment managers invest in a variety of fixed income instruments,including government securities, corporate bonds, and securities backed byassets including mortgages, loans and other forms of credit instruments.Asset-backed securities ('ABS') make up 7 per cent of the Group's totalinvestment portfolio, whilst mortgage-backed securities ('MBS') amount to 14 percent of the portfolio. These holdings include mortgage-backed securities thatare described as 'Alt A', which had a value at 31 December 2007 of US$64million, and securities where credit enhancement is provided by monolineinsurers, which had a value of US$67 million at 31 December 2007. Investment assets by detailed category (at 31 December 2007)------------------------------------------ ---------Asset-backed securities 7%Corporate securities 9%Commercial mortgage-backed securities 4%Non-agency mortgage-backed securities 5%Agency mortgage-backed securities 5%Global bond fund 2%Government & agency 19%Cash & short terms 35%Equity 1%Funds/funds of funds 13%------------------------------------------ --------- 83 per cent of the fixed income portfolio is invested in government securitiesor securities that are rated 'AAA.' Another 6 per cent is rated 'AA'. More than95 per cent of the ABS and MBS securities held by the Group are rated 'AAA'. Investment returnThe Group's total investment return in 2007, including realised and unrealisedgains and losses, amounted to 4.5 per cent (2006: 4.1 per cent). Investment return by asset class (at 31 December 2007) % of assets Return--------------------------------- ---------- ----------Fixed income 51% 4.0%Cash 45% 4.7%DiversifiedEquity 1% 5.9%Funds of funds 3% 9.6%--------------------------------- ---------- ---------- 100% 4.5%--------------------------------- ---------- ---------- Total investment return is stated after a US$75 million charge taken during thesecond half of 2007 following a comprehensive review of all individualsubprime-related securities in the Group's investment portfolio. The reviewfound that asset-backed securities with an original book value of slightly morethan US$100 million (approximately 2 per cent of the Group's investment assetsat 1 January 2007) were exposed to the subprime market. The Group sold some ofthese securities at close to their book value and took a charge against thevalue of the remainder of subprime-related investments, 85 per cent of which arecollateralised debt obligations (CDOs). The charge also covered the small lossesincurred on the sales. The Group has updated its review of investments at 31 December 2007 and nochange to the charge is required. Catlin Group LimitedConsolidated Balance SheetsAs at 31 December 2007 and 2006(US dollars in thousands, except share amounts) 2007 2006---------------------------------- -------- --------AssetsInvestmentsFixed maturities, available-for-sale, at fair value(amortised cost 2007: $2,928,717; 2006: $2,685,960) $2,948,950 $2,669,437Short-term investments, at fair value 47,605 27,565Investments in funds, at fair value 946,418 326,208Investment in associate 2,537 2,617---------------------------------- -------- --------Total investments 3,945,510 3,025,827---------------------------------- -------- -------- Cash and cash equivalents 2,055,634 1,987,882Securities lending collateral 44,662 130,854Accrued investment income 37,274 32,136Premiums and other receivables 1,153,372 987,768Reinsurance recoverable 1,119,847 1,237,531Deposit with reinsurer 5,040 1,321Reinsurers' share of unearned premiums 224,235 104,731Deferred policy acquisition costs 247,171 144,063Value of in-force business acquired - 118,384Intangible assets and goodwill 884,428 868,026Derivatives, at fair value 9,035 46,037Other assets 86,927 121,758---------------------------------- -------- --------Total assets $9,813,135 $8,806,318---------------------------------- -------- -------- Liabilities, Minority Interest and Stockholders' EquityLiabilities:Reserves for losses and loss expenses $4,237,525 $4,005,133Unearned premiums 1,506,899 1,290,379Reinsurance payable 444,294 192,958Accounts payable and other liabilities 227,228 363,399Notes payable - 550,290Subordinated debt 100,825 99,936Derivatives, at fair value 9,099 619Securities lending payable 44,662 130,854Deferred taxes 224,842 153,721---------------------------------- -------- --------Total liabilities $6,795,374 $6,787,289---------------------------------- -------- -------- Minority interest 757 749 2007 2006---------------------------------- -------- --------Stockholders' equity:Ordinary common shares, par value $0.01 Authorised 400,000,000; issued and outstanding: 253,122,072; (2006:238,283,281) $2,531 $2,383Preferred shares, par value $0.01 Authorised, issued and outstanding: 600,000; (2006:nil) 589,785 -Additional paid-in capital 1,622,876 1,610,725Treasury stock (5,849) (6,600)Accumulated other comprehensive income/(loss) 38,820 (26,090)Retained earnings 768,841 437,862---------------------------------- -------- --------Total stockholders' equity 3,017,004 2,018,280---------------------------------- -------- --------Total liabilities, minority interest andstockholders' equity $9,813,135 $8,806,318---------------------------------- -------- -------- The accompanying notes are an integral part of the consolidated financialstatements Approved by the Board of Directors on 5 March 2008 Stephen Catlin, Director Christopher Stooke, Director Catlin Group LimitedConsolidated Statements of OperationsFor the years ended 31 December 2007 and 2006(US dollars in thousands, except share amounts) 2007 2006--------------------------------- ---------- ----------RevenuesGross premiums written $3,360,626 $1,605,019Reinsurance premiums ceded (787,108) (194,896)--------------------------------- ---------- ----------Net premiums written 2,573,518 1,410,123Change in net unearned premiums (83,984) (84,262)--------------------------------- ---------- ----------Net premiums earned 2,489,534 1,325,861--------------------------------- ---------- ----------Net investment income 290,113 105,989Net realised losses on investments (78,970) (17,041)Net realised losses on derivatives (30,088) (1,321)Net realised (losses)/gains on foreign currency exchange (4,035) 38,746Other income 23,354 3,528--------------------------------- ---------- ----------Total revenues 2,689,908 1,455,762--------------------------------- ---------- ---------- ExpensesLosses and loss expenses 1,154,670 681,549Policy acquisition costs 624,195 341,531Administrative expenses 291,694 130,703Other expenses 75,981 26,562--------------------------------- ---------- ----------Total expenses 2,146,540 1,180,345--------------------------------- ---------- ----------Income before minority interest and income tax expense 543,368 275,417Minority interest 8 (22)Income tax expense (59,790) (16,606)--------------------------------- ---------- ----------Net income 483,586 258,789--------------------------------- ---------- ----------Preferred share dividend (21,868) ---------------------------------- ---------- ----------Net income available to common stockholders $461,718 $258,789--------------------------------- ---------- ---------- Earnings per common shareBasic $1.84 $1.59Diluted $1.74 $1.47 The accompanying notes are an integral part of the consolidated financialstatements Catlin Group LimitedConsolidated Statements of Changes in Stockholders' EquityFor the years ended 31 December 2007 and 2006(US dollars in thousands, except share amounts) Accumulated Additional other Total Common Preferred paid-in Treasury Retained comprehensive stockholders' stock stock capital stock earnings (loss)/income equity ------ ------- -------- ------ ------- -------- --------Balance 1 January 2006 $1,559 $- $721,935 $- $228,986 $(21,399) $931,081 Comprehensive income:Net income - - - - 258,789 - 258,789Other comprehensive loss - - - - - (4,691) (4,691) ------ ------- -------- ------ ------- -------- --------Total comprehensiveincome/(loss) - - - - 258,789 (4,691) 254,098 ------ ------- -------- ------ ------- -------- --------Issuance of common shares in connectionwith acquisition ofWellington 744 - 811,683 - - - 812,427 Equity raise 77 - 64,804 - - - 64,881Stock compensation expense - - 11,000 - - - 11,000Stock options and warrants exercised 3 - (3) - - - -Dividends declared - - - - (48,607) - (48,607)Deferred compensationobligation - - 1,306 - (1,306) - -Treasury stock purchased - - - (6,600) - - (6,600) ------ ------- -------- ------ ------- -------- --------Balance 31 December 2006 $2,383 $- $1,610,725 $(6,600) $437,862 $(26,090) $2,018,280 ------ ------- -------- ------ ------- -------- --------Comprehensive income:Net income - - - - 461,718 - 461,718Other comprehensiveincome - - - - - 64,910 64,910 ------ ------- -------- ------ ------- -------- --------Total comprehensiveincome - - - - 461,718 64,910 526,628 ------ ------- -------- ------ ------- -------- --------Issuance of common shares in connectionwith acquisition ofWellington 117 - (117) - - - -Issuance of preferredshares - 589,785 - - - - 589,785Stock compensation expense - - 13,668 - - - 13,668Stock options and warrantsexercised 31 - (31) - - - -Dividends declared - - - - (126,860) - (126,860)Deferred compensationobligation - - 3,879 - (3,879) - -Treasury stock purchased - - - (4,497) - - (4,497)Distribution of treasurystock held by EmployeeBenefit Trust - - (5,248) 5,248 - - - ------ ------- -------- ------ ------- -------- --------Balance 31 December 2007 $2,531 $589,785 $1,622,876 $(5,849) $768,841 $38,820 $3,017,004 ------ ------- -------- ------ ------- -------- -------- The accompanying notes are an integral part of the consolidated financialstatements Catlin Group LimitedConsolidated Statements of Cash FlowsFor the years ended 31 December 2007 and 2006(US dollars in thousands, except share amounts) 2007 2006---------------------------------- --------- ---------Cash flows provided by operating activitiesNet income $461,718 $258,789Adjustments to reconcile net income to net cashprovided by operations: Amortisation and depreciation 18,733 11,379 Amortisation of premiums/(discounts) of fixed maturities (3,450) (6,185)Net realised losses on investments 78,970 17,040Changes in operating assets and liabilities, net ofeffect of business combination Reserves for losses and loss expenses 174,357 (258,017) Unearned premiums 198,928 52,587 Premiums and other receivables 420,126 (7,346) Deferred policy acquisition costs (101,131) (1,639) Value of in-force business acquired 120,705 - Reinsurance payable 601,236 (175,687) Reinsurance recoverable (456,369) 292,176 Reinsurers' share of unearned premiums (118,384) 4,016 Deposit with reinsurer (230,253) 21,823 Deferred gain - (8,078) Accounts payable and other liabilities (351,312) 60,894 Investment in funds (581,034) (89,925) Deferred taxes 136,545 - Other 38,777 (50,635)---------------------------------- --------- ---------Net cash flows provided by operating activities 408,162 121,192---------------------------------- --------- --------- Cash flows (used in)/provided by investingactivitiesPurchases of fixed maturities (2,918,053) (2,138,862)Purchases of short-term investments (226,090) (97,088)Proceeds from sales of fixed maturities 2,593,971 2,104,900Proceeds from maturities of fixed maturities 139,295 17,397Proceeds from sales and maturities of short-terminvestments 191,106 102,219Cash flows arising from investment in associate 1,064 1,452Purchases of subsidiaries, net of cash acquired (40,909) 933,042Purchase of intangible assets 68 (223,257)Purchases of property and equipment (21,247) (16,484)Proceeds from sales of property and equipment 1,808 340Investment of securities lending collateral 96,991 (130,854)---------------------------------- --------- ---------Net cash flows (used in)/provided by investingactivities (181,996) 552,805---------------------------------- --------- --------- 2007 2006----------------------------------- --------- ---------Cash flows (used in)/provided by financingactivitiesNet proceeds from issue of common shares $- $65,436Dividends paid on common shares (124,586) (48,751)Net proceeds from issue of preferred shares 589,785 -Dividends paid on preferred shares (21,868) -Proceeds from notes payable - 500,000Repayment of notes payable (550,290) -Securities lending collateral received (96,991) 130,854Purchase of treasury stock (4,582) (1,352)----------------------------------- --------- ---------Net cash flows (used in)/provided by financingactivities (208,532) 646,187----------------------------------- --------- ---------Net increase in cash and cash equivalents 17,634 1,320,184Cash and cash equivalents - beginning of year 1,987,882 609,857Effect of exchange rate changes 50,118 57,841----------------------------------- --------- ---------Cash and cash equivalents - end of year $2,055,634 $1,987,882----------------------------------- --------- --------- Supplemental cash flow informationTaxes paid $20,140 $16,135Interest paid $8,031 $2,655 Cash and cash equivalents comprise the following:Cash at bank and in hand $1,611,718 $1,040,079Cash equivalents $443,916 $947,803----------------------------------- --------- --------- The accompanying notes are an integral part of the consolidated financialstatements This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW
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