Castelnau Group Regulatory News (CGL)

8 Sep 2006 07:01

Catlin Group Limited08 September 2006 CATLIN GROUP LIMITED ANNOUNCES INTERIM RESULTS FOR PERIOD ENDED 30 JUNE 2006 HAMILTON, Bermuda - Catlin Group Limited ('CGL': London Stock Exchange), theinternational property and casualty insurer and reinsurer, announces record netincome for the six months ended 30 June 2006. Highlights: • Net income increased to record US$147.3 million (30 June 2005: US$111.2 million) • Excluding foreign exchange effects, profit before tax decreased 5.9 per cent to US$139.1 million (30 June 2005: US$147.9 million) • Annualised return on average equity was 29.1 per cent (30 June 2005: 22.0 per cent) • Book value per share decreased 1.8 per cent to US$6.67 (30 June 2005: US$6.79); book value per share increased 11.7 per cent from US$5.97 at 31 December 2005; in sterling terms book value per share increased 3.7 per cent to £3.60 (31 December 2005: £3.47) • Gross premiums written increased 15.5 per cent to US$903.1 million (30 June 2005: US$781.7 million) • Net premiums earned rose 2.5 per cent to US$642.5 million (30 June 2005: US$627.1 million) • Combined ratio was 84.7 per cent (30 June 2005: 82.3 per cent) • Earnings per share of 92 US cents (30 June 2005: 72 US cents) • Interim dividend increased to 6.0 pence (11.3 US cents) per share (30 June 2005: 5.4 pence; 9.9 US cents) • Weighted average rate increase of 37 per cent for catastrophe exposed classes of business during period ended 30 June 2006; increase of 12 per cent across all classes • Aggregate catastrophe exposure reduced by approximately one-third • Catlin US management team in place; infrastructure being completed; underwriting teams hired; new offices opened in Atlanta and New York Commenting on the Group's interim results, Chief Executive Stephen Catlin said: "Catlin's performance during the first half of 2006 was strong thanks to ourculture of disciplined underwriting. We had record premium volume and netincome, while at the same time we have reduced our exposure to naturalcatastrophe risk by approximately one-third compared with a year ago andcontinued to diversify our risk portfolio. "We have also made great strides in building our business for the future. Wehave established strong management in our recently established US operatingplatform, and we have also opened a number of offices in North America and Asia.We are encouraged by the opportunities that this expansion creates." Key Financial Data For the six months ended 30 JuneUS$000 except where indicated 2006 2005 % changeGross premiums written 903,145 781,739 15.5%Net premiums written 765,993 658,695 16.3%Net premiums earned 642,483 627,086 2.5%Income before income tax expense 167,399 126,335 32.5%Net income 147,310 111,175 32.5%Earnings per share (US$) 0.92 0.72 27.8%Interim dividend per share (pence) 6.0 5.4 11.1%Interim dividend per share (US cents) 11.3 9.9 14.1%Book value per share (US$) 6.67 6.79 (1.8%)Effective tax rate 12.0% 12.0% --Combined ratio 84.7% 82.3% --Annualised return on average equity 29.1% 22.0% -- - 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, Tel: +44 (0)20 7458 5726Head of Investor Relations, London Mobile +44 (0)7710 314 365 E-mail: william.spurgin@catlin.com Notes to editors: 1. The Catlin Group, headquartered in Bermuda, is an internationalspecialist property/casualty insurer and reinsurer writing more than 30 classesof business worldwide. Catlin wrote gross premiums of $1.4 billion in 2005.Catlin shares are traded on the London Stock Exchange (ticker symbol: CGL). 2. Catlin management will make a presentation to investment analystsat 10am BST today at its London office (3 Minster Court, Mincing Lane, LondonEC3R 7DD). The presentation will be broadcast live on the Group's website(www.catlin.com). The webcast will also be available on the website followingthe presentation. 3. Catlin operates four underwriting platforms: • The Catlin Syndicate at Lloyd's of London (Syndicate 2003), which is one of the largest syndicates at Lloyd's based on 2006 premium capacity of £500 million. It is a recognised leader of numerous classes of specialty insurance and reinsurance. • Catlin Bermuda (Catlin Insurance Company Ltd.), which underwrites property treaty and casualty treaty reinsurance and property and casualty insurance. • Catlin UK (Catlin Insurance Company (UK) Ltd.), which specialises in underwriting commercial non-life insurance for UK clients. It also writes other classes of business written by the Catlin Syndicate. • Catlin US, which encompasses all of Catlin's operations in the United States. Catlin US includes Catlin Insurance Company Inc., an admitted US insurer, along with underwriting offices in several US cities. The Catlin Syndicate, Catlin Bermuda and Catlin UK have financial strengthratings of 'A' (Excellent) from A.M. Best Company. Catlin Bermuda and Catlin UKhave insurance financial strength ratings of 'A-' (Strong) from Standard &Poor's; the Catlin Syndicate has a Lloyd's Syndicate Assessment of '4-' (LowDependency) from Standard & Poor's. 4. Catlin also operates offices worldwide which allow Catlinunderwriters to work closely with local policyholders and brokers. The officesare located in the United States (Atlanta, Houston, New Orleans, New York andSan Francisco), Canada (Toronto and Calgary), Australia (Sydney), Singapore,Malaysia (Kuala Lumpur), Hong Kong, Germany (Cologne), Belgium (Antwerp) andGuernsey. Catlin UK has regional offices in Glasgow, Leeds, Derby, Birmingham,Tonbridge and Watford. 5. Catlin's financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America ('USGAAP'). The Group reports its results in US dollars. 6. Rates of exchange at 30 June 2006 - balance sheet: £1=US$1.85 (30June 2005: US$1.79); income statement: £1=US$1.79 (30 June 2005: US$1.88). 7. Detailed information regarding Catlin's financial results for thesix months ended 30 June 2006 including unaudited consolidated financialstatements, is attached. 8. More information about Catlin can be found on the Group's website: www.catlin.com. The Catlin Group is pleased to report record premium volume and net income forthe first half of 2006. This excellent performance reflects: • the favourable market environment which has arisen following the unprecedented catastrophe losses incurred in the second half of 2005; • Catlin's ongoing commitment to disciplined underwriting; • the continued development of underwriting initiatives by the Group over the past several years; • the advantages provided by Catlin's multi-platform operating structure; and • positive foreign exchange effects. The record catastrophe losses arising from Hurricanes Katrina, Rita and Wilma inthe second half of 2005 have created a market environment that offerssignificant opportunities for Catlin. However, we have ensured that we have notstrayed from our basic operating principles while taking advantage of thoseopportunities. During the course of 2006 we have continued to reassess ourcatastrophe exposed risk portfolio, and we have reduced our exposure to naturalcatastrophe risk by approximately one-third compared with a year ago. We havefurther diversified our already balanced risk portfolio to increase the amountof business that we write that will not likely be impacted by a majorcatastrophe. We are also expanding our geographic reach, opening offices in theUnited States, Canada and Hong Kong during the year and accelerating thedevelopment of our fourth underwriting platform, Catlin US. Catlin's multi-platform structure - composed of a Bermuda based holding company,underwriting platforms in key markets and a network of international officeswhich allows us to work more closely with local brokers and policyholders - isan important part of our success. This structure differentiates Catlin from manyof its competitors and provides the Group with financial flexibility and greateraccess to uncorrelated risk. We are proud of our performance in the first half of 2006, and we look forwardto continued growth and profitability in the remainder of the year and in 2007. Financial Results Gross premiums written increased by 15.5 per cent during the first six months of2006 to US$903.1 million (30 June 2005: US$781.7 million). Growth in grosspremiums written accelerated during the first half, as premium rates for classesof direct and reinsurance business exposed to natural catastrophes steadilyincreased. Net premiums earned rose 2.5 per cent to US$642.5 million (30 June 2005:US$627.1 million). As premiums earned typically lag premiums written, the 2.5per cent growth in net premiums earned reflects, in part, the pattern of writtenpremiums in 2005 when premium volumes decreased, particularly in the first halfof that year. Unearned premiums increased by 31.5 per cent in the first half of2006 to US$872.9 million (31 December 2005: US$663.7 million), reflectingwritten premium growth in the second half of 2005 and in the first half of 2006. The Group's net income increased by 32.5 per cent to US$147.3 million (30 June2005: US$111.2 million). The performance amounts to an annualised return onaverage equity of 29.1 per cent. The Group's underwriting performance in the first six months of 2006 was broadlycomparable to the corresponding period of 2005. The combined ratio for the firstsix months of 2006 was 84.7 percent (30 June 2005: 82.3 per cent). The lossratio was 49.3 per cent (30 June 2005: 48.7 per cent), which reflected thefavourable underwriting conditions during the period along with a relativelybenign loss environment. The expense ratio increased to 35.4 per cent (30 June2005: 33.6 per cent), reflecting the Group's investment in both personnel andsystems to enhance controls and to take advantage of future underwritingopportunities, including the development of Catlin US. The Group's net income for the six months ended 30 June 2006 includes US$28.3million of realised gains on foreign currency exchange (30 June 2005: US$21.5million foreign exchange loss). Catlin Bermuda assumes sterling denominatedintra-Group reinsurance from other companies within the Group and, consequently,holds sterling net assets on its balance sheet. As a result of the strengtheningof sterling against the US dollar, foreign exchange gains are recorded whenthese sterling net assets are presented in US dollars. These foreign exchangeeffects comprise the majority of the foreign exchange gain in the first half of2006. The gains do not have a significant economic impact and offsettingintra-Group entries are reflected in stockholders' equity. Stockholders' equity amounted to US$1.09 billion (30 June 2005: US$1.06 billion;31 December 2005: US$931.1 million). A small release was made from prior yearloss reserves at 30 June 2006, even though net losses incurred in respect of thethree major hurricanes (Katrina, Rita and Wilma) in the second half of 2005deteriorated by $26.0 million during the period. Catlin's reliance onreinsurance remains modest, with reinsurance costs as a percentage of grosspremiums written amounting to 15.2 per cent (30 June 2005: 15.7 per cent). Catlin's financial strength has been recognised by the major insurance ratingagencies. The Catlin Syndicate, Catlin Bermuda and Catlin UK continue to beassigned financial strength ratings of 'A' (Excellent) from A.M. Best. In May2006 Standard & Poor's assigned insurer financial strength ratings of A-(Strong) to Catlin Bermuda and Catlin UK and an interactive Lloyd's SyndicateAssessment of '4-' (Low Dependency) to the Catlin Syndicate. The Group continued to adopt a conservative investment philosophy, with assetsof US$2.50 billion (30 June 2005: US$2.22 billion) invested primarily in fixedmaturities, cash and cash equivalents. The Group had no equity investmentsduring the first six months of 2006. Net investment income rose by 41.0 per centto US$51.9 million (30 June 2005: US$36.8 million), although the Group sustainedrealised and unrealised investment losses totalling $31.1 million as US shortterm interest rates continued to rise. The total annualised return on averageinvestments during the period therefore amounted to 1.7 per cent (30 June 2005:3.1 per cent), although the realised annualised return on average investmentswas 3.6 per cent (30 June 2005: 3.6 per cent). Dividend Catlin maintains a dividend policy under which payments are linked to recenttrends in the performance of the Group as well as to future business prospects.The Board of Directors has declared an interim dividend of 6.0 pence (11.3 UScents) per share (30 June 2005: 5.4 pence (9.9 US cents)), an increase of 11.1per cent (US dollar increase: 14.1 per cent). The interim dividend will be paidon 10 November 2006 to shareholders of record on 13 October 2006. Share Placement On 9 March 2006, the Group successfully placed 7.7 million new common shares,which represented about 5 per cent of the Group's outstanding shares. Theplacement raised approximately US$65 million, net of expenses. The additionalcapital provides Catlin with greater financial flexibility to take advantage ofunderwriting opportunities, whilst further strengthening the Group's capitalposition. Segmental Information The Group's underwriting results by segment are presented prior to adjustmentsnecessary to eliminate intra-Group reinsurance transactions on consolidation.Administrative and other expenses are managed on a Group basis and are allocatedbetween segments based on net premiums earned. Six months ended 30 June 2006 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Intra-Group Direct Reinsurance Bermuda UK Reinsurance TotalGross premiumswritten 453,343 206,427 393,147 116,632 (266,404) 903,145Reinsurancepremiums ceded (233,681) (97,708) (5,944) (66,223) 266,404 (137,152) --------- ------- ------- ------- -------- -------Net premiumswritten 219,662 108,719 387,203 50,409 765,993 --------- ------- ------- ------- -------- --------Net premiumsearned 199,204 76,932 307,867 58,480 642,483Losses andloss expenses (67,909) (38,824) (174,503) (35,328) (316,564)Expenses (97,223) (31,449) (77,579) (25,044) (231,295) -------- ------- ------- ------- -------- -------Netunderwritingresult 34,072 6,659 55,785 (1,892) 94,624 ------- ------- ------- ------- -------- ------- Loss Ratio 34.1% 50.5% 56.7% 60.4% 49.3%Expense 48.2% 40.3% 24.6% 42.2% 35.4%RatioCombined Ratio 82.3% 90.8% 81.3% 102.6% 84.7% Six months ended 30 June 2005 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Intra Group Direct Reinsurance Bermuda UK Reinsurance TotalGross premiumswritten 379,035 187,848 290,455 115,237 (190,836) 781,739Reinsurancepremiums ceded (185,015) (88,319) (6,580) (33,966) 190,836 (123,044) --------- ------- ------- ------- -------- --------Net premiumswritten 194,020 99,529 283,875 81,271 658,695 --------- ------- ------- ------- -------- --------Net premiumsearned 282,136 95,419 156,018 93,513 627,086Losses andloss expenses (134,607) (38,729) (78,414) (53,523) (305,273)Expenses (112,808) (37,809) (35,913) (25,875) (212,405) --------- ------- ------- ------- -------- --------Netunderwritingresult 34,721 18,881 41,691 14,115 109,408 --------- ------- ------- ------- -------- -------- Loss Ratio 47.7% 40.6% 50.3% 57.2% 48.7%Expense 39.7% 39.4% 22.8% 27.4% 33.6%RatioCombined Ratio 87.4% 80.0% 73.1% 84.6% 82.3% Overview of Results and Operations Gross premiums written by all four business segments increased in the first halfof 2006. This is largely attributable to the positive rating environment incatastrophe exposed classes of business following the 2005 hurricanes. Weightedaverage premium rates for catastrophe exposed classes of insurance andreinsurance written during the first six months of 2006 rose by an average of 37per cent, while weighted average premium rates for other classes of businessdecreased by 2 per cent. Overall, weighted average premium rates for all classesincreased by 12 per cent. Rate adequacy continued to be strong throughout our risk portfolio. The increase in premium rates for catastrophe exposed business meant that Catlinwas able to increase gross premiums written in these classes whilst reducing itsaggregate exposure by approximately one-third from last year. This was achievedthrough a combination of higher attachment points, lower maximum limits andreduced line sizes. Whilst there is obviously a temptation to increase theamount of business underwritten in classes when premium rates are risingsignificantly, we have refused to do so. We believe that this prudent strategyis the correct one, especially in the light of the record catastrophe lossesincurred during 2005 and the possibility that 2006 could be another severe yearfor hurricanes. Gross premiums written in the Catlin Syndicate Direct segment increased by 19.6per cent to US$453.3 million (30 June 2005: US$379.0 million). Premiumsincreased for general liability insurance, both because of better than expectedretention of business and because of new initiatives by the Catlin Syndicate towrite certain US general liability risks. Aviation premium volume has increased,largely due to the establishment of an office in Guernsey in mid-2005 whichspecialises in general aviation risks. Property facultative insurance volumeincreased due to rate improvements following the 2005 hurricanes. Gross premiums written in the Catlin Syndicate Reinsurance segment increased by9.9 per cent to US$206.4 million (30 June 2005: US$187.8 million). Premiumvolume increased for both property catastrophe reinsurance and marine andaviation reinsurance, despite the fact that aggregate exposures in thesecatastrophe exposed classes have been reduced. Gross premiums written by Catlin Bermuda increased by 35.3 per cent to US$393.1million (30 June 2005: US$290.5 million). The majority of the increased premiumvolume is due to an increase in intra-Group reinsurance ceded to Catlin Bermuda,although third-party business underwritten by Catlin Bermuda rose by 27.2 percent to US$126.7 million (30 June 2005: US$99.6 million), largely due toincreased property reinsurance premium volume. Gross premiums written by Catlin UK, which writes both insurance for small tomedium size UK policyholders as well as other classes of business, increased by1.2 per cent to US$116.6 million (30 June 2005: US$115.2 million). The lowerpremium growth in this segment reflects the challenging market conditions in theUK market. During the six months ended 30 June 2006, Catlin Bermuda and Catlin UK accountedfor 52 per cent of total gross premiums written after intra-Group reinsurance(30 June 2005: 51 per cent). Business originated by Catlin Bermuda and Catlin UKaccounted for 27 per cent of total gross premiums written (30 June 2005: 27 percent). The loss, expense and combined ratios for each segment in the preceding tablesare reported including the effects of intra-Group reinsurance and therefore donot reflect the ratios pertaining to the business as underwritten by thesegments prior to intra-Group transactions. The gross premiums written and theloss, expense and combined ratios for each segment, excluding the effect ofintra-Group reinsurance, are shown in the following tables: Six months ended 30 June 2006 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Direct Reinsurance Bermuda UK TotalGross premiums written 453,343 206,427 126,743 116,632 903,145 Loss Ratio 41.0% 53.9% 42.5% 75.1% 49.3%Expense Ratio 38.1% 32.2% 33.0% 33.5% 35.4%Combined Ratio 79.1% 86.1% 75.5% 108.6% 84.7% Six months ended 30 June 2005 (US$000) Catlin Catlin Syndicate Syndicate Catlin Catlin Direct Reinsurance Bermuda UK TotalGross premiums written 379,035 187,848 99,619 115,237 781,739 Loss Ratio 52.8% 41.8% 28.6% 58.5% 48.7%Expense Ratio 35.9% 32.6% 30.9% 28.9% 33.6%Combined Ratio 88.7% 74.4% 59.5% 87.4% 82.3% Loss experience during the first six months of 2006 was generally favourable, asreflected by a loss ratio of 49.3 per cent (30 June 2005: 48.7 per cent). Lossesand loss expenses during the period include a $4.2 million release from prioryears, net of a $26.0 million deterioration in net losses incurred in respect ofthe three major hurricanes (Katrina, Rita and Wilma) in the second half of 2005.The bulk of this deterioration impacted the Catlin Syndicate Reinsurance andCatlin Bermuda segments. A major satellite loss amounting to $19.0 millionimpacted the Catlin UK segment, adversely affecting that segment's loss ratio. Market conditions for catastrophe exposed classes of insurance and reinsurancecontinued to improve during the 1 July renewal period. Weighted average premiumrates for catastrophe exposed business incepting in July rose by 40 per cent,compared with a 2 per cent decrease for other classes. Overall, weighted averagepremium rates across Catlin's portfolio for business incepting in July rose by12 per cent. Catlin's multi-platform operating structure continued to provide benefits duringthe first six months of 2006. Intra-Group reinsurance programmes cede risk andunderwriting profits from our UK underwriting platforms to Catlin Bermuda tomaximise capital and tax efficiency. At 30 June 2006, we anticipate the fullyear effective tax rate for the Group will be approximately 12 per cent. International Expansion Since 1999 the Catlin Group has set itself apart from many of its competitors byestablishing a network of international offices in the United States, Canada,Europe, Asia and Australia. These local offices complement Catlin's strategy ofbuilding a portfolio of uncorrelated risk by providing the Group with access tolocal business that would not generally be underwritten at Lloyd's or in theBermuda market. By establishing these offices, Catlin will work more closelywith assureds and their retail brokers, strengthening the relationship betweenCatlin and the client. So far in 2006, Catlin has opened new offices in Hong Kong and Calgary. The HongKong office was established in July and is underwriting marine hull and cargo,non-marine property and terrorism coverages. This office will serve clients inChina, Korea and Japan and follows Catlin's successful development of Asianoffices in Singapore and Kuala Lumpur. The Calgary office, which was establishedin August, specialises in underwriting aviation business. It complementsCatlin's existing Canadian office in Toronto, which opened in 2005 and isalready producing significant premium volume. We have also opened a Catlin UKregional office in Tonbridge. The bulk of the Group's international development during 2006, however, has beenfocused on Catlin US, our newest underwriting platform. Catlin US, which commenced operations in the second half of 2006, willunderwrite a diversified portfolio of specialty classes of insurance. Growthwill be driven by the employment of specialist underwriting teams. The classesof business to be underwritten will be consistent with Catlin's existingappetite for non-correlated risk. As with all Catlin underwriting platforms,underwriting will be driven by the potential for bottom line profit, not topline growth. Initially, business will be primarily underwritten by the USunderwriting teams on a non-admitted basis and placed with the Catlin Syndicateor Catlin UK. As time passes, more business will be underwritten by US insurancecompanies wholly owned by Catlin. In May 2006, the Group completed the acquisition of American Indemnity Company,a shell insurance company admitted in 27 US states, which has since been renamedCatlin Insurance Company Inc. We are currently applying for the company to beadmitted in additional states, a process we expect will be substantiallycompleted in early 2007. The Group also plans to establish a non-admittedinsurer based in the United States, which will complement the Group's currentnon-admitted capabilities through the Catlin Syndicate and Catlin UK. Theprocess of establishing this insurer has begun, and we expect this company to beoperating by mid-2007. Richard Banas was appointed president and chief executive officer of Catlin USeffective 1 April 2006. Rich, who has more than 30 years of managementexperience in US specialty lines underwriting, has since assembled anexperienced and respected management team, including executives responsible foroperations, finance, claims, actuarial, human resources and IT. The managementteam is based in Catlin US's Atlanta headquarters, which opened in June. In July, Catlin established an office in New York, which is staffed by a highlyexperienced professional liability underwriting team specializing in variousclasses of professional liability and directors & officers (D&O) liabilityinsurance. The professional liability classes underwritten include coverage forfinancial institutions, real estate agents, lawyers, accountants and otherprofessionals. In August, a primary/excess casualty unit was established inAtlanta. The existing Houston office continues to specialise in underwritingmedical malpractice insurance. In addition to these classes of business, Catlin US's portfolio will expand overtime to include other classes. Potential classes include inland marine (buildersrisk, cargo and specie), general aviation and equine/bloodstock. Conclusion Catlin is looking ahead to the remainder of 2006 and into 2007 with optimism.Market conditions are currently good, and we expect that rates will continue tofirm for many classes of business. We believe that we have an advantageousoperating structure in place. We continue to underwrite on a disciplined basis,driven by bottom line profit rather than top line growth. We have significantlyreduced our exposure to catastrophic events, whilst still benefiting from theimproved rates and conditions in catastrophe exposed classes. We haveestablished new offices worldwide, which will increase the amount ofuncorrelated business that we underwrite. Finally, we believe the prospects forCatlin US are excellent, and we are working hard to develop this important partof our business. We are currently in the midst of the US hurricane season. No one can predictwith accuracy whether the wind will blow as it did in 2005, creating recordcatastrophe losses. However, we are in an even stronger position to withstandthe impact of severe hurricane events than we were a year ago. The entire Catlin team has worked extremely hard both to produce these recordresults and to develop our initiatives and strategy for the future. I would liketo take this opportunity to thank the members of the team for their superbeffort and spirit. Stephen CatlinChief Executive7 September 2006 Consolidated Balance SheetsAs at 30 June 2006 and 2005(US dollars in thousands, except share amounts) 30 June 2006 31 Dec 2005 30 June 2005 (unaudited) (audited) (unaudited)AssetsInvestments Fixed maturities, available-for-sale, at fair value (amortised cost 2006: $1,735,282; Dec 2005: $1,761,968; June 2005: $1,525,917) $1,693,718 $1,744,043 $1,531,650Short-term investments at fair value 8,198 14,666 60,596Cash and cash equivalents, at fairvalue 794,497 609,857 624,243Investment in associate 2,498 2,794 2,520 --------- --------- ---------Total investments 2,498,911 2,371,360 2,219,009 --------- --------- --------- Accrued investment income 17,536 17,227 13,989Securities lendingcollateral 209,137 - -Premiums and otherreceivables 768,133 565,500 628,255Reinsurance recoverable (net ofallowance of 2006: $27,312; Dec 2005: $24,511; June 2005: $18,303) 522,420 607,446 338,072Deposit with reinsurer - 21,823 21,823Reinsurers' share of unearned premiums 112,103 37,222 88,890Deferred acquisition costs 151,920 126,738 143,025Intangible assets and goodwill(accumulated amortisation 2006: $28,092; Dec 2005: $26,181; June 2005:$27,210) 72,491 63,639 66,032Other assets 50,706 49,028 48,853 ---------- ---------- ----------Total assets $4,403,357 $3,859,983 $3,567,948 ---------- ---------- ---------- Liabilities and Stockholders' EquityLiabilities:Unpaid losses and loss expenses $1,950,583 $1,995,485 $1,482,400Unearned premiums 872,898 663,659 776,393Deferred gain 1,294 8,078 8,124Reinsurance payable 138,670 137,313 109,851Notes payable 50,000 50,000 50,250Accounts payable and otherliabilities 71,275 70,186 61,297Securities lendingpayable 209,137 - -Deferred taxes 17,559 4,181 22,246 ---------- ---------- ----------Total liabilities $3,311,416 $2,928,902 $2,510,561 ---------- ---------- ----------Minority interest 727 - - Stockholders' equity:Ordinary common shares, par value$0.01Authorised 250,000,000;issued and outstanding 2006:163,633,683; Dec 2005: 155,914,616; June 2005: 155,843,070) $1,636 $1,559 $1,558 Additional paid-in capital 791,859 721,935 719,075Treasury stock (552) - -Accumulated other comprehensive(loss)/income (46,983) (21,399) 565Retained earnings 345,254 228,986 336,189 ---------- -------- ---------Total stockholders' equity 1,091,214 931,081 1,057,387 ---------- -------- ---------Total liabilities and stockholders' equity $4,403,357 $3,859,983 $3,567,948 Approved by the Board of Directors on 7 September 2006 Stephen Catlin, Director Christopher Stooke, Director Consolidated Statements of Operations (unaudited)For the six months ended 30 June 2006 and 2005(US dollars in thousands, except share amounts) 2006 2005RevenuesGross premiums written $903,145 $781,739Reinsurance premiums ceded (137,152) (123,044) ---------- ----------Net premiums written 765,993 658,695Change in net unearned premiums (123,510) (31,609) ---------- ----------Net premiums earned 642,483 627,086 ---------- ----------Net investment income 51,922 36,849Net realised (losses)/gains on investments (7,633) 1,339Net realised gains/(losses) on foreign currency exchange 28,314 (21,545)Other income 172 284 ---------- ----------Total revenues 715,258 644,013 ---------- ----------ExpensesLosses and loss expenses 316,564 305,273Policy acquisition costs 157,157 159,548Administrative expenses 61,790 40,968Other expenses 12,348 11,889 ---------- ----------Total expenses 547,859 517,678 ---------- ----------Income before income tax expense 167,399 126,335Income tax expense (20,089) (15,160) ---------- ----------Net income $147,310 $111,175 ---------- ----------Earnings per common shareBasic $0.92 $0.72Diluted $0.85 $0.66 Consolidated Statements of Changes in Stockholders' Equity andAccumulated Other Comprehensive Income (unaudited)For the six months ended 30 June 2006 and 2005(US dollars in thousands, except share amounts) Accumulated Additional other Total Common paid-in Treasury Retained comprehensive stockholders stock capital stock earnings income (loss) equityBalance 1 January 2005 $1,541 $716,649 $- $248,841 $4,156 $971,187Comprehensive income:Net income - - - 111,175 - 111,175Other comprehensive income - - - - (3,591) (3,591) ------- -------- ------- ------- ---------- ---------Total comprehensive income - - - 111,175 (3,591) 107,584 Stock compensation expense - 2,096 - - - 2,096Stock options andwarrants exercised 17 (17) - - - -Dividends declared - - - (23,480) - (23,480)Deferred compensationobligation - 347 - (347) - - ------- -------- ------- -------- --------- -----------Balance 30 June 2005 $1,558 $719,075 - $336,189 $565 $1,057,387 ------- -------- ------- -------- --------- -----------Balance 1 January 2006 $1,559 $721,935 - $228,986 $(21,399) $931,081Comprehensive income:Net income - - - 147,310 - 147,310Other comprehensive loss - - - - (25,584) (25,584) ------- -------- ------- -------- ---------- ----------Total comprehensive income - - - 147,310 (25,584) 121,726 Equity raise 77 65,154 - - - 65,231Stock compensation expense - 3,975 - - - 3,975Stock options andwarrants exercised - - - - - -Dividends declared - - - (30,247) - (30,247)Deferred compensation obligation - 795 - (795) - -Treasury stock purchased - - (552) - - (552) ------- -------- -------- -------- --------- -----------Balance 30 June 2006 $1,636 $791,859 $(552) $345,254 $(46,983) $1,091,214 ------- -------- ------- -------- --------- ----------- Consolidated Statements of Cash Flows (unaudited)For the six months ended 30 June 2006 and 2005(US dollars in thousands, except share amounts) 2006 2005 Cash flows provided by operating activitiesNet income $147,310 $111,175Adjustments to reconcile net income to net cash providedby operations:Amortisation and depreciation 4,213 4,949Amortisation of discounts of fixed maturities (7,244) (4,708)Net realised losses/(gains) on investments 7,633 (1,339)Unpaid losses and loss expenses (176,092) 109,569Unearned premiums 161,479 100,937Premiums and other receivables (143,052) (46,761)Deferred acquisition costs (16,328) (9,119)Reinsurance payable (79,589) 104,449Reinsurance recoverable 151,499 9,145Reinsurers' share of unearned premiums (52,145) (58,081)Deposit with reinsurer (20,583) 36,008Deferred gain (12,408) (11,844)Accounts payable and other liabilities 68,732 (5,184)Deferred tax 1,456 15,150Other 70,460 (51,809) --------- ---------Net cash flows provided by operating activities 105,341 302,537 --------- ---------Cash flows used in investing activitiesPurchases of fixed maturities (644,684) (951,914)Purchases of short-term investments (46,760) (190,115)Proceeds from sales of fixed maturities 689,361 806,985Proceeds from maturities of fixed maturities 5,410 50,487Proceeds from sales of short-term investments 12,738 311,798Purchase of intangible assets (3,578) -Purchases of property and equipment (3,149) (3,841)Proceeds from sales of property and equipment 72 6Investment of securities lending collateral (209,137) - --------- ---------Net cash flows used in investing activities (199,727) 23,406 --------- --------- 2006 2005Cash flows provided by financing activitiesProceeds from issue of common shares $65,786 $-Dividends paid on common shares (30,037) (23,425)Proceeds from notes payable 150,000 100,000Repayment of notes payable (150,000) (100,000)Securities lending collateral received 209,137 -Proceeds from exercise of stock options - -Purchase of treasury stock (552) - --------- ---------Net cash flows (used in)/provided by financingactivities 244,334 (23,425) --------- ---------Net increase in cash and cash equivalents 149,948 302,518Cash and cash equivalents - beginning of year 609,857 354,608Effect of exchange rate changes 34,692 (32,883) --------- ---------Cash and cash equivalents - end of year $794,497 $624,243 --------- ---------Supplemental cash flow informationTaxes paid $18 $3Interest paid $1,378 $702 Cash and cash equivalents comprise the following:Cash at bank and in hand $793,232 $615,656Cash equivalents $1,265 $8,587 Notes to the Consolidated Financial Statements (unaudited)For the six months ended 30 June 2006 and 2005(US dollars in thousands, except share amounts) 1 Basis of preparation The unaudited interim consolidated financial statements have been prepared inaccordance with the accounting policies set out in the consolidated financialstatements for the year ended 31 December 2005. In February 2006, the Group entered into a securities lending arrangementdescribed in Note 3 and, as a result, the Group has adopted the following newaccounting policy in the first half of 2006. Securities lendingCertain entities within the Group participate in securities lending arrangementswhereby specific securities are loaned to other institutions, primarily banksand brokerage firms, for short periods of time. Under the terms of thesecurities lending agreements, the loaned securities remain under the Group'scontrol and therefore remain on the Group's balance sheet. Collateral in theform of cash, government securities and letters of credit is required and ismonitored and maintained by the lending agent. The Group receives interestincome on the invested collateral, which is recorded in net investment income. Changes in scope of consolidationOn 25 May 2006, the Group, through its wholly owned subsidiary Catlin Inc.,acquired 100 percent of the outstanding common shares of American Indemnity.This company was renamed Catlin Insurance Company Inc. ('Catlin US') and it willunderwrite specialty classes of property and casualty business for US commercialclients on an admitted basis. The aggregate purchase price was $8,375 in cash, which is equal to the fairvalue of net assets acquired. There was no goodwill arising on the transaction. On 13 June 2006, the Group, through its wholly owned subsidiary Catlin HoldingsLimited, acquired 50.01% of the outstanding common shares of Barfish Limited.This company has been renamed Brighter Business Limited ('BB') and will operateas an insurance intermediary, including as a coverholder for Lloyd's Syndicate2003, whose sole member is Catlin Syndicate Limited. BB intends to offercoverage including property, employers' and public liability, motor and legalexpenses. The aggregate purchase price to acquire 50.01% of the outstanding common sharesof BB was $1,432 (£800) in cash. Goodwill of $704 (£394) was generated on thistransaction. 2 Segmental information For the six months ended 30 June 2006 and 2005, these reporting segmentscorrespond to the location of where the business was written, with CatlinSyndicate Direct, Catlin Syndicate Reinsurance and Catlin UK business beingwritten in the UK and Catlin Bermuda business being written in Bermuda. Netincome before tax by operating segment before intra-Group reinsuranceeliminations for the six months ended 30 June 2006 is as follows: Catlin Catlin Syndicate Syndicate Catlin Catlin Intra- Direct Reinsurance Bermuda UK Group TotalGross premiums written $453,343 $206,427 $393,147 $116,632 $(266,404) $903,145Reinsurance premiumsceded (233,681) (97,708) (5,944) (66,223) 266,404 (137,152) -------- -------- -------- -------- ------- --------Net premiums written 219,662 108,719 387,203 50,409 - 765,993 -------- -------- -------- -------- ------- --------Net premiums earned 199,204 76,932 307,867 58,480 - 642,483Losses and loss expenses (67,909) (38,824) (174,503) (35,328) - (316,564)Policy acquisition costs (85,236) (27,989) (47,867) (22,868) 26,803 (157,157)Administrative and otherexpenses (11,987) (3,460) (29,712) (2,176) (26,803) (74,138) -------- -------- -------- -------- ------- --------Net underwriting result 34,072 6,659 55,785 (1,892) - 94,624 -------- -------- -------- -------- ------- --------Net investment incomeand net realisedlosses on investments 13,732 5,303 21,223 4,031 - 44,289Net realised gains onforeign currencyexchange 8,779 3,390 13,568 2,577 - 28,314Other income 52 21 83 16 - 172 -------- -------- -------- -------- ------- --------Income/(loss)beforeincome tax expense $56,635 $15,373 $90,659 $4,732 $- $167,399 --------- -------- -------- -------- ------- ---------Total revenue $221,767 $85,646 $342,741 $65,104 $- $715,258 Net income before tax by operating segment before intra-Group reinsuranceeliminations for the six months ended 30 June 2005 is as follows: Catlin Catlin Syndicate Syndicate Catlin Catlin Intra- Direct Reinsurance Bermuda UK Group TotalGross premiums written $379,035 $187,848 $290,455 $115,237 $(190,836) $781,739Reinsurance premiumsceded (185,015) (88,319) (6,580) (33,966) 190,836 (123,044) -------- -------- -------- -------- -------- --------Net premiums written 194,020 99,529 283,875 81,271 - 658,695 -------- -------- -------- -------- -------- --------Net premiums earned 282,136 95,419 156,018 93,513 - 627,086Losses and loss expenses (134,607) (38,729) (78,414) (53,523) - (305,273)Policy acquisition costs (93,092) (31,141) (25,010) (19,340) 9,035 (159,548)Administrative and otherexpenses (19,716) (6,668) (10,903) (6,535) (9,035) (52,857) -------- -------- -------- -------- -------- --------Net underwriting result 34,721 18,881 41,691 14,115 - 109,408 -------- -------- -------- -------- -------- --------Net investment income andnet realised gains oninvestments 17,181 5,811 9,501 5,695 - 38,188Net realised gains onforeign currency exchange (9,694) (3,278) (5,360) (3,213) - (21,545)Other income 128 43 71 42 - 284 -------- -------- -------- -------- -------- --------Income before income taxexpense $42,336 $21,457 $45,903 $16,639 - $126,335 --------- -------- -------- -------- -------- ---------Total revenue $289,751 $97,995 $160,230 $96,037 $- $644,013 Total revenue is the total of net premiums earned, net investment income and netrealised gain/(loss) on investments, net realised gain/(loss) on foreigncurrency exchange, and other income. Total assets by segment at 30 June 2006 and 2005 are as follows: 2006 2005Catlin Syndicate Direct $2,344,239 $2,004,628Catlin Syndicate Reinsurance 895,467 667,666Catlin Bermuda 2,625,031 1,636,097Catlin UK 612,701 505,641Other 1,034,716 837,062Consolidation adjustments (3,108,797) (2,083,146) ----------- -----------Total assets $4,403,357 $3,567,948 ----------- -----------'Other' in the table above includes assets such as investments in Groupcompanies which are not allocated to individual segments. 3 Investments Fixed maturitiesThe fair values and amortised costs of fixed maturities at 30 June 2006 and 2005are as follows: 2006 2005 Fair Amortised Fair Amortised Value Cost Value CostUS government and agencies $857,888 $886,125 $765,592 $757,448Non-US governments 334,325 340,053 201,094 200,375Corporate securities 235,395 240,044 304,025 306,355Mortgage backed securities 73,475 74,434 82,327 82,584Asset-backed securities 192,635 194,626 178,612 179,155 ---------- ---------- ---------- ----------Total fixed maturities $1,693,718 $1,735,282 $1,531,650 $1,525,917 ---------- ---------- ---------- ----------The gross unrealised gains and losses related to fixed maturities at 30 June2006 and 2005 are as follows: 2006 2005 Gross Gross Gross Gross unrealised unrealised unrealised unrealised gains losses gains lossesUS government and agencies $- $28,238 $9,427 $1,283Non-US governments 42 5,769 1,472 753Corporate securities 27 4,676 239 2,569Mortgage backed securities 45 1,004 102 359Asset-backed securities 59 2,050 100 643 ---------- ---------- ---------- ----------Total fixed maturities $173 $41,737 $11,340 $5,607 ---------- ---------- ---------- ----------There were no other than temporary declines in the value of investments in thesix months to 30 June 2006 or 2005. The net realised losses on fixed maturitiesfor the six months ended 30 June 2006 were $7,399 (2005: net realised gain of$1,254). Fixed maturities at 30 June 2006, by contractual maturity, are shown below.Expected maturities could differ from contractual maturities because borrowersmay have the right to call or prepay obligations, with or without call orprepayment penalties. Fair Amortised value costDue in one year or less $272,453 $274,832Due after one through five years 726,847 743,285Due after five years through ten years 425,606 445,229Due after ten years 2,702 2,877 ---------- ---------- 1,427,608 1,466,223 ---------- ----------Mortgage backed securities 73,475 74,433Asset-backed securities 192,635 194,626 ---------- ---------- Total $1,693,718 $1,735,282 ---------- ----------Restricted assetsThe Group is required to maintain assets on deposit with various regulatoryauthorities to support its insurance and reinsurance operations. Theserequirements are generally promulgated in the statutory regulations of theindividual jurisdictions. These funds on deposit are available to settleinsurance and reinsurance liabilities. The Group also has investments insegregated portfolios primarily to provide collateral or guarantees for Lettersof Credit ('LOC'), as described in Note 6. Finally, the Group also utilisestrust funds where the trust funds are set up for the benefit of the cedingcompanies, and generally take the place of LOC requirements. The total value of these restricted assets by category at 30 June 2006 and 2005are as follows: 2006 2005Fixed maturities, available for sale $916,148 $635,010Short term investments 8,198 21,127Cash and cash equivalents 136,752 136,231 ---------- ---------Total restricted assets $1,061,098 $792,368 ---------- ---------Securities lendingThe Group participates in a securities lending program under which certain ofits fixed maturity investments are loaned to third parties through a lendingagent. Collateral in the form of cash, government securities and letters ofcredit is required at a rate of 102% of the market value of the loanedsecurities and is monitored and maintained by the lending agent. The Group had$206,997 (2005: $nil) of securities on loan at 30 June 2006. 4 Unpaid losses and loss expenses The Group establishes reserves for losses and loss adjustment expenses, whichare estimates of future payments of reported and unreported claims for lossesand related expenses, with respect to insured events that have occurred. Theprocess of establishing reserves is complex and imprecise, requiring the use ofinformed estimates and judgments. The Group's estimates and judgments may berevised as additional experience and other data become available and arereviewed, as new or improved methodologies are developed or as current lawschange. Any such revisions could result in future changes in estimates of lossesor reinsurance recoverable, and would be reflected in the Group's results ofoperations in the period in which the estimates are changed. Management believesthey have made a reasonable estimate of the level of reserves at 30 June 2006and 2005. The reconciliation of unpaid losses and loss expenses for the six months ended30 June 2006 and 2005 is as follows: 2006 2005Gross unpaid losses and loss expenses, beginning ofyear $1,995,485 $1,472,819Reinsurance recoverable on unpaid loss and lossexpenses (575,522) (359,154) --------- ---------Net unpaid losses and loss expenses beginning ofyear 1,419,963 1,113,665Net incurred losses and loss expenses for claimsrelated to:Current year 320,765 308,839Prior years (4,201) (3,566) --------- ---------Total incurred losses and loss expenses 316,564 305,273 --------- ---------Net paid losses and loss expenses for claims relatedto:Current year (24,047) (11,719)Prior year (271,115) (167,723) --------- ---------Total paid losses and loss expenses (295,162) (179,442) --------- ---------Foreign exchange adjustment 53,421 (46,110) --------- ---------Net unpaid losses and loss expenses, end of period 1,494,786 1,193,386Reinsurance recoverable on unpaid loss and lossexpenses 455,797 289,014 --------- ---------Gross unpaid losses and loss expenses, end of period $1,950,583 $1,482,400 --------- --------- As a result of the changes in estimates of insured events in prior years, the2006 provision for losses and loss expenses net of reinsurance recoveriesdecreased by $4,201 (2005: decrease of $3,566). Included in this amount areincurred losses of $26,032, caused by a reassessment of expected ultimate losscosts relating to the 2005 hurricanes, offset by net decreases in estimated lossreserves in other classes of business of $30,233. In 2006 and 2005, thesedecreases were due to changes in estimates of insured events in previous yearsresulting from reductions of expected ultimate loss costs, settlement of lossesat amounts below previously estimated loss costs and reduction in uncertaintysurrounding the quantification of the net cost of claim events. 5 Reinsurance The Group purchases reinsurance to limit various exposures including catastropherisks. Although reinsurance agreements contractually obligate the Group'sreinsurers to reimburse it for the agreed upon portion of its gross paid losses,they do not discharge the primary liability of the Group. The effect ofreinsurance and retrocessional activity on premiums written and earned is asfollows: 2006 2005 Premiums Premiums Premiums Premiums written earned written earnedDirect $582,153 $493,821 $501,922 $502,152Assumed 320,992 221,717 279,817 203,219Ceded (137,152) (73,055) (123,044) (78,285) ---------- ---------- ---------- ----------Net premiums $765,993 $642,483 $658,695 $627,086 ---------- ---------- ---------- ---------- The Group's provision for reinsurance recoverable as at six months ended June30, 2006 and 2005 is as follows: 2006 2005Gross reinsurance recoverable $549,732 $356,375Provision for uncollectible balances (27,312) (18,303) --------- ---------Net reinsurance recoverable $522,420 $338,072 --------- ---------The Group holds collateral against certain reinsurance recoverable positions,including deposit with reinsurer, totalling $nil (2005: $27,978). 6 Notes payable, debt and financing arrangements Bank facilitiesSince November 2003, the Group has participated in a Letter of Credit/ RevolvingLoan Facility (the 'Club Facility') with three banks. Each bank participatesequally in the Club Facility. The Club Facility is comprised of three tranchesas detailed below. The Club Facility has been varied, amended and restated sinceit was originally entered into, most recently on 22 December 2005 when thecredit available under the Club Facility increased from $150,000 and £125,000 to$250,000 and £150,000 respectively. The following amounts were outstanding underthe Club Facility as at 30 June 2006: • Debt outstanding was $50,000, in the form of a 364-day $50,000 revolving facility with a one year term-out option ('Facility A'). Facility A, while not directly collateralised, is secured by floating charges on Group assets and cross guarantees from material subsidiaries. This debt bears interest at three-month Libor plus 65 basis points, and the Group is required to maintain free and unencumbered assets consisting of OECD Government Bonds, US Agencies and Corporate Bonds, discounted by 10%, sufficient to repay the loan at any time. The undrawn portion of Facility A costs 25 basis points per annum. This loan, which is available under one, two or three month renewal periods, can be repaid at any time at the discretion of the Group in increments of $10 million. The Group has the option to extend the revolving facility for 364 days, or to convert all cash advances into a term loan. • A clean, irrevocable standby LOC of $277,500 (£150,000) is provided to support Catlin Syndicate Limited's ('CSL') underwriting at Lloyd's ('Facility B'). As at 30 June 2006, CSL has utilised Facility B and deposited with Lloyd's an LOC in the amount of $277,500 (£150,000). In the event that CSL failed to meet its obligations under policies of insurance written on its behalf, Lloyd's could draw down this letter of credit. This LOC became effective on 26 June 2006 and has an initial expiry date of 27 November 2009. Collateral of $74,000 (£40,000) was provided by 16 August 2006 and a further $37,000 (£20,000) must be provided by 1 August 2007. • A two-year $200 million standby LOC facility is available for utilisation by Catlin Bermuda and Catlin UK ('Facility C'). At 30 June 2006, $128,472 in LOC's were outstanding, of which $126,511 are issued for the benefit of Catlin Bermuda, with a single LOC of $1,972 (£1,066) being for the benefit of Catlin UK. Collateral of 110% of 50% of the face value of the utilised portion of the LOCs under the Standby facility must be provided. The terms of the Club Facility require that certain financial covenants be meton a quarterly basis, evidenced by Compliance Certificates. These includelimitations on probable maximum losses arising from 'realistic disasterscenarios' for the Group, as well as requirements to maintain minimum TangibleNet Worth and Adjusted Tangible Net Worth levels, the calculations of which arebased upon fixed amounts in 2006 and increase over time, for items such asconsolidated net income in future accounting periods. The Group was incompliance with all covenants during 2006. 7 Taxation Catlin Group Limited ('CGL') and its Bermudian subsidiariesUnder current Bermuda law, the Company and its Bermuda subsidiary, CatlinBermuda, are not required to pay any taxes in Bermuda on their income or capitalgains. Each has received an undertaking from the Minister of Finance in Bermudathat, in the event of any taxes being imposed, they will be exempt from taxationin Bermuda until March 2016. UK subsidiariesThe Group operates in the UK through its UK subsidiaries and the income of theUK subsidiaries is subject to UK corporation taxes. CSL is also subject to US federal income tax on the part of its income from itsoperations at Lloyd's which is referred to as US connected income ('USCI'). USCIis calculated in accordance with the terms of the Lloyd's Closing Agreement withthe Internal Revenue Service ('IRS'). The US federal income tax due on USCI isremitted directly to the IRS by Lloyd's in the first instance but issubsequently collected from CSL via the Catlin Syndicate. CSL, as a UK taxresident, receives UK corporation tax credits for any US federal income taxincurred up to the value of the equivalent UK corporation income tax charge onthe US income. The UK tax authorities are currently reviewing legislation on the taxation ofinsurance company technical reserves. The outcome of this review is not yetknown, but it remains a possibility that recoverability of foreign taxes by CSLmay be prejudiced in whole or in part by any changes in a future year. US subsidiariesThe Group operates in the US through its US operations and the income of the USsubsidiaries is subject to US federal and state income taxes. Other subsidiariesOther Group companies are subject to income taxes imposed by the jurisdictionsin which they operate. The Group is not subject to taxation other than as stated above, but there canbe no assurance that there will not be changes in applicable laws, regulationsor treaties, which might require the Group to change the way it operates orbecome subject to taxation. The income tax expense for the six months ended 30 June 2006 and 2005 is asfollows: 2006 2005Current tax expense $18,296 $-Deferred tax expense 1,793 $15,160 --------- ---------Expense for income taxes $20,089 $15,160 --------- --------- 8 Stockholders' equity The following is a detail of the number and par value of common sharesauthorised, issued and outstanding as of 30 June 2006 and 2005: Authorised Issued and outstanding Par Par Number value Number value of shares $000 of shares $000Ordinary common shares,par value $0.01 pershare As at 30 June 2006 250,000,000 $2,500 163,633,683 $1,636 ------------ ---------- ----------- ----------As at 30 June 2005 250,000,000 $2,500 155,843,070 $1,558 ------------ ---------- ----------- ---------- The following table outlines the changes in common shares issued and outstandingduring 2006 and 2005: 2006 2005Balance, 1 January 155,914,616 154,097,989Exercise of stock options and warrants 14,167 1,745,081Equity raise 7,704,900 - ----------- -----------Balance, 30 June 163,633,683 155,843,070 ----------- ----------- Equity raiseOn 14 March 2006, the Group placed 7,704,900 new common shares with par value of$0.01 each at $8.68 (£5.00) per share, raising $65,231 net of expenses. Treasury stockIn connection with the Performance Share Plan ('PSP'), at each dividend date, anamount equal to the dividend that would be payable in respect of the shares tobe issued under the PSP, is paid into an Employee Benefit Trust ('EBT'). The EBTuses these funds to purchase Group shares on the open market. These shares willultimately be distributed to PSP holders to the extent that the PSP awards vest.In May 2006, the Group, through the EBT, purchased 67,300 of the Group's shares,at an average price of $8.22 (£4.35) per share. The total amount paid of $552 isshown as a deduction to stockholders' equity. DividendsOn 12 June 2006, the Group paid a final dividend relating to the 2005 financialyear of $0.176 (£0.101) per share to shareholders of record at the close ofbusiness on 12 May 2006. The total dividend paid for the 2005 financial year was$0.275 (£0.155) per share. 9 Employee stock compensation schemes The Group has two stock compensation schemes under which awards are outstanding:a Performance Share Plan, which was adopted in 2004, and a Long Term IncentivePlan, adopted in 2002. These financial statements include the total cost ofstock compensation for both plans, calculated using the fair value method ofaccounting for stock-based employee compensation. The total cost of the plansexpensed in the six months ended 30 June 2006 was $3,975 (2005: $2,096). On 9 March 2006, a total of 2,020,301 options with nil exercise price and275,296 non-vested shares (total of 2,295,597 securities) were granted to Groupemployees under the PSP. Up to half of the securities will vest on 9 March 2009and up to half will vest on 9 March 2010, subject to certain performanceconditions. 10 Earnings per share Basic earnings per share is calculated by dividing the earnings attributable tocommon shareholders by the weighted average number of common shares in issueduring the year. Diluted earnings per share is calculated by dividing the earnings attributableto all shareholders by the weighted average number of common shares in issueadjusted to assume conversion of all dilutive potential common shares. Thecompany has the following potentially dilutive instruments outstanding duringthe periods presented: (i) Performance share plan;(ii) Employee stock option plan; and(iii) Warrants There is no difference between net income attributable to ordinary stockholdersand net income attributable to all stockholders for the six months ended 30 June2006 and 2005. Reconciliations of the number of shares used in the calculations are set outbelow. 30 June 30 June 2006 2005Weighted average number of shares 160,688,316 154,116,555Dilution effect of warrants 6,203,859 4,125,308Dilution effect of stock options and non-vestedshares 6,930,990 3,900,578Dilution effect of stock options and warrantsexercised in the period 8,106 5,196,711 -------- --------Weighted average number of shares on a dilutedbasis 173,831,271 167,339,152 Earnings per common shareBasic $0.92 $0.72Diluted $0.85 $0.66 Options to purchase 9,885,557 shares under the LTIP were outstanding during theyear but were not included in the computation of diluted earnings per sharebecause the options' exercise price was greater than the average market price ofthe common shares. 11 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 Six months ended 30 June Note 2006 2005Net income under US GAAP $147,310 $111,175Adjustment for:Change to single functional currency (a) (7,890) 4,710Exchange gains/(losses) on foreign currencybond portfolios (b) (2,225) 11,787Fair value of employee stock compensation (c) (49) (49)Recognition of payroll taxes on employee stockcompensation (d) 562 (1,320)Taxation (e) 2,881 (4,646) ---------- ---------Net income under IFRS $140,589 $121,657 ---------- ---------Stockholders' equity Six months ended 30 June Note 2006 2005Stockholders' equity under US GAAP $1,091,214 $1,057,387Adjustment for:Change to single functional currency (a) 3,943 (7,442)Fair value of employee stock compensation (c) (275) (241)Recognition of payroll taxes on employee stockcompensation (d) (1,328) (1,367) ----------- -----------Stockholders' equity under IFRS $1,093,554 $1,048,337 ----------- -----------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 four functional currencies. Under IFRS, the revisedIAS 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 reconciling items are presented before tax. This line itemrepresents the tax effect of all the reconciling items. This information is provided by RNS The company news service from the London Stock Exchange