Castelnau Group Regulatory News (CGL)

9 Mar 2007 07:01

Catlin Group Limited09 March 2007 PART 1 CATLIN GROUP LIMITED PRELIMINARY RESULTS FOR YEAR ENDED 31 DECEMBER 2006 HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), theinternational specialty property/casualty insurer and reinsurer, announces itsfinancial results for the year ended 31 December 2006. Financial highlights:Combined basis (see notes on Page 2) • Income before tax of US$521 million • Net income of US$428 million • Return on average equity of 24 per cent • Earnings per share of US$1.73 • Gross premiums written of US$2.72 billion, representing 15 per cent growth compared with 2005 • Combined ratio of 87 per cent As reported (see notes on Page 2) • Income before tax rose nine-fold to US$275 million (2005: US$28million) • Stockholders' equity increased by 117 per cent to US$2.0 billion (2005: US$931 million) • Investments and cash increased by 111 per cent to US$5.0 billion (2005: US$2.4 billion) • Book value per share increased 19 per cent in sterling terms to £4.12 (2005: £3.47); book value per share in dollar terms rose 35 per cent to US$8.07 (2005: US$5.97) • Proposed final dividend of 17 pence (32.8 US cents) (2005: 10.1 pence; 17.6 US cents); proposed total dividend of 23 pence (44.1 US cents), an increase of 48 per cent in sterling terms over prior year (2005: 15.5 pence ; 27.5 US cents) Catlin as reported Wellington CombinedUS$000 2006 2006 2006----------------------- ----------- ----------- -----------Gross premiums written 1,605,019 1,116,781 2,721,800Net premiums written 1,410,123 913,138 2,323,261Net premiums earned 1,325,861 902,301 2,228,162Income before income taxes 275,417 245,097 520,514Net income 258,789 169,692 428,481Tax rate 6.0% 30.8% 17.7%Loss ratio 51.4% 47.9% 50.0%Expense ratio 36.8% 38.1% 37.3%Combined ratio 88.2% 86.0% 87.3%Return on average equity 24.2% 22.4% 23.8% Investments and cash 5,013,709 5,013,709Stockholders' equity 2,018,280 2,018,280Earnings per share (US$) 1.59 1.73Book value per share (sterling) 4.12 4.12Book value per share (US dollar) 8.07 8.07Total dividend per share (pence) 23.0 23.0Total dividend per share (US cents) 44.1 44.1 Notes: 1. Catlin's results for the year ended 31 December 2006 include the acquisition of Wellington on 18 December 2006. Because of its timing, the acquisition had no impact on the income statement, including net income, for the year, but the acquisition is reflected in the balance sheet at 31 December 2006. 2. Income statement figures presented on a combined basis represent the aggregation of audited Catlin results and Wellington results, both presented under US GAAP. The Wellington US GAAP income statement has not been audited. 3. A summary of Catlin's financial results for the year ended 31 December 2006, including comparisons to the previous year, are contained in the Financial Review attached to this announcement. Catlin's full financial statements are also attached. 4. Earnings per share are based on weighted average shares in issue of 162.6 million (as reported) and 248.7 million (combined). Book value per share is based on shares in issue and to be issued of 250.0 million at 31 December 2006. Operational highlights: Underwriting • Strong underwriting performance in 2006 for Catlin and Wellington • Catlin and Wellington reduced catastrophe exposures; nevertheless, both portfolios grew strongly • Broadly constant split of premium volume between catastrophe exposed and non-catastrophe business Wellington acquisition • Relocated: All London-based employees in one location • Refinanced: Acquisition bridge finance facility retired with proceeds of US$600 million non-cumulative perpetual preferred share issue • Integrated: Catlin and Wellington operations fully integrated • Minimal unplanned staff departures • Acquisition now expected to be earnings accretive for 2007 after restructuring and retention costs • Greater than US$70 million in post-tax synergies projected for 2008, ahead of original expectations Growth • Embedded growth will result from uplift in share of Lloyd's business retained by Group arising from departure of third-party capacity • Organic growth potential across business, from investment in Catlin US and from expansion of international office network Outlook: • Estimated written premium for January 2007 renewal season slightly above combined 2006 volumes for same period • Rates for catastrophe exposed business expected to remain firm • Rates for non-catastrophe exposed business expected to decrease, but margins should remain good • Catlin will continue to expand non-catastrophe exposed portfolio • Catlin looks ahead with confidence Commenting on the Group's preliminary results, Sir Graham Hearne, Chairman ofCatlin Group Limited, said: "Catlin produced a strong operating performance during 2006, with a return onaverage equity of 24 per cent. We are confident about our prospects followingthe acquisition of Wellington, and this confidence is reflected in the proposedtotal dividend of 23 pence per share, an increase of 48 per cent." Chief Executive Stephen Catlin said: "Catlin has made excellent progress, both in terms of our operating results for2006 and the rapid integration with Wellington. Since our offer for Wellingtonwas declared unconditional on 18 December 2006, we have relocated all Londonemployees to a single office, refinanced the debt we assumed to acquireWellington and integrated all operational functions. We now expect theacquisition to be earnings accretive in 2007 and to produce post-tax savings ofat least $70 million in 2008. "The Wellington acquisition provides Catlin with a springboard for futuregrowth. We have made an excellent start to 2007, with written premiums in theJanuary renewal season slightly above the combined volumes for the same periodin 2006. We are set to benefit from embedded growth in the amount of businessretained by the Group from its Lloyd's operations, and expect to see continuedorganic growth from our investment in Catlin US and our international officenetwork. Catlin is in the strongest position in its history, and we look aheadwith confidence." - ends - 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.uk Investor Relations:William Spurgin,Head of InvestorRelations, 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. 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 management will make a presentation to investment analysts at 10.30am GMT today at its London office. The presentation will be broadcast live on the Group's website (www.catlin.com). The webcast will be available on the website following the presentation. 3. 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. 4. Rate of exchange at 31 December 2006: £1 = US$1.96 (balance sheet); £1 = US$1.85 (income statement); at 7 March 2007: £1 = US$1.93. 5. Detailed information regarding Catlin's operations and financial results forthe year ended 31 December 2006 follow, including statements from the Chairman and Chief Executive, an underwriting and financial review, and information about the Wellington acquisition. 6. Statements that the Wellington acquisition is expected to be earnings accretive do not constitute a profit forecast and should not be interpreted to mean that the earnings per share in 2007, or in any subsequent period, would necessarily match or be greater than those for the relevant preceding financial year. Chairman's Statement A year ago, in the aftermath of Hurricanes Katrina, Rita and Wilma, I expressedoptimism that the unparalleled catastrophe losses of 2005 would create newopportunities for the Catlin Group. This was indeed the case during 2006: • The Group achieved excellent operating results as Catlin's reported net income rose to a record US$258.8 million (2005: US$19.7 million) and return on average equity increased to 24.2 per cent (2005: 2.1 per cent). • Catlin's market position was substantially enhanced by the acquisition of Wellington Underwriting plc, which was declared unconditional on 18 December 2006. Including Wellington, Catlin's net income amounted to US$428.5 million andthe return on average equity was 23.8 per cent. The acquisition of Wellington is a watershed in Catlin's evolution. The CatlinSyndicate now ranks as the largest syndicate at Lloyd's in terms of premiumcapacity, and the Group's other operating platforms are in a position to writeincreased volumes of business as a result of the acquisition. The addition ofWellington's established US-based operations significantly advances thedevelopment of Catlin US. The combination of the two companies' books ofbusiness broadens the Group's already diversified risk portfolio. Catlin's staffwill be strengthened by the addition of a group of talented employees. Theacquisition is now expected to be earnings accretive in 2007, and synergies areexpected to increase earnings substantially in 2008 and future years. Dividend As first announced in October 2006, the Board of Directors proposes a finaldividend of 17 pence (32.8 US cents) per share, payable on 8 June 2007 toshareholders of record at the close of business on 11 May 2007. Including theinterim dividend of 6 pence (11.3 US cents) per share paid on 10 November 2006,the proposed 2006 dividend represents an increase of 48 per cent on the 2005dividend paid to Catlin shareholders and a pro forma 37 per cent increase on the2005 dividend paid to former Wellington shareholders. Catlin is committed to providing an attractive return to shareholders throughthe dividend and will continue its current policy under which dividend paymentsare linked to recent trends in the Group's performance as well as to futureprospects. Capital/share issues Catlin's capital base was strengthened during 2006 by earnings and through theaddition of Wellington's net assets. Stockholders' equity increased 117 per centto US$2.02 billion at 31 December 2006 (31 December 2005: US$931.1 million).Included in this increase was the US$65 million in net proceeds from theplacement of 7.7 million new common shares in March 2006. To fulfil the shareportion of the Wellington offer, the Group has issued 86.1 million new commonshares. In January 2007, Catlin Bermuda (Catlin Insurance Company Ltd.) issued US$600million in non-cumulative perpetual preferred shares at a dividend rate of 7.249per cent. The proceeds from this issue, which received an excellent responsefrom investors, was used primarily to repay the US$500 million short-term debtfacility Catlin established as part of the financing for the Wellingtonacquisition and also for general corporate purposes. Board of Directors Jonathan Kelly and Gene Lee will be retiring from the Board at the conclusion ofour upcoming Annual General Meeting, as the entitlement under the Bye-laws fortheir appointing shareholders to maintain a Director in office has lapsed. Inaddition, Richard Haverland has decided to retire from the Board. I would liketo thank them for their many contributions to the Group's success, and to thankall Directors for their guidance and hard work during a demanding year. Outlook The acquisition of Wellington has made Catlin a much larger company in terms ofpremiums written, profits, assets and stockholders' equity. Our increased sizeand stature has strengthened our balance sheet and creates excitingopportunities for further growth. Market conditions remain favourable, withrates adequate across all of the classes of business the Group underwrites. Withits market leadership position strengthened and its reputation for financialprudence and disciplined underwriting secure, Catlin has never been in astronger position. It gives me great pleasure to welcome the management and staff of Wellington tothe Catlin Group. The past 12 months have presented a new, exciting set ofchallenges for them and the Catlin team. I express my sincere thanks to StephenCatlin and all employees for their hard work, and I look forward to reporting ontheir further achievements next year. Sir Graham HearneChairman8 March 2007 Chief Executive's Review The Catlin Group's strong operating results for 2006 combined with ouracquisition of Wellington Underwriting plc provides Catlin with a springboardfor growth and earnings potential in the years ahead. As soon as we announced our offer to acquire Wellington in October 2006, webegan to plan how we could most effectively combine the two companies. Our planhas been successful: we have already relocated employees, refinanced our debtand integrated Wellington's operations. • Relocation. A key strategy was to ensure that Catlin and Wellington employees could work as soon as possible from the same location in London, where the majority of both companies' employees are based. All underwriting staff began working from a new, purpose-built underwriting floor in Catlin's London office within 14 hours after the offer to acquire Wellington was declared unconditional on 18 December 2006. All other employees were relocated to Catlin's office by 4 February. • Refinancing. To finance the Wellington acquisition in part, Catlin arranged a US$500 million bridge financing facility. Our goal was to refinance this debt as quickly as possible. On 18 January 2007 Catlin Bermuda issued US$600 million in non-cumulative perpetual preferred shares to repay the bridge financing and for general corporate purposes. The demand for the preferred shares was strong, and the shares qualify as capital for regulatory purposes in Bermuda and, in large part, for the rating agencies. • Integration. All underwriting and operational functions have been integrated. Details of all insurance contracts incepting on or after 1 January 2007 are stored in Catlin's data warehouse, and prior year Wellington data will be carefully migrated over time. Part of the integration process included employee departures. Since the offerwas declared unconditional, there have been 47 agreed employee departures and 31resignations. Eight underwriters have resigned out of more than 220 employed bythe Group. These resignations will not have a meaningful impact on Catlin'sfuture operations. We now expect that the acquisition will be earnings accretive in 2007 afterrestructuring and retention costs and that synergies in 2008 will amount to atleast US$70 million. The acquisition of Wellington strengthens Catlin and provides a platform forcontinued profitable growth. The acquisition is expected to double Catlin'sgross premiums in a favourable underwriting environment and has significantlyincreased the Group's investment portfolio and stockholders' equity. Improvedmarket positioning arising from the combination of the complementaryunderwriting portfolios, organic growth plans and increasing levels ofintra-group reinsurance should enable all four Catlin operating platforms toincrease their flow of profitable business. Significantly, structural aspects of the acquisition have created embeddedgrowth that the Group will realise over the next several years. Previously,Wellington owned only approximately two-thirds of the capacity of its Lloyd'sSyndicate 2020, acting solely as agent for the third parties who supplied theremaining capacity. Concurrent with the acquisition and through the cessation ofSyndicate 2020, Catlin in effect removed the third-party capacity and combinedthe Wellington and Catlin Syndicates. As a result, there will be an uplift in2007 in the amount of business retained by the Group. There will be a furtheruplift after 2008, when the quota share reinsurance provided by some ofWellington's former third-party capacity providers expires. This embedded growth is in addition to the organic growth that Catlin aims toachieve. We anticipate significant growth from our international network ofoffices and from Catlin US, our fourth underwriting platform. Gross premiumswritten by our international offices rose by 120 per cent in 2006 to US$106million (2005:US$48 million), and we anticipate a further increase toapproximately $150 million in 2007. This growth reflects the development of ourexisting offices and the establishment of new offices in Hong Kong and Calgaryin 2006 and in Paris, Barcelona, Zurich and Innsbruck so far in 2007. Catlin US developed rapidly during 2006 with the appointment of Richard Banas asPresident and Chief Executive Officer. Rich has recruited a team of seasonedexecutives, opened new offices in Atlanta and New York, and developed new booksof professional liability and general/excess liability business to go along withCatlin US's existing book of medical malpractice insurance. The development ofCatlin US will be accelerated by the acquisition, with the addition ofestablished US insurance and reinsurance operations. Combined, Catlin andWellington US operations wrote gross premiums of US$305 million in 2006 (2005:US$238 million), and we project that this volume will increase to approximatelyUS$450 million in 2007 as existing specialties are developed and newunderwriting teams are recruited. Catlin achieved an excellent underwriting performance in 2006. Whilst 2005 saw arecord level of catastrophe losses including Hurricanes Katrina, Rita and Wilma,2006 was a benign year for natural catastrophes. Average weighted premium ratesfor Catlin's catastrophe exposed business increased by 31 per cent during theyear, whilst rates for uncorrelated business decreased by 3 percent. Overall,average weighted premium rates across Catlin's risk portfolio increased by 6 percent. Rate adequacy was strong in the vast majority of business classes wewrite. Detailed commentary regarding our 2006 performance is including in the attachedUnderwriting Review and Financial Review. For 2007, we expect premium rates for catastrophe exposed business to be broadlyneutral following the large increases in 2006, although catastrophe rates willgreatly depend on catastrophe loss experience during the year. Rates fornon-catastrophe exposed business will remain under pressure, but margins areexpected to remain good across the portfolio. When we made our original offer to acquire Wellington, we anticipated that wecould possibly lose a substantial amount of business that had been previouslyunderwritten by Wellington. That has not been the case. For the January 2007renewal season, written premium was slightly greater than the combined volumeswritten during the same period in 2006. Overall, we are pleased with ourperformance to date in 2007. The entire Catlin team continues to work extremely hard to deliver superiorresults to our shareholders. 2006 has been a particularly busy year because ofthe Wellington acquisition, and I would like to thank our employees - both oldand new - for their dedication and effort. Given the advantages that the Wellington acquisition has provided to Catlin, themarket environment, our experience to date in 2007 and the prospects of embeddedand organic growth, I believe Catlin's prospects in 2007 and beyond areexcellent. Stephen CatlinChief Executive8 March 2007 Underwriting Review (Catlin As Reported) Any discussion of Catlin's underwriting performance in 2006 must first look backto 2005, the worst year for natural catastrophe losses on record. The globalinsurance industry's aggregate natural catastrophe losses - including lossesfrom Hurricanes Katrina, Rita and Wilma - exceeded US$100 billion in 2005. The2005 loss experience followed what had also been a record year for naturalcatastrophe losses in 2004. Rates for catastrophe exposed coverages - both direct and reinsurance - rosesignificantly during 2006. Weighted average premium rates for catastropheexposed classes of business underwritten by Catlin rose 31 per cent during 2006,compared with a 3 per cent decrease in weighted average premium rates fornon-catastrophe exposed classes. Overall, weighted average premium rates acrossCatlin's risk portfolio increased by 6 per cent in 2006 (2005: 1 per centdecrease). Rate adequacy was strong in the vast majority of the classes ofbusiness that Catlin underwrites. This strong rate environment and the relatively benign catastrophe experienceduring 2006 can be seen in the Group's loss ratio of 51.4 per cent (2005: 71.1per cent). It is unknown whether the low frequency and severity of catastrophe losses in2006 was an aberration or represents a return to more normal loss levelscompared with the previous two years. However, Catlin is taking a cautious viewand managing its risk portfolio on the basis that catastrophe losses in futureyears could again equal or exceed the levels seen in 2004 and 2005. Whilst gross premiums written for catastrophe exposed classes of businessincreased in 2006 because of the strong rating environment, the Group'saggregate catastrophe exposure was reduced. Throughout 2006, Catlin reduced itsexposure to catastrophe risk, so that if loss experience in 2006 had beensimilar to the previous year's, the company's ROE would have been significantlyhigher than was achieved in 2005. Catastrophe risk was reduced through acombination of increased attachment points, reductions in the maximum limitsoffered and smaller line sizes for certain risks. Catlin maintains that this cautious strategy is the correct one. Whilst theGroup could have written a significantly greater volume of catastrophe businessin 2006 - and would have made a greater profit had it done so because of thebenign conditions - the potential downside was simply too great for Catlin toaccept. This underwriting strategy limits both the upside and downside riskpresented by catastrophe business, which we consider a prudent course of action. In addition to reducing our aggregate exposure to catastrophe risk, Catlincontinued to seek additional streams of non-catastrophe business to balance itsportfolio. The Catlin Syndicate began writing three new classes of business in2006: US general liability insurance, international casualty treaty reinsuranceand crisis management, which comprises product recall and kidnap & ransominsurance. The development of Catlin US, which generally writes non-catastropheexposed classes of business, accelerated in 2006. Catlin Bermuda expanded itspolitical risk and terrorism portfolio. We increased the amount of businesswritten through our international offices and opened new offices in Hong Kongand Calgary in 2006 and in Paris, Barcelona, Zurich and Innsbruck in early 2007. 2007 outlook Rates for catastrophe exposed business throughout 2007 will depend greatly oncatastrophe experience during the year. Average weighted premium rates forcatastrophe exposed business renewing in January 2007 increased by 5 per cent.For other classes of business we are expecting modest rate reductions across theportfolio during 2007. Average weighted premium rates for non-catastrophebusiness decreased by 3 per cent in January 2007. Overall, average weightedpremium rates for all classes of business increased by 1 per cent in January2007. The acquisition of Wellington substantially strengthens Catlin's underwritingoperations. The two companies underwrote complementary portfolios, and theoverlap of business written is less than was initially anticipated. Catlin willbenefit from greater risk diversification and an increase in the strength anddepth of underwriting teams. With the addition of Wellington, Catlin now has the size, the track record, theclient base and the reputation to be a true leader in the specialty insuranceand reinsurance market. Financial Review The following pages contain commentary on Catlin's consolidated financialstatements for the year ended 31 December 2006, which are prepared in accordancewith US Generally Accepted Accounting Principles ('US GAAP'). The commentary also includes an unaudited pro forma income statement for theyear ended 31 December 2006. This unaudited pro forma statement is preparedthrough the aggregation of the consolidated results of operations of Catlintogether with the results of operations of Wellington Underwriting plc for theperiod from 1 January 2006 to the date of acquisition. The acquisition ofWellington was declared unconditional on 18 December 2006. Because the effect oftrading from 19-31 December 2006 was immaterial to Catlin's consolidatedresults, the acquisition date for accounting purposes was 31 December 2006. Set out below are the Consolidated Results of Operations as reported by Catlin.Because the Wellington acquisition date for accounting purposes was 31 December2006, these are Catlin's stand-alone results. Consolidated Results of Operations (as reported) US$000 2006 2005 % change --------- --------- ---------RevenuesGross premiums written 1,605,019 1,386,600 16Reinsurance premiums ceded (194,896) (197,501) (1) --------- --------- ---------Net premiums written 1,410,123 1,189,099 19Change in unearned premiums (84,262) 27,343 (408) --------- --------- ---------Net premiums earned 1,325,861 1,216,442 9 Net investment income and change in fairvalue 104,668 82,147 27of derivativesNet realised (losses)/gains on investments (17,041) (1,520) 1,021Net realised (losses)/gains on foreign 38,746 (13,791) 381currencyOther income 3,528 741 376 --------- --------- ---------Total revenues 1,455,762 1,284,019 13 --------- --------- --------- ExpensesLosses and loss expenses 681,549 865,285 (21)Policy acquisition costs 341,531 305,539 12Administrative expenses 130,703 61,865 111Other expenses 26,562 23,665 12 --------- --------- ---------Total expenses 1,180,345 1,256,354 (6) --------- --------- --------- Income before income taxes 275,417 27,665 896Minority interest (22) - -Income tax expense (16,606) (8,003) 107 --------- --------- ---------Net income 258,789 19,662 1,216 --------- --------- --------- 2006 2005 --------- ---------Loss ratio(1) 51.4% 71.1%Expense ratio(2) 36.8% 32.0%Combined ratio(3) 88.2% 103.1%Tax rate(4) 6.0% 28.9%Return on average equity(5) 24.2% 2.1% --------- --------- 1. Calculated as losses and loss expenses divided by net premiums earned 2. Calculated as the total of policy acquisition costs, administrative expenses and other expenses, less financing and amortisation expenses, divided by net premiums earned 3. Total of loss ratio plus expense ratio 4. Calculated as income tax expense divided by income before income taxes 5. Calculated as net income divided by the weighted average of opening and closing stockholders' equity. For the purposes of the preparation of the unaudited pro forma statement, theresults of Wellington's operations are presented in accordance with US GAAP. Included below are pro forma adjustments to combined net income, calculated asif the acquisition had been in place for the duration of 2006, as required by USGAAP. These adjustments include amortisation on acquired intangible assets, thevalue of the quota share reinsurance provided by some of Wellington's formerthird-party capacity providers and the value of in-force business acquired, aswell as interest expense in respect of the US$500 million bridge financingfacility, which has now been repaid. Consolidated Results of Operations (Pro Forma) Pro forma Wellington Catlin Catlin GroupUS$000 (unaudited) (as reported) (unaudited) --------- --------- ---------RevenuesGross premiums written 1,116,781 1,605,019 2,721,800Reinsurance premiums ceded (203,643) (194,896) (398,539) --------- --------- ---------Net premiums written 913,138 1,410,123 2,323,261Change in unearned premiums (10,837) (84,262) (95,099) --------- --------- ---------Net premiums earned 902,301 1,325,861 2,228,162 Net investment income and changein fair value of derivatives 80,178 104,668 184,846Net realised gains/(losses) oninvestments 20,542 (17,041) 3,501Net realised (losses)/gains onforeign currency (7,544) 38,746 31,202Other income 37,212 3,528 40,740 --------- --------- ---------Total revenues 1,032,689 1,455,762 2,488,451 --------- --------- --------- ExpensesLosses and loss expenses 431,844 681,549 1,113,393Policy acquisition costs 199,183 341,531 540,714Administrative expenses 144,315 130,703 275,018Other expenses 12,250 26,562 38,812 --------- --------- ---------Total expenses 787,592 1,180,345 1,967,937 --------- --------- --------- Income before income taxes 245,097 275,417 520,514Minority interest - (22) (22)Income tax expense (75,405) (16,606) (92,011) --------- --------- ---------Combined net income 169,692 258,789 428,481 --------- --------- --------- Pro forma adjustments:Amortisation of intangible assets, value of quota share and value of in-force, net of tax 8,388Interest on bridge loan (28,234) --------- --------- ---------Pro forma net income 408,635 --------- --------- --------- Ratios on Combined BasisLoss ratio 47.9% 51.4% 50.0%Expense ratio 38.1% 36.8% 37.3%Combined ratio 86.0% 88.2% 87.3%Tax rate 30.8% 6.0% 17.7%Return on average equity 22.4% 24.2% 23.8% --------- --------- --------- Gross premiums written On a pro forma basis gross premiums written in 2006 increased by 15 per cent toUS$2.72 billion. Both Catlin and Wellington benefited from the positive ratingenvironment following the 2005 hurricane losses, with Catlin's gross premiumswritten increasing by approximately 16 per cent and Wellington's increasing by aslightly lower percentage. The largest increases in premium written for both companies were experienced inthe hurricane-impacted classes of business, particularly property treatyreinsurance written by Catlin Bermuda, the Catlin Syndicate Reinsurance segmentand by Wellington Syndicate 2020. The energy, marine facultative and marineexcess of loss business written by both the Catlin Syndicate and WellingtonSyndicate 2020 showed significant increases in premium volume. The growth ingross written premium across these classes was achieved as a result of thestrong rating environment, notwithstanding the reductions in exposure tocatastrophe-exposed classes implemented by both Catlin and Wellington. Gross written premium growth was also achieved in non catastrophe-exposedclasses. Catlin's general liability and aviation accounts both experiencedsignificant growth driven by recruitment of new staff, including staff ininternational offices, and attractive market conditions. Wellington alsoreported growth as a result of the recruitment of new underwriting teams for newclasses of business, particularly US casualty and non-marine liability. Reinsurance Both Catlin and Wellington experienced reductions in premiums ceded toreinsurers, which were increased in 2005 by reinstatement costs resulting fromthe large catastrophe loss experience in that year. Reinsurance costs as apercentage of gross premiums written have fallen to 12 per cent for Catlin(2005: 14 per cent) and to 18 per cent for Wellington (2005: 24 per cent). Bothcompanies experienced savings in overall reinsurance costs: for Catlin thesavings represented approximately US$3 million or 1 per cent; the savings forWellington amount to US$30 million or 13 per cent. Net premiums earned Growth in earned premiums tends to lag growth in written premiums. Accordinglyfor Catlin, growth in net premiums earned was lower than the growth in netpremiums written at 9 per cent. As previously noted Wellington made a 13 percent savings in reinsurance costs in 2006, which is reflected in a 21 per centincrease in net premiums earned. Losses and loss expenses The 2005 underwriting year was significantly impacted by the three largehurricanes - Katrina, Rita and Wilma - which together produced US$333.5 millionin net losses and loss expenses for Catlin and US$328.2 million for Wellingtonin the 2005 calendar year. The 2006 year had no similar large loss activity andthis is reflected in substantial decreases in losses and loss expenses for bothcompanies. This has also resulted in a decrease in the loss ratio to 51.4 percent for Catlin (2005: 71.1 per cent); on a pro forma basis the consolidatedloss ratio was slightly lower at 50.0 per cent. Catlin experienced a number of relatively large losses during 2006, particularlytwo satellite losses which combined amounted to more than US$30 million and alarge motor liability reinsurance loss (relating to a prior accident year) whichhas been reserved at US$29 million. The 2005 hurricane losses remain a source of claims volatility and there isstill some uncertainty in respect of the nature and amount of the underlyinglosses which will impact the Group's reinsurance accounts. Both Catlin andWellington have strengthened reserves during 2006 in respect of these losses:Catlin by US$52 million and Wellington by US$50 million. The relatively highincidence of specific losses which relate to accident years prior to 2006 hasabsorbed general releases from previous years' reserves such that overall Catlinhas strengthened prior years' reserves by US$2 million. Wellington has releasedprior years' reserves of US$19 million, net of the deterioration in respect ofthe 2005 hurricanes and, taken together, there has been a small release of US$17million. Expense ratio Catlin's expense ratio increased to 36.8 percent (2005: 32.0 per cent). Includedin the expense ratio is approximately 25.8 percentage points which relates topolicy acquisition costs; for Catlin this is broadly unchanged compared with2005. On a pro forma basis the expense ratio stood at 37.3 per cent; policyacquisition costs represented 24.3 percentage points of the overall expenseratio. The increase in administration and other expenses is primarily a result ofinvestment in Catlin US and the Group's international offices; investment ininformation technology, particularly in theFrame, Catlin's proprietaryunderwriting management system and data warehouse; and higher awards grantedunder the performance share scheme and higher bonus payments to staff, both ofwhich are based on consolidated return on equity. Wellington's administrative and other expenses also increased, largelyreflecting certain one-off costs including the cost of projects which wereterminated following the acquisition by Catlin and additional costs resultingfrom the early vesting of employee stock options. The expense ratio includes all head office costs and excludes financing andamortisation expenses. Net investment income and net realised gains/(losses) on investments 2006 unaudited pro formaUS$000 consolidated 2006 2005 --------- --------- ---------Total investments and cash as at 31December 5,013,709 2,722,5801 2,371,360 Net investment income and change in fairvalue of derivatives 184,846 104,668 82,147Net realised gains/(losses) oninvestments 3,501 (17,041) (1,520)Net unrealised (losses)/gains oninvestments 1,643 1,643 (29,015) --------- --------- --------- 189,990 89,890 51,612 --------- --------- ---------Realised return on average investments 4.1% 3.5% 3.6% --------- --------- ---------Total return on average investments 4.1% 3.5% 2.3% --------- --------- --------- 1. Represents legacy Catlin investments only, on which the reported return was earned. Total investments and cash as reported in the balance sheet is US$5.01 billion. For Catlin, the 2005 total investment return was depressed by significantunrealised losses on investments caused by rises in US interest rates duringthat year. During 2006 certain of those losses have been realised following areview of investment managers and a resulting rebalancing of portfolios. Thishas slightly depressed the realised return in 2006. In overall terms, aftertaking account of unrealised gains, returns showed a significant improvementover 2005 with interest rates and other valuation effects being quite small. Net investment income also includes the change in the fair value of thecatastrophe swap entered into by Catlin Bermuda, a charge of US$619,000. The Wellington return for 2006 is higher than Catlin's, at 5.3 per cent,resulting particularly from the shorter duration of its fixed income securitiesas well as diversification in equities and hedge funds of funds. Net realised gain/(loss) on foreign currency exchange During 2006 Catlin realised a gain on foreign exchange of US$38.7 million (2005:US$13.8 million loss). The sterling-US dollar exchange rate rose to 1.96 atyear-end 2006 (31 December 2005: 1.72). representing a 14 per cent strengtheningof sterling against the US dollar. During 2005, the US dollar had strengthenedby 10 per cent against sterling. Gains largely resulted from Catlin's US dollarreporting operations holding sterling assets during the year. Wellington had a realised loss on exchange of US$7.5 million, primarilyresulting from losses on currency sales. Income tax expense Catlin's income tax expense increased 108 per cent to US$16.6 million (2005:US$8.0 million), whilst the effective tax rate has fallen to 6.0 per cent (2005:28.9 per cent). The effective tax rate is lower than the Group's expected rate of 12 to 15 percent over the course of an underwriting cycle because profitable business wasceded to Catlin Bermuda. The Catlin Syndicate and Catlin UK recorded net lossesduring the year, after intra-Group reinsurance. The Catlin Syndicate lossesoccurred due to losses from prior years that were not covered by intra-Groupreinsurance. The Catlin UK loss was the result of two large satellite claimswhich caused a loss for the year even after intra-Group reinsurance. During 2005 the opposite effect occurred, when losses were ceded to CatlinBermuda through intra-Group reinsurance, leaving profits in the Catlin Syndicateand Catlin UK, which caused the Group's tax rate to exceed the expected rate. Most of Wellington's profits arose in UK entities and its effective tax rate isclose to the UK corporate tax rate. Balance sheet The balance sheet at 31 December 2006 incorporates the net assets of Wellingtonwhich were acquired as at the year end. The fair value of the assets acquired isreflected in the balance sheet in accordance with US GAAP requirements. US$000 (except share amounts) 2006 2005 % change --------- --------- --------Investments and cash 5,013,709 2,371,360 111Securities lending collateral 130,854 - -Intangible assets and goodwill 868,026 63,639 1,264Premiums and other receivables 987,768 565,500 75Reinsurance recoverable 1,238,852 629,269 97Value of in-force business acquired 118,384 - -Deferred acquisition costs 144,063 126,738 14Other assets 304,662 103,477 194 Loss reserves (4,005,133) (1,995,485) 101Unearned premiums (1,290,379) (663,659) 94Notes payable (550,290) (50,000) 1,000Subordinated debt (99,936) - -Other liabilities (710,697) (219,758) 223Securities lending payable (130,854) - -Minority interest (749) - - --------- --------- --------Stockholders' equity 2,018,280 931,081 117 --------- --------- --------Stockholders' equity per share (US$)(1) US$8.07 US$5.97 35 --------- --------- --------Stockholders' equity per share (sterling)(1) £4.12 £3.47 19 --------- --------- -------- (1) Calculated based on issued share capital at 8 March 2007 of 250.0 millionshares. The chart below shows the principal components of the change in stockholders'equity during the year: US$000Stockholders' equity, 1 January 2006 931,081Equity raise, March 2006 64,881Net income 258,789Equity issued to acquire Wellington 812,427Stock compensation and other 11,000Treasury shares acquired (6,600)Dividends declared (48,607)Change in other comprehensive income (4,691) ---------------Stockholders' equity, 31 December 2006 2,018,280 --------------- Investments and cash Investments and cash increased by 111 per cent to US$5.01 billion (2004:US$2.37billion). Included in this amount are US$2.29 billion in investments and cash inthe acquired Wellington balance sheet. In addition to cash generated fromoperations, cash resources were increased by US$65 million through the issue ofequity in March 2006. The Group continued to maintain a conservative investment philosophy, with themajority of assets invested in a portfolio of fixed maturities, short terminvestments and cash. At 31 December 2006, the fixed maturities were all highquality, primarily with ratings of AA or higher. The Wellington portfolioincludes assets with a market value of US$233 million invested in diversifiedinvestment funds. Securities lending In early 2006 the Group entered into a securities lending arrangement, throughwhich certain of its fixed maturity investments are loaned to third partiesthrough a lending agent. Catlin maintains control over the securities it lends,retains the earnings and cash flows associated with the loaned securities, andreceives a fee from the borrower for the temporary use of the securities.Collateral in the form of cash, government securities and letters of credit isrequired to be established by the borrower at a minimum rate of 102% of themarket value of the loaned securities; this is monitored and maintained by thelending agent. Intangibles and goodwill Intangibles and goodwill have increased by US$804 million due to the acquisitionof Wellington at the end of the year. Goodwill arising on the transaction isUS$69 million. The following intangible assets have been created: • Purchased Lloyd's syndicate capacity (US$716 million) o This represents the capacity that Wellington owned on acquisition as well as the capacity acquired by Catlin from Wellington's third-party capital providers. The element acquired by Catlin as part of the cessation of Syndicate 2020 is valued at US$250 million. o This asset will have an indefinite life and, as such, will not be amortised but will be subject to annual impairment tests. • Distribution network (US$5 million) o This represents the value of the customer and broker networks after allowing for an assumed rate of attrition and will be deducted from the syndicate capacity amount above. Catlin already has access to similar networks in Lloyd's, but there is value in the Lloyd's distribution network from a market participant's point of view. o This asset will be amortised over its estimated useful life of five years. • Surplus lines licenses (US$ 6 million) o This represents the value of the surplus lines licenses acquired. o This asset will be amortised over its estimated useful life of five years. Under US GAAP Catlin is required to establish a liability for deferred taxationin relation to the value of intangible assets and goodwill arising on theacquisition. This liability is included in 'other liabilities' and amounts toUS$127 million. In May 2006 the Group acquired American Indemnity Company, a shell insurancecompany in the United States which will write admitted business for the Group.As part of the acquisition, the Group acquired approvals by states to writesurplus lines business which are valued at $3 million. These intangible assetsare also included in this balance. Reinsurance recoverable Included in this amount are reinsurance recoverables of US$805 million in theacquired Wellington balance sheet. Wellington historically relied on reinsuranceto a greater extent than Catlin. The composition and quality of reinsurers usedby Wellington are comparable to those used by Catlin. The legacy Catlin reinsurance recoverable, which included the deposit withreinsurer, has decreased by US$196 million compared with the prior year. The2005 balance reflected the anticipated recoveries from reinsurers due to thehurricane losses incurred in the second half of 2005. There is no deposit withreinsurer balance in the 2006 figures as all recoveries have now been made underthis contract. Premiums and other receivables Included in this amount are receivables of US$339 million in the acquiredWellington balance sheet. Legacy Catlin premiums and other receivables haveincreased by US$83 million compared with the prior year, reflecting the higherlevels of premiums written during 2006. Value of in-force business acquired As part of the Wellington acquisition, the legacy Wellington deferredacquisition costs have been written off and have been replaced by an asset thatrepresents the value of the business acquired. The establishment of this asset,which represents the profit embedded in the unearned premiums carried on theWellington balance sheet, is required under US GAAP. It will be amortised to netincome in line with the earning of the related unearned premium. Deferred acquisition costs Deferred acquisition costs as a percentage of unearned premiums was 11 per cent(31 December 2005: 19 per cent). However, including the value of in-forcebusiness acquired, which effectively replaced deferred acquisition costs onWellington's acquisition balance sheet, this percentage is comparable to theprevious year at 20 per cent. Loss reserves Gross loss reserves have approximately doubled to US$4.00 billion (2005:US$2.00billion), including US$2.03 billion assumed at fair value upon the acquisitionof Wellington. For both companies the level of gross loss reserves has fallenover 2006, reflecting steady settlement of losses arising from the 2005hurricanes. Notwithstanding this, approximately 44 per cent of the grossreported losses in respect of Hurricane Katrina remain unpaid. Loss reservescontinue to be held at levels which are conservative relative to the range ofestimates of both internal actuaries and independent advisors. Unearned premiums Unearned premiums have increased by approximately 94 per cent to US$1.29 billion(31 December 2005:US$664 million), including US$492 million assumed on theacquisition of Wellington. The growth in unearned premiums reflects growth innet written premiums during 2006. Cash and capital management Intra-Group reinsurance The use of intra-Group reinsurance is central to the management of the Group'scapital. The Group seeks to maintain economic capital within Catlin Bermuda tothe maximum extent possible and to manage the insurance risk portfolio on aGroup basis, regardless of the underwriting platform which originallyunderwrites the risk. The intra-Group contracts which cede risk from the CatlinSyndicate and Catlin UK to Catlin Bermuda have been renewed during the year, andcontracts have also been put in place to cede Catlin US risk to Bermuda whenCatlin US commences underwriting for its own account. These arrangements willalso be effective in ceding former Wellington syndicate risk to Catlin Bermuda;Wellington Syndicate 2020 ceased operations effective 31 December 2006, with thebusiness formerly written by Syndicate 2020 now underwritten by the CatlinSyndicate. Cash and liquidityA summary of the growth in cash and invested assets is shown in the table below. US$000Total cash and investments, 1 January 2006 2,371,360Operating cash 121,192Dividends paid (48,751)Acquisition of Wellington, net of cash and investments acquired 1,970,942Bridge financing facility 500,000Other 98,966 --------------Total cash and investments, 31 December 2006 5,013,709 -------------- Gearing and banking facility The Group's banking arrangements were largely unchanged from 2005 up to theacquisition of Wellington. To assist with the financing of that transaction,Catlin entered into a US$500 million bridge financing facility which was used tofinance the cash element of the acquisition of Wellington, together with part ofthe consideration paid to the third-party capital providers to the Wellingtonsyndicate in accordance with the syndicate cessation arrangement. The cost ofthis facility was LIBOR plus 45 basis points. On 18 January 2007 Catlin Insurance Company Ltd. ('Catlin Bermuda') issuedUS$600 million of non-cumulative perpetual preferred shares. Interest is payableat 7.249 per cent. The proceeds of this issue were primarily used to repay the bridge financing facility. These preferred shares represent regulatory capital for Catlin Bermuda and innovative Tier I capital. The Group has renegotiated its bank facility to meet the needs of the combinedGroup. This includes the following three elements: • A US$50 million revolving credit facility. This was fully drawn at 31 December 2006 but was repaid following completion of the preferred share issue referred to above. • A £275 million (US$539 million) unsecured letter of credit facility. £225 million of this facility is currently drawn and used to provide part of the Funds at Lloyd's supporting the underwriting of the Group's operations at Lloyd's. • A US$350 million standby letter of credit facility which is used by Catlin Bermuda and Catlin UK to secure outstanding claim and unearned premium balances as necessary for trading in, for example, the US. There is approximately US$110 million outstanding on this facility. During 2006 Wellington issued a total of US$68 million and €18 million variablerate unsecured subordinated notes. The interest payable on the notes is based onmarket rates for three-month deposits in US dollars plus a margin of up to 317basis points. The notes, which are redeemable in 2011 at the earliest, qualifyas lower Tier II capital under UK Financial Services Authority regulations. Theproceeds were primarily used to provide funding for Syndicate 2020. The gearing reflected on the balance sheet arising from this financingrepresents 32 per cent (31 December 2005: 5 per cent) of stockholders' equity.After the preferred share issue in January 2007, gearing has fallen to 4 percent. Foreign currency management US 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 primarilyfocussed on analysis and matching of expected cash flows; derivatives or otherfinancial instruments have not been utilised by Catlin during the year. Forwardpurchases and sales of currency are used when currency needs are identified.Wellington undertook forward currency and other currency derivative transactionsduring the year. Other capital management Group capital adequacy is measured against Catlin's economic capital model whichmeasures required capital against a series of 1 in 200 year scenarios. Thiscomplies with European and US regulatory requirements, although the Group holdscapital in excess of regulatory minima. The model calculates capitalrequirements having regard to underwriting, reserving, credit, market,investment and operational risk. The model is regularly updated as part of theGroup's planning process. Catlin Bermuda, Catlin UK and the Catlin Syndicate have financial strengthratings of 'A' (Excellent) by A.M. Best Company, while Wellington SpecialtyInsurance Company is rated 'A-' (Excellent). The Catlin Bermuda and Catlin UKratings from A.M. Best are currently under review with negative implications.Catlin anticipates that this review will be resolved in the first half of 2007.During 2006, Catlin Bermuda and Catlin UK received insurer financial strengthratings of A- (Strong) by Standard & Poor's. The non-cumulative perpetual preferred shares issued by Catlin Bermuda are rated'bbb' by A.M. Best Company and 'BBB' by Standard & Poor's. Reconciliation to IFRS The Group's consolidated financial statements are prepared in accordance with USGAAP, which differs in certain respects from International Financial ReportingStandards ('IFRS'). The following statements summarise the material adjustments, gross of their taxeffect, which reconcile the net income and stockholders' equity under US GAAP tothe amounts which would have been reported had IFRS been applied. Net income Year ended 31 December(US$000) Note 2006 2005 ----- --------- ---------Net income under US GAAP $258,789 $19,662Adjustment for:Change to single functional currency (a) (50,052) 5,275Exchange gains/(losses) on foreign currency bondportfolios (b) (4,240) 3,662Fair value of employee stock compensation (c) (99) (99)Recognition of payroll taxes on employee stock compensation (d) (371) (1,826)Taxation (e) 16,429 (2,319) ----- --------- ---------Net income under IFRS $220,456 $24,355 ----- --------- --------- Stockholders' equity As at 31 December(US$000) Note 2006 2005 ----- --------- ---------Stockholders' equity under US GAAP 2,018,280 $931,081Adjustment for:Change to single functional currency (a) (10,388) (9,387)Fair value of employee stock compensation (c) (310) (241)Recognition of payroll taxes on employee stockcompensation (d) (1,981) (1,721) ----- --------- ---------Stockholders' equity under IFRS 2,005,601 $919,732 ----- --------- --------- a) Under US GAAP, an entity is permitted to have more than one functionalcurrency, if certain criteria are met. The Catlin Syndicate meets these criteriaand therefore operates with multiple functional currencies. Under IFRS, therevised IAS 21 became effective on 1 January 2005. Although multiple functionalcurrencies were allowed under the former IAS 21, the revised standard prohibitsmultiple functional currencies within an entity. The new IAS 21 has been appliedprospectively, and this reconciling item shows the net effect of moving theCatlin Syndicate from four functional currencies to sterling as the solefunctional currency. b) Certain of the Group companies hold fixed income investments in foreigncurrencies, which are intended to mitigate exposures to foreign currencyfluctuations in net liabilities. Under US GAAP, changes in the value of suchinvestments due to foreign currency rate movements are reflected as a directincrease or decrease to stockholders' equity. Under IFRS, such changes areincluded in the statement of operations. c) Under US GAAP, options issued under an employee stock compensation schemewhen the Company is privately-held may be valued assuming no expected volatility(the minimum value method). Under IFRS, a volatility assumption must be made invaluing stock-based compensation issued after 7 November 2002, even if theCompany is privately-held. This reconciling item represents the fair value ofemployee stock options issued after 7 November 2002, recalculated with anexpected volatility assumption reflecting the historical volatility of theGroup's listed peers. d) Under US GAAP, a liability for payroll taxes arising from stockcompensation is recognised when the amount is due to the taxing authority, forexample on the exercise of stock options. Under IFRS, a liability must berecorded at the date of grant, based on the market value of the underlyingsecurity. This liability should be subsequently adjusted for movements in themarket value of the underlying security. e) All of the net income reconciling items are presented before tax. Thisline item represents the tax effect of all the reconciling items. The Wellington Acquisition Catlin's acquisition of Wellington Underwriting plc is expected to bringmaterial benefits to the business. Catlin's and Wellington's businesses arecomplementary with strong operational and underwriting expertise which will befurther strengthened and diversified through the combination. On an unauditedcombined basis, Catlin and Wellington's operations produced net income in 2006amounting to US$428 million, representing a 23.8 per cent return on averageequity. Catlin's recommended offer to acquire Wellington was declared unconditional on18 December 2006. The combination of the businesses was deemed effective 31December 2006 for accounting purposes and the net assets acquired have beenvalued as at that date. The operating results of Wellington will be included inCatlin's consolidated financial statements for periods following 31 December2006. Under the terms of the offer, Wellington shareholders received 0.17 shares ofthe Company's common stock and 35 pence in cash for each Wellington share. Totalconsideration including expenses for the transaction was approximately US$1.18billion, including US$347 million of cash and 86.1 million shares of theCompany's common stock valued at US$812 million. The offer represented a premium for Wellington shareholders of approximately 25per cent to the closing middle market price of 97.25 pence per Wellington shareon 23 October 2006, the last business day prior to the announcement that Catlinand Wellington were in discussions. The offer represented a premium forWellington shareholders of approximately 31 per cent to the average Wellingtonshare price over the one-month period prior to 24 October 2006, the day that itwas announced that Catlin and Wellington were in discussions. Prior to the acquisition, Wellington conducted its underwriting activitiesthrough: •The management by Wellington Underwriting Agencies Limited of Syndicate 2020, and its participation on Syndicate 2020 through the Wellington corporate members (the Wellington Group's participation on Syndicate 2020 amounted to 67 per cent for the 2006 year of account). In December 2006, Lloyd's approved the cessation of Syndicate 2020 and its operations have been combined with those of the Catlin Syndicate (Syndicate 2003) for the 2007 year of account. •Wellington Underwriting Inc., an underwriting agency in the United States which underwrote or introduced insurance and reinsurance business to Syndicate 2020. •Wellington Specialty Insurance Company, a non-admitted insurer in the United States which underwrites specialty casualty and non-catastrophe property insurance for US commercial clients. The projected benefits of the acquisition include: •A major expansion of Catlin's operating platforms. Following the amalgamation with Syndicate 2020, the Catlin Syndicate is the largest syndicate at Lloyd's for the 2007 underwriting year with a total premium capacity of £1.25 billion. Catlin Bermuda is expected to grow through further underwriting opportunities and increased intra-Group reinsurance cessions. Catlin UK will develop further through writing business classes also underwritten by Wellington. •The accelerated development of Catlin's US business. The acquisition of Wellington advances Catlin's existing expansion plans in the US. The addition of Wellington's US operations enhances the depth of the underwriting staff and the range of products offered by Catlin US. It has also strengthened Catlin US's infrastructure. •Further diversification of Catlin's underwriting operations. The Wellington acquisition broadens Catlin's already diversified underwriting portfolio by adding new classes of business and additional non-catastrophe risk. In addition, Wellington brings a strong reputation for underwriting skill, and the addition of Wellington's underwriting staff will bolster Catlin's team. •A strengthened balance sheet. Catlin's greater financial resources arising from 2006 results and the acquisition are a positive factor for clients, brokers and shareholders. At 31 December 2006, investments and cash increased by 111 per cent per cent to US$5.01 billion (31 December 2005: US$2.37 billion), whilst stockholders' equity increased by 117 per cent to US$2.02 billion (31 December 2005: US$931.1 million). The acquisition is now expected to be earnings accretive in 2007 after projectedrestructuring and retention costs, and significantly earnings enhancing in 2008and subsequent years following the projected realisation of not less than US$70million in annualised synergies. The projected synergies include: • Reinsurance synergies, which are expected due to greater diversification and therefore reduced reinsurance need, and economies of scale. There is considerable scope for reinsurance synergies in the light of the Group's US$500 million expenditure for reinsurance in 2006. • Tax synergies, which are expected through the maintenance of capital in Bermuda. For 2006 Wellington produced pre tax income of US$245 million and had a tax rate of 30.8 per cent. Catlin's tax rate for 2006 was 6.0% and it is expected that Catlin's tax rate over time will average 12 per cent to 15 per cent. • Operating synergies, which are expected to stem from scale efficiencies, including headcount savings and consolidation of information technology, professional services and office costs . As at 28 February 2007, there have been 47 agreed employee departures and 31 resignations since the offer was declared unconditional, producing an annualised saving of US$9 million. In addition, the Group has reduced by 150 employees the recruitment previously projected separately by Catlin and Wellington, which will produce an estimated annualised cost saving of US$14 million. The combination of premises is expected to produce an additional annualised saving of US$6 million. • Investment synergies, which are expected as a result of increased portfolio size and optimisation of risk-adjusted returns. Catlin has owned 100 per cent of the capacity of the Catlin Syndicate since 2003and believes that full ownership of syndicate capacity provides significantbenefits. Accordingly, concurrent with the acquisition and through the cessationof Syndicate 2020, Catlin in effect removed the third-party capacity andcombined the Wellington and Catlin Syndicates. As a result, the Group owns 100%of the capacity of the enlarged Catlin Syndicate for 2007. Some of the thirdparty capacity that previously supported Wellington Syndicate 2020 participateson a quota share reinsurance of Catlin Syndicate for 2007 (and will do so for2008). The quota share reinsurance comprises £156 million of Catlin Syndicate'stotal premium capacity of £1.25 billion. In December 2006, after the offer was declared unconditional, Lloyd's grantedpermission for Syndicate 2020 to cease as at 31 December 2006. Catlin entered into a US$500 million bridge financing facility which was used tofinance the cash element of the acquisition of Wellington, together with part ofthe consideration paid to the third-party capital providers to Syndicate 2020.On 18 January 2007 Catlin Insurance Company Limited issued US$600 million ofnon-cumulative perpetual preferred shares and used a portion of the proceeds ofthis issue to repay the bridge facility. This information is provided by RNS The company news service from the London Stock Exchange